Intermediate Accounting Exam 2

Under the Employee Retirement Income Security Act, a company can be liable for its pension plan up to:

30% of its net worth

Which of these statements is false?

A company comparison should not be made with industry averages if the company does not clearly fit into any one industry

Which of the following will NOT cause times interest earned to drop? Assume no other changes than those listed.

A rise in preferred stock dividends

Statements in which all items are expressed only in relative terms (percentages of a base) are termed

Common-Size Statements

Company A uses lifo and Company B uses fifo for inventory valuation. Otherwise, the firms are of similar size and have the same revenue and expense. Assume inflation. In analyzing liquidity and profitability of the two firms, which of the following will hold true?

Company B will have relatively higher profit and a higher current ratio

Which of the following ratios would generally be used to evaluate a firm's overall liquidity position?

Current Ratio

What significant improvement in the financial reporting of pensions have pension accounting rules provided?

Determination of the expense for the income statement, limited balance sheet recognition o pension liabilities, and improved disclosure

Which of the following does NOT represent a problem with financial analysis?

Financial analysis can be used to detect apparent liquidity problems

Denver Dynamics has net income of $2,000,000. Oakland Enterprises has net income of $2,500,000. Which of the following best compares the profitability of Denver and Oakland?

Further information is needed for a reasonable comparison

Which of the following is a false statement as it relates to analysis?

If merchandise with a 20% markup is sold on credit, it would take ten successful sales of the same amount to make up for one sale not collected

Which of the following statements is incorrect?

In most sectors, NAICS provides for compatibility at the industry (six-digit) level

Which of these statements are false

In vertical analysis, a figure from the year's statement is compared with a base selected form the prior statement

In computing debt to tangible net worth, which of the following is NOT subtracted in the denominator?

Investments

Which of the following would not be a reasonable conclusion when comparing lifo—fifo under an inflationary condition?

Lifo would probably be used for inventory that has a high turnover rate because there would be an immaterial difference in the results between lifo and fifo.

Management is a user of financial analysis. Which of the following comments does not represent a fair statement as to the management perspective?

Management is always interested in maximum profitability

Which of the following is NOT a source of industry statistics?

Mergent Dividend Record

Jones Company has long-term debt of $1,000,000, while Smith Company, Jones' competitor, has long-term debt of $200,000. Which of the following statements best represents an analysis of the long-term debt position of these two firms?

Not enough information to determine if any of the answers are correct.

Which of the following statements is NOT true relating to a capitalized (capital) lease?

On the balance sheet, the capitalized asset amount will usually be higher than the capitalized liability amount

Which of the following can offer a type of comparison in financial statement analysis?

Past ratios and figures industry averages statistics of competitors

A manufacturing firm will most likely have the heaviest investment in which type of assets?

Plant, property, and equipment

Suppose you are comparing two firms in the steel industry. One firm is large and the other is small. Which type of numbers would be most meaningful for statement analysis?

Relative numbers would be most meaningful for both the large and small firm, especially for interfirm comparisons.

Which of the following reasons should not be considered in order to explain why the receivables appear to be abnormally high?

Sales volume decreases the materially late in the year

Which of the following is a government document that provides industry statistics?

The Department of Commerce Financial Report

Which of the following statements best compares long-term borrowing capacity ratios?

The debt to tangible net worth ratio is more conservative than the debt/equity ratio

Annual Statement Studies reported the following figures for manufacturers of screw machine products for the ratio of current assets to current debt. The following figures are for a particular industry's current ratio: 1.6; 1.3; 1.2. Which best describes these three numbers?

The median was 1.3. 1.6 is the figure for the upper quartile; 1.2 is the figure for the lower quartile

Which of the following statements is NOT true relating to a defined contribution pension plan?

This type of plan presents substantial problems in estimating the pension liability

Which of the following statements is NOT correct?

Usually, the highest times interest coverage in the most recent five-year period is used as the primary indication of the interest coverage

the debt ratio indicates

a comparison of liabilities with total assets

Which of the following types of businesses would normally have the shortest operating cycle?

a grocery store compared to a car dealership or retail clothing store

Which of the following businesses would normally have the longest operating cycle?

a seller of resort property compared to car dealer or grocery store

Which of these items represents a definite commitment to pay out funds in the future?

bonds payable

If a firm has pledged its receivables and its inventory, then the best indicator of its short-term liquidity may be indicated by:

cash ratio

Which of the following accounts would not be classified as a current asset?

cash restricted for retirement of bonds

Typically, which of the following would be considered to be the most indicative of a firm's short-term debt paying ability?

current ratio

In Financial statement analysis, ratios are

fractions usually expressed in percent or times

There are a number of assumptions about future events that must be made regarding a defined benefit plan. An assumption that does NOT need to be made is:

how long the firm will continue

Which of the following would NOT be classified as a current asset?

investments

A fixed charge coverage:

is an income statement indication of debt carrying ability

Which of the following would be a user of financial statements?

management bankers employee unions investment analysts

A retailing firm has which type of inventory

merchandise

Which of the following ratios does not represent some form of comparison between accounts in current assets and accounts in current liabilities?

merchandise inventory turnover

Which of the following is NOT an acceptable inventory costing method?

next-in, first-out (nifo)

A times interest earned ratio indicates that:

none of these answers are correct

Which of the following current assets will NOT generate cash in the future?

prepayments

Included in the Employee Retirement Income Security Act are the following:

provisions requiring minimum funding of pension plans, minimum rights to employees upon termination of their employment, and creation of the Pension Benefit Guaranty Corporation

Which of following answers bear on the quality of receivables?

shortening/lengthening the credit terms right of return privilege lengthening the outstanding period

Which of the following would best indicate that the firm is carrying excess inventory?

stable current ratio with declining quick ratios

Unrealized losses for long-term investments should usually be reported in the:

stockholders' equity section of the balance sheet

A number of assumptions about future events must be made regarding a defined benefit plan. Which of the following does NOT represent one of the assumptions?

termination date for the firm

A times interest earned ratio of 0.90 to 1 means:

that net income is less than the interest expense

If a firm has substantial capital or financing leases disclosed in the notes but not capitalized in the financial statements, then:

the debt ratio will be understated

Various techniques are used in the analysis of financial data to emphasize the comparative and relative importance of the data presented and to evaluate the position of the firm. Which of the following is not one of the techniques used in analysis?

theory consistency

Liquidity ratios can be used:

to measure the earning ability of a firm