Acct Ch 12

Ace Electric's income statement reports Sales of $100,000; Cost of goods sold of $46,000, Operating expenses of $34,000, Interest expense of $15,000, Income tax expense of $2,000, and Net income of $3,000. If you were to perform a vertical analysis of this income statement, you would divide each of these income statement line items by

$100,000

If Currants & Jams, Inc.'s current ratio equals 2.0, current liabilities are $10,000, and long-term liabilities are $30,000, then its current assets equal:

$20,000

Which of the following formulas is used in horizontal analysis to determine the percentage increase or decrease between two years?

(Current-year amount -- Prior-year amount)/Prior-year amount

Which of the following are liquidity ratios?

1. Current ratio 2. Acid-test ratio

Which of the following would improve a current ratio that is now 1.2?

1. Issuing stock for cash 2. Selling long-term assets for cash

Which statements about the inventory turnover ratio are correct?

1. It indicates how quickly inventory is sold. 2. It shows the number of times the average inventory balance is sold during a reporting period.

Which of the following items are included in the numerator for the current ratio but are excluded from the numerator of the quick or acid-test ratio?

1. Prepaid expenses 2. Inventory

Which of the following are profitability ratios?

1. price-earnings ratio 2. return on assets 3. gross profit ratio

When comparing the financial statements of two different companies, a financial analyst would use which two categories of ratios?

1. profitability ratios 2. risk ratios

Which of the following are profitability ratios?

1. return on equity 2. profit margin

Compute the return on equity ratio using the following information: Net sales is $200,000 for the year, cost of goods sold are $40,000, net income is $60,000, last year's total assets were $900,000, and this year's total assets are $1,100,000. Shareholders' equity changed from $300,000 last year to $400,000 this year.

17.1%

Compute the inventory turnover ratio using the following information: Net sales is $100,000 for the year, costs of goods sold are $40,000, last year's assets in place were $900,000, and this year's assets in place are $1,100,000. Receivables for both years are $50,000. Inventory changed from $30,000 last year to $10,000 this year.

2

Which of the following would be the best current ratio, assuming the company had excellent liquidity and an ability to generate positive income?

2.4

Kat Company reported current assets in year 1 of $20,000 and in year 2 of $24,000. When performing horizontal analysis, the percentage change in current assets would be expressed as:

20%

GPS, Inc.'s sales were $200,000, cost of goods sold was $150,000 and net income was $20,000. Its average inventory was $25,000. The gross profit ratio equals ______.

25%

Pferd Company reported total assets in year 1 of $200,000 and in year 2 of $250,000. When performing horizontal analysis, the percentage change in total assets would be expressed as:

25%

Ace Electronics had sales of $1,000,000 in 2018 and sales of $1,040,000 in 2019. The percentage increase in sales was ______.

4%

Green Company has net credit sales of $100,000, an asset turnover ratio of 4, and a receivables turnover ratio of 9. What is the average collection period?

40.6 days

Acme, Inc. had net income of $120,000 in 2018 and net income of $126,000 in 2019. The percentage increase in net income was ______.

5%

Compute the average days in inventory ratio using the following information: Net sales is $200,000 for the year, cost of goods sold are $80,000, last year's total assets were $900,000, and this year's total assets are $1,100,000. Receivables for both years are $40,000. Inventory changed from $30,000 last year to $10,000 this year.

91.25 days

Where are the effects of discontinued operations reported on the income statement?

Below income from continuing operations.

Based on their respective debt to equity ratios, which of the following companies will tend to have the highest risk of bankruptcy. Assume that the companies are otherwise very similar: Company A: 120%; Company B: 90%; Company C: 100%.

Company A

You are analyzing the following four companies based on their debt to equity ratio. Which company has the highest risk of insolvency? Company A 2.5 Company B 1.0 Company C 0.9 Company D 3.0

Company D

Which of the following is a solvency ratio?

Debt-to-equity

The current ratio, acid-test ratio, and average collection period are ratios that provide information about a company's:

Liquidity

Which term best describes a company having a suitable amount of cash or easily-convertible assets to pay incurred current liabilities?

Liquidity

Which type of ratios do investors and creditors use most frequently in making financial decisions?

Profitability

What does the inventory turnover ratio measure?

The average number of times inventory is sold during a period.

If a company has a current ratio of 1.20, which of the following is true?

The company has $1.20 in current assets for each dollar of current liabilities.

Which ratio indicates the portion of each sales dollar above its cost of goods sold?

The gross profit ratio

Which of these is a solvency ratio?

Times interest earned

Risk ratios and profitability ratios represent common ratios used for analysis.

True

______ analysis identifies the relative contribution made by each financial statement line item.

Vertical

______ analysis is a technique that expresses each financial statement amount as a percentage of another amount on the same financial statement.

Vertical

Which is typically preferable for a company?

a short average collection period

The sum of cash, current investments, and accounts receivable divided by current liabilities equals the

acid-test ratio

The current ratio equals:

current assets divided by current liabilities

A ratio used to measure liquidity is the

current ratio

A BLANK BLANK is a business, or a component of a business, that the organization has already discontinued or plans to discontinue.

discontinued operation

If a company owns multiple lines of business in different areas such as cable TV, film entertainment, networks, and publishing, and decides to sell a specific unit, the resulting gain or loss would most likely be classified as a(n)______ on the income statement.

discontinued operation

The profit margin ratio indicates the amount of net income achieved for

each dollar of sales.

True or false: The debt to equity ratio is calculated as total liabilities divided by common stock.

false

Net sales revenue minus the cost of goods sold, divided by net sales revenue equals the ______.

gross profit ratio

The higher the debt to equity ratio is for a company, then the ______ the risk of insolvency is for that company.

higher

Analyzing trends of financial statement data over time by looking at the percent change from year to year is referred to as

horizontal analysis

To analyze changes in a company's net income over the last 10 years, you should perform a ______.

horizontal analysis

Milken Inc. currently has a current ratio of 1.5. If Milken pays off an accounts payable balance, its current ratio will BLANK

increase

Horizontal analysis ______.

is used to identify trends over time

The profit margin is calculated by dividing

net income by net sales.

Discontinued operations should be reported on the income statement:

net of tax below income from continuing operations

The gross profit ratio equals ______.

net sales revenue minus cost of goods sold, divided by net sales revenue

The formula (current-year amount -- prior-year amount)/prior-year amount calculates the _______ used in horizontal analysis.

percentage increase or decrease

The BLANK margin measures the income earned on each dollar of sales.

profit

The group of ratios that measure the earnings or operating effectiveness BLANK ratios.

profitability

To perform a vertical analysis of an income statement, you would divide each line item on the statement by ______.

sales

A company's ability to pay its long-term debt is referred to as:

solvency

Mark Company manufactures and sells healthy granola bars, trail mixes, cookies, and crackers. Which of the following - if discontinued - would most likely be reported as a discontinued operation?

the cookie line

Current assets divided by current liabilities equals ______.

the current ratio

The average collection period is an estimate of

the number of days the average account receivable balance is outstanding.

A common-size balance sheet presents each line item as a percentage of BLANK BLANK

total assets

A common-size balance sheet will list each line item as a percentage of

total assets.

The debt to equity ratio is calculated as

total liabilities divided by total stockholders' equity.

The profit margin ratio indicates

what amount of sales goes toward net income.