Accounting Chapter 12 Review

Which of these are liquidity ratios? A. Current ratio B. Times interest earned C. Average collection period D. Net profit margin E. Receivables turnover F. Fixed asset turnover

A. Current ratio C. Average collection period E. Receivables turnover

Which of the following is a ratio used to evaluate a company's solvency? A. Debt to equity B. Quick ratio C. Dividends per share D. Earnings per share

A. Debt to equity

Which of the following ratios are used to evaluate a company's ability to pay long-term debts? A. Debt to equity ratio B. Current ratio C. Cash flow per share ratio D. Times interest earned ratio

A. Debt to equity ratio D. Times interest earned ratio

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? A. Inventory B. Prepaid expenses C. Accounts receivable D. Short-term trading securities

A. Inventory B. Prepaid expenses

Which statements about the inventory turnover ratio are correct? A. It shows the number of times the average inventory balance is sold during a reporting period. B. A high ratio suggests a high inventory level. C. It indicates how quickly inventory is sold. D. The lower the ratio, the quicker a company sells its inventory.

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

What is the formula for the receivables turnover ratio? A. Net credit sales divided by average accounts receivable (net). B. Average accounts receivable divided by average total assets. C. Average accounts receivable (net) divided by net credit sales. D. Net credit sales divided by average total assets.

A. Net credit sales divided by average accounts receivable (net).

What is the formula to compute the return on assets? A. Net income divided by average total assets. B. Net income divided by average shareholders' equity. C. Net income divided by net sales.

A. Net income divided by average total assets.

Risk ratios and profitability ratios represent common ratios used for analysis. A. True B. False

A. True

The formula for the inventory turnover ratio is A. cost of goods sold divided by average inventory. B. cost of goods sold divided by average accounts receivable. C. sales divided by cost of goods sold. D. average accounts receivable divided by average inventory.

A. cost of goods sold divided by average inventory.

Which of the following are profitability ratios? A. gross profit ratio B. times interest earned ratio C. price-earnings ratio D. current ratio E. return on assets

A. gross profit ratio C. price-earnings ratio E. return on assets

Mark wants to determine whether a specific company has become more profitable over time. Mark should compare the company's performance to: A. its prior years' performance B. its industry C. its main competitor

A. its prior years' performance

The profit margin is calculated by dividing A. net income by net sales. B. gross margin by net sales. C. net income by cost of goods sold. D. net sales by net income.

A. net income by net sales.

Common types of analysis that help assess a specific company's performance include comparisons: A. over time B. to the same industry C. to another industry D. between companies

A. over time B. to the same industry D. between companies

When comparing the financial statements of two different companies, a financial analyst would use which two categories of ratios? A. profitability ratios B. asset ratios C. risk ratios D. equity ratios

A. profitability ratios C. risk ratios

A company's ability to pay its long-term debt is referred to as: A. solvency B. profitability C. liquidity

A. solvency

P/E ratio equals _____. A. stock price divided by earnings per share B. stock price divided by shareholders' equity C. earnings per share divided by stock price D. stock price divided by net income

A. stock price divided by earnings per share

The average collection period is calculated as 365 divided by A. the receivable turnover ratio. B. net credit sales. C. average accounts receivable. D. average total assets.

A. the receivable turnover ratio.

The debt to equity ratio is calculated as A. total liabilities divided by total stockholders' equity. B. current liabilities divided by total stockholders' equity. C. long-term debt divided by total stockholders' equity. D. noncurrent liabilities divided by current liabilities + stockholders' equity.

A. total liabilities divided by total stockholders' equity.

Common-size analysis is another term used for a _____ analysis. A. vertical B. horizontal

A. vertical

The formula for average collection period is A. 365 divided by net credit sales. B. 365 divided by the receivables turnover ratio. C. 365 divided by average accounts receivable. D. net credit sales divided by average accounts receivable.

B. 365 divided by the receivables turnover ratio.

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

B. False

True or false: The times interest earned formula is net income divided by interest expense. A. True B. False

B. False

Which of the following are common synonyms of the gross profit ratio? A. Profit margin B. Gross profit margin C. Gross margin D. Sales margin

B. Gross profit margin C. Gross margin

Which information regarding the receivables turnover ratio is true? A. It shows the number of days it takes to collect accounts receivable. B. It shows the number of times during a period that the average accounts receivable balance is collected. C. The lower the ratio, the better the company is performing. D. It provides an indication of a company's efficiency in collecting receivables.

B. It shows the number of times during a period that the average accounts receivable balance is collected. D. It provides an indication of a company's efficiency in collecting receivables.

Which term best describes a company having a suitable amount of cash or easily-convertible assets to pay incurred current liabilities? A. Profitability B. Liquidity C. Solvency D. Risk-free

B. Liquidity

What is the formula for the profit margin ratio? A. Net income divided by average total assets. B. Net income divided by net sales. C. Net income divided by average shareholders' equity. D. Gross profit divided by sales.

B. Net income divided by net sales.

Many investors view this type of indicator as the number one measure of a company's success. A. Liquidity B. Profitability C. Solvency

B. Profitability

Which of the following ratios provides the most conservative measure of a firms ability to pay its current liabilities. A. The current ratio B. The acid-test ratio

B. The acid-test ratio

Which of these are the same as horizontal analysis? A. Vertical analysis B. Time-series analysis C. Ratio analysis D. Trend analysis

B. Time-series analysis D. Trend analysis

Which is typically preferable for a company? A. a long average collection period B. a short average collection period

B. a short average collection period

The current ratio, acid-test ratio, and average collection period are ratios that provide information about a company's: A. profitability B. liquidity C. solvency

B. liquidity

Which of the following are profitability ratios? A. current ratio B. profit margin C. return on equity D. times interest earned ratio E. debt equity ratio

B. profit margin C. return on equity

Which type of ratios do investors and creditors use most frequently in making financial decisions? A. solvency ratios B. profitability ratios C. liquidity ratios

B. profitability ratios

The ability of reported earnings to reflect the company's true earnings is referred to as: A. earnings management B. quality of earnings C. comprehensive income

B. quality of earnings

Recipes, Inc. had Sales of $120,000 and Cost of goods sold of $80,000 for the year. All sales were credit sales. Accounts receivable was $10,000 at the beginning of the year and $14,000 at the end. Inventory was $18,000 at the beginning of the year and $22,000 at the end. Recipes' accounts receivables turnover equals: A. 4.0 B. 8.6 C. 10.0 D. 6.7 E. 12.0

C. 10.0

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. A. 0.4 B. 4 C. 2 D. 1

C. 2

What is the formula to compute the average days in inventory? A. 365 days/receivables turnover ratio B. Inventory turnover ratio/365 days C. 365 days/inventory turnover ratio

C. 365 days/inventory turnover ratio

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. A. 73 days B. 20 days C. 91.25 days D. 45.63 days

C. 91.25 days

Company A has an accounts receivable turnover of 8.0. Company B has an accounts receivable turnover of 10.0. Which of the following is true? A. Company A makes more sales on account than Company B. B. Company B has more receivables than Company A. C. Company B collects its receivables faster than Company A. D. Company A collects its receivables faster than Company B. E. Company B makes more sales on account than Company A.

C. Company B collects its receivables faster than Company A.

What is the formula for the inventory turnover ratio? A. Average inventory multiplied by cost of goods sold. B. 365 divided by average inventory. C. Cost of goods sold divided by average inventory. D. Cost of goods sold divided by net sales.

C. Cost of goods sold divided by average inventory.

Which of the following is the formula for the current ratio? A. Current assets plus current liabilities. B. Current liabilities divided by current assets. C. Current assets divided by current liabilities. D. Current assets times current liabilities.

C. Current assets divided by current liabilities.

Which of the following is a solvency ratio? A. Net profit margin B. Return on equity C. Debt-to-equity D. Current ratio

C. Debt-to-equity

Which of the following items requires separate disclosure after income from continuing operations? A. Gain on sale of equipment B. Restructuring costs C. Discontinued operations D. Impairment loss

C. Discontinued operations

What is the formula to compute return on shareholders' equity? A. Net income divided by average total assets B. Net income divided by net sales C. Net income divided by average shareholders' equity

C. Net income divided by average shareholders' equity

What is the formula for the asset turnover ratio? A. Average assets divided by net sales. B. Net sales divided by average accounts receivable. C. Net sales divided by average total assets.

C. Net sales divided by average total assets.

Which ratio indicates the portion of each sales dollar above its cost of goods sold? A. The cost ratio B. The profit ratio C. The gross profit ratio

C. The gross profit ratio

Which of these is a solvency ratio? A. Current ratio B. Asset turnover C. Times interest earned D. Fixed asset turnover

C. Times interest earned

The sum of cash, current investments, and accounts receivable divided by current liabilities equals the A. asset turnover ratio B. current ratio C. acid-test ratio

C. acid-test ratio

The formula to compute the receivables turnover ratio is net credit sales divided by A. cost of goods sold. B. the receivable turnover ratio. C. average accounts receivable. D. average total assets.

C. average accounts receivable.

Average days in inventory is calculated as 365 days divided by the A. average cost of goods sold. B. average accounts receivable. C. inventory turnover ratio. D. average total assets.

C. inventory turnover ratio.

The average collection period is an estimate of A. how many times on average a sale is made. B. the number of days of inventory that have not yet been paid. C. the number of days the average account receivable balance is outstanding. D. the average length of time to make a sale.

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

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? A. 11.1 days B. 25 days C. 36 days D. 40.6 days

D. 40.6 days

What does the inventory turnover ratio measure? A. The average time it takes to collect for inventory sold on account. B. The average investment in inventory during the period. C. The average time to pay suppliers for inventory purchased. D. The average number of times inventory is sold during a period.

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

Asset turnover ratio is net sales divided by A. average accounts receivable. B. average noncurrent assets. C. average current assets. D. average total assets.

D. average total assets.

Return on assets is calculated as net income divided by A. average inventory. B. average net assets. C. average current assets. D. average total assets.

D. average total assets.

An item that requires separate disclosure on the income statement after income from continuing operations is A. interest expense. B. restructuring costs. C. research and development costs. D. discontinued operations.

D. discontinued operations.

Receivable turnover equals: A. average net receivables divided by net sales revenue B. 365 divided by net sales and average net receivables C. cost of sales divided by average inventory D. net credit sales divided by average net receivables

D. net credit sales divided by average net receivables

The price of a single share of stock divided by earnings per share is: A. quality of income B. EPS C. average days in inventory D. return on equity E. the P/E ratio

E. the P/E ratio

_____ refers to a company having enough cash or convertible assets to pay its current liabilities.

Liquidity

_____ of _____ refers to the ability of reported earnings to reflect a company's true earnings, as well as the usefulness of reported earnings to predict future earnings.

Quality; earnings

_____ refers to a company's ability to pay its long-term liabilities.

Solvency

The _____-_____ ratio provides a more conservative measure of a company's ability to pay its current liabilities from current sources.

acid test

Vertical analysis is also commonly known as _____-size analysis.

common

Mathematically, the current ratio is expressed as current assets divided by _____ _____.

current liabilities

The _____ profit ratio indicates the portion of each dollar of sales above the cost of goods sold.

gross

Trend analysis and time-series analysis refer to _____ analysis.

horizontal

The times interest earned formula is calculated as earnings before interest and taxes divided by _____ _____. (Enter one word per blank)

interest expense

The formula for return on equity is _____ _____ divided by average total shareholders' equity. (Enter one word per blank)

net income

The profit margin ratio is defined as _____ _____ divided by net sales. (Enter one word per blank)

net income

Gross margin is a synonym for gross _____.

profit

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

profit