Accounting exam 1 (part2)

A percentage change can be computed only if the base amount is zero or positive. True/False?

False

Meaningful analysis of financial statements will include either horizontal or vertical analysis, but not both. True/False?

False

Using borrowed money to increase the rate of return on common stockholders' equity is called "trading on the equity. True/False?

False Explanation: Trading on the equity - Borrowing money at a lower rate of interest than can be earned by using the borrowed money.

5 broad categories of financial ratios.

Profitability ratios - Measures of the income or operating success of an enterprise for a given period of time. Liquidity ratios - Measures short term ability of a enterprise to pay it maturing obligations and to meet unexpected needs of cash. (Short-term ratios) Solvency ratios - Measures of the ability of the enterprise to survive over a long period of time. (Long-term ratios) Turnover ratios - Measures the efficiency with which a business utilizes its assets. Market value ratios - Evaluate the current share price of a publicly-held company's stock. (Common stockholders ratios)

Extraordinary items are reported net of applicable taxes in a separate section of the income statement. True/Fasle?

True

In horizontal analysis, if an item has a negative amount in the base year, and a positive amount in the following year, no percentage change for that item can be computed. True/False?

True

The following events occurred during the accounting period: Cash of $33,000 was used to purchase a second-hand forklift. Cash of $12,000 was received from the sale of an investment at a loss. Cash dividends of $6,000 were received from an investment. Cash of $15,000 was used to retire bonds. Plant assets were depreciated for $7,000 on the declining balance method. Cash provided or used by investing activities was: a. $21,000 used b. $15,000 used c. $7,000 used d. $7,000 provided

a. $21,000 used Explanation: The investing activities were the purchase of the forklift ($33,000 used) and the sale of an investment ($12,000 provided). $33,000 used less $12,000 provided equals $21,000 used.

lake Company reported the following on its income statement: Income before income taxes $600,000 Income tax expense 150,000 Net income $450,000 An analysis of the income statement revealed that interest expense was $50,000. Flake Company's times interest earned was a. 13 times. b. 12 times. c. 6 times. d. 7 times

a. 13 times. Income before interest expense and income taxes = 600,000 + 50,000 = 650,000 Times interest earned=650,000/50,000=13 times

West Company had $375,000 of current assets and $150,000 of current liabilities before borrowing $75,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on the amount of West Company's working capital? a. No effect b. $75,000 increase c. $150,000 increase d. $75,000 decrease

a. No effect

Under which of the following cases may a percentage change be computed? a. The trend of the balances is decreasing but all balances are positive. b. There is no balance in the base year. c. There is a positive balance in the base year and a negative balance in the subsequent year. d. There is a negative balance in the base year and a positive balance in the subsequent year.

a. The trend of the balances is decreasing but all balances are positive.

In common size analysis, a. a base amount is required. b. a base amount is optional. c. the same base is used across all financial statements analyzed. d. the results of the horizontal analysis are necessary inputs for performing the analysis

a. a base amount is required

In performing a vertical analysis, the base for sales revenues on the income statement is a. net sales. b. sales. c. net income. d. cost of goods available for sale

a. net sales.

Earnings per share is calculated a. only for common stock. b. only for preferred stock. c. for common and preferred stock. d. only for treasury stock

a. only for common stock.

A measure of the percentage of each dollar of sales that results in net income is a. profit margin. b. return on assets. c. return on common stockholders' equity. d. earnings per share

a. profit margin.

Each of the following is included in computing the acid-test ratio except a. cash. b. inventory. c. receivables. d. short-term investments.

b. inventory

The acid-test (quick) ratio a. is used to quickly determine a company's solvency and long-term debt paying ability. b. relates cash, short-term investments, and net receivables to current liabilities. c. is calculated by taking one item from the income statement and one item from the balance sheet. d. is the same as the current ratio except it is rounded to the nearest whole percent.

b. relates cash, short-term investments, and net receivables to current liabilities.

A weakness of the current ratio is a. the difficulty of the calculation. b. that it doesn't take into account the composition of the current assets. c. that it is rarely used by sophisticated analysts. d. that it can be expressed as a percentage, as a rate, or as a proportion.

b. that it doesn't take into account the composition of the current assets.

Stout Corporation had net income of $200,000 and paid dividends to common stockholders of $40,000 in 2013. The weighted average number of shares outstanding in 2013 was 50,000 shares. Stout Corporation's common stock is selling for $75 per share on the New York Stock Exchange. Stout Corporation's price-earnings ratio is a. 3.8 times. b. 15 times. c. 18.8 times. d. 12 times

c. 18.8 times. Explanation: Price-Earning Ratio = Price Per Share / Earning Per Share Earning Per Share = Net Earnings / Outstanding Shares -->Price-Earning Ratio = Price Per Share / (Net Earnings / Outstanding Shares) = $75 / ($200,000 / 50,000) = 75 / 4 = 18.75

Stout Corporation had net income of $200,000 and paid dividends to common stockholders of $40,000 in 2013. The weighted average number of shares outstanding in 2013 was 50,000 shares. Stout Corporation's common stock is selling for $60 per share on the New York Stock Exchange. Stout Corporation's payout ratio for 2013 is a. $4 per share. b 25%. c. 20%. d. 12.5%.

c. 20%. Explanation: Earning Per Share = Net Earnings / Outstanding Shares = $200,000 / 50,000 = 4 Divedends payout ratio=Annual divedends per share/Earning Per Share = (40,000/50,000)/4=20%

A supplier to a company would be most interested in the company's a. asset turnover. b. profit margin. c. current ratio. d. earnings per share.

c. current ratio.

Each of the following is a liquidity ratio except the a. acid-test ratio. b. current ratio. c. debt to total assets ratio. d. inventory turnove

c. debt to total assets ratio.

The acid-test ratio a. is a quick calculation of an approximation of the current ratio. b. does not include all current liabilities in the calculation. c. does not include inventory as part of the numerator. d. does include prepaid expenses as part of the numerator

c. does not include inventory as part of the numerator.

The ratio that uses weighted average common shares outstanding in the denominator is the a. price-earnings ratio. b. return on common stockholders' equity. c. earnings per share. d. payout ratio

c. earnings per share.

A horizontal analysis performed on a statement of retained earnings would not show a percentage change in a. dividends paid. b. net income. c. expenses. d. beginning retained earnings

c. expenses

n performing a vertical analysis, the base for sales returns and allowances is a. sales. b. sales discounts. c. net sales. d. total revenues.

c. net sales.

A technique for evaluating financial statements that expresses the relationship among selected items of financial statement data is a. common size analysis. b. horizontal analysis. c. ratio analysis d. vertical analysis

c. ratio analysis

Parker Hardware Store had net credit sales of $8,000,000 and cost of goods sold of $5,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $600,000 and $700,000, respectively. The receivables turnover was a. 7.7 times. b. 4.6 times. c. 11.4 times. d. 12.3 times

d. 12.3 times Calculating avg receivable receivable turnover = net sales/avg receivable

Which of the following items would be reported at its gross amount on the face of the income statement? a. Extraordinary loss b. Prior period adjustment c. Cumulative effect of a change in an accounting principle d. Unusual gain

d. Unusual gain

Which of the following is a change in accounting principle? a. A change in the estimated service life of machinery b. A change from FIFO to LIFO c. A change from straight-line to double-declining-balance d. A change from FIFO to LIFO and a change from straight-line to double-declining- balance

d. a change from FIFO to LIFO an a change from straight line to double declining balance

Which of the following items would be reported net of tax on the face of the income statement? a. Prior period adjustment b. Unusual gain c. Cumulative effect of a change in an accounting principle d. Discontinued operations

d. discontinued operations

Long-term creditors (or Stockholders) are usually most interested in evaluating a. liquidity and solvency. b. solvency and marketability. c. liquidity and profitability. d. profitability and solvency

d. profitability and solvency

The debt to total assets ratio measures a. the company's profitability. b. whether interest can be paid on debt in the current year. c. the proportion of interest paid relative to dividends paid. d. the percentage of the total assets provided by creditors

d. the percentage of the total assets provided by creditors