ACTG 6100 exam 3_ chapter 14

A company has cash of $5,000; accounts receivable of $25,000; inventories of $35,000; accounts payable of $35,000; and retained earnings of $30,000. What is the company's current ratio, rounded to the nearest hundredth?

1.86 *** Reason: ($5,000 + $25,000 + $35,000)/$35,000 = 1.86

A company has cash of $4,000; accounts receivable of $8,000; inventories of $12,000; and accounts payable of $6,000. What is the amount of the company's quick ratio?

2 *** Reason: ($4,000 + $8,000)/$6,000 = 2

If a company had sales of $500,000; gross profit of $360,000; interest expense of $10,000; and net income of $125,000, the component percentage for interest expense, is

2% *** 10,000/500,000

A company had interest expense of $12,400 during a year. In the previous year, interest expense was $11,800. What was the percentage increase rounded to the nearest 1/10 percent?

5.1% *** Reason: ($12,400 - $11,800)/$11,800 = 5.1%

A company has current assets of $300,000; noncurrent assets of $700,000; current liabilities of $175,000; noncurrent liabilities of $425,000; and stockholders' equity of $400,000. What is the amount of the company's debt ratio?

60% *** Reason: ($175,000 + $425,000)/($300,000 + $700,000) = 60%

True or false: Annual reports of companies are made available only to that company's creditors and stockholders.

False

Which of the following is NOT a goal of financial accounting information?

To demonstrate a company's compliance with income tax law.

Which of the following is NOT a current asset?

buildings

Measures of profitability include all of the following except

the current ratio.

A company has cash of $4,000; accounts receivable of $16,000; accounts payable of $5,000; and bonds payable of $12,000. What is the amount of the company's working capital?

$15,000 *** Reason: $4,000 + $16,000 - $5,000 = $15,000

A company has sales revenue of $100,000; cost of goods sold of $40,000; operating expenses of $30,000; and nonoperating expenses of $5,000. What is the amount of gross profit?

$60,000 *** Reason: $100,000 - $40,000 = $60,000

True or false: Ratios compare only amounts within a single financial statement, such as an income statement or a statement of financial position (balance sheet).

False

True or false: The quick ratio and the current ratio are two names for the same financial statement ratio.

False

The figure resulting from the division of net income by the number of shares of common stock outstanding is called

earnings per share

The calculation of the current ratio includes all of the following in the numerator except

equipment. retained earnings.

The difference between net sales and the cost of goods sold is called

gross profit

Comparing amounts for a company with other companies that have similar characteristics is called

industry analysis.

Examples of current assets include which of the following?

inventories accounts receivable cash

A company's ability to meet its obligations on an ongoing basis is generally referred to as the company's

liquidity

Judging the impact on earnings of the specific accounting methods a company chooses is sometimes referred to as the

quality of earnings

The basis or denominator for computing a percentage change from Year 1 to Year 2 is

the Year 1 amount.

A company had sales of $400,000; gross profit of $250,000; operating income of 150,000; and net income of $75,000. Dividends on preferred stock were $10,000. Throughout the year, 10,000 shares of common stock were outstanding and 1,000 shares of preferred stock were outstanding. What was the earnings per share for the year?

$7.50 *** Reason: $75,000/10,000 = $7.50

A company has cash of $4,000; accounts receivable of $8,000; inventory of $12,000; and accounts payable of $15,000. What is the amount of the company's working capital?

$9,000 *** Reason: $4,000 + $8,000 + $12,000 - $15,000 = $9,000

A company's assets include cash of $6,000; accounts receivable of $10,000; inventories of $56,000; and plant assets of $28,000, totaling $100,000. Its liabilities include accounts payable of $25,000 and bonds payable of $45,000, totaling $70,000. Its stockholders' equity includes $10,000 of capital stock and $20,000 of retained earnings, totaling $30,000. What is the company's current ratio?

2.88 *** Reason: ($6,000 + $10,000 + $56,000)/$25,000 = 2.88

A company had operating income of $250,000 and net income of $300,000 for a year in which its total stockholders' equity was $800,000 at the beginning of the year and increased to $950,000 from the sale of additional capital stock during the year. What was the amount of the company's return on equity for the year, rounded to the nearest whole percentage?

34% *** Reason: $300,000/(($800,000 + $950,000)/2) = 34%

A company had sales of $10,000 in Year 1 and $13,500 in Year 2. What was the percentage increase?

35% *** Reason: ($13,500 - $10,000)/$10,000 = 35%

A company has total assets of $100,000; total liabilities of $65,000; and total stockholders' equity of $35,000. What is the amount of the company's debt ratio?

65%

A company had operating income of $100,000 for the year. Other selected figures from the company's statement of financial position (balance sheet) were beginning plant assets of $40,000; ending plant assets of $45,000; beginning total assets of $120,000; and ending total assets of $150,000. What was the return on assets for the year, rounded to the nearest whole percentage?

74% *** Reason: $100,000/(($120,000 + $150,000)/2) = 74%

A company's current market price is $12 per share. Other items of key information from its financial statements include gross profit of $100,000; net income of $40,000; and earnings per share of $1.50. What is the company's price-earning ratio?

8 *** Reason: $12/$1.50 = 8

Which of the following is/are correct about the debt ratio?

Debt ratios of companies vary by industry. The lower the debt ratio, the safer the position of creditors.

The basis or denominator for calculating a trend percentage is

a base-year amount.

The return on __________ is a broad measure of profitability of a company based on the total investment in the company.

assets

Which of the following do(es) NOT accurately describe the price-earnings ratio?

It reflects a company's rate of inventory turnover. It reflects a company's liquidity.

Ratios are used for which of the following purposes?

assisting in understanding the relationship of one financial statement to anther explaining the relative size of related items

The base number (denominator) in the calculation of the return on assets is the

average total assets.

Which of the following are NOT considered in calculating the amount of a company's working capital?

capital stock retained earnings bonds payable

Consolidated financial statements present which of the following?

combined financial statements of parent and subsidiary companies

The price-earnings ratio is calculated by dividing the current market price by

earnings per share.

The best number to use for the numerator in the calculation of return on equity is

net income.

Which of the following are measures of different levels of profitability?

operating income net income gross profit

Gross profit minus operating expenses is called

operating profit

A company had gross profit of $500,000; operating income of $200,000; and net income of $100,000 during the year. Its statement of financial position (balance sheet) shows that its stockholders' equity began the year at $1 million and during the year was reduced to $950,000 by the purchase of treasury stock. What was the return on equity for the year, rounded to the nearest whole percentage?

10% *** Reason: $100,000/(($1,000,000 + $950,000)/2) = 10%

A company had operating income of $450,000 and net income of $230,000 for the year. Its beginning total asset balance was $500,000, and its ending total asset balance was $600,000. What was the return on assets for the year, rounded to the nearest whole percentage?

82% *** Reason: $450,000/(($500,000 + $600,000)/2) = 82%

A company had sales of $90,000 in Year 1, the base year; $95,000 in Year 2; and $78,000 in Year 3. What is the trend percentage for Year 3? Round the answer to two decimal places? Multiple choice question. 106%

86.7% *** Reason: $78,000/$90,000 = 86.7%

Which of the following best describe(s) what is meant by a company's liquidity?

A company's ability to meet its obligations as they become due.

Which of the following is/are correct about the annual reports of companies?

They often include multiyear summaries of comparative information about the company. They include management's own discussion and analysis of important aspects of the company.

True or false: Public opinion polls show that people generally overstate the amount of profit earned by companies.

True

Financial statements that present multiyear information in side-by-side columns are called

comparative financial statements

Standards of comparison commonly used in financial analysis include all of the following except

comparisons with other companies in close geographic proximity

The percentage that inventory represents of the total assets in a statement of financial position (balance sheet) is called the

component percentage.

If a business fails, the claims of ______ exceed those of the owners

creditors

Assets that are relatively liquid and are expected to become cash in the relatively near future are called

current assets

Which of the following is NOT a section you would find in a classified income statement?

current assets

A widely used measure of liquidity that includes all current assets is referred to as the

current ratio

Which of the following subtotals would you expect to find in a classified income statement?

gross profit net income operating income

Comparing amounts for a company over time in successive accounting periods is called

horizontal analysis.

The most common approaches used for financial analysis compare information about a company in a single accounting period with

information about the same company in different accounting periods. information about other companies in the same industry.

The general formula for calculating earnings per share is

net income divided by the number of shares of common stock outstanding.

The subtotal that follows operating expenses in a multiple-step income statement is called

operating income.

Classified financial statements are statements that

place items with certain characteristics together in the statements.

The balance sheet ratio that measures liquidity by excluding inventory as an asset is called the

quick ratio

The relationship of one number to another related number is called a

ratio

The return on investment is calculated as follows:

return divided by average amount invested during the period

Two common applications of the Return on investment concept include:

return on assets return on equity

Which of the following is NOT a factor in judging a company's liquidity?

the depreciation of plant assets

Quality of earnings is a term used to describe

the impact on earnings and assets of the accounting methods selected by a company.