Financial Accounting - Chapter 15

The current ratio shows the profitability of a firm. True or False

False

Horizontal analysis provides a year-to-year comparison of a company's performance in different periods. True or False

True

A high interest-coverage ratio indicates a company's difficulty in paying interest expense. True or False

False

A high rate of inventory turnover indicates difficulty in selling inventory. True or False

False

A vertical analysis would be used if an analyst wants to see how gross profit of a company has changed from one year to the next. True or False

False

Grace Paper Company has a debt ratio of 25%, which means that 75% of the assets are financed by creditors. True or False

False

Having a cash ratio below 1 is a good thing. True or False

False

The days' sales in receivables for Barker Sales is 35. The days' sales in receivables for Xanadu Company is 25. This suggests that Xanadu is having greater difficulty than Barker is in collecting its accounts receivable. True or False

False

The higher the acid-test ratio, the less able the business is to pay its current liabilities. True or False

False

The higher the debt ratio, the lower the risk. True or False

False

The smaller the current ratio, the higher the firm's ability to repay its current debts. True or False

False

A current ratio that has increased from the prior period indicates an improvement in the company's ability to pay its current debts. True or False

True

A higher price/earnings ratio signifies a higher return on investment. True or False

True

An acid-test ratio of 1.0 is considered safer than a ratio of 0.50. True or False

True

The rate of return on common stockholders' equity shows the relationship between net income available to common stockholders and their average common equity invested in the company. True or False

True

Which of the following is not a way to accurately determine the financial performance of a company? a) Carefully examining one year's data b) With the same industry as a whole c) From year to year d) With a competing company

a) Carefully examining one years data

The ability of a company to repay its liabilities can be determined from it's ___________ . a) Debt ratio b) Bankers c) Creditors d) Journal

a) Debt ratio

Which of the following best describes trend analysis? a) Expressing each year's financial statement amounts as a percentage of the base year amounts b) Comparing a company's financial statements with that of other companies c) Calculating key ratios to evaluate performance d) Expressing each financial statement amount as a percentage of a budgeted amount

a) Expressing each year's financial statement amounts as a percentage of the base year amounts

Which of the following factors is assessed using the debt ratio? a) Risk b) Income c) Expenses d) Revenues

a) Risk

Which of the following is used to see how a company's operating expenses, as a percentage of net sales, have changed from one year to the next? a) Vertical analysis b) Ratio analysis c) Horizontal analysis d) Analysis of internal control system

a) Vertical analysis

Which of the following statement is an accurate interpretation of the current ratio? a) A current ratio of 0.60 or lower is a good and safe ratio b) A current ratio of 2.0 indicates strong ability to pay current liabilities c) A current ratio below 1.00 is considered a good and safe ratio d) A current ratio of 1.5 or higher is considered a high-risk ratio

b) A current ratio of 2.0 indicates strong ability to pay current liabilities

The times-interest-earned ratios of Benin, Inc. are 20.56 and 7.35 for 2016 ad 2017, respectively. Which of the following can be the possible reason for such a change? a) Benin, Inc. paid less interest in its revolving line of credit b) Benin, Inc. incurred more debt specifically in its revolving line of credit c) Benin, Inc. incurred less debt specifically in it revolving line of credit d) Benin, Inc.'s debt-paying ability increased

b) Benin, Inc. incurred more debt specifically in its revolving line of credit

Maywood, Inc. has a current ratio of 2. This indicates that the company has $2.00 in ____________ . a) Current liabilities for every $1 of current assets b) Current assets for every $1 of current liabilities c) Total assets for every $1 of current liabilities d) Total assets for every $1 of current assets

b) Current assets for every $1 of current liabilities

Which of the following is used to determine how the sales revenue of a company has changed from one year to the next? a) Horizontal analysis of the balance sheet b) Horizontal analysis of the income statement c) Vertical analysis of the income statement d) Vertical analysis of the balance sheet

b) Horizontal analysis of the income statement

The ________________ is a measure of a company's ability to pay its current liabilities from cash and cash equivalents a) Debt equity ratio b) Cash conversion cycle c) Cash ratio d) Gross profit

c) Cash ratio

If a company is financing more assets with debt than equity, the ____________ . a) Debt to equity ratio will be between 0 to 1 b) Debt to equity ratio will be equal to 1 c) Debt to equity ratio will be more than 1 d) Debt to equity ratio will be negative

c) Debt to equity ratio will be more than 1

Days' sales in receivables measures _______________ . a) How many days it takes to sell inventories b) The number of times a company collects the average accounts receivable balance in one year c) How many days it takes to collect the average level of accounts receivable d) How many days it takes to order and receive inventory

c) How many days it takes to collect the average level of accounts receivable

Which of the following is true of the acid - test ratio? a) It measures a company's ability to meet its short-term obligations with cash and cash equivalents b) It indicates how much cash could be realized by selling the inventory c) It measures a company's ability to pay its current liabilities d) It measures the ability of the company to earn net income

c) It measures a company's ability to pay its current liabilities

The debt to equity ratio of four companies is given below: Lewis, Inc. 1.30 Jackson, Inc. 1.50 Jones Corp. 0.88 Roberts Corp. 09.2 Which of the following companies has the greatest financial risk? a) Jones Corp. b) Lewis, Inc. c) Jackson, Inc. d) Roberts Corp.

c) Jackson, Inc.

A company has a cash ratio of 2.3. What does this imply? a) The company does not have enough cash supply b) The company is not in a position to pay off its long-term liabilities c) The company has an unnecessarily large amount of cash supply d) The company is not in a position to pay off its current liabilities

c) The company has an unnecessarily large amount of cash supply

The times-interest-earned ratios of four companies are given below: Forge Corp. 8.9 Fellow, Inc. 9.2 Stacy Corp. 6.7 Bennett, Inc. 13.5 Which of the above companies has the highest debt-paying ability? a) Forge Corp. b) Fellow, Inc. c) Stacy Corp. d) Bennett, Inc.

d) Bennett, Inc.

There are three main ways to analyze financial statements. Which of the following does not represent one of these ways of analyzing financial statements? a) Ratio analysis b) Vertical analysis c) Horizontal analysis d) Financial statement analysis

d) Financial statement analysis

The cash ratios of four companies are listed below: Juan Corp. 0.24 Rose, Inc. 0.14 Freelance, Inc. 0.20 Pioneer Corp. 0.27 Which company has the maximum ability to repay its current liabilities? a) Juan Corp. b) Freelance, Inc. c) Rose, Inc. d) Pioneer Corp.

d) Pioneer Corp.

A lower days' sales in inventory for Moonshine, Inc., when compared to other companies, indicates that it is _____________. a) Incurring higher insurance costs b) Holding excess obsolete inventory c) Spending more on inventory storage d) Selling its inventory more quickly

d) Selling its inventory more quickly

Which of the following statements is true of the debt to equity ratio? a) If the debt to equity ratio is less than 1, the company is financing more assets with debt more than with equity b) The higher the debt to equity ratio, the lower the company's financial risk c) If the debt to equity ratio is greater than 1, the company is financing more assets with equity than debt d) The higher the debt to equity ratio, the greater the company's financial risk

d) The higher the debt to equity ratio, the greater the company's financial risk