MOD 3 CHAPTER 12

The profit margin ratio indicates Multiple choice question. what amount of assets goes toward net income. the amount of net income achieved for each dollar of inventory. the amount of net income achieved for each dollar of collection on receivables. what amount of sales goes toward net income.

what amount of sales goes toward net income.

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 Multiple choice question. $100,000. $46,000. $15,000. $2,000. $34,000. $3,000.

$100,000. (Vertical: Income Statement use "Net Sales)

Indigo, Inc.'s stock price was $60 last year and is now $70. Given that Indigo's earnings per share was $3 last year and is now $4, which of the following are true? Multiple select question. The PE ratio is higher now. The stock price was more reasonable last year. The stock price is more reasonable now. The PE ratio was higher last year.

+ The PE ratio is higher now. Reason: The PE ratio is lower at 17.5 (=$70/$4) than last year at 20 (=$60/$3) meaning the price is better given the earnings the stock produced. + The stock price was more reasonable last year. Reason: The stock price was more reasonable now based on a comparing the price to the earnings per share. The PE ratio is lower at 17.5 (=$70/$4) than last year at 20 (=$60/$3) meaning the price is better given the earnings the stock produced.

Which of the following would be the best current ratio, assuming the company had excellent liquidity and an ability to generate positive income? Multiple choice question. 1.0 2.4 1.5 0.90

2.4

Gamble & Protector, Inc. had Net income of $1,000,000 during 2018. Gamble & Protector, Inc.'s stock price was $80 and its average shares of stock outstanding was 250,000 shares at December 31, 2018. Its P/E ratio equals: Multiple choice question. 4.00 0.05 12.5 20.0

20.0 (Reason: EPS=$1,000,000/250,000=$4; P/E=$80/$4=20.0)

Which of the following factors external to the company will usually decrease a company's gross profit ratio? Multiple choice question. An increase in sales tax A decrease in the cost of inventory An increase in competition A decrease in competition An increase in the sales price

An increase in competition

Where are the effects of discontinued operations reported on the income statement? Multiple choice question. Before restructuring expenses. Below income from continuing operations. Below gross profit

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%. Multiple choice question. Company B Company C Company A

Company A

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? Multiple choice question. Company B collects its receivables faster than Company A. Company A collects its receivables faster than Company B. Company B has more receivables than Company A. Company A makes more sales on account than Company B. Company B makes more sales on account than Company A.

Company B collects its receivables faster than Company A.

Which of following accounting practices could be considered aggressive? Multiple select question. Depreciating an asset over a longer estimated service life Higher estimation of the allowance for uncollectible accounts Depreciating an asset over a shorter estimated service life Lower estimation of the allowance for uncollectible accounts

Depreciating an asset over a longer estimated service life Lower estimation of the allowance for uncollectible accounts

Which of following accounting practices are conservative? Multiple select question. Estimating a smaller allowance for uncollectible accounts Depreciating an asset over a shorter estimated service life Depreciating an asset over a longer estimated service life Estimating a larger allowance for uncollectible accounts

Depreciating an asset over a shorter estimated service life Estimating a larger allowance for uncollectible accounts

Which of following accounting practices are conservative? Multiple select question. Delaying the recognition of contingent litigation Depreciating an asset over a longer estimated service life Recording contingent litigation Depreciating assets over a shorter service life

Recording contingent litigation Depreciating assets over a shorter service life

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

The acid-test ratio

If a company has a current ratio of 1.2, which of the following is true? Multiple choice question. The company has $1.20 in current assets for each dollar of current liabilities. The company has $1.20 in current assets for each dollar of equity. The company has 1.2 times more current assets than its competitors. The company has $1.20 in current liabilities greater than its current assets.

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

______ analysis identifies the relative contribution made by each financial statement line item. Multiple choice question. Horizontal Ratio Vertical

Vertical

______ analysis is a technique that expresses each financial statement amount as a percentage of another amount on the same financial statement. Multiple choice question. Horizontal Ratio Vertical

Vertical

*** What type of entry may be most frequently used to manipulate earnings? Multiple choice question. Journal entries during the year Year-end adjustments Beginning-of-year entries Closing entries

Year-end adjustments

** ______ - _______ adjustments that increase or decrease earnings should be investigated with more skepticism..

Year; end

Which of the following scenarios is consistent with a high current ratio? Multiple choice question. low level of inventory relatively small amount of long-term debt relatively high level of accounts payable a high level of inventory

a high level of inventory

Which is typically preferable for a company? Multiple choice question. a long average collection period a short average collection period

a short average collection period

** The sum of cash, current investments, and accounts receivable divided by current liabilities equals the Multiple choice question. asset turnover ratio acid-test ratio current ratio

acid-test ratio

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

acid; test

Profit margin multiplied by asset turnover equals return on ________.

assets

A higher Price-Earnings Ratio: Multiple choice question. indicates less earnings growth potential measures current liquidity indicates more earnings growth potential measures current profitability

indicates more earnings growth potential

A high inventory turnover ratio indicates that Multiple choice question. inventory was purchased more frequently during the year. the average collection period has increased. inventory was sold frequently during the year. sales increased relative to the previous year.

inventory was sold frequently during the year.

Discontinued operations should be reported on the income statement: Multiple choice question. net of tax below income from continuing operations pre-tax with other income and other loss in operating income net of tax in operating income pre-tax before income from continuing operations

net of tax below income from continuing operations

Common types of analysis that help assess a specific company's performance include comparisons: Select all that apply over time to the same industry to another industry between companies

over time to the same industry between companies

A discontinued operation is a business, or a component of business, that the organization Multiple select question. is considering to discontinue plans to discontinue has already discontinued

plans to discontinue has already discontinued

Select all that apply When comparing the financial statements of two different companies, a financial analyst would use which two categories of ratios? Multiple select question. equity ratios risk ratios asset ratios profitability ratios

risk ratios profitability ratios

*** To perform a vertical analysis of an income statement, you would divide each line item on the statement by ______. Multiple choice question. total assets net income operating expenses cost of goods sold sales

sales

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

solvency

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

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? Multiple choice question. the cookie line a specific granola bar a specific type of cracker

the cookie line

To calculate a year-to-year percentage change in any financial statement line item, you should take ______, then divide by the prior year's amount, and finally multiply the result by 100. Multiple choice question. the prior year's financial statement amount minus the current year's amount the average of the current year's financial statement amount and the prior year's amount the current year's financial statement amount minus the prior year's amount

the current year's financial statement amount minus the prior year's amount

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

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

PART C

BELOW AFTER >>>

Which of the following are liquidity ratios? Select all that apply Return on equity ratio Debt to asset ratio Current ratio Acid-test ratio

Current ratio Acid-test ratio

Which of the following is a solvency ratio? Multiple choice question. Debt-to-equity Current ratio Net profit margin Return on equity

Debt-to-equity

Which of the following items requires separate disclosure after income from continuing operations? Multiple choice question. Gain on sale of equipment Restructuring costs Impairment loss Discontinued operations

Discontinued operations

True or false: Gross profit ratios normally increase as competition increases.

False (Reason: Increased competition drives selling prices down resulting in lower gross profit ratios.)

** _______ profit ratio indicates the portion of each dollar of sales above the cost of goods sold.

Gross

Which of the following are aggressive accounting policies that will increase net income? Multiple select question. Increasing the useful lives of fixed assets for depreciation purposes. Writing down a higher amount of obsolete inventory. Recording a high amount of estimated litigation losses. Estimating a lower amount of accounts that are uncollectible.

Increasing the useful lives of fixed assets for depreciation purposes. Estimating a lower amount of accounts that are uncollectible.

Which of the following would improve a current ratio that is now 1.2? Multiple select question. Purchasing inventory on account Buying equipment in exchange for a two-year note Issuing stock for cash Selling long-term assets for cash Purchasing land for cash

Issuing stock for cash Selling long-term assets for cash

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

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

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

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

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

Liquidity

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

Liquidity

*** 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? Multiple select question. Prepaid expenses Accounts receivable Inventory Short-term trading securities

Prepaid expenses Inventory

Which two ratios when multiplied with each other will yield the return on assets? Multiple choice question. Profit margin; Asset turnover Gross profit ratio; asset turnover Profit margin; gross profit ratio Return on equity; profit margin

Profit margin; Asset turnover

*** Many investors view this type of indicator as the number one measure of a company's success. Multiple choice question. Liquidity Profitability Solvency

Profitability

Select all that apply Puffin Turnovers, Inc.'s asset turnover was 1.5 while Muffin Tops, Inc.'s asset turnover was 0.9. Which of the following are true about Puffin compared with Muffin? Multiple select question. Puffin had more sales for each dollar of assets. Puffin's total assets are greater. Puffin generated sales more efficiently. Puffin's sales are greater.

Puffin had more sales for each dollar of assets. Puffin generated sales more efficiently.

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

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

Which of these is a solvency ratio? Multiple choice question. Current ratio Times interest earned Fixed asset turnover Asset turnover

Times interest earned

Which of the following is/are common terms used for horizontal analysis? Select all that apply Trend analysis Probability analysis Common-size analysis Time-series analysis

Trend analysis Time-series analysis

Changes in accounting estimates and practices usually: Multiple select question. change cash flows change amounts reported on the income statement do not change cash flows do not change amounts reported on the income statement

change amounts reported on the income statement do not change cash flows

The receivables turnover ratio offers an indication of how quickly a company is able to Multiple choice question. collect its accounts receivable. pay for its inventory. generate cash from financing activities. generate revenue.

collect its accounts receivable.

*** Vertical analysis is also commonly known as __________-size analysis.

common

Accounting practices that result in lower income, lower assets, and increased liabilities are referred as ________ accounting.

conservative

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. Multiple choice question. change in accounting principle other revenue or expense revenue reduction discontinued operation

discontinued operation

An item that requires separate disclosure on the income statement after income from continuing operations is Multiple choice question. restructuring costs. discontinued operations. interest expense. research and development costs.

discontinued operations.

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

discontinued; operation

*** The profit margin ratio indicates the amount of net income achieved for Multiple choice question. each dollar of inventory. each collection on receivable. each dollar of total assets. each dollar of sales.

each dollar of sales.

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

horizontal

To analyze changes in a company's net income over the last 10 years, you should perform a ______. Multiple choice question. horizontal analysis ratio analysis vertical analysis

horizontal analysis

*** The type of analysis used to analyze trends in financial statement data over time is called Multiple choice question. vertical analysis. horizontal analysis.

horizontal analysis.

Other gains and losses are reported Multiple choice question. in income from continuing operations net of tax on the income statement. in income from continuing operations on the income statement. as a contra account to the related asset on the balance sheet. in other comprehensive income net of tax.

in income from continuing operations on the income statement.

Horizontal analysis ______. Multiple choice question. provides an understanding of the relationships among various items on financial statements is used to identify trends over time identifies the relative contribution made by each financial statement line item

is used to identify trends over time

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

its prior years' performance

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

its prior years' performance

A high inventory turnover ratio could be caused by Multiple select question. high purchases of inventory. low ending inventory levels. high accounts receivable as compared to inventory. high cost of goods sold.

low ending inventory levels. high cost of goods sold.

*** ________ 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

The ability of reported earnings to reflect the company's true earnings is referred to as: Multiple choice question. earnings management quality of earnings comprehensive income

quality of earnings

Which of the following are profitability ratios? Multiple select question. return on assets price-earnings ratio current ratio times interest earned ratio gross profit ratio

return on assets price-earnings ratio gross profit ratio

To calculate a year-to-year percentage change in any financial statement line item such as sales, you should take the current year's amount, subtract the prior year's amount, then divide by ______, and finally multiply the result by 100. Multiple choice question. net income the prior year's amount total assets the industry average the current year's amount

the prior year's amount

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

total asset

*** A common-size balance sheet will list each line item as a percentage of Multiple choice question. total retained earnings. total liabilities. total revenues. total assets.

total assets.

A common-size balance sheet will list each line item as a percentage of Multiple choice question. total retained earnings. total revenues. total assets. total liabilities.

total assets.

Common-size analysis is another term used for a ____ analysis Multiple choice question. horizontal vertical

vertical