TEST BANK managerial accounting by 5e kieso weygand ch14

CHAPTER 14
FINANCIAL STATEMENT ANALYSIS: THE BIG PICTURE
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY
Item

SO

BT

Item

SO

BT

Item

SO

BT

Item

SO

BT

5
5
6
6

7
7
2
3

C
C
K
K
K
K
K
K

5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5

5
5
5
5
5
5
6
6
6
6

AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP

AP
AP
AP
AP
AP
AP
K

Item

SO

BT

33.
34.
sg
35.
sg
36.

4
5
5
6

K
K
K
K

141.
142.
143.
144.
145.
146.
147.
148.
149.
150.
151.
sg
152.
sg
153.
st
154.
sg
155.
sg
156.
sg
157.
sg
158.
sg
159.
sg
160.

sg
161.
sg
162.

6
6
6
6
6
6
6
6
6
7
1
1
3
4
4
5
5
5
5
6
6
6

K
AP

AP
C
K
K
K
C
K
C

True-False Statements
1.
2.
3.
4.
5.
6.
7.
8.

1
1
1
1
1
2
2
3

C
K

K
K
K
K
K
K

9.
10.
11.
12.
13.
14.
15.
16.

3
3
3
4
4
4
4
4

K
AP
C
K
C

C
C
C

17.
18.
19.
20.
21.
22.
23.
24.

4
5
5
5
5
5
5
5

K
K
K
K
K
C
C
C

25.
26.
27.
28.
29.
30.
sg
31.
sg
32.

sg
sg

Multiple Choice Questions
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.

51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
sg
st

1
1
1
1
1
1
1
1
2
2
2
2
2
2
3

3
3
3
3
3
3
3
3
3
4
4

K
K
C
C
C
C
C
K
K
K
K
K
K
K
K
K
K
AP

K
C
C
C
AP
AP
AP
AP

63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.

84.
85.
86.
87.
88.

4
4
4
4
4
4
4
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5

5
5

K
K
C
C
C
C
C
C
C
K
K
K
AP
AP
AP
AP
K
C
C
K
AP
AP
AP
C
K
AP

89.
90.
91.
92.
93.
94.
95.
96.
97.
98.
99.
100.
101.
102.
103.
104.
105.
106.
107.
108.
109.
110.
111.
112.
113.
114.

5
5
5

5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5

K
C
C
C
C
C

C
AP
C
C
K
C
AP
AP
C
K
AP
C
C
AP
K
C
K
K
K
AP

115.
116.
117.
118.
119.
120.
121.
122.
123.

124.
125.
126.
127.
128.
129.
130.
131.
132.
133.
134.
135.
136.
137.
138.
139.
140.

This question also appears in the Study Guide.
This question also appears in a self-test at the student companion website.


14 - 2

Test Bank for ISV Managerial Accounting, Fourth Edition

SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY
Brief Exercises
163.
164.

165.

3
3
3

AP
AP
AN

166.
167.
168.

3
4
4

AP
AP
AP

169.
170.
171.

5
5
5

K
AP
AP

172.
173.

5
6

AP
AP

192.
193.
194.
195.
196.
197.

5
5
5
6
6
6

AN
AP
AP

AP
AP
AP

198.
199.

6
6

AP
AP

5
6
6

K
K
K

212.

6

K

Exercises
174.
175.

176.
177.
178.
179.

3
3
3
3
3,4
3,4

AP
AP
AP
AN
AP
AP

180.
181.
182.
183.
184.
185.

4
4
5
5

5
5

AP
AN
AP
AP
AP
AN

186.
187.
188.
189.
190.
191.

5
5
5
5
5
5

AP
AP
AP
AP
AP
E

Completion Statements
200.
201.
202.

1
3
4

K
K
K

203.
204.
205.

5
5
5

K
K
AP

206.
207.
208.

5
5
5

AP
K
K

209.
210.
211.

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE
Item

Type

Item

Type

Item

1.
2.
3.

TF
TF
TF

4.
5.
37.

TF
TF
MC

38.
39.
40.

6.
7.

TF
TF

31.
45.

TF
MC

46.
47.

8.
9.

10.
11.

TF
TF
TF
TF

32.
51.
52.
53.

TF
MC
MC
MC

54.
55.
56.
57.

12.
13.
14.
15.

TF
TF

TF
TF

16.
17.
33.
61.

TF
TF
TF
MC

62.
63.
64.
65.

18.
19.
20.
21.
22.
23.
24.
25.

TF
TF
TF

TF
TF
TF
TF
TF

75.
76.
77.
78.
79.
80.
81.
82.

MC
MC
MC
MC
MC
MC
MC
MC

91.
92.
93.
94.
95.
96.

97.
98.

Type

Item

Type

Item

Study Objective 1
MC
41. MC
44.
MC
42. MC
151.
MC
43. MC
152.
Study Objective 2
MC
48. MC
50.
MC
49. MC
Study Objective 3
MC
58. MC

163.
MC
59. MC
164.
MC
60. MC
165.
MC
153. MC
166.
Study Objective 4
MC
66. MC
154.
MC
67. MC
155.
MC
68. MC
167.
MC
69. MC
168.
Study Objective 5
MC
107. MC
123.
MC
108. MC
124.

MC
109. MC
125.
MC
110. MC
126.
MC
111. MC
127.
MC
112. MC
128.
MC
113. MC
129.
MC
114. MC
130.

Type

Item

Type

Item

Type

MC

MC
MC

200.

C

BE
BE
BE
BE

174.
175.
176.
177.

Ex
Ex
Ex
Ex

178.
179.
201.

Ex
Ex
C

MC
MC
BE
BE

178.
179.
180.
181.

Ex
Ex
Ex
Ex

202.

C

MC
MC
MC
MC
MC
MC
MC
MC

158.
159.

169.
170.
171.
172.
182.
183.

MC
MC
BE
BE
BE
BE
Ex
Ex

188.
193.
194.
203.
204.
205.
206.
207.

Ex
Ex
Ex
C
C

C
C
C

MC


Financial Statement Analysis: The Big Picture

26.
34.
35.
70.
71.
72.
73.
74.

TF
TF
TF
MC
MC
MC
MC
MC

83.
84.
85.

86.
87.
88.
89.
90.

MC
MC
MC
MC
MC
MC
MC
MC

99.
100.
101.
102.
103.
104.
105.
106.

27.
28.
36.
137.

TF

TF
TF
MC

138.
139.
140.
141.

MC
MC
MC
MC

142.
143.
144.
145.

29.

TF

30.

TF

150.

Study Objective 5 (cont.)

MC
115. MC
131.
MC
116. MC
132.
MC
117. MC
133.
MC
118. MC
134.
MC
119. MC
135.
MC
120. MC
136.
MC
121. MC
156.
MC
122. MC
157.
Study Objective 6
MC
146. MC
160.
MC
147. MC

161.
MC
148. MC
162.
MC
149. MC
173.
Study Objective7
MC

14 - 3

MC
MC
MC
MC
MC
MC
MC
MC

184.
185.
186.
187.
189.
190.
191.
192.

Ex
Ex
Ex
Ex
Ex
Ex
Ex
Ex

208.
209.

C
C

MC
MC
MC
BE

195.
196.
197.
198.

Ex
Ex
Ex
Ex

199.
210.
211.
212.

Ex
C
C
C

Note: TF = True-False
BE = Brief Exercise
C = Completion
MC = Multiple Choice
Ex = Exercise
The chapter also contains two sets of ten Matching questions and four Short-Answer Essay
questions.

CHAPTER STUDY OBJECTIVES
1. Discuss the need for comparative analysis. There are three bases of comparison: (1)
Intracompany, which compares an item or financial relationship with other data within a
company. (2) Industry, which compares company data with industry averages. (3)
Intercompany, which compares an item or financial relationship of a company with data of one
or more competing companies.
2. Identify the tools of financial statement analysis. Financial statements can be analyzed
horizontally, vertically, and with ratios.
3. Explain and apply horizontal analysis. Horizontal analysis is a technique for evaluating a
series of data over a period of time to determine the increase or decrease that has taken
place, expressed as either an amount or a percentage.
4. Describe and apply vertical analysis. Vertical analysis is a technique that expresses each

item within a financial statement in terms of a percentage of a relevant total or a base amount.
5. Identify and compute ratios used in analyzing a firm's liquidity, profitability, and
solvency. The formula and purpose of each ratio is presented in Illustration 14-27.
6. Understand the concept of earning power, and how irregular items are presented.
Earning power refers to a company’s ability to sustain its profits from operations. “Irregular
items”—discontinued operations and extraordinary items—are presented net of tax below
income from continuing operations to highlight their unusual nature.
7. Understand the concept of quality of earnings. A high quality of earnings provides full and
transparent information that will not confuse or mislead users of financial statements. Issues
related to quality of earnings are (1) alternative accounting methods, (2) pro forma income,
and (3) improper recognition.


14 - 4

Test Bank for ISV Managerial Accounting, Fourth Edition

TRUE-FALSE STATEMENTS
1.

Intracompany comparisons of the same financial statement items can often detect
changes in financial relationships and significant trends.

2.

Calculating financial ratios is a financial reporting requirement under generally accepted
accounting principles.

3.

Measures of a company's liquidity are concerned with the frequency and amounts of
dividend payments.

4.

Analysis of financial statements is enhanced with the use of comparative data.

5.

Comparisons of company data with industry averages can provide some insight into the
company's relative position in the industry.

6.

Vertical and horizontal analyses are concerned with the format used to prepare financial
statements.

7.

Horizontal, vertical, and circular analyses are the most common tools of financial
statement analysis.

8.

Horizontal analysis is a technique for evaluating a financial statement item in the current
year with other items in the current year.

9.

Another name for trend analysis is horizontal analysis.

10.

If a company has sales of $110 in 2008 and $154 in 2009, the percentage increase in
sales from 2008 to 2009 is 140%.

11.

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.

12.

Common size analysis expresses each item within a financial statement in terms of a
percent of a base amount.

13.

Vertical analysis is a more sophisticated analytical tool than horizontal analysis.

14.

Vertical analysis is useful in making comparisons of companies of different sizes.

15.

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

16.

Using vertical analysis of the income statement, a company's net income as a percentage
of net sales is 10%; therefore, the cost of goods sold as a percentage of sales must be
90%.

17.

In the vertical analysis of the income statement, each item is generally stated as a
percentage of net income.

18.

A ratio can be expressed as a percentage, a rate, or a proportion.


Financial Statement Analysis: The Big Picture

14 - 5

19.

A solvency ratio measures the income or operating success of an enterprise for a given
period of time.

20.

The current ratio is a measure of all the ratios calculated for the current year.

21.

Inventory turnover measures the number of times on average the inventory was sold
during the period.

22.

Profitability ratios are frequently used as a basis for evaluating management's operating
effectiveness.

23.

The rate of return on total assets will be greater than the rate of return on common
stockholders' equity if the company has been successful in trading on the equity at a gain.

24.

From a creditor's point of view, the higher the total debt to total assets ratio, the lower the
risk that the company may be unable to pay its obligations.

25.

A current ratio of 1.2 to 1 indicates that a company's current assets exceed its current
liabilities.

26.

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

27.

When the disposal of a significant segment occurs, the income statement should report
both income from continuing operations and income (loss) from discontinued operations.

28.

An event or transaction should be classified as an extraordinary item if it is unusual in
nature or if it occurs infrequently.

29.

Variations among companies in the application of generally accepted accounting
principles may reduce quality of earnings.

30.

Pro forma income usually excludes items that the company thinks are unusual or
nonrecurring.

Additional True-False Questions
31.

The three basic tools of analysis are horizontal analysis, vertical analysis, and ratio
analysis.

32.

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

33.

In vertical analysis, the base amount in an income statement is usually net sales.

34.

Profitability ratios measure the ability of the enterprise to survive over a long period of
time.

35.

The days in inventory is computed by multiplying inventory turnover by 365.

36.

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


14 - 6

Test Bank for ISV Managerial Accounting, Fourth Edition

Answers to True-False Statements
Item

1.
2.
3.
4.
5.
6.

Ans.

T
F
F
T
T
F

Item

7.
8.
9.
10.
11.
12.

Ans.

F
F
T
F
T
T

Item

13.
14.
15.
16.
17.
18.

Ans.

F
T
F
F
F
T

Item

19.
20.
21.
22.
23.
24.

Ans.

F
F
T

T
F
F

Item

25.
26.
27.
28.
29.
30.

Ans.

T
F
T
F
T
T

Item

31.
32.
33.
34.
35.
36.

Ans.

T
F
T
F
F
T

MULTIPLE CHOICE QUESTIONS
37.

Which one of the following is primarily interested in the liquidity of a company?
a. Federal government
b. Stockholders
c. Long-term creditors
d. Short-term creditors

38.

Which one of the following is not a characteristic generally evaluated in analyzing financial
statements?
a. Liquidity
b. Profitability
c. Marketability
d. Solvency

39.

In analyzing the financial statements of a company, a single item on the financial
statements
a. should be reported in bold-face type.
b. is more meaningful if compared to other financial information.
c. is significant only if it is large.
d. should be accompanied by a footnote.

40.

Short-term creditors are usually most interested in evaluating
a. solvency.
b. liquidity.
c. marketability.
d. profitability.

41.

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

42.

Stockholders are most interested in evaluating
a. liquidity and solvency.
b. profitability and solvency.
c. liquidity and profitability.
d. marketability and solvency.

Financial Statement Analysis: The Big Picture

14 - 7

43.

A stockholder is interested in the ability of a firm to
a. pay consistent dividends.
b. appreciate in share price.
c. survive over a long period.
d. all of these.

44.

Comparisons of financial data made within a company are called
a. intracompany comparisons.
b. interior comparisons.
c. intercompany comparisons.
d. intramural comparisons.

45.

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.

46.

Which one of the following is not a tool in financial statement analysis?
a. Horizontal analysis
b. Circular analysis
c. Vertical analysis
d. Ratio analysis

47.

In analyzing financial statements, horizontal analysis is a
a. requirement.
b. tool.
c. principle.
d. theory.

48.

Horizontal analysis is also called
a. linear analysis.
b. vertical analysis.
c. trend analysis.
d. common size analysis.

49.

Vertical analysis is also known as
a. perpendicular analysis.
b. common size analysis.

c. trend analysis.
d. straight-line analysis.

50.

In ratio analysis, the ratios are never expressed as a
a. rate.
b. negative figure.
c. percentage.
d. simple proportion.


14 - 8

Test Bank for ISV Managerial Accounting, Fourth Edition

51.

The formula for horizontal analysis of changes since the base period is the current year
amount
a. divided by the base year amount.
b. minus the base year amount divided by the base year amount.
c. minus the base year amount divided by the current year amount.
d. plus the base year amount divided by the base year amount.

52.

Horizontal analysis evaluates a series of financial statement data over a period of time
a. that has been arranged from the highest number to the lowest number.
b. that has been arranged from the lowest number to the highest number.

c. to determine which items are in error.
d. to determine the amount and/or percentage increase or decrease that has taken
place.

53.

Horizontal analysis evaluates financial statement data
a. within a period of time.
b. over a period of time.
c. on a certain date.
d. as it may appear in the future.

54.

Assume the following sales data for a company:
2010
2009
2008
2007

$1,000,000
900,000
750,000
600,000

If 2007 is the base year, what is the percentage increase in sales from 2007 to 2009?
a. 100%
b. 150%
c. 50%
d. 66.7%

55.

Comparative balance sheets are usually prepared for
a. one year.
b. two years.
c. three years.
d. four years.

56.

Horizontal analysis is appropriately performed
a. only on the income statement.
b. only on the balance sheet.
c. only on the statement of retained earnings.
d. on all three of these statements.

57.

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.


Financial Statement Analysis: The Big Picture

14 - 9

58.

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.

59.

Assume the following sales data for a company:
2009
2008
2007

$945,000
780,000
650,000

If 2007 is the base year, what is the percentage increase in sales from 2007 to 2008?
a. 25%
b. 20%
c. 125%
d. 143%
60.

Assume the following cost of goods sold data for a company:
2009

2008
2007

$1,500,000
1,200,000
900,000

If 2007 is the base year, what is the percentage increase in cost of goods sold from 2007
to 2009?
a. 167%
b. 67%
c. 60%
d. 40%
Use the following information for questions 61–62:
Moon Beam, Inc. has the following income statement (in millions):
MOON BEAM, INC.
Income Statement
For the Year Ended December 31, 2008
Net Sales
Cost of Goods Sold
Gross Profit
Operating Expenses
Net Income
61.

$180
120
60
33
$ 27

Using vertical analysis, what percentage is assigned to Cost of Goods Sold?
a. 67%
b. 33%
c. 100%
d. None of the above


14 - 10 Test Bank for ISV Managerial Accounting, Fourth Edition
62.

Using vertical analysis, what percentage is assigned to Net Income?
a. 100%
b. 85%
c. 15%
d. None of the above

63.

Vertical analysis is also called
a. common size analysis.
b. horizontal analysis.
c. ratio analysis.
d. trend analysis.

64.

Vertical analysis is a technique which expresses each item within a financial statement
a. in dollars and cents.
b. in terms of a percentage of the item in the previous year.

c. in terms of a percent of a base amount.
d. starting with the highest value down to the lowest value.

65.

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.

66.

In performing a vertical analysis, the base for prepaid expenses is
a. total current assets.
b. total assets.
c. total liabilities and stockholders' equity.
d. prepaid expenses.

67.

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.

68.

In performing a vertical analysis, the base for sales returns and allowances is

a. sales.
b. sales discounts.
c. net sales.
d. total revenues.

69.

In performing a vertical analysis, the base for cost of goods sold is
a. total selling expenses.
b. net sales.
c. total revenues.
d. total expenses.


Financial Statement Analysis: The Big Picture

14 - 11

70.

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 turnover.

71.

A ratio calculated in the analysis of financial statements
a. expresses a mathematical relationship between two numbers.

b. shows the percentage increase from one year to another.
c. restates all items on a financial statement in terms of dollars of the same purchasing
power.
d. is meaningful only if the numerator is greater than the denominator.

72.

A liquidity ratio measures the
a. income or operating success of an enterprise over a period of time.
b. ability of the enterprise to survive over a long period of time.
c. short-term ability of the enterprise to pay its maturing obligations and to meet
unexpected needs for cash.
d. number of times interest is earned.

73.

The current ratio is
a. calculated by dividing current liabilities by current assets.
b. used to evaluate a company's liquidity and short-term debt paying ability.
c. used to evaluate a company's solvency and long-term debt paying ability.
d. calculated by subtracting current liabilities from current assets.

74.

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.

75.

Walker Clothing Store had a balance in the Accounts Receivable account of $780,000 at
the beginning of the year and a balance of $820,000 at the end of the year. Net credit
sales during the year amounted to $8,000,000. The average collection period of the
receivables in terms of days was
a. 30 days.
b. 365 days.
c. 10 days.
d. 37 days.

76.

Parr Hardware Store had net credit sales of $5,200,000 and cost of goods sold of
$4,000,000 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. 7.4 times.
b. 8.7 times.
c. 6.2 times.
d. 8 times.


14 - 12 Test Bank for ISV Managerial Accounting, Fourth Edition
Use the following information for questions 77–78.
Waters Department Store had net credit sales of $12,000,000 and cost of goods sold of
$9,000,000 for the year. The average inventory for the year amounted to $2,000,000.
77.

Inventory turnover for the year is

a. 6 times.
b. 10.5 times.
c. 4.5 times.
d. 3 times.

78.

The average number of days in inventory during the year was
a. 122 days.
b. 81 days.
c. 61 days.
d. 35 days.

79.

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

80.

Which one of the following would not be considered a liquidity ratio?
a. Current ratio
b. Inventory turnover
c. Acid-test ratio
d. Return on assets

81.

Asset turnover measures
a. how often a company replaces its assets.
b. how efficiently a company uses its assets to generate sales.
c. the portion of the assets that have been financed by creditors.
d. the overall rate of return on assets.

82.

Profit margin is calculated by dividing
a. sales by cost of goods sold.
b. gross profit by net sales.
c. net income by stockholders' equity.
d. net income by net sales.

Use the following information for questions 83–84.
Raney Corporation had net income of $200,000 and paid dividends to common stockholders of
$50,000 in 2008. The weighted average number of shares outstanding in 2008 was 50,000
shares. Raney Corporation's common stock is selling for $40 per share on the New York Stock
Exchange.
83.

Raney Corporation's price-earnings ratio is
a. 2.5 times.
b. 10 times.
c. 13.3 times.
d. 4 times.


Financial Statement Analysis: The Big Picture

84

Raney Corporation's payout ratio for 2008 is
a. $4 per share.
b 33.3%.
c. 25%.
d. 10%.

85

Holt Company reported the following on its income statement:
Income before income taxes
Income tax expense
Net income

14 - 13

$400,000
120,000
$280,000

An analysis of the income statement revealed that interest expense was $50,000. Holt
Company's times interest earned was
a. 9 times.
b. 8 times.
c. 7 times.
d. 6 times.
86.

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.

87.

Trading on the equity (leverage) refers to the
a. amount of working capital.
b. amount of capital provided by owners.
c. use of borrowed money to increase the return to owners.
d. number of times interest is earned.

88.

The current assets of Kile Company are $150,000. The current liabilities are $120,000.
The current ratio expressed as a proportion is
a. 125%.
b. 1.25 : 1
c. .80 : 1
d. $150,000 ÷ $120,000.

89.

The current ratio may also be referred to as the
a. short run ratio.
b. acid-test ratio.
c. working capital ratio.
d. contemporary ratio.

90.

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.


14 - 14 Test Bank for ISV Managerial Accounting, Fourth Edition
91.

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.

92.

Which one of the following ratios would not likely be used by a short-term creditor in
evaluating whether to sell on credit to a company?
a. Current ratio
b. Acid-test ratio
c. Asset turnover
d. Receivables turnover

93.

Ratios are used as tools in financial analysis

a. instead of horizontal and vertical analyses.
b. because they may provide information that is not apparent from inspection of the
individual components of the ratio.
c. because even single ratios by themselves are quite meaningful.
d. because they are prescribed by GAAP.

94.

The ratios that are used to determine a company's short-term debt paying ability are
a. asset turnover, times interest earned, current ratio, and receivables turnover.
b. times interest earned, inventory turnover, current ratio, and receivables turnover.
c. times interest earned, acid-test ratio, current ratio, and inventory turnover.
d. current ratio, acid-test ratio, receivables turnover, and inventory turnover.

95.

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.

Use the following information for questions 96–97.
Risen Company had $250,000 of current assets and $90,000 of current liabilities before
borrowing $50,000 from the bank with a 3-month note payable.
96.

What effect did the borrowing transaction have on the amount of Risen Company's
working capital?
a. No effect

b. $50,000 increase
c. $90,000 increase
d. $50,000 decrease

97.

What effect did the borrowing transaction have on Risen Company's current ratio?
a. The ratio remained unchanged.
b. The change in the current ratio cannot be determined.
c. The ratio decreased.
d. The ratio increased.


Financial Statement Analysis: The Big Picture

14 - 15

98.

If equal amounts are added to the numerator and the denominator of the current ratio, the
ratio will always
a. increase.
b. decrease.
c. stay the same.
d. equal zero.

99.

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.

100.

If a company has an acid-test ratio of 1.2:1, what respective effects will the borrowing of
cash by short-term debt and collection of accounts receivable have on the ratio?
Short-term Borrowing
Collection of Receivable
a.
Increase
No effect
b.
Increase
Increase
c.
Decrease
No effect
d.
Decrease
Decrease

101.

A company has a receivables turnover of 10 times. The average net receivables during
the period are $500,000. What is the amount of net credit sales for the period?
a. $50,000
b. $5,000,000
c. $600,000

d. Cannot be determined from the information given

102.

If the average collection period is 35 days, what is the receivables turnover?
a. 9.45 times
b. 10.4 times
c. 5.2 times
d. None of these

103.

A general rule to use in assessing the average collection period is that
a. it should not exceed 30 days.
b. it can be any length as long as the customer continues to buy merchandise.
c. it should not greatly exceed the discount period.
d. it should not greatly exceed the credit term period.

104.

Inventory turnover is calculated by dividing
a. cost of goods sold by the ending inventory.
b. cost of goods sold by the beginning inventory.
c. cost of goods sold by the average inventory.
d. average inventory by cost of goods sold.

105.

A company has an average inventory on hand of $100,000 and the days in inventory is 73
days. What is the cost of goods sold?

a. $500,000
b. $7,300,000
c. $1,000,000
d. $3,650,000


14 - 16 Test Bank for ISV Managerial Accounting, Fourth Edition
106.

A successful grocery store would probably have
a. a low inventory turnover.
b. a high inventory turnover.
c. zero profit margin.
d. low volume.

107.

An aircraft company would most likely have
a. a high inventory turnover.
b. low profit margin.
c. high volume.
d. a low inventory turnover.

108.

Net sales are $4,500,000, beginning total assets are $2,100,000, and the asset turnover is
3.0 times. What is the ending total asset balance?
a. $1,500,000
b. $900,000
c. $2,100,000

d. $1,200,000

109.

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.

110.

Which of the following is not a profitability ratio?
a. Payout ratio
b. Profit margin
c. Times interest earned
d. Return on common stockholders' equity

111.

Times interest earned is also called the
a. money multiplier.
b. interest coverage ratio.
c. coupon coverage ratio.
d. premium ratio.

112.

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.

113.

Net income does not appear in the numerator of the
a. profit margin.
b. return on assets.
c. return on common stockholders' equity.
d. payout ratio.


Financial Statement Analysis: The Big Picture

14 - 17

114.

Fall Clothing Store had a balance in the Accounts Receivable account of $820,000 at the
beginning of the year and a balance of $880,000 at the end of the year. Net credit sales
during the year amounted to $6,120,000. The receivables turnover ratio was
a. 7.2 times.
b. 7 times.
c. 6.9 times.
d. 6.8 times.

115.

Fall Clothing Store had a balance in the Accounts Receivable account of $810,000 at the
beginning of the year and a balance of $850,000 at the end of the year. Net credit sales
during the year amounted to $5,810,000. The average collection period of the receivables
in terms of days was
a. 50.9 days.
b. 52.1 days.
c. 365 days.
d. 55.6 days.

Use the following information for questions 116–117.
Luthor Corporation had net income of $160,000 and paid dividends to common stockholders of
$40,000 in 2008. The weighted average number of shares outstanding in 2008 was 50,000
shares. Luthor Corporation's common stock is selling for $50 per share on the New York Stock
Exchange.
116.

Luthor Corporation's price-earnings ratio is
a. 3.2 times.
b. 15.6 times.
c. 10 times.
d. 5 times.

117.

Luthor Corporation's payout ratio for 2008 is
a. $5 per share.
b. 25%.
c. 20%.
d. 12.5%.

118.

Raye Company reported the following on its income statement:
Income before income taxes
Income tax expense
Net income

$500,000
150,000
$350,000

An analysis of the income statement revealed that interest expense was $80,000. Raye
Company's times interest earned was
a. 8 times.
b. 7.25 times.
c. 6.25 times.
d. 4.4 times.


14 - 18 Test Bank for ISV Managerial Accounting, Fourth Edition
Use the following information for questions 119-125.
The following information pertains to Soho Company. Assume that all balance sheet amounts
represent both average and ending balance figures. Assume that all sales were on credit.
Assets
Cash and short-term investments
Accounts receivable (net)
Inventory
Property, plant and equipment
Total Assets

$ 40,000
25,000
20,000
210,000
$295,000

Liabilities and Stockholders’ Equity
Current liabilities
Long-term liabilities
Stockholders’ equity—common
Total Liabilities and Stockholders’ Equity

$ 60,000
85,000
150,000
$295,000

Income Statement
Sales
Cost of goods sold
Gross margin
Operating expenses
Net income
Number of shares of common stock
Market price of common stock
Dividends per share
119.

What is the current ratio for this company?
a. 1.42

b. .80
c. 1.16
d. .60

120.

What is the receivables turnover for this company?
a. 2.8 times
b. 2 times
c. 3.4 times
d. 3 times

121.

What is the inventory turnover for this company?
a. 2 times
b. 2.25 times
c. 1 time
d. .44 times

122.

What is the return on assets for this company?
a. 6.8%
b. 10.5%
c. 11.7%
d. 26.7%

$ 85,000
45,000

40,000
20,000
$ 20,000
6,000
$20
$.90


Financial Statement Analysis: The Big Picture
123.

What is the profit margin for this company?
a. 42.86%
b. 18.75%
c. 23.5%
d. 15.0%

124.

What is the return on common stockholders’ equity for this company?
a. 13.3%
b. 5%
c. 23.3%
d. 53.3%

125.

What is the price-earnings ratio for this company?
a. 6 times
b. 2.5 times

c. 8 times
d. 4 times

14 - 19

Use the following information for questions 126–129.
The following information pertains to Cashe Company. Assume that all balance sheet amounts
represent both average and ending balance figures. Assume that all sales were on credit.
Assets
Cash and short-term investments
Accounts receivable (net)
Inventory
Property, plant and equipment
Total Assets

$ 40,000
30,000
25,000
215,000
$310,000

Liabilities and Stockholders’ Equity
Current liabilities
Long-term liabilities
Stockholders’ equity—common
Total Liabilities and Stockholders’ Equity

$ 60,000
95,000
155,000

$310,000

Income Statement
Sales
Cost of goods sold
Gross margin
Operating expenses
Net income
Number of shares of common stock
Market price of common stock
Dividends per share
126.

What is the return on assets for this company?
a. 6.8%
b. 10.5%
c. 8.1%
d. 16.1%

$ 90,000
45,000
45,000
20,000
$ 25,000
6,000
$20
$1.00


14 - 20 Test Bank for ISV Managerial Accounting, Fourth Edition

127.

What is the profit margin for this company?
a. 50.0%
b. 55.6%
c. 23.5%
d. 27.8%

128.

What is the return on common stockholders’ equity for this company?
a. 7.3%
b. 16.1%
c. 23.5%
d. 53.3%

129.

What is the price-earnings ratio for this company?
a. 6 times
b. 4.2 times
c. 8 times
d. 4.8 times

Use the following information for questions 130–131.
The following information is available for Charles Company:
Accounts receivable
Inventory
Net credit sales
Cost of goods sold

Net income

2008
$ 360,000
280,000
3,000,000
1,200,000
300,000

130.

The receivables turnover ratio for 2008 is
a. 8.3 times.
b. 3.9 times.
c. 7.9 times.
d. 10.0 times.

131.

The inventory turnover ratio for 2008 is
a. 4.3 times.
b. 4.0 times.
c. 2.0 times.
d. 2.4 times.

2007
$ 400,000
320,000
1,400,000
1,060,000

170,000

Use the following information for questions 132–134.
The following amounts were taken from the financial statements of Palmer Company:
2008
Total assets
$800,000
Net sales
720,000
Gross profit
352,000
Net income
144,000
Weighted average number of common shares outstanding 120,000
Market price of common stock
$36

2007
$1,000,000
650,000
320,000
117,000
120,000
$40


Financial Statement Analysis: The Big Picture
132.

The return on assets ratio for 2008 is

a. 18%.
b. 16%.
c. 36%.
d. 32%.

133.

The profit margin ratio for 2008 is
a. 10%.
b. 15%.
c. 20%.
d. 30%.

134.

The price-earnings ratio for 2008 is
a. 30 times.
b. 20 times.
c. 10 times.
d. 5 times.

14 - 21

Use the following information for questions 135–136.
Panza Corporation had net income of $250,000 and paid dividends to common stockholders of
$50,000 in 2008. The weighted average number of shares outstanding in 2008 was 50,000
shares. Panza Corporation's common stock is selling for $40 per share on the New York Stock
Exchange.
135.

Panza Corporation's price-earnings ratio is
a. 2 times.
b. 8 times.
c. 10 times.
d. 5 times.

136.

Panza Corporation's payout ratio for 2008 is
a. $5 per share.
b. 25%.
c. 20%.
d. 12.5%.

137.

Ester’s Bunny Barn has experienced a $40,000 loss due to tornado damage to its
inventory. Tornados have never before occurred in this area. Assuming that the company’s
tax rate is 30%, what amount will be reported for this loss on the income statement?
a. $40,000
b. $28,000
c. $12,000
d. $36,000

138.

Wenger Company reported income before taxes of $600,000 and an extraordinary loss of
$150,000. Assume that the company’s tax rate is 30%. What amounts will be reported on
the income statement for income before irregular items and extraordinary items,
respectively?

a. $420,000 and $150,000
b. $420,000 and $105,000
c. $495,000 and $150,000
d. $495,000 and $105,000


14 - 22 Test Bank for ISV Managerial Accounting, Fourth Edition
139.

Kandy Kane Corporation has income before taxes of $400,000 and an extraordinary gain
of $100,000. If the income tax rate is 25% on all items, the income statement should show
income before irregular items and extraordinary items, respectively, of
a. $325,000 and $100,000.
b. $325,000 and $75,000.
c. $300,000 and $100,000.
d. $300,000 and $75,000.

140.

Hardy Inc. has an investment in available-for-sale securities of $50,000. This investment
experienced an unrealized loss of $3,000 during the current year. Assuming a 35% tax
rate, the effect of this loss on comprehensive income will be
a. no effect.
b. $50,000 increase.
c. $17,500 decrease.
d. $3,000 decrease.

141.

The disposal of a significant segment of a business is called

a. a change in accounting principle.
b. an extraordinary item.
c. an other expense.
d. discontinued operations.

142.

ABC Company reports income before income taxes of $1,800,000 and had an extraordinary loss of $600,000. If the tax rate is 30%,
a. the income before the extraordinary item is $1,440,000.
b. the extraordinary loss would be reported on the income statement at $600,000.
c. the income before the extraordinary item is $1,260,000.
d. the extraordinary loss will be reported at $180,000.

143.

Evers, Inc. disposes of an unprofitable segment of its business. The operation of the
segment suffered a $240,000 loss in the year of disposal. The loss on disposal of the
segment was $120,000. If the tax rate is 30%, and income before income taxes was
$1,500,000,
a. the income tax expense on the income before discontinued operations is $342,000.
b. the income from continuing operations is $1,050,000.
c. net income is $1,140,000.
d. the losses from discontinued operations are reported net of income taxes at $180,000.

144.

Each of the following is an extraordinary item except the
a. effects of major casualties, if rare in the area.
b. effects of a newly enacted law or regulation.
c. expropriation of property by a foreign government.

d. losses attributable to labor strikes.

145.

The discontinued operations section of the income statement refers to
a. discontinuance of a product line.
b. the income or loss on products that have been completed and sold.
c. obsolete equipment and discontinued inventory items.
d. the disposal of a significant component of a business.


Financial Statement Analysis: The Big Picture

14 - 23

146.

Which one of the following would be classified as an extraordinary item?
a. Expropriation of property by a foreign government
b. Losses attributed to a labor strike
c. Write-down of inventories
d. Gains or losses from sales of equipment

147.

A loss on the write down of obsolete inventory should be reported as
a. "other expenses and losses."
b. part of discontinued operations.
c. an operating expense.
d. an extraordinary item.

148.

If an item meets one (but not both) of the criteria for an extraordinary item, it
a. only needs to be disclosed in the footnotes of the financial statements.
b. may be treated as sales revenue (if it is a gain) and as an operating expense (if it is a
loss).
c. is reported as an "other revenue or gain" or "other expense and loss," net of tax.
d. is reported at its gross amount as an "other revenue or gain" or "other expense or
loss."

149.

The order of presentation of nontypical items that may appear on the income statement is
a. Extraordinary items, Discontinued operations, Other revenues and expenses.
b. Discontinued operations, Extraordinary items, Other revenues and expenses.
c. Other revenues and expenses, Discontinued operations, Extraordinary items.
d. Other revenues and expenses, Extraordinary items, Discontinued operations.

150.

Each of the following is a factor affecting quality of earnings except
a. alternative accounting methods.
b. improper recognition.
c. pro forma income.
d. extraordinary items.

Additional Multiple Choice Questions
151.

Comparisons can be made on each of the following bases except
a. industry averages.
b. intercompany basis.
c. intracompany basis.
d. Each of these is a basis for comparison.

152.

Comparisons of data within a company are an example of the following comparative
basis:
a. Industry averages
b. Intercompany
c. Intracompany
d. Interregional


14 - 24 Test Bank for ISV Managerial Accounting, Fourth Edition
153.

Silva Corporation reported net sales of $240,000, $420,000, and $540,000 in the years
2007, 2008, and 2009 respectively. If 2007 is the base year, what is the trend percentage
for 2009?
a. 129%
b. 135%
c. 164%
d. 225%

154.

In vertical analysis, the base amount for each income statement item is

a. gross profit.
b. net income.
c. net sales.
d. sales.

155.

When performing vertical analysis, the base amount for administrative expense is
generally
a. administrative expense in a previous year.
b. net sales.
c. gross profit.
d. fixed assets.

156.

Ratios that measure the short-term ability of the company to pay its maturing obligations
are
a. liquidity ratios.
b. profitability ratios.
c. solvency ratios.
d. trend ratios.

157.

What type of ratios best measure the short-term ability of the enterprise to pay its
maturing obligations and to meet unexpected needs for cash?
a. Leverage
b. Solvency
c. Profitability

d. Liquidity

158.

The acid-test ratio is also known as the
a. current ratio.
b. quick ratio.
c. fast ratio.
d. times interest earned ratio.

159.

The debt to total assets ratio
a. is a solvency ratio.
b. is computed by dividing total assets by total debt.
c. measures the total assets provided by stockholders.
d. is a profitability ratio.

160.

An extraordinary item is one that
a. occurs infrequently and is uncontrollable in nature.
b. occurs infrequently and is unusual in nature.
c. is material and is unusual in nature.
d. is material and is uncontrollable in nature.


Financial Statement Analysis: The Big Picture

14 - 25

161.

Galileo, Inc. decided on January 1 to discontinue its telescope manufacturing division. On
July 1, the division’s assets with a book value of $630,000 are sold for $450,000.
Operating income from January 1 to June 30 for the division amounted to $75,000.
Ignoring income taxes, what total amount should be reported on Galileo’s income
statement for the current year under the caption, Discontinued Operations?
a. $75,000
b. $105,000 loss
c. $180,000 loss
d. $255,000

162.

When there has been a change in accounting principle,
a. the old principle should be used in reporting the results of operations for the current
year.
b. the cumulative effect of the change should be reported in the current year’s retained
earnings statement.
c. the change should be reported retroactively.
d. the new principle should be used un reporting the results of operations of the current
year, but there is no change to prior years.

Answers to Multiple Choice Questions
Item

37.
38.
39.

40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.

Ans.

d
c
b
b
d
b
d
a
c
b
b
c

b
b
b
d
b
c

Item

55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.

Ans.

b
d
c
a
b
b
a
c
a
c
a
b
a
c
b
c
a
c

Item

73.
74.
75.
76.
77.
78.
79.
80.
81.

82.
83.
84.
85.
86.
87.
88.
89.
90.

Ans.

Item

Ans.

Item

Ans.

b
b
d
d
c
b
b
d
b
d

b
c
a
d
c
b
c
b

91.
92.
93.
94.
95.
96.
97.
98.
99.
100.
101.
102.
103.
104.
105.
106.
107.
108.

c
c

b
d
a
a
c
b
c
c
b
b
d
c
a
b
d
b

109.
110.
111.
112.
113.
114.
115.
116.
117.
118.
119.
120.
121.

122.
123.
124.
125.
126.

a
c
b
c
d
a
b
b
b
b
a
c
b
a
c
a
a
c

Item

127.
128.
129.

130.
131.
132.
133.
134.
135.
136.
137.
138.
139.
140.
141.
142.
143.
144.

Ans.

d
b
d
c
b
b
c
a
b
c
b
b

d
d
d
c
b
d

Item

145.
146.
147.
148.
149.
150.
151.
152.
153.
154.
155.
156.
157.
158.
159.
160.
161.
162.

Ans.

d
a
a
d
c
d
d
c
d
c
b
a
d
b
a
b
b
c