Test Bank financial accounting 2nd spiceland ch12

Ch12
Student: ___________________________________________________________________________

1.

We can use ratios to help evaluate a firm's performance and financial position.
True

2.

Vertical analysis expresses each item in a financial statement as a percentage of the same base amount.
True

3.

False

If the base-year amount is zero, we can't calculate a percentage change under horizontal analysis.
True

9.

False

Horizontal analysis analyzes trends in financial statement data for a single company over time.
True

8.

False

For vertical analysis, we express each balance sheet item as a percentage of sales.
True

7.

False

We use vertical analysis to express each income statement item as a percentage of sales.
True

6.

False

We use vertical analysis for income statement accounts, but not balance sheet accounts.
True

5.

False

Vertical analysis calculates the amount and percentage change of an account over time.
True

4.

False

False

Using horizontal analysis, if the base year is negative and the following year is positive, the percentage
change is just as useful as if the base year and the following year were both positive.
True

False

10. We use horizontal analysis to analyze trends in financial statement data, such as the dollar amount of
change and the percentage change, for one company over time.
True

False

11. We measure income statement accounts at a point in time and balance sheet accounts over a period of time.
True

False


12. Ratios that compare an income statement account with a balance sheet account should express the balance
sheet account as an average of the beginning and ending balances.
True

False

13. Every liquidity ratio is calculated using one or more current asset accounts.
True

False

14. Solvency refers to a company's ability to pay its current liabilities while liquidity refers to a company's

ability to pay its long-term liabilities.
True

False

15. The receivables turnover ratio measures how many times, on average, a company collects its receivables
during the year.
True

False

16. A low receivables turnover ratio is a positive sign that a company can quickly turn its receivables into cash.
True

False

17. The average collection period converts the receivables turnover ratio into days.
True

False

18. A low inventory turnover ratio usually is a positive sign and indicates that inventory is selling quickly.
True

False

19. An extremely high inventory turnover ratio may be a signal that the company is losing sales due to
inventory shortages.
True

False

20. The average days in inventory converts the inventory turnover ratio into days.
True

False

21. A low current ratio indicates that a company has sufficient current assets to pay current liabilities as they
become due.
True

False

22. The acid-test ratio is always smaller than the current ratio.
True

False

23. Other things being equal, the higher the debt to equity ratio, the higher the risk of bankruptcy.
True

False


24. We use the times interest earned ratio to compare interest payments with a company's income available to
pay those charges.
True

False

25. We calculate the times interest earned ratio by dividing net income by interest expense.
True

False

26. The gross profit ratio is calculated as gross profit divided by net sales.
True

False

27. Return on assets is calculated as net income divided by ending total assets.
True

False

28. Profit margin measures the income earned on each dollar of sales, and is calculated by dividing net income
by net sales.
True

False

29. Asset turnover measures sales volume in relation to the investment in assets, and is calculated as net sales
divided by average total assets.
True

False

30. Return on equity is calculated by dividing the stock return by average stockholders' equity.
True

False

31. The price-earnings (PE) ratio compares a company's share price with its earnings per share.
True

False

32. Growth stocks have high expectations of future earnings growth, and therefore, usually trade at higher PE
ratios.
True

False

33. Value stocks have lower share prices in relationship to their fundamental ratios, and therefore, trade at
lower PE ratios.
True

False

34. A discontinued operation is the sale or disposal of any long-term asset.
True

False

35. We report any profits or losses on discontinued operations in the current year, separately from profits and
losses on the portion of the business that will continue.
True

False

36. To be an extraordinary item, an event that produces a gain or loss must be either unusual in nature or
infrequent in occurrence.
True

False

37. We report extraordinary items separately, net of taxes, near the bottom of the income statement just below
discontinued operations.
True

False

38. If an item meets one but not both criteria for extraordinary item treatment, it is correctly excluded from
extraordinary items and included with other revenue and expenses.
True

False

39. The location where a loss is reported in the income statement does not really matter as long as the loss is
reported.
True

False

40. When using a company's current earnings to estimate future earnings performance, investors normally
should exclude discontinued operations and extraordinary items.
True

False

41. Conservative accounting practices are those that result in reporting higher income, higher assets, and lower
liabilities.
True

False

42. Conservative accounting practices are those that result in reporting lower income, lower assets, and higher
liabilities.
True

False

43. A larger estimation of the allowance for uncollectible accounts, the write-down of overvalued inventory
and the use of a shorter useful life for depreciation are all examples of conservative accounting.
True

False

44. Aggressive accounting practices result in reporting higher income, higher assets, and lower liabilities.
True

False

45. Changes in accounting estimates usually have no effect on a company's underlying cash flows.
True

False

46. Which of the following is not a common type of comparison in accounting?

A.
B.
C.
D.

Comparisons of sales growth between companies.
Comparisons of earnings per share between companies.
Comparisons over time.
Comparisons to industry.


47. When using vertical analysis,we express income statement accounts as a percentage of
A.
B.
C.
D.

Net income.
Gross profit.
Sales.
Total assets.

48. When using vertical analysis, we express balance sheet accounts as a percentage of
A.
B.
C.
D.

Sales.
Total assets.

Total liabilities.
Total stockholders' equity.

49. Which of the following is an example of verticalanalysis?
A.
B.
C.
D.

Comparing gross profit across companies.
Comparing income statement items as a percentage of sales.
Comparing debt with industry averages.
Comparing the change in sales over time.

50. Comparing operating expenses as a percentage of sales is an example of:
A.
B.
C.
D.

Vertical analysis.
Horizontal analysis.
Diagonal analysis.
Both vertical and horizontal analysis.

51. The following is an example of:

A.
B.
C.

D.

Vertical analysis.
Horizontal analysis.
Diagonal analysis.
Both vertical and horizontal analysis.


52. The following is an example of:

A.
B.
C.
D.

Vertical analysis.
Horizontal analysis.
Diagonal analysis.
Both vertical and horizontal analysis.

53. Horizontal analysis examines trends in a company
A.
B.
C.
D.

Over time.
Between income statement accounts in the same year.
Between balance sheet accounts in the same year.
Between income statement and balance sheet accounts in the same year.

54. Which of the following is an example of horizontal analysis?
A.
B.
C.
D.

Comparing COGS with sales.
Comparing net income across companies.
Comparing debt with equity.
Comparing the growth in sales over time.

55. Which of the following is an example of horizontal analysis?
A.
B.
C.
D.

Comparing gross profit across companies.
Comparing gross profit with operating expenses.
Comparing assets with equity.
Comparing the change in sales over time.

56. Comparing changes in net income for one company over time is an example of:
A.
B.
C.
D.

Vertical analysis.

Horizontal analysis.
Diagonal analysis.
Both vertical and horizontal analysis.

57. Which of the following is correct?

A.
B.
C.
D.

Option a
Option b
Option c
Option d


58. Which of the following ratios is most useful in evaluating liquidity?
A.
B.
C.
D.

Return on assets.
Return on equity.
Debt to equity ratio.
Current ratio.

59. Which of the following ratios is most useful in evaluating solvency?
A.

B.
C.
D.

Debt to equity ratio.
Current ratio.
Receivables turnover ratio.
Inventory turnover ratio.

60. Which of the following is a sign that a company can quickly turn its receivables into cash?
A.
B.
C.
D.

A low receivables turnover ratio.
A high receivables turnover ratio.
A high average collection period.
Both a low receivables turnover ratio and a high average collection period.

61. Which of the following is a sign that a company cannot quickly turn its receivables into cash?
A.
B.
C.
D.

A high receivables turnover ratio.
A low receivables turnover ratio.
A low average collection period.
Both a high receivables turnover ratio and a low average collection period.

62. Which of the following is a negative sign that a company is not selling its inventory quickly?
A.
B.
C.
D.

A low inventory turnover ratio.
A high inventory turnover ratio.
A low average days in inventory.
Both a high inventory turnover ratio and a low average days in inventory.

63. Which of the following is a positive sign that a company is selling its inventory quickly?
A.
B.
C.
D.

A low inventory turnover ratio.
A high inventory turnover ratio.
A low average days in inventory.
Both a high inventory turnover ratio and a low average days in inventory.

64. The current ratio is calculated as:
A.
B.
C.
D.

Current assets divided by noncurrent assets.

Current assets divided by current liabilities.
Current liabilities divided by noncurrent liabilities.
Current liabilities divided by current assets.


65. The acid-test ratio is most similar to the:
A.
B.
C.
D.

Current ratio.
Debt to equity ratio.
Times interest earned ratio.
Inventory turnover ratio.

66. The acid-test ratio is:
A.
B.
C.
D.

The liquidity ratio divided by the equity ratio.
Current assets minus inventory divided by current liabilities minus accounts payable.
Cash, net receivables, and current investments divided by current liabilities.
Cash divided by accounts payable.

67. Which of the following is not a solvency ratio?
A.
B.

C.
D.

Time interest earned ratio.
The debt to equity ratio.
The current ratio.
All of the other options are solvency ratios.

68. When a company pays a bill from a plumber for previous services on account:
A.
B.
C.
D.

Its debt to equity ratio decreases.
Its acid-test ratio always remains unchanged.
Its current ratio always remains unchanged.
All of the other options are correct.

69. Assuming a current ratio of 1.0, how will the purchase of inventory with cash affect the ratio?
A.
B.
C.
D.

Increase the current ratio.
No change to the current ratio.
Decrease the current ratio.
Could either increase or decrease the current ratio.

70. Assuming an acid-test ratio of 1.0, how will the purchase of inventory with cash affect the ratio?
A.
B.
C.
D.

Increase the acid-test ratio.
No change to the acid-test ratio.
Decrease the acid-test ratio.
Could either increase or decrease the acid-test ratio.

71. Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the purchase of inventory with cash
affect each ratio?
A.
B.
C.
D.

Increase the current ratio and increase the acid-test ratio.
No change to the current ratio and decrease the acid-test ratio.
Decrease the current ratio and decrease the acid-test ratio.
Increase the current ratio and decrease the acid-test ratio.


72. When a company sells land for cash and makes a $25,000 gain:
A.
B.
C.
D.

Its acid-test ratio decreases.
Its current ratio decreases.
Its debt to equity ratio decreases.
Cannot determine from the given information.

73. Assume a company's current ratio and acid-test ratio are less than 1.0 before it purchases inventory on
credit. When it makes the purchase.
A.
B.
C.
D.

Its current ratio decreases.
Its acid-test ratio decreases.
Its current ratio remains unchanged.
Its acid-test ratio remains unchanged.

A partial balance sheet ($s in thousands) for Captain D's Seafood Inc. is shown below.

74. The current ratio is:
A.
B.
C.
D.

1.98.
1.58.
1.17.
0.66.

75. The acid-test ratio is:
A.
B.
C.
D.

0.25.
0.88.
1.17.
1.58.

76. The debt to equity ratio is:
A.
B.
C.
D.

0.33.
0.77.
1.17.
1.30.


Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below.

77. HHF's debt to equity ratio is:
A.
B.
C.
D.

0.75.
1.13.
0.38.
1.80.

78. HHF's times interest earned ratio is:
A.
B.
C.
D.

3.47.
1.72.
2.47.
10.0.

Excerpts from Stealth Company's December 31, 2013 and 2012, financial statements are presented below:

79. Stealth Company's 2013 receivables turnover ratio is:
A.
B.
C.
D.

2.85.
4.70.
5.00.
10.63.

80. Stealth Company's 2013 average collection period is:
A.
B.
C.
D.

73 days.
104 days.
109 days.
128 days.

81. Stealth Company's 2013 inventory turnover is:
A.
B.
C.
D.

3.62 times.
3.96 times.
4.07 times.
6.03 times.


82. Stealth Company's 2013 average days in inventory is:
A.
B.
C.
D.

60.5 days.

92.2 days.
100.8 days.
89.7 days.

83. Stealth Company's 2013 debt to equity ratio is:
A.
B.
C.
D.

77.1%.
80.0%.
40.0%.
60.0%.

84. Stealth Company's 2013 gross profit ratio is:
A.
B.
C.
D.

77.1%.
80.0%.
40.0%.
60.0%.

85. Stealth Company's 2013 return on assets is:
A.
B.
C.

D.

7.1%.
7.8%.
13.5%.
44.7%.

86. Stealth Company's 2013 profit margin is:
A.
B.
C.
D.

17.1%.
13.5%.
7.6%.
4.5%.

87. Stealth Company's 2013 asset turnover is:
A.
B.
C.
D.

3.7 times.
2.8 times.
2.2 times.
0.5 times.

88. Stealth Company's 2013 return on equity is:

A.
B.
C.
D.

17.1%.
14.0%.
12.6%.
7.1%.


Excerpts from TPX Company's December 31, 2013 and 2012, financial statements are presented below:

89. TPX Company's 2013 receivables turnover ratio is:
A.
B.
C.
D.

5.3 times.
5.6 times.
5.0 times.
0.2 times.

90. TPX Company's 2013 average collection period is:
A.
B.
C.
D.

69 days.
65 days.
73 days.
1,825 days.

91. TPX Company's 2013 inventory turnover is:
A.
B.
C.
D.

3.0 times.
5.2 times.
3.3 times.
3.6 times.

92. TPX Company's 2013 average days in inventory is:
A.
B.
C.
D.

121.7 days.
70.2 days.
110.6 days.
101.4 days.

93. TPX Company's 2013 debt to equity ratio is:
A.
B.

C.
D.

50.0%.
60.0%.
70.0%.
80.0%.

94. TPX Company's 2013 gross profit ratio is:
A.
B.
C.
D.

57.5%.
36.5%.
63.5%.
60.0%.


95. TPX Company's 2013 return on assets is:
A.
B.
C.
D.

48.2%.
9.3%.
8.8%.
9.0%.

96. TPX Company's 2013 profit margin is:
A.
B.
C.
D.

18.8%.
9.0%.
19.4%.
15.1%.

97. TPX Company's 2013 asset turnover is:
A.
B.
C.
D.

3.7 times.
2.8 times.
2.2 times.
0.5 times.

98. TPX Company's 2013 return on equity is:
A.
B.
C.
D.

16.7%.

15.0%.
15.8%.
21.4%.

99. Given the information below, what is the company's gross profit?

A.
B.
C.
D.

Option a
Option b
Option c
Option d

100.Return on assets equals:
A.
B.
C.
D.

Gross profit ratio x Inventory turnover.
Profit margin x Inventory turnover.
Gross profit ratio x Asset turnover.
Profit margin x Asset turnover.

101.Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The
return on assets is:
A.

B.
C.
D.

200%.
25%.
50%.
12.5%.


102.Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The
profit margin is:
A.
B.
C.
D.

12.5%.
25%.
50%.
8 times.

103.Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The
asset turnover is:
A.
B.
C.
D.

0.25 times.

0.5 times.
2 times.
8 times.

104.Richard's Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of
$1,000,000. The return on assets is:
A.
B.
C.
D.

10%.
20%.
50%.
5 times.

105.Richard's Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of
$1,000,000. The profit margin is:
A.
B.
C.
D.

10%.
20%.
50%.
5 times.

106.Richard's Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of
$1,000,000. The asset turnover is:

A.
B.
C.
D.

0.1 times.
0.5 times.
2 times.
5 times.

107.The sale or disposal of a significant component of a company's operations is referred to as:
A.
B.
C.
D.

A discontinued operation.
An extraordinary item.
Other revenues and expenses.
Gain or loss on sale of assets.

108.A discontinued operation refers to:
A.
B.
C.
D.

The sale or disposal of a significant component of a company's operations.
Discontinued inventory items.
Inventory items that have been completed and sold.

The sale of most long-term assets.


109.An extraordinary item must meet which of the following criteria?
A.
B.
C.
D.

Unusual in nature.
Infrequent in occurrence.
Unusual in nature and infrequent in occurrence.
Unusual in nature or infrequent in occurrence.

110.Extraordinary items:

A.
B.
C.
D.

Option a
Option b
Option c
Option d

111.Which of the following items is most likely to be reported as an extraordinary loss?

A.
B.

C.
D.

Option a
Option b
Option c
Option d

112.What is the correct order to present the following items on the income statement?

A.
B.
C.
D.

Option a
Option b
Option c
Option d

113.Popson Inc. incurred a material loss which was not unusual in character, but was clearly an infrequent
occurrence. This loss should be reported as:
A.
B.
C.
D.

An extraordinary loss.
A loss from discontinued operations.
Other revenues and expenses.

A separate line item in retained earnings.


114.The financial statements of a firm that uses more aggressive accounting practices would be likely to report:

A.
B.
C.
D.

Option a
Option b
Option c
Option d

115.Which of the following is NOT an example of applying conservatism in accounting?

A.
B.
C.
D.

Option a
Option b
Option c
Option d

116.Which of the following is a conservative accounting practice?
A.
B.

C.
D.

The use of a longer service life for depreciation.
Waiting to record a litigation loss.
Adjust the allowance for uncollectible accounts to a smaller amount.
The write-down of overvalued inventory.

117.Which of the following is an aggressive accounting practice?
A.
B.
C.
D.

The use of a shorter service life for depreciation.
Waiting to record a litigation loss.
Adjust the allowance for uncollectible accounts to a larger amount.
The write-down of overvalued inventory.

118.Which of the following is a conservative accounting practice?
A.
B.
C.
D.

Change from double-declining balance to straight-line depreciation.
Record sales revenue before it is actually earned.
Adjust the allowance for uncollectible accounts to a larger amount.
Record inventory at market rather than lower of cost or market.

119.Which of the following is an aggressive accounting practice?
A.
B.
C.
D.

Change from straight-line to double-declining balance depreciation.
Record sales revenue before it is actually earned.
Adjust the allowance for uncollectible accounts to a larger amount.
Record inventory at lower of cost or market rather than at cost.


120.Perform a vertical analysis on the following information:

121.Perform a horizontal analysis on the following information providing both the dollar amount and
percentage change:

122.Assume a company's sales are $1.6 million in 2011, $1.8 million in 2012, and $1.7 million in 2013. What
is the percentage change from 2011 to 2012? What is the percentage change from 2012 to 2013? Be sure to
indicate whether the percentage change is an increase or a decrease.


123.If a company's sales are $648,000 in 2012, and this represents an 8% increase over sales in 2011, what were
sales in 2011?

124.United Products began the year with an Accounts Receivable balance of $250,000, and had a yearend balance of $280,000. Credit sales of $800,000 generated a gross profit of $150,000. Calculate the
receivables turnover ratio for the year.

125.United Products began the year with an Inventory balance of $180,000, and had a year-end balance of
$200,000. Sales of $800,000 generated a gross profit of $150,000. Calculate the inventory turnover ratio for

the year.

126.BC Training reports sales revenue of $2,200,000. Average inventory during the year was $200,000. The
inventory turnover ratio for the year is 8.0. What amount of gross profit would the company report in its
income statement?


127.LeBron's Kids Camps has a current ratio of 0.75 to 1, based on current assets of $3 million and current
liabilities of $4 million. How, if at all, will a $500,000 cash purchase of inventory affect the current ratio?
How, if at all, will a $500,000 purchase of inventory on account affect the current ratio?


128.The following income statement and balance sheets for Laser World are provided:

Assuming that all sales were on account, calculate the following risk ratios for 2012:


129.The following income statement and balance sheets for Laser World are provided:

Earnings per share for the year-ended December 31, 2012, is $1.90. The closing stock price on December
31, 2012, is $30.40.
Calculate the following profitability ratios for 2012:


130.Barry's BBQ had sales revenue for the year of $200 million and net income of $20 million. Total assets
were $70 million at the beginning of the year, and $80 million at the end of the year. Calculate Barry's
return on assets, profit margin, and asset turnover ratios.

131.Paul Pierce Enterprises reports net income of $800,000, average total assets of $2,400,000, and average
total liabilities of $400,000. Calculate the return on asset and return on equity ratios.

132.Phillip's Fun Center has go-karts, miniature golf, bumper boats, paintball, and laser tag. Determine whether
the company should report each of the following items as discontinued operations, extraordinary items, or
other expenses:
1. Uninsured losses of $200,000 were incurred due to a hurricane that swept through the area for the first
time in 50 years.
2. The company sold its old go-karts at a loss of $25,000 and replaced them with all new go-karts.
3. The company sold its laser tag center at a loss of $10,000 to focus on the other more profitable segments.
Laser tag is considered to be a separate business segment.
4. The company restructured its business at a cost of $75,000, replacing some employee positions with
automated equipment.


133.Classify each of the following accounting practices as conservative or aggressive:
1. Increase the allowance for uncollectible accounts.
2. When costs are rising, change from FIFO to LIFO.
3. Increase the estimated useful life of equipment.

134.Classify each of the following accounting practices as conservative or aggressive.
1. Choosing a shorter life for calculating depreciation.
2. The write-down of inventory.
3. Decrease the allowance for uncollectible accounts.
4. Recording revenues sooner.

135.Explain the difference between vertical and horizontal analysis.

136.Explain why ratios that compare an income statement account with a balance sheet account should express
the balance sheet account as an average of the beginning and ending balances.

137.Sideline Sports Products reports a return on assets of 6%, and a return on equity of 10%. Why do these two
ratios differ?

138.Define earnings persistence. How does earnings persistence relate to the reporting of discontinued
operations and extraordinary items?

139.Explain the difference between conservative and aggressive accounting practices. Provide an example of a
conservative accounting practice and explain why this practice is conservative. Provide an example of an
aggressive accounting practice and explain why this practice is aggressive.


140.Listed below are eight risk ratios followed by a list of phrases that describe or characterize the ratios. Match
each phrase with the correct ratio placing the letter designating the ratio in the space provided.

1. Average
collection
period

_
Cost of goods sold divided by average inventory; the number_
of times the firm sells its average inventory balance during a_
reporting period._

2. Times
interest
earned ratio

_
_
Total liabilities divided by total stockholders' equity; measure_

a company's solvency risk._

3. Current
ratio

_
_
_
Approximate number of days the average inventory is held._

4. Acidtest ratio

_
_
Ratio that compares interest expense with income available to_
pay those charges._

5.
Receivables
turnover
ratio

_
Net sales divided by average accounts receivable; the number_
of times during a year that the average accounts receivable_
balance is collected._

6. Inventory
turnover
ratio

_
Cash, short-term investments, and accounts receivable divided_
by current liabilities; measures the availability of liquid current_
assets to pay current liabilities._

7. Debt to
equity ratio

_
_
Current assets divided by current liabilities; measures_
the availability of current assets to pay current liabilities._

8. Average
days in
inventory

_
_
Approximate number of days the average accounts receivable_
balance is outstanding._