Chapter 12

Question 1

What expresses each item in a financial statement as a percentage of the same base amount?

Answer 1

Vertical Analysis

Question 2

When using vertical analysis, we express income statement items as a percentage of what?

Answer 2

Sales

Question 3

When using vertical analysis, we express balance sheet items as a percentage of what?

Answer 3

Total assets

Question 4

What do we use to analyze trends in financial statement data for a single company over time?

Answer 4

Horizontal Analysis

Question 5

What is the formula you use in the horizontal analysis to find the % increase (decrease)?

Answer 5

(Current Year Amount - Prior Year Amount) / Prior Year Amount

Question 6

Horizontal analysis examines trends:

a. Between companies in the same year
b. Between balance sheet accounts in the same year
c. For a single company over time
d. As a percentage of sales on every financial statement

Answer 6

c. For a single company over time

Question 7

What refers to having sufficient cash (or other assets readily convertible into cash) to pay its current liabilities?

Answer 7

Liquidity

Question 8

What refers to a company’s ability to pay its long-term liabilities as well?

Answer 8

Solvency

Question 9

What is the formula to find Current Ratio?

Answer 9

Current Assets / Current Liabilities

Question 10

What is the formula to find Return on Assets?

Answer 10

Net Income / Average total assets

Question 11

What is the formula to find Profit Margin?

Answer 11

Net Income / Net Sales

Question 12

What is the formula to find Asset Turnover?

Answer 12

Net Sales / Average Total Assets

Question 13

What compares current assets to current liabilities?

Answer 13

The current ratio

Question 14

Would a company want a lower or higher current ratio?

Answer 14

A higher

Question 15

What is a more conservative measure of a company’s ability to pay current liabilities?

Answer 15

The acid-test ratio

Question 16

What’s another name for the acid-test ratio?

Answer 16

The quick ratio

Question 17

What indicates the risk of bankruptcy?

Answer 17

The debit to equity ratio

Question 18

Would a higher debt to equity ratio indicate lower or higher risk?

Answer 18

A higher risk

Question 19

What compares interest payments with income available to pay them?

Answer 19

The Times Interest Earned Ratio

Question 20

Is a higher or lower times interest earned ratio better?

Answer 20

A higher is better

Question 21

Which of the following is considered a liquidity ratio?

a. Profit margin
b. Asset turnover
c. Receivables turnover ratio
d. Times interest earned ratio

Answer 21

c. Receivables turnover ratio

Question 22

Which of the following is considered a solvency ratio?

a. Profit margin
b. Asset turnover
c. Receivables turnover ratio
d. Times interest earned ratio

Answer 22

d. Times interest earned ratio

Question 23

What measures the income the company earns on each dollar invested in assets?

Answer 23

Return on assets

Question 24

Is a higher or lower return on assets better?

Answer 24

A higher is better

Question 25

What measures the income earned on each dollar of sales?

Answer 25

Profit margin

Question 26

What measures sales volume in relation to the investment in assets?

Answer 26

Asset turnover

Question 27

Is a lower or higher asset turnover better?

Answer 27

Higher is better

Question 28

What measures the income earned for each dollar in stockholders’ equity?

Answer 28

Return on equity

Question 29

Would you want a lower or higher return on equity?

Answer 29

You'd want a higher

Question 30

What compares a company’s share price with its earnings per share?

Answer 30

The price-earnings ratio

Question 31

What measure the earnings or operating effectiveness of a company over a period of time, such as a year?

Answer 31

Profitability Ratios

Question 32

The Sports Zone reports net income of $50,000, net sales of $500,000, and average total assets of $400,000. What is their asset turnover? a. 10% b. 10 times c. 1.25 times d. 0.8 times

Answer 32

c. 1.25 times 500,000 / 400,000 = 1.25 times

Question 33

The Sports Zone reports net income of $50,000, net sales of $500,000, and average total assets of $400,000. What is their profit margin? a. 10% b. 80% c. 125% d. 25%

Answer 33

a. 10% 50,000 / 500,000 = 10%

Question 34

The Sports Zone reports net income of $50,000, sales of $500,000, and average assets of $400,000. What is their return on assets? a. 10% b. 80% c. 12.5% d. 25%

Answer 34

c. 12.5% 50,000 / 400,000 = 12.5%

Question 35

What are current earnings that will continue or persist into future years?

Answer 35

Earnings Persistence

Question 36

What are certain items are part of net income in the current year but are not expected to persist?

Answer 36

One-time Income Items

Question 37

What is a business, or component of a business, that the organization has already discontinued or plans to discontinue?

Answer 37

Discontinued operation

Question 38

Which of the following items would be reported at the bottom of the income statement, just before net income? a. Losses due to the write down of inventory b. Gain on sale of long-term assets c. Discontinued operations d. Losses due to restructuring

Answer 38

c. Discontinued operations

Question 39

What refers to the ability of reported earnings to reflect the company’s true earnings, as well as the usefulness of reported earnings to predict future earnings?

Answer 39

Quality of earnings

Question 40

Is conservative or aggressive accounting considered "safe?"

Answer 40

Conservative Accounting

Question 41

What result in reporting lower income, lower assets, and higher liabilities?

Answer 41

Conservative Accounting Practices

Question 42

What result in reporting higher income, higher assets, and lower liabilities?

Answer 42

Aggressing Accounting Practices

Question 43

Which of the following would be considered an aggressive accounting practice? a. Writing down inventory due to a decline in inventory value b. Changing from straight line to the double declining balance method of depreciation c. Deciding to remove a loss contingency when the likelihood of an unfavorable decision is probable d. All the above

Answer 43

c. Deciding to remove a loss contingency when the likelihood of an unfavorable decision is probable