Chapter 12 Flashcards
What expresses each item in a financial statement as a percentage of the same base amount?
Vertical Analysis
When using vertical analysis, we express income statement items as a percentage of what?
Sales
When using vertical analysis, we express balance sheet items as a percentage of what?
Total assets
What do we use to analyze trends in financial statement data for a single company over time?
Horizontal Analysis
What is the formula you use in the horizontal analysis to find the % increase (decrease)?
(Current Year Amount - Prior Year Amount) / Prior Year Amount
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
c. For a single company over time
What refers to having sufficient cash (or other assets readily convertible into cash) to pay its current liabilities?
Liquidity
What refers to a company’s ability to pay its long-term liabilities as well?
Solvency
What is the formula to find Current Ratio?
Current Assets / Current Liabilities
What is the formula to find Return on Assets?
Net Income / Average total assets
What is the formula to find Profit Margin?
Net Income / Net Sales
What is the formula to find Asset Turnover?
Net Sales / Average Total Assets
What compares current assets to current liabilities?
The current ratio
Would a company want a lower or higher current ratio?
A higher
What is a more conservative measure of a company’s ability to pay current liabilities?
The acid-test ratio
What’s another name for the acid-test ratio?
The quick ratio
What indicates the risk of bankruptcy?
The debit to equity ratio
Would a higher debt to equity ratio indicate lower or higher risk?
A higher risk
What compares interest payments with income available to pay them?
The Times Interest Earned Ratio
Is a higher or lower times interest earned ratio better?
A higher is better
Which of the following is considered a liquidity ratio?
a. Profit margin
b. Asset turnover
c. Receivables turnover ratio
d. Times interest earned ratio
c. Receivables turnover ratio
Which of the following is considered a solvency ratio?
a. Profit margin
b. Asset turnover
c. Receivables turnover ratio
d. Times interest earned ratio
d. Times interest earned ratio
What measures the income the company earns on each dollar invested in assets?
Return on assets
Is a higher or lower return on assets better?
A higher is better
What measures the income earned on each dollar of sales?
Profit margin
What measures sales volume in relation to the investment in assets?
Asset turnover
Is a lower or higher asset turnover better?
Higher is better
What measures the income earned for each dollar in stockholders’ equity?
Return on equity
Would you want a lower or higher return on equity?
You’d want a higher
What compares a company’s share price with its earnings per share?
The price-earnings ratio
What measure the earnings or operating effectiveness of a company over a period of time, such as a year?
Profitability Ratios
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
c. 1.25 times
500,000 / 400,000 = 1.25 times
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%
a. 10%
50,000 / 500,000 = 10%
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%
c. 12.5%
50,000 / 400,000 = 12.5%
What are current earnings that will continue or persist into future years?
Earnings Persistence
What are certain items are part of net income in the current year but are not expected to persist?
One-time Income Items
What is a business, or component of a business, that the organization has already discontinued or plans to discontinue?
Discontinued operation
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
c. Discontinued operations
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?
Quality of earnings
Is conservative or aggressive accounting considered “safe?”
Conservative Accounting
What result in reporting lower income, lower assets, and higher liabilities?
Conservative Accounting Practices
What result in reporting higher income, higher assets, and lower liabilities?
Aggressing Accounting Practices
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
c. Deciding to remove a loss contingency when the likelihood of an unfavorable decision is probable
