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Exam 13: Financial Statement Analysis

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Question 1

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On January 1,2015 Gatewood issued common stock for $20,000 cash.Which of the following statement is true?

A) Gatewood's current ratio will increase.
B) Gatewood's current ratio will decrease and Gatewood's quick ratio will increase.
C) Gatewood's quick ratio will decrease.
D) Gatewood's working capital will decrease.

E) B) and C)
F) A) and B)

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A

Question 2

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Select the incorrect statement regarding the return on equity (ROE) measure.

A) ROE is used to measure the profitability of the firm in relation to the amount invested by stockholders.
B) A company's ROE is lower than its return on investment because ROE does not consider that part of the business that is financed by debt.
C) ROE is affected by a company's use of leverage.
D) ROE equals net income divided by total stockholders' equity.

E) B) and D)
F) B) and C)

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Question 3

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The following partial balance sheet is provided for Trenton Company: The company's debt to assets ratio is closest to:

Which ratios measure a company's long-term debt paying ability and its financing structure?

Working capital is current assets divided by current liabilities.

The current ratio is one of the most common measures of liquidity.

Which of the following is not included in the computation of the quick ratio?

In vertical analysis,each item is expressed as a percentage of:

Indicate whether each of the following statements is true or false. _____ a)Financial statement ratios permit comparisons over time and among different companies. _____ b)Knowledge of financial statement analysis techniques is useful to stockholders and creditors but not to the managers of a business. _____ c)The primary objective of accounting is to provide information that is stable over time. _____ d)Current accounting principles indicate that financial statements should be prepared to meet information needs of those who have a reasonably informed knowledge of business. _____ e)Financial statements are aimed at the information needs of stockholders only.

Steger Corporation has current assets of $450,000,total current liabilities of $350,000,net credit sales of $1,350,000,beginning accounts receivable of $165,000 and ending accounts receivable of $135,000.What is Steger's accounts receivable turnover?

You are considering an investment in Microsoft stock and wish to assess the firm's short-term debt-paying ability.All of the following ratios are used to assess liquidity except:

The Anchorage Company provided the following information from its financial records: What is the amount of the company's earnings per share?

On January 1,2015,Gatewood paid $200 for transportation costs on merchandise it had received.Which of the following statements is incorrect?

Indicate whether each of the following statements about financial statement analysis is true or false. _____ a)The ratio,plant assets to long-term liabilities,is a measure of a company's ability to obtain additional long-term financing. _____ b)Generally,a company's current assets should be purchased using long-term financing such as bonds payable. _____ c)Ratios that measure a company's profitability provide some measure of the effectiveness of the company's management. _____ d)Net margin indicates the amount remaining from each sales dollar after cost of goods sold has been subtracted out. _____ e)Gross margin ratio is also sometimes called the return on sales ratio.

Indicate whether each of the following statements about financial statement analysis is true or false. _____ a)Solvency ratios measure a company's short-term debt paying ability and its financial structure. _____ b)A company with a high debt to assets ratio probably would be considered to have a high level of financial risk. _____ c)The debt to equity ratio and debt to assets ratio are two ways to measure the same relationship. _____ d)From the point of view of stockholders,a decline in the debt to equity ratio is always good news. _____ e)The lower the debt to equity ratio,the higher a company's financial leverage.

The following balance sheet information was provided by Owen Company: Assuming that net credit sales totaled $300,000 and cost of goods sold totaled $175,000,what is the company's most recent accounts receivable turnover?

Indicate whether each of the following statements about financial statement analysis is true or false. _____ a)Working capital is a measure of the amount of current assets a company would have left after paying its current liabilities. _____ b)If a transaction causes a company's working capital to increase,the transaction caused the company to become less liquid. _____ c)Interpretation of a company's working capital can be difficult because it is an absolute amount. _____ d)The quick ratio is a less conservative variation of the current ratio. _____ e)The quick ratio is usually calculated by using the following equation: cash + receivables + current marketable securities + prepaid expense/current liabilities

Which of the following is an objective of ratio analysis?

Horizontal analysis is also known as:

Lakeland Corporation has working capital of $440,000,and Houston Corporation has working capital of $320,000.Which of the following statements is incorrect?