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Exam 9: Financial Statement Analysis

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Question 51

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Which ratio would you use to examine a company's ability to pay its debts in the short term?

A) Earnings per share
B) Acid-test ratio
C) Debt to assets ratio
D) Return on equity

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

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Question 52

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Select the incorrect statement regarding horizontal analysis.

A) Percentage analysis involves establishing the relationship of one amount to another.
B) A horizontal analysis of cost of goods sold on the income statement includes dividing net income by total revenue.
C) Percentage analysis attempts to eliminate the materiality problem of comparing firms of different sizes.
D) In doing horizontal analysis, an account is expressed as a percentage of the previous balance of the same account.

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

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Question 53

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Solvency ratios are used to assess a company's:

Horizontal analysis is also known as:

On December 31, 2013, Houston Company's total current assets were $560,000 and its total current liabilities were $420,000. On January 1, 2014, Houston issued a long-term note to a bank for $30,000 cash. Required: (a) Compute Houston's working capital before and after issuing the note payable. (b) Compute Houston's current ratio before and after issuing the note payable. Round your answer to two decimal places.

Indicate whether each of the following statements about financial statement analysis is true or false. 1. Ratio analysis may involve studying relationships between an item reported on the balance sheet and another reported on the income statement. 2. Comparing sales in 2014 with sales for 2013 is a form of vertical analysis. 3. Comparing net income in 2014 with sales for 2014 is a form of horizontal analysis. 4. Liquidity ratios measure a company's ability to generate cash flows in the short term. 5. Working capital is calculated by using the following formula: current assets - current liabilities.

The following information applies to Acorn Construction Company (ACC): Information on the number of shares outstanding is provided below: $\begin{array} { | l | l | } \hline \text { Avg. \# of shares outstanding } 2013 & 38,000 \\\hline \text { Avg. \# of shares outstanding } 2014 & 33,000 \\\hline\end{array}$ Required: Compute the following ratios for ACC for 2014 and 2013: (a) Number of times interest is earned (b) Earnings per share (c) Price-earnings ratio (Market prices: 2014 $17.50 per share, 2013 $15.00 per share) (d) Return on equity (e) Net margin.

You are considering an investment in IBM stock and wish to assess the firm's long-term debt-paying ability and its use of debt financing. All of the following ratios can be used to assess solvency except:

When debt is used to finance the purchase of assets, the term or time span of the debt should always be shorter than the lifespan of the assets.

Indicate whether each of the following statements about financial statement analysis is true or false. 1. The reason behind a financial statement ratio or percentage analysis result is usually self evident and does not require further study or analysis. 2. In horizontal percentage analysis, an item from the financial statements is expressed as a percentage of the same item from a previous year's financial statements. 3. Horizontal analysis for several years can be done by choosing one year as a base year and calculating increases or decreases in relation to that year. 4. One form of horizontal analysis is the preparation of common size financial statements. 5. Vertical analysis compares two or more financial statement items within the same time period.

Which of the following is a potential limitation of financial statement analysis?

A careless accountant splattered spaghetti sauce on Kitchen Company's balance sheet. The balance sheet with its missing amounts is provided below: Kitchen Company's working capital is $138,000. Required: Compute the missing amounts. Record your answers in the following table:

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

Two ratios that provide insight on the relationship between credit sales and receivables are:

Financial analysis typically involves some form of comparison such as changes in the same item over a number of years.

An analysis procedure that uses percentages to compare each of the parts of an individual statement to a key dollar amount from the financial statements is:

Indicate whether each of the following statements about financial statement analysis is true or false. 1. The ratio, plant assets to long-term liabilities, is a measure of a company's ability to obtain additional long-term financing. 2. Generally, a company's current assets should be purchased using long-term financing such as bonds payable. 3. Ratios that measure a company's profitability provide some measure of the effectiveness of the company's management. 4. Net margin indicates the amount remaining from each sales dollar after cost of goods sold has been subtracted out. 5. Net margin is also sometimes called the return on assets ratio.

The Miller Company reported gross sales of $850,000, sales returns and allowances of $15,000 and sales discounts of $5,000. The company has total assets of $500,000, of which $250,000 is property, plant, and equipment. What is the company's asset turnover ratio?

Indicate whether each of the following statements about financial statement analysis is true or false. 1. Working capital measures a company's immediate debt-paying ability. 2. Accounts receivable turnover is a direct measure of a company's uncollectible accounts expense. 3. Accounts receivable turnover is calculated by using the following formula: net credit sales/average accounts receivable. 4. Net credit sales is sales on account plus sales returns and discounts. 5. The amount of average receivables can be calculated using the amount of receivables shown on balance sheets for the current year and previous year.

The most frequently quoted measure of earnings performance is the stockholders' equity ratio.