Multiple Choice Questions

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M ul ti pl e Choi ce Questi ons C ha ha pt e r 1 8

M ul ul t i p l e C ho ho i c e Q ue ue s ti ti o ns

Multiple Choice Questions This activity contains 15 questions.

Evaluating financial Evaluating financial statem ent in informat format ion can be divided divided into broad c ategories including vertical vertical analysis analysis (shows the relationship between between n umbers on a financial financial statement st atement for one year) year) horizontal horizontal analysis (compares (compares financial financial statement amounts to amounts from previous previous years in terms of the percentage percentage of change) change) ratio analysis analysis (expr (express ess es the relationship of one num ber to another numbe num ber) r) all of the above

Use the following information and horizontal analysis to compute the perc enta entage ge increase incr ease in sales: 2007 sales wer e $200,000 and 2008 2008 sales were we re $250,000. sales increased increased by 125% sales increased increased by 25% sales increased increased by 80% sales increased increased by 20%

2006 sales were $200,000, 2007 sales were $220,000, 2008 sales were $240,000, and 2009 sales were $300,000. 2006 is the base year. Using the previous informat inform ation ion and your knowledge of tr trend end analysis, selec s electt t he statement t hat is false. false. The trend analysis % for 2009 is 125%. Trend Trend analysis is a type of horizontal horizontal analysis analysis.. The trend analysis % for 2006 is 100%. Amounts are always always compared compared to, or divid divided ed by, the base year year amount amount..

2007 net sales $200,000; 2007 Cost of Goods Sold $130,000; 2001 operating expenses $50,000; and 2007 net income $20,000. Use this information and your knowledge of vertical analysis to select the statement that is false. On the income statement, all amounts are usually compared to, or divided by, net sales. On the balance sheet, all amounts are compared to, or divided by, total liabilities.

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Multiple Choice Questions

The vertical analysis % for Cost of Goods Sold is 65%. Vertical analysis sh ows t he relative importance of each income statement item.

2007 current assets $100,000; 2007 long-term assets $300,000; 2007 total liabilities $150,000; and 2007 total shareholders' equity $250,000. Using the previous information and your knowledge of common-sized statements, select the stat ement that is false. Common-size statements allow companies of different sizes to be more easily compared. The common-size % for total liabilities is 37.5%. Common-size statements are a type of vertical analysis. The common-size % for current ass ets is 33.3%.

All of t he following are t rue regarding benchmarking except benchmarking includes comparing one company with a key competitor if the industry average for cost of goods sold (COGS) is 50% and your company average is 60%, this would be considered favourable if the industry average for gross profit is 35% and your company average is 40%, this would be considered favourable benchmarking includes comparing one company with the industry average

Ratio analysis expresses the relationship of one number to another number. To add meaning to a ratio it can be compared to industry averages ratios of prior years or accounting periods budgeted ratios all of the above

All of t he following stat ement s are t rue regarding rat ios that measure a company's ability t o pay c urrent liabilities except in most indus tries, a current ratio of 2.0 is considered adequate a higher current ratio is always preferred to a lower current ratio

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working capital = current assets - current liabilities inventory and prepaid expense are included in the numerator of the current ratio, but not in the nu merator of the acid-test ratio

All of t he following stat ement s are t rue regarding rat ios that measure a company's ability t o sell inventory and c ollect rec eivables except an increased accounts receivable turnover ratio indicates an increased ability to collect cash from credit customers the formula for the inventory tu rnover ratio is sales/average inventory an increased inventory turnover ratio indicates a company is selling merchandise more quickly than in previous accounting periods; in general, this translates into more merchandise being sold and higher profitability a decreased days' sales in receivables ratio indicates the company is collecting cash from credit cus tomers more quickly. In general, this results in greater cash inflows

All of t he following stat ement s are t rue regarding rat ios that measure a company's ability to pay short-term and long-term debt except a debt ratio of 60% indicates 60% of assets are financed with debt a debt ratio of 90% indicates lower financial risk than a debt ratio of 60%; in general, lower financial risk results in lower interest rates a high times-interest-earned ratio indicates a company can pay interest expense with relative ease the average debt ratio is between 0.57 and 0.67 according to Robert Morris Ass ociates

All of t he following stat ement s are t rue regarding rat ios that measure a company's profitability except return on assets includes interest expense plus net income in the numerator because th ese are the returns to the two groups that have financed company assets companies s trive for a high return on s ales earnings per share is the only ratio that mus t appear on the face of the income statement return on as sets (ROA) is usually greater than return on equity (ROE) because creditors demand a higher return than shareholders

All of t he following stat ement s are t rue regarding rat ios that analyze a stock investment except in general, an increased price/earnings ratio indicates increased investor http://wps.pr enhal l.com/ca_ph_hor ng ren_accounti ng _7/60/15481/3963328.cw/content/index.html

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confidence in the future of the company many experts argue that book value is th e most useful ratio for investment analysis two ways for shareholders to earn a return on a share investment are receiving dividends and s elling the s tock investment at a gain shareholders who invest primarily to receive dividends pay special attention to the dividend yield ratio

Given the following information: Cash 29,000, Accounts Receivable $114,000, Inventory $113,000, Prepaid Expenses $6,000, Total capital assets $525,000, Total current liabilities $142,000, Long-term debt $289,000, Total shareholders' equity $356,000' Net sales $858,000, Cost of goods sold $513,000, Gross Margin $345,000, Net income $48,000. The acid test ratio is: 55% 1.85 75% 1.01

Given the following information: Cash 29,000, Accounts Receivable $114,000, Inventory $113,000, Prepaid Expenses $6,000, Total capital assets $525,000, Total current liabilities $142,000, Long-term debt $289,000, Total shareholders' equity $356,000' Net sales $858,000, Cost of goods sold $513,000, Gross Margin $345,000, Net income $48,000. The debt ratio is: 101% 185% 75% 55%

Given the following information: Cash 29,000, Accounts Receivable $114,000, Inventory $113,000, Prepaid Expenses $6,000, Total capital assets $525,000, Total current liabilities $142,000, Long-term debt $289,000, Total shareholders' equity $356,000' Net sales $858,000, Cost of goods sold $513,000, Gross Margin $345,000, Net income $48,000. The inventory turnover ratio is: 5.56 4.54 8.62 7.52


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Some questions in this exer cise may hav e more than one corre ct answer. To answer such questions correctly, you must select all the correct answers. Also note that answer choices in this exe rcise appea r in a different order each time the page is loaded.

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Multiple Choice Questions

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