Chapter 13 test bank

Financial Accounting, 9e (Harrison/Horngren/Thomas) Chapter 13 Financial Statement Analysis 13.1 Learning Objective 13-1 1) Vertical analysis highlights changes in financial statement balances from period to period. Answer: FALSE Diff: 1 LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) The best way to analyze a company is by examining the financial data for several years. Answer: TRUE Diff: 1 LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) Trend percentages are computed only for balance sheet items. Answer: FALSE Diff: 1 LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) It is generally considered more useful to know the percentage change in financial statement amounts from year to year than to know the absolute dollar amount. Answer: TRUE Diff: 2 LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) Trend analysis using income statement data is widely used for predicting the future. Answer: TRUE Diff: 2 LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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6) Horizontal analysis compares financial statement items in the current period with other items in the current period. Answer: FALSE Diff: 2 LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) The percentage change in financial statement balances is computed by dividing the dollar amount of the most recent period by the base period dollar amount. Answer: FALSE Diff: 2 LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) Horizontal analysis and trend analysis are synonymous. Answer: TRUE Diff: 1 LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) If a company has sales of $250 in 2010 and $225 in 2011, the percentage increase from 2010 to 2011 is 10%. Answer: TRUE Diff: 2 LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) If a company has sales of $150 in 2010 and $225 in 2011, the percentage change from 2010 to 2011 is 50%. Answer: TRUE Diff: 2 LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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11) Period to period percentage change in comparative financial statements is often called: A) benchmarking. B) horizontal analysis. C) vertical analysis. D) common-size statements. Answer: B Diff: 2 LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) The primary focus of horizontal analysis is: A) percentage changes in comparative financial statements. B) the balance sheet only. C) the changes in individual financial statement amounts as a percentage of some related total. D) the change in key financial statement ratios over a certain time frame. Answer: A Diff: 2 LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) The percentage change in any individual item shown on comparative financial statements is calculated by dividing the dollar amount of the change from the base period to the current period by: A) the amount shown for the current period. B) the base-period amount. C) the average of the amounts shown for the base and the current periods. D) the amount estimated for the future period. Answer: B Diff: 2 LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14) The analysis of percentage changes in comparative statements is known as: A) economic value added analysis. B) vertical analysis. C) horizontal analysis. D) benchmarking analysis. Answer: C Diff: 2 LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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15) Horizontal analysis is most closely related to: A) trend analysis. B) economic value added analysis. C) vertical analysis. D) benchmarking. Answer: A Diff: 2 LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 16) A form of horizontal analysis that indicates the direction a business is taking is: A) benchmarking. B) economic value added analysis. C) vertical analysis. D) trend percentages. Answer: D Diff: 2 LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) The horizontal analysis formula is the current year amount: A) divided by the base year amount. B) minus the base year amount divided by the base year amount. C) minus the base year amount divided by current year amount. D) added to the base year amount divided by the base year amount. Answer: B Diff: 2 LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18) Horizontal analysis of financial statements is an: A) analysis tool. B) analysis theory C) analysis principle. D) analysis requirement. Answer: A Diff: 2 LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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19) When computing trend percentages: A) the current year is always equal to 100%. B) the base year is always the latest year. C) the base year is always equal to 100%. D) the base year is equal to the current year plus the previous year divided by two. Answer: C Diff: 2 LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 20) Horizontal analysis is performed on: A) only the income statement. B) only the balance sheet. C) only the statement of retained earnings D) the income statement, the balance sheet, and the statement of retained earnings. Answer: D Diff: 2 LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 21) When performing a horizontal analysis on a statement of retained earnings, which would NOT show a percentage change value? A) Dividends paid B) Net income C) Expenses D) Beginning balance of retained earnings Answer: C Diff: 2 LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

13.2 Learning Objective 13-2 1) When comparing companies of different sizes, vertical analysis would be a useful tool. Answer: TRUE Diff: 1 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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2) When performing vertical analysis of an income statement, net income is usually used as the base. Answer: FALSE Diff: 2 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) The relationship of each individual asset as a percentage of total assets is an example of vertical analysis. Answer: TRUE Diff: 2 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) Vertical analysis compares an item on the financial statement to the same item in a prior period. Answer: FALSE Diff: 2 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) When performing a vertical analysis of the income statement, each item is stated as a percentage of net income. Answer: FALSE Diff: 1 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) Vertical analysis is concerned with the format used to prepare financial statements. Answer: FALSE Diff: 1 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) A company's net income as a percentage of sales is 15%. Using vertical analysis, the cost of goods sold as a percentage of sales must be 85%. Answer: FALSE Diff: 1 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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8) Vertical analysis is a less sophisticated analysis tool than horizontal analysis. Answer: FALSE Diff: 1 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) Matrix analysis expresses each item on a financial statement in terms of a percent of a base amount. Answer: FALSE Diff: 1 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) A thorough analysis of financial statements will include either horizontal or vertical analysis, but not both. Answer: FALSE Diff: 1 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 11) Which of the following is typically used as the base in a vertical analysis of an income statement? A) Cash B) Inventory C) Net income D) Net sales Answer: D Diff: 2 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) Which of the following is typically used as the base in a vertical analysis of a balance sheet? A) Total liabilities B) Cash C) Total assets D) Gross sales Answer: C Diff: 1 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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13) Expressing cash and cash equivalents as a percentage of total assets is an example of: A) horizontal analysis. B) economic value added. C) ratio analysis. D) vertical analysis. Answer: D Diff: 2 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14) A vertical analysis is primarily concerned with: A) the dollar amount of the change in various financial statement amounts from year to year. B) individual financial statement items expressed as a percentage of a base (which represents 100%). C) percentage changes in the balances shown in comparative financial statements. D) the change in key financial statement ratios over a specified period of time. Answer: B Diff: 2 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) Tech Support Corporation reports the following data: Net sales Cost of goods sold Gross profit

$275,000 175,000 $100,000

In a vertical analysis, the gross profit percentage is closest to: A) 63%. B) 57%. C) 157%. D) 36%. Answer: D Explanation: D) 100,000/275,000 = 36.3636% rounded to 36% Diff: 2 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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16) Common-size analysis is also known as: A) Trend analysis. B) Ratio analysis. C) Vertical analysis. D) Matrix analysis. Answer: C Diff: 2 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) In vertical analysis: A) a base amount is optional. B) a base amount is required. C) comparative statements are optional. D) comparative statements are required. Answer: B Diff: 2 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18) A financial statement item expressed as a percentage of a base amount is a result of: A) horizontal analysis. B) ratio analysis. C) vertical analysis. D) comparative analysis. Answer: C Diff: 2 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19) In performing a vertical analysis, the base for cash is: A) total liabilities and stockholders' equity. B) total assets. C) total cash and cash equivalents. D) total current assets. Answer: B Diff: 2 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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20) In performing a vertical analysis, the base for interest expense is: A) net sales. B) total operating expenses. C) net income. D) interest income. Answer: A Diff: 2 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 21) Given the following data: Current liabilities Noncurrent liabilities Stockholders' equity

$450,000 650,000 500,000

In vertical analysis, current liabilities would be expressed as: A) 356%. B) 90%. C) 111%. D) 28%. Answer: D Explanation: D) 450,000/(450,000 + 650,000 + 500,000) = 450,000/1,600,000 = 28% Diff: 2 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 22) In performing a vertical analysis, the base for sales returns and allowances is: A) sales discounts. B) sales. C) gross profit. D) net sales. Answer: D Diff: 2 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting

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23) In performing a vertical analysis, the base for cost of goods sold is: A) net sales. B) total revenues. C) total expenses. D) gross profit. Answer: A Diff: 2 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 24) Given the following data: Cash Current assets Total assets

$225,000 970,000 2,105,000

In a vertical analysis, cash would be expressed as: A) 935%. B) 217%. C) 46%. D) 11%. Answer: D Explanation: D) 225,000/2,105,000 = 10.7% rounded to 11% Diff: 2 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 25) If a balance sheet is subjected to vertical analysis which shows that current assets (using total assets as the base) have increased from 42% to 56%, this would always mean that: A) current assets have increased as a percentage of total assets. B) the dollar amount of total assets has increased. C) the dollar amount of total assets has decreased. D) the dollar amount of current assets has increased. Answer: A Diff: 2 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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26) Given the following data: Net sales Cost of goods sold Gross profit

200,000 120,000 80,000

In a vertical analysis, cost of goods sold would be expressed as: A) 166%. B) 40%. C) 60%. D) 250%. Answer: C Explanation: C) 120,000/200,000 = 60% Diff: 2 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 27) Given the following data: Net sales Cost of goods sold Gross profit Operating expenses Net income

200,000 120,000 $80,000 44,000 36,000

In a vertical analysis, net income would be expressed as: A) 18%. B) 45%. C) 30%. D) 82%. Answer: A Explanation: A) 36,000/200,000 = 18% Diff: 2 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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28) If the assets shown on a balance sheet are subjected to vertical analysis (using total assets as the base), an increase in the figure for current assets from 56% to 60% would always mean that: A) the dollar amount of noncurrent assets has increased. B) the dollar amount of total assets has increased. C) total current assets have increased as a percentage of total assets. D) the dollar amount of current assets has increased. Answer: C Diff: 2 LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 29) Prepare a vertical analysis for Winkler Corporation using the information shown below (round percentages to the nearest one-tenth percent):

Sales Cost of goods sold Gross profit Operating expenses Net income

2012 $450,000 200,000 250,000 118,000 132,000

Answer: Sales Cost of goods sold Gross profit Operating expenses Net income

2012 $450,000 200,000 250,000 118,000 132,000

Percent 100% 44.4% 55.6% 26.2% 29.3%

Diff: 2 LO: 13-2 AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

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30) Prepare a vertical analysis for Crestwood Corporation's balance sheet to determine the component percentages of its assets, liabilities, and stockholders' equity. Round percentages to the nearest one-tenth percent.

Answer:

Diff: 2 LO: 13-2 AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

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31) Prepare a vertical analysis for Westwood Corporation by completing the right column of the following balance sheet with the appropriate percentages. Round percentages to the nearest one-tenth percent.

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Answer:

Diff: 2 LO: 13-2 AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

13.3 Learning Objective 13-3 1) Common-size financial statements report only dollar amounts. Answer: FALSE Diff: 2 LO: 13-3 AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

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2) Benchmarking is the process of comparing a company to standards set by the leading company in the industry. Answer: FALSE Diff: 2 LO: 13-3 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) A common-size statement is less effective than a horizontal analysis when comparing companies. Answer: FALSE Diff: 2 LO: 13-3 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) Common-size financial statements are particularly valuable for identifying areas for improvements. Answer: TRUE Diff: 2 LO: 13-3 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) To perform vertical analysis, financial statements must first be converted to common-size format. Answer: TRUE Diff: 2 LO: 13-3 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) Which of the following would be most helpful in the comparison of different size companies? A) Horizontal analysis B) Comparison of their net incomes C) Comparison of their working capital balances D) Preparation of common-size financial statements Answer: D Diff: 2 LO: 13-3 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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7) A financial statement that shows each item as a percentage of one key item on the statement is referred to as: A) benchmarking. B) common-size statement. C) horizontal analysis. D) statement of cash flows. Answer: B Diff: 2 LO: 13-3 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) On a common-size balance sheet each item is expressed as a percentage of: A) current assets. B) operating income. C) total assets. D) net income. Answer: C Diff: 2 LO: 13-3 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) On a common-size balance sheet, income taxes payable is expressed as a percentage of: A) Current liabilities. B) Stockholders' equity. C) Total assets. D) Total liabilities. Answer: C Diff: 2 LO: 13-3 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) Benchmarking financial statements represents a form of: A) horizontal analysis. B) vertical analysis. C) gross profit analysis. D) trend analysis. Answer: B Diff: 2 LO: 13-3 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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11) When benchmarking financial statements of two key competitors, the gross margin of Company A is expressed as a percentage of: A) the total gross margins of Companies A and B. B) Company B's gross margin. C) a common standard for both Company A and Company B. D) Company A's sales. Answer: D Diff: 2 LO: 13-3 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) Walton Company's return on sales for the most recent year was 5%. The industry leader reports a return on sales of 7%. The comparison of each company's return on sales is an example of: A) benchmarking. B) gross margin analysis. C) detail analysis. D) intercompany analysis. Answer: A Diff: 3 LO: 13-3 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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13) Computer City, Inc.'s comparative income statement is shown below:

Required: Prepare a common-size income statement for 2012 and 2011 showing the percentages for each item listed above. Round percentages to one-tenth percent. Answer:

Calculations:

Diff: 2 LO: 13-3 AICPA Bus Persp: Strategic/Critical Thinking

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AICPA Functional: Measurement

13.4 Learning Objective 13-4 1) As another analytical tool, analysts rely on the statement of cash flows as a predictor of eventual success for a given company. Answer: TRUE Diff: 2 LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) The statement of cash flows is helpful for spotting weaknesses as well as gauging success. Answer: TRUE Diff: 2 LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) On the statement of cash flows of a healthy company, net cash from operating activities is generally less than net income. Answer: FALSE Diff: 2 LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) If the sale of plant assets is a company's major source of cash, it may be a sign of financial difficulty. Answer: TRUE Diff: 2 LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) On the statement of cash flows of a healthy company, net cash from operating activities generally exceeds net income because of the reduction for depreciation. Answer: FALSE Diff: 2 LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) In the statement of cash flows, depreciation and amortization are considered a use of funds. Answer: FALSE Diff: 2 LO: 13-4

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AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting

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7) In the statement of cash flows, sales of marketable securities are considered an operating activity. Answer: FALSE Diff: 2 LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 8) In the statement of cash flows, purchases of fixed assets are considered to be investing activities. Answer: TRUE Diff: 2 LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 9) In the statement of cash flows, more purchases of long-term assets than sales of long-term assets are considered a sign of a healthy company. Answer: TRUE Diff: 2 LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) In the statement of cash flows, an increase in new borrowing, exceeding the payoff of long-term debt, is a sign of weakness. Answer: TRUE Diff: 2 LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 11) When analyzing the statement of cash flows, which of the following statement are true? A) Cash has no effect on the success of the company. B) Cash is ignored when analyzing a company. C) An excess of cash is the sign of a healthy company. D) A company with a large cash balance is ensured success. Answer: C Diff: 2 LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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12) Analyzing the statement of cash flows may help analysts determine the financial health of a company. Which of the following signs below is a NOT indicator of a financially healthy company? A) The company's operations are a major source (not a use) of cash. B) The company's operations are a major use (not a source) of cash. C) The company's investing activities include more purchases than sales of long-term assets. D) The company's financing activities are not dominated by borrowing. Answer: B Diff: 2 LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) On a statement of cash flows of a struggling company, net income would ordinarily be: A) less than depreciation expense. B) more than depreciation expense. C) greater than cash provided by operating activities. D) more than cash provided by operating activities. Answer: C Diff: 2 LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14) On a statement of cash flows, which is considered an operating activity? A) Sale of securities B) Purchase of fixed assets C) Purchase of securities D) Depreciation Answer: D Diff: 2 LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) On a statement of cash flows, which is considered an investing activity? A) Depreciation B) Increase in inventory C) Sale of securities D) Repayment of debt Answer: C Diff: 2 LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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16) Purchases of fixed assets is a sign of: A) a struggling company. B) reinvestment in the company. C) a shortage of cash. D) a decrease in inventory. Answer: B Diff: 2 LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) On a statement of cash flows, an increase or decrease in inventory is considered: A) an operating activity. B) an investing activity. C) a financing activity. D) an investing or financing activity. Answer: A Diff: 2 LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18) On a statement of cash flows, repayment of long-term debt is considered: A) an operating activity. B) an investing activity. C) a financing activity. D) a change in operating assets and liabilities. Answer: C Diff: 2 LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19) On a statement of cash flows, which of the following are signs of a healthy company? A) Investing activities include more sales of long-term assets than purchases. B) Financing activities are dominated by borrowing. C) Operating activities are the major source of cash. D) Operating activities provide less cash than net income. Answer: C Diff: 2 LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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20) On a statement of cash flows, which is NOT considered an operating activity? A) Depreciation B) Net income C) Increase in inventory D) Repayment of long-term debt Answer: D Diff: 2 LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 21) On a statement of cash flows, which is NOT considered a financing activity? A) Deferred income tax B) Proceeds from long-term debt C) Repayment of long-term debt D) Foreign currency effect on cash Answer: A Diff: 2 LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

13.5 Learning Objective 13-5 1) A firm's ability to pay current liabilities can be evaluated using working capital and the current ratio. Answer: TRUE Diff: 2 LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) A company's debt ratio is computed as total assets minus total liabilities. Answer: FALSE Diff: 1 LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) A ratio analysis, horizontal analysis, and vertical analysis are all financial analysis tools. Answer: TRUE Diff: 1 LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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4) The acid-test ratio reflects the company's percentage of total assets financed with total debt. Answer: FALSE Diff: 1 LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) A high inventory turnover may indicate that a company is experiencing difficulty selling its inventory. Answer: FALSE Diff: 2 LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) A ratio can be expressed as a proportion, a rate, or a percent. Answer: TRUE Diff: 1 LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) A profitability ratio measures the income or operating success of a company for a given period of time. Answer: TRUE Diff: 2 LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) The larger the working capital, the better the ability to pay debts. Answer: TRUE Diff: 2 LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) Cash, short-term investments and net current receivables are all components of the acid-test ratio. Answer: TRUE Diff: 2 LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) Inventory turnover is calculated by dividing the cost of goods sold by the average receivables. Answer: FALSE Diff: 2 LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking

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AICPA Functional: Measurement 11) Ratios that test liquidity include all of the following EXCEPT: A) acid-test ratio. B) current ratio. C) debt to total assets. D) inventory turnover. Answer: C Diff: 2 LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) To compute operating income (profit) percentage, divide: A) sales by cost of goods sold. B) gross profit by net sales. C) net income by stockholders' equity. D) operating income by net sales. Answer: D Diff: 2 LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) A measure of a company's ability to collect cash from credit customers is the: A) accounts receivable turnover. B) earnings per share. C) inventory turnover. D) acid-test ratio. Answer: A Diff: 2 LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14) Kaufman's Department Store had net sales of $20 million and cost of goods sold of $14 million for the year. The average inventory for the year was $4 million. What was the average number of days in inventory? A) 46 B) 104 C) 92 D) 52 Answer: C Diff: 2 LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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15) Depots Clothing Store had an accounts receivable balance of $420,000 at the beginning of the year and a year-end balance of $510,000. Net sales for the year totaled $2,100,000. The average collection period of the receivables was: A) 162 days. B) 41 days. C) 51 days. D) 81 days. Answer: D Diff: 2 LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 16) The ratio that provides an estimate of the number of days, on average, that it takes for customers to pay their account is the: A) days' sales in receivables B) current ratio. C) accounts receivable turnover. D) acid-test ratio. Answer: A Diff: 2 LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) The ratio that measures a company's success in using its assets to earn income for the persons who finance the business is the: A) leverage. B) rate of return on total assets. C) debt ratio. D) times-interest-earned ratio. Answer: B Diff: 2 LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18) The ratio that measures the number of times that operating income can cover interest expense is the: A) leverage. B) rate of return on total assets. C) debt ratio. D) times-interest-earned ratio. Answer: D Diff: 1 LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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19) The amount of a company's net income earned for each share of its outstanding common stock is termed the: A) return on equity. B) price/earnings ratio. C) earnings per share. D) dividend yield. Answer: C Diff: 2 LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

13.6 Learning Objective 13-6 1) Economic value added (EVA) can be computed as net income minus interest expense minus capital charge. Answer: FALSE Diff: 2 LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) The cost of capital is a weighted average of the returns demanded by the company's stockholders and lenders. Answer: TRUE Diff: 2 LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) Economic value added is a measure of change in corporation's total assets. Answer: FALSE Diff: 2 LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) Usually new companies have a lower cost of capital. Answer: FALSE Diff: 2 LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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5) If a corporation's economic value added is negative, stockholders will probably be displeased with the company. Answer: TRUE Diff: 2 LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) Cost of capital varies with a company's market value of its common stock. Answer: FALSE Diff: 2 LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) If a corporation's cash flows are consistently lower than net income, it could be a sign of a cash shortage in the future. Answer: TRUE Diff: 2 LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) When determining economic value added (EVA), capital charge is the amount that stockholders expect to pay per share of common stock. Answer: FALSE Diff: 2 LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) A positive economic value added (EVA) suggests an increase in stockholders wealth. Answer: TRUE Diff: 2 LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) An efficient capital market is one in which market prices are above stated cost. Answer: FALSE Diff: 2 LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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11) In an efficient market, an investor's search for "underpriced" stock will be unsuccessful unless the investor has knowledge of confidential information. Answer: TRUE Diff: 2 LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) The cost of capital is defined as the: A) sum of liabilities and stockholders' equity accounts. B) weighted average of the returns demanded by the company's stockholders and lenders. C) rate of return demanded by stockholders times the rate of return demanded by lenders. D) rate of return demanded by the stockholders divided by the rate of return demanded by lenders. Answer: B Diff: 2 LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) Economic value added (EVA) is computed as: A) net income + long-term debt + interest expense. B) net income + interest expense - capital charge. C) net income - interest expense + capital charge. D) net income - long-term debt + interest expense. Answer: B Diff: 2 LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14) Which of the following combines the concepts of accounting income and corporate finance to measure whether the company's operations have increased stockholder wealth? A) Gross profit margin B) Earnings per share C) Economic value added D) Price/earnings ratio Answer: C Diff: 2 LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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15) If economic value added (EVA) is negative: A) stockholders' wealth has decreased. B) stockholders' wealth has increased. C) stockholders' wealth has stayed the same. D) stockholders' earnings per share have increased. Answer: A Diff: 2 LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 16) The cost of capital: A) is lower for a start-up company since it is untested. B) can be obtained from the financial statements. C) is the same for all companies. D) is higher for a start-up company since it is untested. Answer: D Diff: 2 LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) Cash flow from operations that are consistently lower than net income may imply that: A) a dividend has not been issued in a long time. B) the common stock should be split. C) the company may be facing a cash shortage. D) working capital has decreased. Answer: C Diff: 2 LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18) Capital charge is computed as: A) Cost of capital - Notes payable - Loans payable - Long-term debt - Stockholders' equity. B) (Notes payable + Loans payable + Long-term debt + Stockholders' equity) × Cost of capital. C) Cost of capital + Notes payable + Loans payable + Long-term debt + Stockholders' equity. D) (Notes payable + Loans payable + Long-term debt) × (Stockholders' equity + Cost of capital). Answer: B Diff: 2 LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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19) If ABC Corporation's debt ratio is higher than its major competitors, ABC may: A) purchase treasury stock. B) sell treasury stock. C) invest in another company. D) be unable to pay its debts. Answer: D Diff: 2 LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 20) Red flags in financial statement analysis can include all of the following EXCEPT: A) a debt ratio higher than average. B) a slowdown in inventory turnover. C) sales increasing while receivables decrease. D) increase in income from continuing operations. Answer: D Diff: 2 LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

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