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Accounting: What the Numbers Mean, 5/e

David H. Marshall, Millikin University
Wayne W. McManus, International College of the Cayman Islands
Daniel F. Viele, Webster University

Financial Statement Analysis

Multiple Choice Quiz

Please answer all questions


1	Many financial analysts substitute one amount for another in making ratio analysis comparisons in order to better achieve inter-company or company-to-industry data comparability. Which of the substitutions described below would not achieve better data comparability (for the ratio indicated) under any situation?
		A)	Cost of goods sold for sales--in the numerator of the inventory turnover ratio.
		B)	Cost of plant and equipment for net book value--in the numerator of the plant and equipment turnover ratio.
		C)	Expected future earnings per share for current earnings per share--in the denominator of the price/earnings ratio.
		D)	Average net assets for average total assets--in the denominator of the return on investment ratio.
		E)	Number of working days in a year for 365--in the denominator of the number of days' sales in accounts receivable ratio.


2	If the trend of the current ratio is increasing, while the trend of the acid-test ratio is decreasing over a period of time, this could be a warning that the firm is:
		A)	Depleting its inventories.
		B)	Having trouble collecting its receivables.
		C)	Purchasing too much treasury stock.
		D)	Paying "extra" dividends.
		E)	Carrying excess inventories.


3	Return on Investment is computed as:
		A)	Net income divided by average total assets.
		B)	Net income divided by total sales.
		C)	Net income divided by average total owners' equity.
		D)	Sales divided by average total assets.
		E)	Sales divided by average total owners' equity.


4	Which of the following is not a category of financial statement ratios?
		A)	Financial leverage.
		B)	Liquidity.
		C)	Profitability.
		D)	Reliability.
		E)	Activity.


5	An individual interested in making a judgment about the profitability of a company should:
		A)	review the trend of working capital for several years.
		B)	calculate the company's ROE for the most recent year.
		C)	review the trend of the company's ROI for several years.
		D)	compare the company's price/earnings ratio trend the most recent year with the industry average price/earnings ratio trend for the most recent year.
		E)	review the trend in the company's book value per share for several years.


6	A potential creditor's judgment about granting credit would be most influenced by the potential customer's:
		A)	current ratio at the end of the prior fiscal year.
		B)	most recent acid-test ratio.
		C)	trend of acid-test ratio over the past three years.
		D)	practice with respect to taking cash discounts offered by current suppliers.
		E)	price/earnings ratio.


7	The comparison of activity measures of different companies is complicated by the fact that:
		A)	dollar amounts of working capital may be significantly different.
		B)	dollar amounts of assets may be significantly different.
		C)	only one of the companies may have preferred stock outstanding.
		D)	the number of shares of common stock issued may be significantly different.
		E)	different inventory cost flow assumptions may be used.


8	The dividend payout ratio describes:
		A)	the proportion of earnings paid as dividends.
		B)	the relationship of dividends per share to market price per share.
		C)	the percentage change in dividends this year compared to last year.
		D)	dividends as a percentage of the price/earnings ratio.
		E)	the relationship of dividends per share to average total assets


9	If management that wanted to increase the financial leverage of the firm, it would:
		A)	raise additional capital by selling common stock.
		B)	use excess cash to purchase preferred stock for the treasury.
		C)	raise additional capital by selling fixed interest rate long-term bonds.
		D)	try to increase its ROI by increasing asset turnover.
		E)	concentrate on improving the firm's working capital management.


10	A vertical common size income statement:
		A)	uses the same dollar amount of revenues for each year.
		B)	expresses all items within a given year's income statement as a percentage of revenues for that year.
		C)	makes horizontal comparisons between years more difficult.
		D)	is useful in estimating the impact of inflation.
		E)	is useful in comparing the percentage increases from year to year in operating expenses.

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