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1
A financial statement for one company that shows two or more years in a side-by-side format is called a comparative financial statement.
A)True
B)False
2
A classified financial statement shows similar items arranged in groups, with subtotals shown to assist users in analyzing the statements.
A)True
B)False
3
A corporation that does portions of its business through its subsidiaries is called a parent company.
A)True
B)False
4
A company that is owned and operated by a parent company is called a subsidiary.
A)True
B)False
5
A classified financial statement shows the combined activities of a parent company and its subsidiaries.
A)True
B)False
6
If a company that has no long-term debt in Year 1 and $50,000 of long-term debt in Year 2, it had a 100% increase in long-term debt between Years 1 and 2.
A)True
B)False
7
Component percentages indicate the relative size of each item included in a total, such as total assets or net sales.
A)True
B)False
8
A percentage change of 80% in net income can be misleading.
A)True
B)False
9
A trend percentage is always measured from the balances of accounts after the first year of operations.
A)True
B)False
10
If the base-year net sales are $120,000 and the second year net sales are $132,000, the trend percentage in sales for the second year will shown as 10%.
A)True
B)False
11
If the base-year sales are $120,000, the second year sales are $132,000, and the third year sales are $151,800, the trend percentage in sales for the third year will shown as 115%.
A)True
B)False
12
If the component percentages for net sales, cost of good sold, and net income are 100.0%, 55.0%, and 10.0%, respectively, the component percentage of operating expenses is 35.0%.
A)True
B)False
13
If the component percentage of net sales is 100% and the component percentage of the cost of goods sold is 60%, this relationship can be expressed as a ratio of 10:6, or 5:3.
A)True
B)False
14
The comparison of data over time is sometimes called horizontal analysis.
A)True
B)False
15
Comparing each item in a financial statement to some common total of the financial statement, within a single accounting period, is sometimes called vertical analysis.
A)True
B)False
16
The benchmark set by management for a selected base year is always the best benchmark for comparing totals on a horizontal basis.
A)True
B)False
17
The quality of earnings can be affected through the selection of a variety of accounting principles.
A)True
B)False
18
A company may be profitable and have a high quality of earnings but have a poor quality of assets.
A)True
B)False
19
Current assets are those assets that can be converted into cash or will be used up within one year or the operating cycle (whichever is longer) without interfering with normal business operations.
A)True
B)False
20
The operating cycle can be any 12-month period.
A)True
B)False
21
Working capital is equal to current assets minus current liabilities.
A)True
B)False
22
In a classified balance sheet, current assets are listed in alphabetical order.
A)True
B)False
23
When a company writes off an account receivable through the allowance method, the current ratio decreases.
A)True
B)False
24
Another term for quick ratio is acid-test ratio.
A)True
B)False
25
It is possible for a firm to have a current ratio greater than 1 and a quick ratio of less than 1.
A)True
B)False
26
The current ratio is calculated by dividing the total of current assets by the total of current liabilities.
A)True
B)False
27
The debt ratio is computed by dividing total liabilities by total assets.
A)True
B)False
28
The annual report is a document that includes audited comparative financial statements, management's discussion and analysis of performance and liquidity, and other information about the company.
A)True
B)False
29
Measures taken by management to make a business look as strong as possible at the balance sheet date are called window dressing.
A)True
B)False
30
The creditors of unincorporated businesses often depend on the financial position of the owners when making lending decisions.
A)True
B)False
31
Measures of a company's profitability are drawn primarily from the balance sheet.
A)True
B)False
32
A multiple-step income statement is more useful in illustrating accounting concepts than is the single-step income statement.
A)True
B)False
33
A company's share of total industry sales is called its industry share.
A)True
B)False
34
Income resulting from the company's principal business activities is called operating income.
A)True
B)False
35
The gross profit rate is a better measurement of a company's ability to generate income than is the amount of gross profit.
A)True
B)False
36
In a multiple-step income statement, operating expenses are classified as (1) selling expenses and (2) general and administrative expenses.
A)True
B)False
37
Interest expense and income taxes expense are included as operating expenses in a multiple-step income statement.
A)True
B)False
38
The gross margin is a measurement that provides an indication of management's ability to control expenses and to retain a reasonable portion of its revenue as profits.
A)True
B)False
39
Earnings per share, in its simplest form, is determined by dividing net income by the average number of shares of capital stock outstanding.
A)True
B)False
40
The current market price per share of the company's stock divided by the annual earnings per share results in a measure called the price-earnings ratio.
A)True
B)False
41
If the P/E ratio is 5 and the current market price of a share of common stock is $25, the earnings per share must have been $125.
A)True
B)False
42
The trend in earnings from year to year is seldom as important as the amount of net income in a current period.
A)True
B)False
43
The multiple-step income statement is used in the annual reports of most publicly owned corporations.
A)True
B)False
44
The return on investment is computed by dividing the profit generated by the investment by the average amount invested.
A)True
B)False
45
The return on equity is computed by dividing operating income by average total assets.
A)True
B)False
46
In the formula used to determine the rate of return earned on the stockholders' equity, the denominator in the formula is average total stockholders' equity.
A)True
B)False
47
If net income is $43,750, the number of shares of common were 150,000, and an additional 50,000 shares were issued on July 1, the earnings per share is $0.25.
A)True
B)False
48
The dividend yield on common stock that received a dividend of $1.26 per share and has a per-share market value of $28 is 4.5%.
A)True
B)False
49
As the operating expense ratio decreases, net income increases.
A)True
B)False
50
Applying leverage can ultimately result in a negative effect on the return on stockholders' equity.
A)True
B)False
51
The debt ratio is one indicator of the amount of leverage used by a business.
A)True
B)False
52
If the debt ratio is 52%, the owners have provided most of the assets.
A)True
B)False
53
If operating income is $150,000 and the interest coverage ratio is 6.52 times, the annual interest expense is $9,780.
A)True
B)False
54
One of the principal factors affecting the quality of working capital is the nature of the current assets.
A)True
B)False
55
Long-term creditors have a primary interest in the accounts receivable turnover rate.
A)True
B)False
56
A short-term creditor would have a primary interest in the accounts receivable turnover rate.
A)True
B)False
57
The accounts receivable turnover rate is measured as the cost of goods sold divided by the average receivables.
A)True
B)False
58
You can determine the number of days required on average to collect customer accounts by dividing the number of days in a year by the accounts receivable turnover rate.
A)True
B)False
59
If current assets total $340,000 and current liabilities total $170,000, the current ratio is 2.
A)True
B)False
60
Unused lines of credit, from a short-term creditor's view point, represent a resources almost as liquid as cash.
A)True
B)False
61
The cash flow from operations to current liabilities indicates ability to cover currently maturing obligations from recurring operations.
A)True
B)False
62
The quick ratio is a measure of short-term liquidity.
A)True
B)False
63
Offering an extra 1% discount on 30-days accounts during the last month of the 12-month accounting period will have a short-term positive effect on working capital.
A)True
B)False
64
The gross profit rate is a measurement of short-term liquidity.
A)True
B)False
65
The inventory turnover rate is an indication of how often inventory is purchased.
A)True
B)False
66
The debt ratio is a measure of long-term credit risk.
A)True
B)False
67
Operating income is a measure of profitability.
A)True
B)False
68
The quick ratio and the operating expense ratio are among the ratios that measure short-term liquidity.
A)True
B)False





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