Chapter 17 - Financial Statement Analysis

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Chapter 17 - Financial Statement Analysis Indicate whether the statement is true or false.

1.Factors that reflect the ability of a business to pay its debts and earn a reasonable amount of income are referred to as solvency, profitability, and liquidity.a.True b.Fals e 2.When you are interpreting financial ratios, it is useful to compare a company's ratios to the same ratios from a prior period or to the ratios of another company in the same industry.a.True b.Fals e 3.Comparative financial statements are designed to compare the financial statements of two or more corporations.a.True b.Fals e 4.In horizontal analysis, the current year is the base year.a.True b.Fals e 5.On a common-sized income statement, all items are stated as a percent of total assets or equities at year-end.a.True b.Fals e 6.The analysis of increases and decreases in the amount and percentage of comparative financial statement items is referred to as horizontal analysis.a.True b.Fals e 7.A 15% change in sales will result in a 15% change in net income.a.True b.Fals e 8.A financial statement showing each item on the statement as a percentage of one key item on the statement is called a common-sized financial statement.a.True b.Fals e Powered by CogneroPage 1 Test Bank for Financial Accounting, 16th Edition By Carl Warren, Christine Jonick, Jennifer Schneider (All Chapters 1-17)

All Chapters Arranged Reverse: 17-1 1 / 4

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Chapter 17 - Financial Statement Analysis

• The relationship of each asset item as a percent of total assets is an example of vertical analysis.
• True
• Fals

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• Vertical analysis refers to comparing the financial statements of a single company over several years.
• True
• Fals

e

• In a common-sized income statement, each item is expressed as a percentage of net income.
• True
• Fals

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• In the vertical analysis of a balance sheet, the base for current liabilities is total liabilities.
• True
• Fals

e

• Using vertical analysis of the income statement, a company's net income as a percentage of sales is 15%; therefore, the

cost of merchandise sold as a percentage of sales must be 85%.

• True
• Fals

e

• In the vertical analysis of an income statement, each item is generally stated as a percentage of sales.
• True
• Fals

e

• The excess of current assets over current liabilities is referred to as working capital.
• True
• Fals

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• Dollar amounts of working capital are difficult to assess when comparing companies of different sizes or in comparing

such amounts with industry figures.

• True
• Fals

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• Using measures to assess a business's ability to pay its current liabilities is called current position analysis.
• True
• Fals

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Chapter 17 - Financial Statement Analysis

• Current position analysis is used by short-term creditors to assess how quickly they will be repaid.
• True
• Fals

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• An advantage of the current ratio is that it considers the makeup of the current assets.
• True
• Fals

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• If two companies have the same current ratio, their ability to pay short-term debt is the same.
• True
• Fals

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• The ratio of the sum of cash, receivables, and temporary investments to current liabilities is referred to as the current

ratio.

• True
• Fals

e

• A balance sheet shows cash, $75,000; temporary investments, $115,000; accounts receivable, $150,000; inventories,

$222,500; and accounts payable, $225,000. The current ratio is 2.5.

• True
• Fals

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• If a firm has a current ratio of 2, the subsequent collection of a 60-day note receivable on account will cause the ratio

to decrease.

• True
• Fals

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• If a firm has a quick ratio of 1, the subsequent payment of an account payable will cause the ratio to increase.
• True
• Fals

e

• If the accounts receivable turnover for the current year has decreased when compared with the ratio for the preceding

year, there has been an acceleration in the collection of receivables.

• True
• Fals

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• An increase in the accounts receivable turnover may be due to a change in how credit is granted and/or in collection

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Chapter 17 - Financial Statement Analysis

• True
• Fals

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• The number of days' sales in receivables is one means of expressing the relationship between average daily sales and

accounts receivable.

• True
• Fals

e

• A firm selling food should have a higher inventory turnover rate than a firm selling office furniture.
• True
• Fals

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• The number of days' sales in inventory is one means of expressing the relationship between the cost of merchandise

sold and merchandise inventory.

• True
• Fals

e

• Assuming that the quantities of inventory on hand during the current year were sufficient to meet all demands for

sales, a decrease in the inventory turnover for the current year when compared with the turnover for the preceding year indicates an improvement in inventory management.

• True
• Fals

e

• Solvency analysis focuses on the ability of a business to pay its long-term liabilities.
• True
• Fals

e

• The ratio of fixed assets to long-term liabilities provides a measure of a firm’s ability to pay dividends.
• True
• Fals

e

• A decrease in the ratio of liabilities to stockholders' equity indicates an improvement in the margin of safety for

creditors.

• True
• Fals

e

• In computing the asset turnover ratio, the numerator is net income.
• True

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