Financial Statement Analysis

1. Horizontal analysis is analysis

a. of percentage changes over several years.
b. in which all items are presented as a percentage of one selected item on a financial statement.
c. in which a statistic is calculated for the relationship between two items on a single financial
statement or for two items on different financial statements.
d. of all ratios that increased or decreased over past accounting periods.

2. Horizontal analysis is a technique for evaluating a series of financial statement data over a period of
time
a. that has been arranged from the highest amount to the lowest amount.
b. that has been arranged from lowest amount to the highest amount.
c. to determine which items are in error.
d. to determine the amount and/or percentage increase or decrease that has taken place.

3. In horizontal analysis, each item is expressed as a percentage of the

a. retained earnings figure. c. net income figure.
b. total assets figure. d. base year figure.

4. In vertical analysis, line items on the balance sheet are generally expressed as a percentage of
a. total liabilities. c. total assets.
b. net income. d. cost of goods sold.

5. In vertical analysis, line items on the income statement are generally expressed as a percentage of
a. net income. c. cost of goods sold.
b. net sales. d. total assets.

6. The type of analysis that is concerned with the relationships among the components of the financial
statements is to prepare a
a. vertical analysis. c. profitability analysis.
b. trend analysis. d. ratio analysis.

7. Vertical analysis is a technique that expresses each item in a financial statement

a. in dollars and cents.
b. as a percent of the item in the previous year.
c. as a percent of a base amount.
d. starting with the highest value down to the lowest value.

8. If year one equals $800,000, year two equals $840,000, and year three equals $896,000, the
percentage to be assigned for year three in a trend analysis, assuming that year 1 is the base year, is
a. 100%. b. 89%. c. 105%. d. 112%.

9. Assume the following sales data for a company:

2012 $1,000,000
2011 900,000
2010 750,000
2006 500,000

If 2006 is the base year, what is the percentage increase in sales from 2006 to 2010?
a. 100% b. 180% c. 50% d. 55.5%
10. For meaningful analysis, ratios are best compared with
a. historical company averages. c. historical and industrial averages.
b. industrial averages. d. no standard.

11. Short-term creditors are usually most interested in assessing

a. leverage. c. marketability.
b. liquidity. d. profitability.

12. The current ratio is a

a. liquidity ratio. c. leverage ratio.
b. profitability ratio. d. cash flow ratio.

13. The quick ratio

a. is used to quickly determine a company's leverage and long-term debt-paying ability.
b. relates cash, marketable securities, and net receivables to current liabilities.
c. is calculated by taking one item from the income statement and one item from the balance sheet.
d. is the same as the current ratio except it is rounded to the nearest whole percent.

14. Swanson Company had $250,000 of current assets and $90,000 of current liabilities before borrowing
$60,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on
Swanson Company's current ratio?
a. The ratio remained unchanged.
b. The change in the current ratio cannot be determined.
c. The ratio decreased.
d. The ratio increased.

15. Which of the following is an example of liquidity analysis?

a. Bonds payable are divided by total liabilities and stockholders' equity.
b. Current assets are divided by current liabilities.
c. Net income is divided by the number of shares of stock outstanding.
d. Net income is divided by total assets.

16. Eagle Company has $9,000 in cash, $11,000 in marketable securities, $26,000 in current receivables,
$34,000 in inventories, and $40,000 in current liabilities. The company's quick ratio is closest to
a. 1.35. b. 1.15. c. 2.00. d. 1.73.

17. Dartmouth Company has a quick ratio of 2.5 to 1. It has current liabilities of $40,000 and noncurrent
assets of $70,000. If Dartmouth's current ratio is 3.1 to 1, its inventory and prepaid expenses must be
a. $12,400. b. $24,000. c. $30,000. d. $40,000.

18. A high accounts receivable turnover ratio indicates

a. customers are making payments quickly.
b. a large portion of the company's sales are on credit.
c. many customers are not paying their receivables.
d. the company's sales have increased.

19. The inventory turnover is calculated by dividing

a. cost of goods sold by the ending inventory.
b. cost of goods sold by the beginning inventory.
c. cost of goods sold by the average inventory.
d. average inventory by cost of goods sold.

20. A successful grocery store would probably have

a. a low inventory turnover. c. zero profit margin.
b. a high inventory turnover. d. low volume.
21. Toller Drug Store had net credit sales of $6,000,000 and cost of goods sold of $2,000,000 for the year.
The Accounts Receivable balances at the beginning and end of the year were $350,000 and $250,000,
respectively. The accounts receivable turnover ratio was
a. 17.1 times. b. 10.0 times. c. 13.3 times. d. 20.0 times.

22. Jackson Company, a retailer, had cost of goods sold of $140,000 last year. The beginning inventory
balance was $8,000 and the ending inventory balance was $11,000. The company's inventory turnover
ratio was closest to
a. 12.73. b. 14.73. c. 7.37. d. 17.50.

23. Phillips Company had $300,000 in sales on account last year. The beginning accounts receivable
balance was $25,000 and the ending accounts receivable balance was $18,000. The company's accounts
receivable turnover ratio was closest to
a. 16.67. b. 12.00. c. 3.85. d. 13.95.

24. Lisa's Dress Company, a retailer, had cost of goods sold of $180,000 last year. The beginning inventory
balance was $13,000 and the ending inventory balance was $18,000. The company's average inventory
turnover in days was closest to
a. 36.50 days. c. 31.43 days.
b. 26.36 days. d. 62.86 days.

25. If the accounts receivable turnover is 42 days, what is the account receivable turnover ratio (assuming
a 365 day year)?
a. 7.14 times c. 4.52 times
b. 8.69 times d. None of these

26. Ryngard Corp's sales last year were $38,000, and its total assets were $16,000. What was its total
assets turnover ratio (TATO)?
a. 2.04 b. 2.14 c. 2.26 d. 2.38 e. 2.49

27. Which one of the following would be considered a leverage ratio?

a. accounts receivable turnover c. quick ratio
b. return on total assets d. debt ratio

28. Opis Company has total assets of $475,000 and total liabilities of $130,000. The company's debt-to-
equity ratio is closest to
a. .32. b. .21. c. .38. d. .27.

29. Grant Company reported the following on its income statement:

Income before income taxes $420,000
Income tax expense 120,000
Net income $300,000
An analysis of the income statement revealed that interest expense was $60,000. Grant Company's
times-interest-earned ratio was
a. 8. b. 7. c. 6. d. 5.

30. A common measure of profitability is

a. the quick ratio. c. return on common stockholders' equity
b. times-interest-earned ratio. ratio.
d. debt ratio.
31. Return on sales is calculated by dividing
a. sales by cost of goods sold. c. net income by stockholders' equity.
b. gross profit by net sales. d. net income by sales.
32. Selected financial data from Harlow Company for the most recent year appear below:

Sales $100,000 Interest expense $ 8,000

Cost of goods sold $ 60,000 Operating expenses $ 18,000
Dividends declared and paid $ 5,000

The income tax rate is 30 percent.

The return on sales ratio was closest to

a. 14%. b. 40%. c. 22%. d. 10%.
33. Dowling Company's net income last year was $40,000 and its interest expense was $8,000. Total assets
at the beginning of the year were $260,000 and total assets at the end of the year were $315,000. The
company's income tax rate was 35 percent. The company's return on total assets for the year was
closest to
a. 14.5%. b. 15.7%. c. 16.7%. d. 7.9%.

34. Goslier Company's net income last year was $130,000. The company paid preferred dividends of
$42,000 and its average common stockholders' equity was $610,000. The company's return on common
stockholders' equity for the year was closest to
a. 15.8%. b. 28.1%. c. 21.3%. d. 14.4%.

35. The following data have been taken from your company's financial records for the current year:
Earnings per share $ 4.50 Dividend per share $ 3.00
Market price per share $46.00 Book value per share $31.00

The price-earnings ratio is

a. 10.2. b. 6.9. c. 1.5. d. 15.3.

36. Presented below are selected data from the financial statements of Russell Corp. for 2012 and 2011.

2012 2011
Net income $100,000 $123,000
Cash dividends paid on preferred stock 12,000 15,000
Cash dividends paid on common stock 42,000 38,000
Weighted average number of common shares outstanding 105,000 95,000

Earnings per share is reported on the 2012 income statement as

a. $ .44. b. $ .55. c. $ .84. d. $ .95.

37. Earnings per share is an indication of how much

a. the company paid as dividends for each share of stock.
b. the company earned for each share of outstanding common and preferred stock.
c. the company earned for each share of outstanding common stock
d. cash the company has for each share of all outstanding stock.

38. Wellston Company's net income last year was $300,000. The company has 100,000 shares of common
stock and 30,000 shares of preferred stock outstanding. There was no change in the number of
common or preferred shares outstanding during the year. The company declared and paid dividends
last year of $1.90 per share on the common stock and $1.70 per share on the preferred stock. The
earnings per share of common stock is closest to
a. $2.49. b. $1.10. c. $3.51. d. $3.00.

39. Which of the following is considered a profitability ratio?

a. Earnings per share c. Quick ratio
b. Debt ratio d. Inventory turnover ratio
40. Presented below are selected data from the financial statements of Korn Corp. for 2012 and 2011.
2012 2011
Net income $100,000 $123,000
Weighted average number of common shares outstanding 105,000 95,000
Market price per share of common stock at the end of the year $12.00 $10.00
Earnings per share $ 2.00 $ 1.83

The price-earnings ratio for 2012 is

a. 1.09. b. 5.46. c. 6.0. d. 11.0.

41. Chaney Inc. wants to measure the relationship between profitability and the investment made by
stockholders. Chaney should use
a. return on common stockholders' equity. c. return on sales.
b. earnings per share. d. The statement of retained earnings.

42. Precision Aviation had a profit margin of 6.25%, a total assets turnover of 1.5, and an equity multiplier
of 1.8. What was the firm's ROE?
a. 15.23%
b. 16.03% d. 17.72%
c. 16.88% e. 18.60%

43-50 (8 points) Select an appropriate action for Marble Savings Bank and explain in not more than 6
sentences.