There are those that believe that the analysis of financial statements has limitations. Which of the statements below would qualify as a limitation of financial statement analysis?

There are those that believe that the analysis of financial statements has limitations. Which of the statements below would qualify as a limitation of financial statement analysis?

A) Ratio analysis requires the analyst to evaluate a firm's performance over too many years to be of any value.
B) Proper ratio analysis requires the analyst to rely upon audited financial statements, which can be easily manipulated.
C) Thorough ratio analysis requires the analyst to refer to benchmarking, which is very easy to misinterpret.
D) Ratio analysis requires the analyst to utilize accounting data that is based on historical costs instead of current market values.

Answer: D

Which of the following is not a method of "benchmarking"?

Which of the following is not a method of "benchmarking"?

A) Conduct an industry group analysis.
B) Utilize the DuPont system to analyze a firm's performance.
C) Evaluating a single firm's performance over time.
D) Identify a group of firms that compete with the company being analyzed.

Answer: B

Why is the quick ratio considered by some to be a better measure of liquidity than the current ratio?

Why is the quick ratio considered by some to be a better measure of liquidity than the current ratio?

A) The quick ratio more accurately reflects a firm's profitability.
B) It omits the least liquid current asset from the numerator of the ratio.
C) The current ratio does not include accounts receivable.
D) It measures how "quickly" cash flows through the firm.

Answer: B

Which of the following is a benefit of a common-size income statement?

Which of the following is a benefit of a common-size income statement?

A) It is very useful to assess how effectively a firm collected its accounts receivable.
B) It reveals a great deal of information about the adequacy of a firm's net working capital.
C) It can tell the analyst a great deal about the firm's efficiency and profitability.
D) It reveals how effectively a firm has increased its sales.

Answer: C

Limitations of ratio analysis include all but

Limitations of ratio analysis include all but

A) Ratios depend on accounting data based on historical costs.
B) Differences in accounting practices like FIFO versus LIFO make comparison difficult.
C) Trend analysis could be distorted by financial statements affected by inflation.
D) All of the above are limitations of ratio analysis.

Answer: D

Peer group analysis can be performed by

Peer group analysis can be performed by

A) management choosing a set of firms that are similar in size or sales, or who compete in the same market.
B) using the average ratios of this peer group, which would then be used as the benchmark.
C) identifying firms in the same industry that are grouped by size, sales, and product lines in order to establish benchmark ratios.
D) Only a and b relate to peer group analysis.

Answer: D

Which one of the following statements about trend analysis is NOT correct?

Which one of the following statements about trend analysis is NOT correct?

A) This benchmark is based on a firm's historical performance.
B) It allows management to examine each ratio over time and determine whether the trend is good or bad for the firm.
C) The Standard Industrial Classification (SIC) System is used to identify benchmark firms.
D) All of the above are true statements.

Answer: C

Which one of the following is NOT an advantage of using ROE as a goal?

Which one of the following is NOT an advantage of using ROE as a goal?

A) ROE is highly correlated with shareholder wealth maximization.
B) ROE and the DuPont analysis allow management to break down the performance and identify areas of strengths and weaknesses.
C) ROE does not consider risk.
D) All of the above are advantages of using ROE as a goal.

Answer: C

Which one of the following is a criticism of equating the goals of maximizing the ROE of a firm and maximizing the firm's shareholder wealth?

Which one of the following is a criticism of equating the goals of maximizing the ROE of a firm and maximizing the firm's shareholder wealth?

A) ROE is based on after-tax earnings, not cash flows.
B) ROE does not consider risk.
C) ROE ignores the size of the initial investment as well as future cash flows.
D) All of the above are criticisms of ROE as a goal.

Answer: D

The DuPont equation shows that a firm's ROE is determined by three factors:

The DuPont equation shows that a firm's ROE is determined by three factors:

A) net profit margin, total asset turnover, and the equity multiplier
B) operating profit margin, ROA, and the ROE
C) net profit margin, total asset turnover, the ROA
D) ROA, total assets turnover, and the equity multiplier

Answer: A

Which one of the following statements is NOT correct?

Which one of the following statements is NOT correct?

A) The DuPont system is based on two equations that relate a firm's ROA and ROE.
B) The DuPont system is a set of related ratios that links the balance sheet and the income statement.
C) Both management and shareholders can use this tool to understand the factors that drive a firm's ROE.
D) All of the above are correct.

Answer: D

For a firm that has both debt and equity,

For a firm that has both debt and equity,

A) ROE > ROA.
B) ROE < ROA.
C) ROE = ROA
D) None of the above.

Answer: A

For a firm that has no debt in its capital structure,

For a firm that has no debt in its capital structure,

A) ROE > ROA.
B) ROE < ROA.
C) ROE = ROA.
D) None of the above.

Answer: C

Coverage ratios, like times interest earned and cash coverage ratio, allow

Coverage ratios, like times interest earned and cash coverage ratio, allow

A) a firm's management to assess how well they meet short-term liabilities.
B) a firm's shareholders to assess how well the firm will meet its short-term liabilities.
C) a firm's creditors to assess how well the firm will meet its interest obligations.
D) a firm's creditors to assess how well the firm will meet its short-term liabilities other than interest expense.

Answer: C

Which one of the following statements is NOT correct?

Which one of the following statements is NOT correct?

A) A leveraged firm is more risky than a firm that is not leveraged.
B) A leveraged firm is less risky than a firm that is not leveraged.
C) A firm that uses debt magnifies the return to its shareholders.
D) All of the above statements are correct.

Answer: B

If firm A has a higher debt-to-equity ratio than firm B, then

If firm A has a higher debt-to-equity ratio than firm B, then

A) firm A has a lower equity multiplier than firm B.
B) firm B has a lower equity multiplier than firm A.
C) firm B has lower financial leverage than firm A.
D) None of the above.

Answer: A

Which one of the following statements is correct?

Which one of the following statements is correct?

A) The lower the level of a firm's debt, the higher the firm's leverage.
B) The lower the level of a firm's debt, the lower the firm's equity multiplier.
C) The lower the level of a firm's debt, the higher the firm's equity multiplier.
D) The tax benefit from using debt financing reduces a firm's risk.

Answer: B

One of the following statements is NOT true of asset turnover ratios.

One of the following statements is NOT true of asset turnover ratios.

A) Asset turnover ratios measure the level of sales per dollar of assets that the firm has.
B) The fixed assets turnover ratio is less significant for equipment-intensive manufacturing industry firms than the total assets turnover ratio.
C) The higher the total asset turnover, the more efficiently management is using total assets.
D) All of the above are true.

Answer: B

Which one of the following statements is NOT true?

Which one of the following statements is NOT true?

A) The accounts receivables turnover ratio measures how quickly the firm collects on its credit sales.
B) One ratio that measures the efficiency of a firm's collection policy is days' sales outstanding.
C) The more days that it takes the firm to collect on its receivables, the more efficient the firm is.
D) DSO measures in days, the time the firm takes to convert its receivables into cash.

Answer: C

All but one of the following is true about the inventory turnover ratio.

All but one of the following is true about the inventory turnover ratio.

A) It is calculated by dividing inventory by cost of goods sold.
B) It measures how many times the inventory is turned over into saleable products.
C) The more times a firm can turnover the inventory, the better.
D) Too high a turnover or too low a turnover could be a warning sign.

Answer: A

All else being equal, which one of the following will decrease a firm's current ratio?

All else being equal, which one of the following will decrease a firm's current ratio?

A) a decrease in the net fixed assets
B) a decrease in depreciation
C) an increase in accounts payable
D) None of the above

Answer: C

Which one of the following does NOT change a firm's current ratio?

Which one of the following does NOT change a firm's current ratio?

A) The firm collects on its accounts receivables.
B) The firm purchases inventory by taking a short-term loan.
C) The firm pays down its accounts payables.
D) None of the above.

Answer: A

All but one of the following is true about quick ratios.

All but one of the following is true about quick ratios.

A) The quick ratio is calculated by dividing the most liquid of current assets by current liabilities.
B) Service firms that tend not to carry too much inventory will see significantly higher quick ratios than current ratios.
C) Inventory, being not very liquid, is subtracted from total current assets to determine the most liquid assets.
D) Quick ratios will tend to be much smaller than current ratio for manufacturing firms or other industries that have a lot of inventory.

Answer: B

Which of the following is NOT true of liquidity ratios?

Which of the following is NOT true of liquidity ratios?

A) They measure the ability of the firm to meet short-term obligations with short-term assets without putting the firm in financial trouble.
B) There are two commonly used ratios to measure liquidity—current ratio and quick ratio.
C) For manufacturing firms, quick ratios will tend to be much larger than current ratios.
D) The higher the number, the more liquid the firm and the better its ability to pay its short-term bills.

Answer: C

Which of the following is true of ratio analysis?

Which of the following is true of ratio analysis?

A) A ratio is computed by dividing one balance sheet or income statement by another.
B) The choice of the scale determines the story that can be garnered from the ratio.
C) Ratios can be calculated based on the type of firm being analyzed or the kind of analysis being performed.
D) All of the above are true.

Answer: D

Common-size financial statements:

Common-size financial statements:

A) are a specialized application of ratio analysis.
B) allow us to make meaningful comparisons between the financial statements of two firms that are different in size.
C) are prepared by having each financial statement item expressed as a percentage of some base number, such as total assets or total revenues.
D) All of the above are true.

Answer: D

All but one of the following is true of common-size income statements.

All but one of the following is true of common-size income statements.

A) Each income statement item is standardized by dividing it by total assets.
B) Income statement accounts are represented as percentages of sales.
C) Each income statement item is standardized by dividing it by sales.
D) Common-size financial statement analysis is a specialized application of ratio analysis.

Answer: A

All but one of the following is true of common-size balance sheets.

All but one of the following is true of common-size balance sheets.

A) Each asset and liability item on the balance sheet is standardized by dividing it by total assets.
B) Balance sheet accounts are represented as percentages of total assets.
C) Each asset and liability item on the balance sheet is standardized by dividing it by sales.
D) Common-size financial statements allow us to make meaningful comparisons between the financial statements of two firms that are different in size.

Answer: C

An individual analyzing a firm's financial statements should do all but one of the following:

An individual analyzing a firm's financial statements should do all but one of the following:

A) Use unaudited financial statements.
B) Do a trend analysis.
C) Perform a benchmark analysis.
D) Compare the firm's performance to that of its direct competitors.

Answer: A

Anyone analyzing a firm's financial statements should

Anyone analyzing a firm's financial statements should

A) use audited financial statements only.
B) do a trend analysis.
C) perform a benchmark analysis.
D) All of the above.

Answer: D

A firm's management analyzes financial statement's so that:

A firm's management analyzes financial statement's so that:

A) they can get feedback on their investing, financing, and working capital decisions by identifying trends in the various accounts that are reported in the financial statements.
B) similar to shareholders, they can focus on profitability, dividend, capital appreciation, and return on investment.
C) they can get more stock options.
D) a and b.

Answer: D

The creditors of a firm analyze financial statements so that they can focus on

The creditors of a firm analyze financial statements so that they can focus on

A) the firm's amount of debt.
B) the firm's ability to generate sufficient cash flows to meet all legal obligations first and still have sufficient cash flows to meet debt repayment and interest payments.
C) the firm's ability to meet its short-term obligations.
D) All of the above.


Answer: D

Shareholders analyze financial statements in order to:

Shareholders analyze financial statements in order to:

A) assess the cash flows that the firm will generate from operations.
B) determine the firm's profitability, their return for that period, and the dividend they are likely to receive.
C) focus on the value of the stock they hold.
D) All of the above.




Answer: D

Financial statements can be analyzed from the following three different perspectives:

Financial statements can be analyzed from the following three different perspectives:

A) management, regulator, and bondholder
B) management, shareholder, and creditor
C) regulator, shareholder, and creditor
D) shareholder, creditor, and regulator

Answer: B

Which one of the following is NOT true for a corporation?

Which one of the following is NOT true for a corporation?

A) Interest paid on bonds issued last year is tax deductible.
B) Common-stock dividends to be paid this year are not tax deductible.
C) Common-stock dividends to be paid this year will be tax deductible if the firm has a net loss for the year.
D) Preferred stock dividends to be paid this year are not tax deductible.

Answer: C

Clarity Music Company has a marginal tax rate of 34 percent and an average tax rate of 32 percent this year. It is planning to construct a new recording studio next year. The appropriate tax rate to be applied on the income generated from the new studio is

Clarity Music Company has a marginal tax rate of 34 percent and an average tax rate of 32 percent this year. It is planning to construct a new recording studio next year. The appropriate tax rate to be applied on the income generated from the new studio is

A) the average tax rate.
B) the marginal tax rate.
C) either one.
D) none of the above.

Answer: B

Trident Corporation had the following cash flows in the current year. Which one of the following is a financing activity cash flow?

Trident Corporation had the following cash flows in the current year. Which one of the following is a financing activity cash flow?

A) Rent on a warehouse amounting to $1.1 million
B) Purchase of $125,000 worth of five-year bonds issued by Towson Utilities
C) Preferred dividends to the tune of $330,000 paid to shareholders
D) Lease income received on a piece of land

Answer: C

Which one of the following is NOT a cash flow from investing activities?

Which one of the following is NOT a cash flow from investing activities?

A) buying and selling bonds or stock of other firms
B) buying or selling of land, buildings, and plant and equipment
C) cash payments of dividends to shareholders
D) issuing and paying out on insurance contracts

Answer: C

Cash flows from financing activities include all but one of the following:

Cash flows from financing activities include all but one of the following:

A) cash payments on the principal of long-term debt
B) issuing and paying out on insurance contracts
C) cash purchases of treasury stock
D) cash proceeds from a bank loan

Answer: B

Which one of the following is NOT a cash flow from operating activities?

Which one of the following is NOT a cash flow from operating activities?

A) cash payments on the principal of long-term debt
B) payments for utilities and rent
C) payments to purchase raw materials
D) cash receipts from selling goods and services

Answer: A

Which one of the following are NOT all noncash items?

Which one of the following are NOT all noncash items?

A) depreciation, deferred taxes, and prepaid expenses
B) depletion charges, taxes, and amortization
C) depletion charges, deferred taxes, and prepaid expenses
D) depreciation, amortization, and prepaid taxes

Answer: B

The major disadvantages of market-value accounting include

The major disadvantages of market-value accounting include

A) the difficulty in estimating the current value for some assets.
B) the difficulty in applying some of the valuation models used to estimate market values.
C) the resulting numbers are potentially open to abuse.
D) All of the above are disadvantages of market-value accounting.

Answer: D

Which of the following is NOT true about treasury stock?

Which of the following is NOT true about treasury stock?

A) It is the firm's own shares repurchased in the market by the firm.
B) It can be reissued under stock option and other employee benefit plans.
C) It lowers the value of the company.
D) It increases the net worth of the company.

Answer: C

Which one of the following is NOT true about goodwill?

Which one of the following is NOT true about goodwill?

A) It is an intangible asset.
B) It represents the value of all unrecorded assets acquired in a merger.
C) It equals the premium paid over the fair market value of the assets acquired in a merger.
D) When goodwill appears on a firm's balance sheet, it reduces the firm's net worth by that amount.

Answer: D

When prices are falling, valuing inventory using the LIFO method rather than FIFO gives

When prices are falling, valuing inventory using the LIFO method rather than FIFO gives

A) inventory a higher value but lowers net income.
B) inventory a lower value and also lowers net income.
C) both inventory and net income a higher value.
D) inventory a lower value and net income a higher value.

Answer: C

When prices are rising, valuing ending inventory using the FIFO method rather than LIFO gives

When prices are rising, valuing ending inventory using the FIFO method rather than LIFO gives

A) inventory a higher value but lowers net income.
B) inventory a lower value and also lowers net income.
C) both inventory and net income a higher value.
D) inventory a lower value and net income a higher value.

Answer: C

Petra, Inc., has $400,000 as current assets, $1.225 million as plant and equipment, and $250,000 as goodwill. In preparing the balance sheet, these assets should be listed in which of the following orders?

Petra, Inc., has $400,000 as current assets, $1.225 million as plant and equipment, and $250,000 as goodwill. In preparing the balance sheet, these assets should be listed in which of the following orders?

A) current assets, goodwill, and plant and equipment
B) current assets, plant and equipment, and goodwill
C) goodwill is not an asset and is not listed here
D) none of the above.



Answer: B

The conventional way of preparing a balance sheet is to list all assets in the order of their

The conventional way of preparing a balance sheet is to list all assets in the order of their

A) market value.
B) risk.
C) liquidity.
D) historical cost.

Answer: C

Trekkers Footwear bought a piece of machinery on January 1, 2006 at a cost of $2.3 million, and the machinery is being depreciated annually at an amount of $230,000 for 10 years. Its market value on December 31, 2008 is $1.75 million. The firm's accountant is preparing its financial statement for the fiscal year end on December 31, 2008. The asset's value should be recognized on the balance sheet at

Trekkers Footwear bought a piece of machinery on January 1, 2006 at a cost of $2.3 million, and the machinery is being depreciated annually at an amount of $230,000 for 10 years. Its market value on December 31, 2008 is $1.75 million. The firm's accountant is preparing its financial statement for the fiscal year end on December 31, 2008. The asset's value should be recognized on the balance sheet at

A) $2.3 million.
B) $1.61 million.
C) $230,000.
D) $1.75 million.




Answer: B

The cost principle states that an asset should be recognized on the balance sheet at

The cost principle states that an asset should be recognized on the balance sheet at

A) the market value of the asset.
B) at the market value less the accumulated depreciation on the asset.
C) at its historical cost.
D) at its historical cost less the accumulated depreciation on the asset.

Answer: C

On June 23, 2008, Mikhal Cosmetics sold $250,000 worth of its products to Rynex Corporation, with the payment to be made in 90 days on September 20. The goods were shipped to Rynex on July 2. The firm's accountants should recognize the sale on

On June 23, 2008, Mikhal Cosmetics sold $250,000 worth of its products to Rynex Corporation, with the payment to be made in 90 days on September 20. The goods were shipped to Rynex on July 2. The firm's accountants should recognize the sale on

A) June 23, 2008.
B) July 2, 2008.
C) September 20, 2008.
D) none of the above.

Answer: A

According to the realization principle, revenue from a sale of the firm's products are recognized

According to the realization principle, revenue from a sale of the firm's products are recognized

A) when the products are shipped to the buyer.
B) when the buyer orders the goods.
C) when cash is realized from the sale of the products.
D) at the time of the sale.

Answer: D

Tyson Corporation bought raw materials on April 23, 2008 and also on July 2, 2008. Products produced in the months of May were sold in July. The firm uses FIFO to value its inventory. According to the matching principle, the firm's accountant should associate

Tyson Corporation bought raw materials on April 23, 2008 and also on July 2, 2008. Products produced in the months of May were sold in July. The firm uses FIFO to value its inventory. According to the matching principle, the firm's accountant should associate

A) the inventory acquired on July 2 with the products sold.
B) the inventory acquired on April 23 with the products sold.
C) Neither of these dates is valid because the products were sold in July.
D) None of the above.

Answer: B

The matching principle calls for the accountant of a firm to

The matching principle calls for the accountant of a firm to

A) identify an asset with each liability of the firm.
B) associate the revenue generated from a sale to the costs incurred to produce the product.
C) match each item of inventory with the historical cost at which it was acquired.
D) none of the above

Answer: B

Dell Computer Corporation has receivables of $2.5 million and inventory worth $1.8 million. The firm plans to borrow $2 million for working capital purposes from Austin First National Bank. In evaluating the loan request, the bank should place the most emphasis on

Dell Computer Corporation has receivables of $2.5 million and inventory worth $1.8 million. The firm plans to borrow $2 million for working capital purposes from Austin First National Bank. In evaluating the loan request, the bank should place the most emphasis on

A) the matching principle.
B) the realization principle.
C) the going-concern assumption.
D) the assumption of arm's-length transactions.

Answer: C

The going concern assumption implies that

The going concern assumption implies that

A) a firm will continue to be in business for the foreseeable future.
B) a firm will be going out of business in the near future.
C) a firm will continue to operate in the near future but only after being acquired by another firm.
D) none of the above

Answer: A

Your uncle, who has a second home in Bethany Beach, Delaware, is planning to sell it in the next few weeks. You are interested in buying this beachside property, so your agent negotiates a price for the house with your uncle's agent. This transaction is an example of

Your uncle, who has a second home in Bethany Beach, Delaware, is planning to sell it in the next few weeks. You are interested in buying this beachside property, so your agent negotiates a price for the house with your uncle's agent. This transaction is an example of

A) The cost principle.
B) the assumption of arm's-length transactions.
C) the realization principle.
D) the going-concern assumption.
E) the matching principle.

Answer: B

The assumption of arm's-length transaction states that

The assumption of arm's-length transaction states that

A) both parties to a transaction can act independently of each other and make economically rational decisions.
B) both parties to a transaction must have had previous transactions.
C) one of the parties to the transaction is a bank that has full knowledge of the firm's creditworthiness.
D) none of the above

Answer: A

Accounting standards prescribed by GAAP are important because

Accounting standards prescribed by GAAP are important because

A) they make the financial statements of all firms standardized.
B) they allow one to examine a firm's performance over time.
C) they make it possible for management or analysts to compare the firm's performance to that of other competitors.
D) all of the above.

Answer: D

The generally accepted accounting principles (GAAP) are

The generally accepted accounting principles (GAAP) are

A) rules that outline how a firm can operate ethically.
B) rules on how the firm will be valued in the event of a merger.
C) rules and procedures that define how companies are to maintain financial records and prepare financial reports.
D) rules for how a company can issue stock to raise money.

Answer: C

Annual reports are prepared by a firm's management to

Annual reports are prepared by a firm's management to

A) communicate to shareholders the firm's failures in the previous year.
B) provide overview of the firm's financial and operating performance.
C) highlight the performance of its chief competitors.
D) provide a forecast of the economy in the coming years.

Answer: B

Which of the following sections do annual reports typically contain?

Which of the following sections do annual reports typically contain?

A) financial summary related to the past year's performance
B) information about the company, its products, and its activities
C) audited financial statements, including limited historical financial data
D) All three of the above sections are included in the annual report.

Answer: D