Test Bank financial accounting 2nd spiceland ch12

Ch12 Student: _ We can use ratios to help evaluate a firm's performance and financial position True Vertical analysis expresses each item in a financial statement as a percentage of the same base amount True False If the base-year amount is zero, we can't calculate a percentage change under horizontal analysis True False Horizontal analysis analyzes trends in financial statement data for a single company over time True False For vertical analysis, we express each balance sheet item as a percentage of sales True False We use vertical analysis to express each income statement item as a percentage of sales True False We use vertical analysis for income statement accounts, but not balance sheet accounts True False Vertical analysis calculates the amount and percentage change of an account over time True False False Using horizontal analysis, if the base year is negative and the following year is positive, the percentage change is just as useful as if the base year and the following year were both positive True False 10 We use horizontal analysis to analyze trends in financial statement data, such as the dollar amount of change and the percentage change, for one company over time True False 11 We measure income statement accounts at a point in time and balance sheet accounts over a period of time True False 12 Ratios that compare an income statement account with a balance sheet account should express the balance sheet account as an average of the beginning and ending balances True False 13 Every liquidity ratio is calculated using one or more current asset accounts True False 14 Solvency refers to a company's ability to pay its current liabilities while liquidity refers to a company's ability to pay its long-term liabilities True False 15 The receivables turnover ratio measures how many times, on average, a company collects its receivables during the year True False 16 A low receivables turnover ratio is a positive sign that a company can quickly turn its receivables into cash True False 17 The average collection period converts the receivables turnover ratio into days True False 18 A low inventory turnover ratio usually is a positive sign and indicates that inventory is selling quickly True False 19 An extremely high inventory turnover ratio may be a signal that the company is losing sales due to inventory shortages True False 20 The average days in inventory converts the inventory turnover ratio into days True False 21 A low current ratio indicates that a company has sufficient current assets to pay current liabilities as they become due True False 22 The acid-test ratio is always smaller than the current ratio True False 23 Other things being equal, the higher the debt to equity ratio, the higher the risk of bankruptcy True False 24 We use the times interest earned ratio to compare interest payments with a company's income available to pay those charges True False 25 We calculate the times interest earned ratio by dividing net income by interest expense True False 26 The gross profit ratio is calculated as gross profit divided by net sales True False 27 Return on assets is calculated as net income divided by ending total assets True False 28 Profit margin measures the income earned on each dollar of sales, and is calculated by dividing net income by net sales True False 29 Asset turnover measures sales volume in relation to the investment in assets, and is calculated as net sales divided by average total assets True False 30 Return on equity is calculated by dividing the stock return by average stockholders' equity True False 31 The price-earnings (PE) ratio compares a company's share price with its earnings per share True False 32 Growth stocks have high expectations of future earnings growth, and therefore, usually trade at higher PE ratios True False 33 Value stocks have lower share prices in relationship to their fundamental ratios, and therefore, trade at lower PE ratios True False 34 A discontinued operation is the sale or disposal of any long-term asset True False 35 We report any profits or losses on discontinued operations in the current year, separately from profits and losses on the portion of the business that will continue True False 36 To be an extraordinary item, an event that produces a gain or loss must be either unusual in nature or infrequent in occurrence True False 37 We report extraordinary items separately, net of taxes, near the bottom of the income statement just below discontinued operations True False 38 If an item meets one but not both criteria for extraordinary item treatment, it is correctly excluded from extraordinary items and included with other revenue and expenses True False 39 The location where a loss is reported in the income statement does not really matter as long as the loss is reported True False 40 When using a company's current earnings to estimate future earnings performance, investors normally should exclude discontinued operations and extraordinary items True False 41 Conservative accounting practices are those that result in reporting higher income, higher assets, and lower liabilities True False 42 Conservative accounting practices are those that result in reporting lower income, lower assets, and higher liabilities True False 43 A larger estimation of the allowance for uncollectible accounts, the write-down of overvalued inventory and the use of a shorter useful life for depreciation are all examples of conservative accounting True False 44 Aggressive accounting practices result in reporting higher income, higher assets, and lower liabilities True False 45 Changes in accounting estimates usually have no effect on a company's underlying cash flows True False 46 Which of the following is not a common type of comparison in accounting? A B C D Comparisons of sales growth between companies Comparisons of earnings per share between companies Comparisons over time Comparisons to industry 47 When using vertical analysis,we express income statement accounts as a percentage of A B C D Net income Gross profit Sales Total assets 48 When using vertical analysis, we express balance sheet accounts as a percentage of A B C D Sales Total assets Total liabilities Total stockholders' equity 49 Which of the following is an example of verticalanalysis? A B C D Comparing gross profit across companies Comparing income statement items as a percentage of sales Comparing debt with industry averages Comparing the change in sales over time 50 Comparing operating expenses as a percentage of sales is an example of: A B C D Vertical analysis Horizontal analysis Diagonal analysis Both vertical and horizontal analysis 51 The following is an example of: A B C D Vertical analysis Horizontal analysis Diagonal analysis Both vertical and horizontal analysis 52 The following is an example of: A B C D Vertical analysis Horizontal analysis Diagonal analysis Both vertical and horizontal analysis 53 Horizontal analysis examines trends in a company A B C D Over time Between income statement accounts in the same year Between balance sheet accounts in the same year Between income statement and balance sheet accounts in the same year 54 Which of the following is an example of horizontal analysis? A B C D Comparing COGS with sales Comparing net income across companies Comparing debt with equity Comparing the growth in sales over time 55 Which of the following is an example of horizontal analysis? A B C D Comparing gross profit across companies Comparing gross profit with operating expenses Comparing assets with equity Comparing the change in sales over time 56 Comparing changes in net income for one company over time is an example of: A B C D Vertical analysis Horizontal analysis Diagonal analysis Both vertical and horizontal analysis 57 Which of the following is correct? A B C D Option a Option b Option c Option d 58 Which of the following ratios is most useful in evaluating liquidity? A B C D Return on assets Return on equity Debt to equity ratio Current ratio 59 Which of the following ratios is most useful in evaluating solvency? A B C D Debt to equity ratio Current ratio Receivables turnover ratio Inventory turnover ratio 60 Which of the following is a sign that a company can quickly turn its receivables into cash? A B C D A low receivables turnover ratio A high receivables turnover ratio A high average collection period Both a low receivables turnover ratio and a high average collection period 61 Which of the following is a sign that a company cannot quickly turn its receivables into cash? A B C D A high receivables turnover ratio A low receivables turnover ratio A low average collection period Both a high receivables turnover ratio and a low average collection period 62 Which of the following is a negative sign that a company is not selling its inventory quickly? A B C D A low inventory turnover ratio A high inventory turnover ratio A low average days in inventory Both a high inventory turnover ratio and a low average days in inventory 63 Which of the following is a positive sign that a company is selling its inventory quickly? A B C D A low inventory turnover ratio A high inventory turnover ratio A low average days in inventory Both a high inventory turnover ratio and a low average days in inventory 64 The current ratio is calculated as: A B C D Current assets divided by noncurrent assets Current assets divided by current liabilities Current liabilities divided by noncurrent liabilities Current liabilities divided by current assets 65 The acid-test ratio is most similar to the: A B C D Current ratio Debt to equity ratio Times interest earned ratio Inventory turnover ratio 66 The acid-test ratio is: A B C D The liquidity ratio divided by the equity ratio Current assets minus inventory divided by current liabilities minus accounts payable Cash, net receivables, and current investments divided by current liabilities Cash divided by accounts payable 67 Which of the following is not a solvency ratio? A B C D Time interest earned ratio The debt to equity ratio The current ratio All of the other options are solvency ratios 68 When a company pays a bill from a plumber for previous services on account: A B C D Its debt to equity ratio decreases Its acid-test ratio always remains unchanged Its current ratio always remains unchanged All of the other options are correct 69 Assuming a current ratio of 1.0, how will the purchase of inventory with cash affect the ratio? A B C D Increase the current ratio No change to the current ratio Decrease the current ratio Could either increase or decrease the current ratio 70 Assuming an acid-test ratio of 1.0, how will the purchase of inventory with cash affect the ratio? A B C D Increase the acid-test ratio No change to the acid-test ratio Decrease the acid-test ratio Could either increase or decrease the acid-test ratio 71 Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the purchase of inventory with cash affect each ratio? A B C D Increase the current ratio and increase the acid-test ratio No change to the current ratio and decrease the acid-test ratio Decrease the current ratio and decrease the acid-test ratio Increase the current ratio and decrease the acid-test ratio 72 When a company sells land for cash and makes a $25,000 gain: A B C D Its acid-test ratio decreases Its current ratio decreases Its debt to equity ratio decreases Cannot determine from the given information 73 Assume a company's current ratio and acid-test ratio are less than 1.0 before it purchases inventory on credit When it makes the purchase A B C D Its current ratio decreases Its acid-test ratio decreases Its current ratio remains unchanged Its acid-test ratio remains unchanged A partial balance sheet ($s in thousands) for Captain D's Seafood Inc is shown below 74 The current ratio is: A B C D 1.98 1.58 1.17 0.66 75 The acid-test ratio is: A B C D 0.25 0.88 1.17 1.58 76 The debt to equity ratio is: A B C D 0.33 0.77 1.17 1.30 Recent financial statement data for Harmony Health Foods (HHF) Inc is shown below 77 HHF's debt to equity ratio is: A B C D 0.75 1.13 0.38 1.80 78 HHF's times interest earned ratio is: A B C D 3.47 1.72 2.47 10.0 Excerpts from Stealth Company's December 31, 2013 and 2012, financial statements are presented below: 79 Stealth Company's 2013 receivables turnover ratio is: A B C D 2.85 4.70 5.00 10.63 80 Stealth Company's 2013 average collection period is: A B C D 73 days 104 days 109 days 128 days 81 Stealth Company's 2013 inventory turnover is: A B C D 3.62 times 3.96 times 4.07 times 6.03 times 130.Barry's BBQ had sales revenue for the year of $200 million and net income of $20 million Total assets were $70 million at the beginning of the year, and $80 million at the end of the year Calculate Barry's return on assets, profit margin, and asset turnover ratios 131.Paul Pierce Enterprises reports net income of $800,000, average total assets of $2,400,000, and average total liabilities of $400,000 Calculate the return on asset and return on equity ratios 132.Phillip's Fun Center has go-karts, miniature golf, bumper boats, paintball, and laser tag Determine whether the company should report each of the following items as discontinued operations, extraordinary items, or other expenses: Uninsured losses of $200,000 were incurred due to a hurricane that swept through the area for the first time in 50 years The company sold its old go-karts at a loss of $25,000 and replaced them with all new go-karts The company sold its laser tag center at a loss of $10,000 to focus on the other more profitable segments Laser tag is considered to be a separate business segment The company restructured its business at a cost of $75,000, replacing some employee positions with automated equipment 133.Classify each of the following accounting practices as conservative or aggressive: Increase the allowance for uncollectible accounts When costs are rising, change from FIFO to LIFO Increase the estimated useful life of equipment 134.Classify each of the following accounting practices as conservative or aggressive Choosing a shorter life for calculating depreciation The write-down of inventory Decrease the allowance for uncollectible accounts Recording revenues sooner 135.Explain the difference between vertical and horizontal analysis 136.Explain why ratios that compare an income statement account with a balance sheet account should express the balance sheet account as an average of the beginning and ending balances 137.Sideline Sports Products reports a return on assets of 6%, and a return on equity of 10% Why these two ratios differ? 138.Define earnings persistence How does earnings persistence relate to the reporting of discontinued operations and extraordinary items? 139.Explain the difference between conservative and aggressive accounting practices Provide an example of a conservative accounting practice and explain why this practice is conservative Provide an example of an aggressive accounting practice and explain why this practice is aggressive 140.Listed below are eight risk ratios followed by a list of phrases that describe or characterize the ratios Match each phrase with the correct ratio placing the letter designating the ratio in the space provided Average collection period _ Cost of goods sold divided by average inventory; the number_ of times the firm sells its average inventory balance during a_ reporting period._ Times interest earned ratio _ _ Total liabilities divided by total stockholders' equity; measure_ a company's solvency risk._ Current ratio _ _ _ Approximate number of days the average inventory is held._ Acidtest ratio _ _ Ratio that compares interest expense with income available to_ pay those charges._ Receivables turnover ratio _ Net sales divided by average accounts receivable; the number_ of times during a year that the average accounts receivable_ balance is collected._ Inventory turnover ratio _ Cash, short-term investments, and accounts receivable divided_ by current liabilities; measures the availability of liquid current_ assets to pay current liabilities._ Debt to equity ratio _ _ Current assets divided by current liabilities; measures_ the availability of current assets to pay current liabilities._ Average days in inventory _ _ Approximate number of days the average accounts receivable_ balance is outstanding._ 141.Listed below are six profitability ratios followed by a list of phrases that describe or characterize the ratios Match each phrase with the correct ratio placing the letter designating the ratio in the space provided Return on assets Profit margin Priceearnings (PE) ratio Gross profit ratio Net income divided by average total assets; measures the amount of net income generated for each dollar invested in assets. Compares a company's share price with its earnings per share. Net income divided by average stockholders' equity; measures the income generated per dollar of equity. Gross profit divided by net sales; measures the amount by which the sale price of inventory exceeds its cost per dollar of sales. Asset turnover Net sales divided by average total assets; which measures the sales per dollar of assets invested. Return on equity Net income divided by net sales; indicates the earnings per dollar of sales. 142.Listed below are seven terms followed by a list of phrases that describe or characterize the terms Match each phrase with the best term placing the letter designating the term in the space provided Learning Objectives: 1, 2, 3, Liquidity Analyzes trends in financial statement data for a single company over time. Growth stocks Have lower share prices in relationship to their fundamental ratios and therefore trade at lower PE ratios. Vertical analysis Expresses each item in a financial statement as a percentage of the same base amount. Horizontal analysis Solvency Value Stocks Profitability ratios Refers to a company's ability to pay its current liabilities. Refers to a company's ability to pay its long-term liabilities. Have high expectations of future earnings and therefore usually trade at higher P/E ratios. Measure the earnings or operating effectiveness of a company. 143.Listed below are five terms followed by a list of phrases that describe or characterize the terms Match each phrase with the best term placing the letter designating the term in the space provided Learning Objectives: 5, Conservative accounting practices Quality of earnings _ _ An event that is (1) unusual in nature and (2) infrequent in_ occurrence._ _ _ The sale or disposal of a significant component of a_ company's operations._ Discontinued operation _ Refers to the ability of reported earnings to reflect the_ company's true earnings, as well as the usefulness of reported_ earnings to predict future earnings._ Aggressive accounting practices _ _ Practices that result in reporting lower income, lower_ assets, and higher liabilities._ Extraordinary item _ _ Practices that result in reporting higher income, higher_ assets, and lower liabilities._ 144.Listed below are eight terms followed by a list of phrases that describe or characterize the terms Match each phrase with the best term placing the letter designating the term in the space provided Learning Objectives: 1, 2, 3, 4, 5, Aggressive accounting practices A company's ability to pay its current liabilities. Horizontal analysis Accounting choices that result in reporting lower income, lower assets, and higher liabilities. Solvency A profit or loss unusual in nature and infrequent in occurrence. Discontinued operation Accounting choices that result in reporting higher income, higher assets, and lower liabilities. Vertical analysis A tool to analyze trends in financial statement data for a single company over time. Liquidity Conservative accounting practices Extraordinary item The sale or disposal of a significant component of a company's operations. A means to express each item in a financial statement as a percentage of a base amount. A company's ability to pay its long-term liabilities. Ch12 Key TRUE TRUE FALSE FALSE TRUE FALSE TRUE TRUE FALSE 10 TRUE 11 FALSE 12 TRUE 13 TRUE 14 FALSE 15 TRUE 16 FALSE 17 TRUE 18 FALSE 19 TRUE 20 TRUE 21 FALSE 22 TRUE 23 TRUE 24 TRUE 25 FALSE 26 TRUE 27 FALSE 28 TRUE 29 TRUE 30 FALSE 31 TRUE 32 TRUE 33 TRUE 34 FALSE 35 TRUE 36 FALSE 37 TRUE 38 TRUE 39 FALSE 40 TRUE 41 FALSE 42 TRUE 43 TRUE 44 TRUE 45 TRUE 46 B 47 C 48 B 49 B 50 A 51 A 52 B 53 A 54 D 55 D 56 B 57 D 58 D 59 A 60 B 61 B 62 A 63 D 64 B 65 A 66 C 67 C 68 A 69 B 70 C 71 B 72 C 73 B 74 B 75 B 76 D 77 B 78 A 79 C 80 A 81 A 82 C 83 A 84 C 85 B 86 A 87 D 88 B 89 A 90 A 91 C 92 C 93 C 94 B 95 D 96 A 97 D 98 C 99 D 100 D 101 B 102 A 103 C 104 A 105 B 106 B 107 A 108 A 109 C 110 B 111 D 112 A 113 C 114 A 115 D 116 D 117 B 118 C 119 B 120 121 122 % change from 2011 to 2012 = ($1.8 million - $1.6 million) / $1.6 million = 12.5% increase.% change from 2012 to 2013 = ($1.7 million - $1.8 million) / $1.8 million = 5.6% decrease 123 $648,000 / 1.08 = $600,000 124 125 126 Feedback: *COGS = $200,000 x 8.0 = $1,600,000 Given sales of $2,200,000 and calculating COGS of $1,600,000, gross profit is $600,000 127 A cash purchase of inventory will not affect the current ratio, but a purchase of inventory on account will increase the current ratio as shown below: 128 129 130 131 132 Extraordinary items Other expenses Discontinued operations Other expenses 133 134 135 For vertical analysis, we express each item as a percentage of the same base amount, such as a percentage of sales in the income statement or as a percentage of total assets in the balance sheet We use horizontal analysis to analyze trends in financial statement data, such as the dollar amount of change and the percentage change, for one company over time 136 We measure income statement accounts over a period of time (like a video), while we measure balance sheet accounts at a point in time (like a photograph) Therefore, ratios that compare an income statement account with a balance sheet account should express the balance sheet account as an average of the beginning and ending balances 137 The return on assets and the return on equity differ due to financial leverage - the amount of debt a company carries If a company earns a return on investment above the interest cost of borrowing, then the additional debt will benefit investors in the company The result, as is the case for Sideline Sports Products, is that the return on equity will exceed the return on assets 138 Earnings persistence is the ability of current earnings to continue or persist into future years Certain items are part of net income in the current year but are not expected to persist We refer to these as one-time income items The two primary examples are discontinued operations and extraordinary items 139 Conservative accounting practices are those that result in reporting lower income, lower assets, and higher liabilities In contrast, aggressive accounting practices result in reporting higher income, higher assets, and lower liabilities A larger estimation of the allowance for uncollectible accounts, the write-down of overvalued inventory, the use of a shorter useful life for depreciation, and the recording of a contingent litigation loss are all examples of conservative accounting They are conservative because all of these practices report lower net income A lower estimation of the allowance for uncollectible accounts, waiting to report an inventory write-down, choosing a longer useful life for depreciation, and waiting to record a litigation loss all are examples of more aggressive accounting They are aggressive because all of these practices report higher net income 140 Inventory turnover ratio :: Cost of goods sold divided by average inventory; the number of times the firm sells its average inventory balance during a reporting period and Debt to equity ratio :: Total liabilities divided by total stockholders' equity; measure a company's solvency risk and Average days in inventory :: Approximate number of days the average inventory is held and Times interest earned ratio :: Ratio that compares interest expense with income available to pay those charges and Receivables turnover ratio :: Net sales divided by average accounts receivable; the number of times during a year that the average accounts receivable balance is collected and Acid-test ratio :: Cash, short-term investments, and accounts receivable divided by current liabilities; measures the availability of liquid current assets to pay current liabilities and Current ratio :: Current assets divided by current liabilities; measures the availability of current assets to pay current liabilities and Average collection period :: Approximate number of days the average accounts receivable balance is outstanding 141 Return on assets :: Net income divided by average total assets; measures the amount of net income generated for each dollar invested in assets and Price-earnings (PE) ratio :: Compares a company's share price with its earnings per share and Return on equity :: Net income divided by average stockholders' equity; measures the income generated per dollar of equity and Gross profit ratio :: Gross profit divided by net sales; measures the amount by which the sale price of inventory exceeds its cost per dollar of sales and Asset turnover :: Net sales divided by average total assets; which measures the sales per dollar of assets invested and Profit margin :: Net income divided by net sales; indicates the earnings per dollar of sales 142 Horizontal analysis :: Analyzes trends in financial statement data for a single company over time and Value Stocks :: Have lower share prices in relationship to their fundamental ratios and therefore trade at lower PE ratios and Vertical analysis :: Expresses each item in a financial statement as a percentage of the same base amount and Liquidity :: Refers to a company's ability to pay its current liabilities and Solvency :: Refers to a company's ability to pay its long-term liabilities and Growth stocks :: Have high expectations of future earnings and therefore usually trade at higher P/E ratios and Profitability ratios :: Measure the earnings or operating effectiveness of a company 143 Extraordinary item :: An event that is (1) unusual in nature and (2) infrequent in occurrence and Discontinued operation :: The sale or disposal of a significant component of a company's operations and Quality of earnings :: Refers to the ability of reported earnings to reflect the company's true earnings, as well as the usefulness of reported earnings to predict future earnings and Conservative accounting practices :: Practices that result in reporting lower income, lower assets, and higher liabilities and Aggressive accounting practices :: Practices that result in reporting higher income, higher assets, and lower liabilities 144 Liquidity :: A company's ability to pay its current liabilities and Conservative accounting practices :: Accounting choices that result in reporting lower income, lower assets, and higher liabilities and Extraordinary item :: A profit or loss unusual in nature and infrequent in occurrence and Aggressive accounting practices :: Accounting choices that result in reporting higher income, higher assets, and lower liabilities and Horizontal analysis :: A tool to analyze trends in financial statement data for a single company over time and Discontinued operation :: The sale or disposal of a significant component of a company's operations and Vertical analysis :: A means to express each item in a financial statement as a percentage of a base amount and Solvency :: A company's ability to pay its long-term liabilities Ch12 Summary Category # of Questions AACSB: Analytic 44 AACSB: Reflective Thinking 100 AICPA: Critical Thinking 16 AICPA: Decision Making 25 AICPA: Measurement 79 AICPA: Reporting 24 Blooms: Analysis 44 Blooms: Application Blooms: Comprehension 50 Blooms: Knowledge 32 Blooms: Synthesis 11 Difficulty: Easy 39 Difficulty: Hard 20 Difficulty: Medium 85 Learning Objective: 12-01 Perform vertical analysis 14 Learning Objective: 12-02 Perform horizontal analysis 15 Learning Objective: 12-03 Use ratios to analyze a companys risk 52 Learning Objective: 12-04 Use ratios to analyze a companys profitability 32 Learning Objective: 12-05 Distinguish persistent earnings from one-time items 16 Learning Objective: 12-06 Explain quality of earnings and distinguish between conservative and aggressive accounting 14 practices Spiceland - Chapter 12 148 ... Assuming an acid -test ratio of 1.0, how will the purchase of inventory with cash affect the ratio? A B C D Increase the acid -test ratio No change to the acid -test ratio Decrease the acid -test ratio... acid -test ratio No change to the current ratio and decrease the acid -test ratio Decrease the current ratio and decrease the acid -test ratio Increase the current ratio and decrease the acid -test. .. examples of conservative accounting True False 44 Aggressive accounting practices result in reporting higher income, higher assets, and lower liabilities True False 45 Changes in accounting estimates