Managerial accounting, 5th by jiambalvo test bank ch14

Chapter 14 Analyzing Financial Statements: A Managerial Perspective 18.. If a company’s return on total assets is higher than its return on common stockholders’ equity, a company is usin

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CHAPTER 14 Analyzing Financial Statements: A Managerial Perspective

Summary of Questions by Objectives and Bloom’s Taxonomy

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Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition

TRUE-FALSE

1 A managerial accountant may analyze his/her company’s own financial statements in order to

assess the appearance of his/her firm to investors

2 One reason a managerial accountant might need to analyze financial statements of other firms is

to assess the viability of a vendor

3 To assess control of operations, managers expect that successful implementation of their plan will

be reflected in subsequent financial statements as substantially increased profits

4 It is important for managers to analyze their company’s financial statements so that they can

anticipate and answer questions from investors and creditors

5 In general, managers should analyze financial statements primarily from the perspective of their

customers

6 Whenever an asset increases, the corresponding part of the transaction will always be an increase

to net income

7 Vertical analysis is performed on the balance sheet because it represents a point in time, while

horizontal analysis is performed on the income statement because it covers a period of time

8 An increase in gross margin of 7% from one period to the next implies that the company’s net

income will have increased by 7% as well

9 The statement of cash flows divides a company’s profitability into operating, investing, and

financing activities

10 If sales revenue of a retail company increases by 10% because the company sells more units of

product, the company’s cost of goods sold will increase by 10% as well

11 If a company records fictitious sales, income will increase, but operating cash flows will not be

affected

12 Common size financial statements are an example of horizontal analysis

13 Horizontal analysis examines the change in financial statement amounts over time

14 One example of vertical analysis is the determination that long-term assets increased by 2.5%

over time

15 One example of vertical analysis is the determination that interest expense rose from 1.2% of net

sales to 1.4% of net sales from one period to the next period

16 When the amount of net sales is used as the base amount for all income statement items,

horizontal analysis is being performed

17 If net income is substantially less than operating cash flows, this is a sign of possible accounting

irregularities

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Chapter 14 Analyzing Financial Statements: A Managerial Perspective

18 Recording fictitious sales will cause operating cash flows and net income to increase

19 The management discussion and analysis section of the annual report explains financial results

that are not obvious simply from reading the basic financial statements

20 News articles and credit reports are valuable sources of financial information

21 Financial leverage relates to a company’s use of debt financing to acquire and use productive

assets

22 Earnings per share is the amount of net income earned in a company that is paid out as cash

dividends to shareholders

23 The gross margin percentage is a turnover ratio that measures the efficiency with which a

company sells its products

24 If a company’s return on total assets is higher than its return on common stockholders’ equity, a

company is using financial leverage effectively

25 An increase in inventory turnover implies that a company is selling its inventory and collecting

cash from customers more quickly

26 Turnover ratios involve both a balance sheet and an income statement account

27 Debt-related ratios reveal the ability of a company to pays its obligations when they become due

28 A high debt-to-equity ratio implies that a company has more risk than a company with a low ratio

29 Times interest earned measures how many times operating income is able to pay the company’s

interest expense

30 The acid-test ratio is a more stringent test of a company’s ability to pay its short-term debt

compared to the current ratio

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MULTIPLE CHOICE

31 Which of the following is not a reason that managers need to analyze financial reports?

A To assess control of operations

B To assess the ability of customers to pay their bills

C To assess the viability of suppliers

D To maximize annual bonuses

32 Which of the following is a reason that managers use financial statements?

A To assess the company’s image

B To assess the product cost of competitors

C To assess competitors’ contribution margins

D To assess the long-term viability of key customers

33 Which of the following does accounts receivable turnover measure?

A The ability of a company to pay its short-term obligations

B The number of times receiveables are collected during the period

C The efficiency with which a company generates sales on credit

D The length of time it takes to collect receivables

34 Which of the following indicates the amount investors are willing to pay per dollar of earnings?

A Market price per share of a company’s stock

B Earnings per share

C Price-earnings ratio

D Return on total assets

35 Using the balance sheet equation, which of the following is not a possible transaction?

A Increase an asset and increase stockholders’ equity

B Increase a liability and decrease stockholders’ equity

C Increase an asset and decrease a liability

D Decrease an asset and decrease a liability

36 Which of the following is the return a company is able to earn on funds invested by shareholders?

A Return on total assets

B Return on common stockholders’ equity

C Price-earning ratio

D Dividends paid

37 Which of the following is not an operating activity on the statement of cash flows?

A Paying a dividend

B Paying for inventory purchases

C Collecting cash from the sale of merchandise

D Paying cash for income taxes

38 Which of the following is not a profitability ratio?

A Price-earnings ratio

B Return on total assets

C Earnings per share

D Asset turnover

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39 Which of the following changes is the least favorable?

A An increase in inventory turnover

B A decrease in operating expenses

C An increase in the price-earnings ratio

D A decrease in the asset turnover

40 Net cash provided by operations represents

A net income converted to a cash basis

B the net increase in cash and cash equivalents for a period

C the cash provided by selling inventory to customers

D a measure of profitability

41 What does financial leverage measure?

A How quickly a company generates profit from its assets

B How quickly a company is turning its net income into cash

C The overall efficiency with which a company uses assets to generate revenues

D How effectively the company uses debt financing to acquire economic resources

42 What is asset turnover?

A How quickly a company generates profit from its assets

B How quickly a company is turning its net income into cash

C The overall efficiency with which the company uses assets to generate revenues

D How quickly the company acquires economic resources

43 Which of the following is true concerning vertical analysis?

A It is a technique for evaluating a series of financial statement data over a period of time.

B It is used to determine the increase or decrease that has taken place over a period of time

C It is expressed as a percentage of the base year amount of the same account

D It is also called common size analysis

44 Which of the following is true concerning horizontal analysis?

A It is also called common size analysis

B It consists of analyzing changes in financial statement amounts across time

C It consists of analyzing financial statements in terms of a base amount

D It restates each income statement line item as a percentage of net sales

45 Which type of analysis would highlight the percentage increase in sales from one year to the

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47 In which of the following will the percentage increase in sales from one year to the next be most

48 If the rate of growth in sales is greater than the rate of growth in cost of goods sold from one year

to the next, which of the following will you most likely expect?

A The gross margin percentage is increasing

B The gross margin percentage is decreasing

C Accounts receivable turnover is declining

D Inventory turnover is declining

49 Which of the following will vertical analysis allow managers to readily identify?

A Sales are increasing at a faster rate than selling expenses

B The percentage change in sales from the prior year

C Sales are growing at a faster rate than assets

D Income taxes are a larger percentage of sales in the current year compared to a previous

year

50 Gross margin in 2014 for Beaver Enterprises totaled $1,000,000 If cost of goods sold is 60% of

sales, how much is sales?

A Net income may exceed cash from operations

B Cash from investing activities will exceed cash from financing activities

C Cash will experience a net decrease

D Total assets will increase

52 Where can you find insight of why sales has increased by 32% from a prior period?

A Common size financial statements

B Management’s discussion and analysis

C The balance sheet

D Horizontal analysis

53 Which of the following is a stringent measure of a company’s ability to repay obligations in a

short period of time?

B Current ratio

C Acid-test ratio

D Debt turnover

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54 Which of the following ratios measures how many multiples of the firm’s earnings that investors

are willing to pay for the company’s stock?

C Price-earnings ratio

D Time interest earned

55 Which of the following most likely indicates that a company is making good use of financial

leverage?

A The price-earnings ratio exceeds that of competitors

B Earnings per share is higher than the dividends paid per share

C Net income is higher than cash from operations

D Return on common stockholders’ equity is higher than the return on total assets

56 What effect does financing with debt have on a company?

A It will increase financial risk

B It will decrease the potential return for shareholders

C It will create a requirement to pay dividends

D It will decrease turnover

57 Which of the following is not a profitability ratio?

A Inventory turnover

B Gross margin percentage

D Return on total assets

58 Which ratio measures the rate earned on a company’s total economic resources?

C Return on total assets

D Return on common stockholders’ equity

59 Which ratio is a measure of the profit available to common shareholders on each share of

common stock outstanding?

60 Which statement is true concerning the gross margin percentage?

A It indicates how much a company earns per dollar of sales taking into account the cost of

items it sells

B It indicates how much earnings are generated on each share of common stock

C It indicates the amount of sales generated for each dollar of assets

D It measures the amount of net income generated for each dollar of sales

61 Which of the following ratios is a measure of the company’s profitability to its market price?

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62 Which of the following is not used to measure the efficiency with which a firm uses its assets?

A Inventory turnover ratio

B Current ratio

C Accounts receivable turnover ratio

D Asset turnover

63 Which of the following is a common effect when return on common stockholders’ equity is

greater than return on total assets?

A Financial leverage is being used effectively

B The company has no debt

C The company’s profit is declining

D Earnings per share will be extremely large

64 Cost of goods sold in 2014 for Reno Parts Company totaled $4,530,000 If the gross margin

percentage is 56%, how much are sales ?

A $10,295,454

B $7,066,800

C $8,089,286

D None of these answer choices are correct

65 The gross margin amount in 2014 for the Billings Corporation totaled $800,000 If cost of goods

sold is 80% of sales, how much is sales?

A $960,000

B $4,000,000

C $3,200,000

D $1,440,000

66 Bonanza, Incorporated’s net income in 2014 was $378,000 The company had 75,000 shares of

common stock outstanding and 35,000 shares of preferred stock outstanding No shares were issued or repurchased during the year The company paid dividends of $1.50 per share on the common stock and $1.80 per share on the preferred stock How much is earnings per share for 2014?

A $3.44

B $4.20

C $4.34

D $5.04

67 Best Corporation’s net income in 2014 was $1,295,000 The company had 500,000 shares of

common stock outstanding and 90,000 shares of preferred stock outstanding No shares were issued or repurchased during the year The company paid dividends of $0.70 per share on the common stock and $0.80 per share on the preferred stock How much profit did Best generate for each share of outanding common stock in 2014?

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68 Bread Enterprises had a current ratio of 3.5 on December 31 of the current year On that date, the

company’s assets were as follows:

Accounts receivable, net 600,000

Prepaid expenses 25,000Equipment, net 2,200,000Total assets $3,985,000What impact will issuing common stock for cash have on the company’s earnings per share?

A It will increase earnings per share

B It will decrease earnings per share

C There will be no change

D The number of common shares outstanding is needed to determine the answer

69 Bread Enterprises had a current ratio of 2.5 on December 31 of the current year On that date, the

company’s assets were as follows:

Prepaid expenses 25,000Equipment, net 2,200,000Total assets $3,985,000What impact will an increase in the market price of the company’s common stock from $24.50 to

$37.20 have on a company’s price-earnings ratio?

A It will increase the price-earnings ratio

B It will decrease the price-earnings ratio

C There will be no change

D There is not enough information to determine the answer

70 Lane Class Company had 50,000 shares of common stock outstanding and 10,000 shares of

preferred stock outstanding No shares were issued or repurchased during the year The company paid a dividend of $0.80 per share of common stock and $0.60 per share of preferred stock If the company reports earnings per common share of $0.85, how much is net income?

A $42,500

B $56,500

C $48,500

D $57,000

71 Blue Corporation reported earnings per share of common stock at $12 in 2014 and paid dividends

of $3 per share The current market price per share is $102 and the book value per share is $54 Blue Corporation has no preferred stock How much is the company’s price-earnings ratio?

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72 McDonald Company’s net income in 2014 was $200,000 The company paid preferred dividends

of $32,000 and common stock dividends of $10,000 It average common stockholders’ equity was

$850,000 during 2014 How much is the company’s return on common stockholders’ equity for 2014?

A 19.8%

B 23.5%

C 18.6%

D 4.3%

73 The following is from Nantucket Limited’s records for 2014:

Account Balances January 1 December 31

Common stock $210,000 $250,000Additional paid-in-capital 95,000 110,000Retained earnings 105,000 195,000During 2014, the company paid dividends of $15,000 on its common stock The company’s net income for the year was $105,000 How much is the company’s return on common stockholders’ equity for the year ending December 31, 2014?

A 18.9%

B 16.2%

C 22.0%

D 25.6%

74 Relish Holdings had 250,000 shares of common stock outstanding and 40,000 shares of preferred

stock outstanding No shares were issued or repurchased during the year The company paid a dividend of $1.50 per share of common stock and $2 per share of preferred stock If the company reported earnings per common share of $1.60, how much would net income have been?

A $480,000

B $400,000

C $156,250

D $320,000

75 Denton Limited Company reported earnings per share of common stock $2 in 2014 and paid

dividends of $1.50 per share Denton has no preferred stock issued The current market price per share is $15 and the book value per share is $14 How much is Denton’s price-earnings ratio?

A net income divided by sales

B net sales divided by total assets

C net sales divided by current assets

D earnings per share divided by the market price per share of stock

77 Asset turnover is a measure of

A how quickly a company is replacing its old plant assets with new plant assets

B how quickly a company is turning its sales into cash

C the overall efficiency with which the company uses assets to generate revenues

D how rapidly the stock market believes the company will grow

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78. Inventory turnover

A is a measure of the profitability of selling inventory

B is used to calculate how quickly customers pay for inventory they purchased

C is an indicator of how quickly suppliers are being paid by the company

D measures how efficiently a company sells it inventory

79 The higher the amount of a company’s accounts receivable turnover,

A the shorter time period it takes to collect a receivable

B the more assets a company has tied up in receivables

C the longer it takes a company to collect its receivables

D the more likely a company will experience cash flow problems

80 Which statement is true concerning the current ratio?

A It is usually a larger amount than the acid-test ratio

B It is a more stringent test of a company’s ability to pay its short-term obligations

C It measures a company’s ability to manage its assets efficiently

D It measures a company’s ability to make interest payments on debt

81 Wangley Company has an inventory turnover of 8 Which statement is true?

A Wangley has about 2 months of sales in its inventory

B Wangley takes about 46 days from the time an item is sold until Wangley collects the

cash

C Wangley takes about one month from the time an item is purchased until the cash is

collected from the sale of the inventory

D Wangley sells it inventory 8 times faster than other companies

82 Redzone Corporation reported $400,000 in sales on account plus another $60,000 in cash sales

last year Cost of goods sold for the period totaled $220,000 The beginning balance in accounts receivable was $32,000 and the ending balance was $50,000 How much is the company’s

accounts receivable turnover?

A 9.2 times

B 4.8 times

C 8.0 times

D 12.5 times

83 Fenwick Holdings reported cash sales in 2014 of $220,000 Accounts receivable at the beginning

of the year totaled $420,000, with a balance of $490,000 at the end of the year If the company’s accounts receivable turnover is 3.5 for the year, how much are its total sales for the year?

A $2,250,000

B $1,715,000

C $1,495,000

D $1,935,000

84 Real Crisp Company reported cost of goods sold of $800,000 last year The company’s beginning

inventory balance was $58,000 and the ending inventory balance was $54,000 How many days will it take the company to sell its inventory as of year end?

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85 Benzo Limited reported an inventory turnover of 14.5 times last year Beginning inventory was

$290,000 and ending inventory was $260,000 How much was cost of goods sold?

A $3,770,000

B $3,987,500

C $4,205,000

D $7,975,000

86 Zin Company repoted cost of goods sold of $1,500,000 last year The company’s beginning

inventory balance was $110,000 and the ending inventory balance was $86,000 How many days will it take the company to sell off all of its inventory?

D Times interest earned

88 Which of the following is included in the calculation of the current ratio, but not the quick ratio?

A Inventory

B Cash

C Accounts receivable

D Marketable securities

89 Wilker Industries has a current ratio of 1.8 If Wilker collects a payment from a customer on

account, what is expected to happen to the company’s current ratio?

A It will increase

B It will decrease

C It will stay the same

D The effect is based on the amount of debt a company holds at the end of the period

90 Organic Ways is a large food and drug retailer with more than 1,700 stores in the U.S and

Canada The following financial information relates to fiscal years, 2013 and 2014

Cost of goods sold 32,000 34,000Accounts receivable 577 461Merchandise inventory 2,905 2,510How much is the company’s inventory turnover for 2014?

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91 Waylon Appliances is a large applicance retailer with more than 800 stores in the U.S The

following financial information relates to fiscal 2013 and 2014

Cost of goods sold 33,000 31,000Accounts receivable 820 960Merchandise inventory 2,900 2,700How much is the company’s days’ sales in inventory for 2014 and 2013, respectively?

A 32.08, 31.79 days

B 41.52, 41.91 days

C 11.38, 11.48 days

D 2.13; 3.15 days

92 Brick Works, Inc had a current ratio of 1.5 to 1 on December 31 of the current year On that date,

the company’s assets were as follows:

Prepaid expenses 25,000Equipment, net 2,600,000Total assets $4,485,000What impact will collecting $56,000 due from customers have on Brick Work’s inventory

turnover?

A It will increase

B It will decrease

C It will have no effect

D The amount of current liabilities is needed to determine the answer

93 A company has a high debt-to-equity ratio What other amount will most likely be high for the

company?

A The company’s level of risk

B The company’s assets

D Net income

94 What does times interest earned measure?

A The ability of a company to make interest payments on its debt

B The ability of a company to pay its interest-bearing debt obligations

C The increase in interest expense as a result of new debt obligations acquired during the

period

D The average interest rate incurred on the company’s debt

95 What does a quick ratio of less than one typically indicate?

A The company does not have enough quick assets to settle its current liabilities

B The company is unprofitable

C The company has a very high debt-to-equity ratio

D All of the answer choices are correct

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96 RT Enterprises has a current ratio of less than one, and a very high debt-to-equity ratio Which of

the following will management of other companies most likely be reluctant to do?

I Sign an agreement with RT Enterprises to become a major supplier

II Sell RT Enterprises goods on creditIII Expand capacity to better serve the needs of RT Enterprises

A I and II

B II and III

C I and III

D I, II, and III

97 Which of the following is not a communication by a company’s management that may help

alleviate investors and creditors concerns of the company’s financial statements?

A News articles

B Notes to their financial statements

C Assessment of vendors and customers

D Press releases

98 Cramer Cooling Company reported the following results for the year just ended:

Accounts receivable 45,000Prepaid insurance 10,000

99 Planter Zone’s working capital is $32,500 and its current assets are $85,100 How much is the

company’s current ratio?

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101 Kerwin Holdings has total assets of $450,000 and shareholders’ equity of $120,000, of which

$45,000 of the equity is common stock How much is the company’s debt-to-equity ratio?

Property, plant, and equipment, net 103,600 123,300Intangible assets, net 64,000 47,000

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable $ 11,000 $ 12,000Other current liabilities 11,800 3,200Total current liabilities 22,800 15,200

Year Ended December 31

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103 Comparative financial statements for Bent Stew Enterprises are shown below:

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Bent Stew Enterprises had 10,000 shares of common stock outstanding during both 2013 and

2014 How much was earnings per share in 2014?

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B Operating expenses increased by $10,000 from 2013 to 2014

C Operating expenses increased from 23.5% to 25.6% of sales from 2013 to 2014

D Operating expenses increased by 18.5% from 2013 to 2014

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B Operating expenses increased by $10,000 from 2013 to 2014

C Operating expenses increased from 23.5% to 25.6% of sales from 2013 to 2014

D Operating expenses increased by 18.5% from 2013 to 2014

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What does vertical analysis for 2014 versus 2013 reveal for Bent Stew Enterprises?

A There was no change in the proportion of common stock to total assets from 2013 to

2014

B Inventory levels have decreased from 2013 to 2014 in proportion to total assets

C Gross margin declined to 34.4% in 2014, down from 38.19% in 2013

D The company has a higher proportion of long-term debt in 2014 compared to 2013

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The company’s stock is selling for a market price of $31.00 per share at the end of 2014, up from

$28.00 per share at the end of 2013 There are 5,000 shares of common stock outstanding at the end of 2014 How much is the company’s price-earnings ratio at the end of 2014?

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B The company is poorly leveraged

C The company is highly leveraged, but the leverage has a negative impact on stockholders

D The company has no financial leverage

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120 Comparative financial statements for Cross, Inc are shown below:

Accounts payable $ 85,443 $ 62,394Other current liabilities 38,112 33,507Total current liabilities 123,555 95,901Long-term debt 302,430 290,324

Stockholders’ equity:

Retained earnings 145,605 25,934Total stockholders’ equity 745,605 625,934Total liabilities and stockholders’ equity $1,171,590 $1,012,159

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earnings per share for Cross, Inc in 2014?

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