Multiple Choice
Identify the choice that best completes the statement or answers the
question.
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1.
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The acid test or quick ratio measures a company’s ability to
a. | satisfy its short term debts by using all current assets. | b. | satisfy its short
term debts immediately by using only current assets that can be quickly converted into
cash. | c. | convert credit sales into cash. | d. | increase sales
revenues. |
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2.
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The receivables turnover is a useful measure for assessing a company’s
a. | sales revenues. | b. | efficiency in converting credit sales into
cash. | c. | ability to pay debts. | d. | bad debts. |
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3.
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Whenever a ratio compares a balance sheet figure to an income statement
figure
a. | the income statement figures must be averaged. | b. | the ratio is
incorrect. | c. | the balance sheet figures must be averaged. | d. | both the income
statement figures and the balance sheet figures must be averaged. |
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4.
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A high return on assets indicates
a. | a profitable company. | b. | the amount of sales generated by each dollar
invested in total assets. | c. | new assets need to be
purchased. | d. | the company may be in financial difficulty. |
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5.
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Return on equity
a. | is used by management to evaluate liquidity. | b. | calculates the rate
of return shareholders are earning on their investment. | c. | represents the
equity a common shareholder has in net assets of the corporation. | d. | is calculated by
taking Net Income divided by this year’s Shareholders’ Equity.
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6.
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In analysing the financial statements of a company, a single item on the
financial statements
a. | should be reported in bold-faced type. | b. | is more meaningful if compared to other
financial information. | c. | is significant only if it is
large. | d. | should be accompanied by a footnote. |
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7.
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Trend/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 number to the lowest
number. | b. | that has been arranged from the lowest number to the highest
number. | c. | to determine which items are in error. | d. | to determine the amount and/or percentage
increase or decrease that has taken place. |
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8.
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Trend/horizontal analysis is appropriately performed
a. | only on the income statement. | b. | only on the balance sheet. | c. | only on the
statement of retained earnings. | d. | on all three of these
statements. |
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9.
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In performing a vertical analysis, the base for prepaid expenses is
a. | total current assets. | b. | total assets. | c. | total liabilities
and shareholders’ equity. | d. | prepaid
expenses. |
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10.
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In performing a common-size analysis, the base for sales returns and allowances
is
a. | sales. | b. | cost of goods sold. | c. | net
sales. | d. | total revenues. |
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11.
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In performing a common size analysis, the base for cost of goods sold
is
a. | total selling expenses. | b. | net sales. | c. | total
revenues. | d. | total expenses. |
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12.
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A liquidity ratio measures the
a. | income or operating success of an enterprise over a period of
time. | b. | ability of the enterprise to survive over a long period of time. | c. | short-term ability
of the enterprise to pay its maturing obligations and to meet unexpected needs for
cash. | d. | number of times interest is earned. |
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13.
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The acid test or quick ratio
a. | is used to quickly determine a company's solvency and long-term debt-paying
ability. | b. | relates cash, temporary investments, 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. |
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14.
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Which one of the following would not be considered a liquidity ratio?
a. | Current ratio | b. | Inventory turnover ratio | c. | Quick
ratio | d. | Return on assets ratio |
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15.
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The asset turnover ratio measures
a. | how often a company replaces its assets. | b. | how efficiently a
company uses its assets to generate sales. | c. | the portion of the assets that have been
financed by creditors. | d. | the overall rate of return on
assets. |
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16.
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The profit margin is calculated by dividing
a. | sales by cost of goods sold. | b. | gross profit by net sales. | c. | net income by
shareholders' equity. | d. | net income by net
sales. |
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17.
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The debt to total assets ratio measures
a. | the company's profitability. | b. | whether interest can be paid on debt in the
current year. | c. | the proportion of interest paid relative to dividends paid. | d. | the percentage of
the total assets provided by creditors. |
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18.
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A weakness of the current ratio is
a. | the difficulty of the calculation. | b. | that it doesn't take into account the
composition of the current assets. | c. | that it is rarely used by sophisticated
analysts. | d. | that it can be expressed as a percentage, as a rate, or as a
proportion. |
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19.
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Ratios are used as tools in financial analysis
a. | instead of horizontal and vertical analyses. | b. | because they may
provide information that is not apparent from inspection of the individual components of the
ratio. | c. | because even single values by themselves are quite meaningful. | d. | because they are
prescribed by GAAP/IFRS. |
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20.
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The acid test/quick ratio
a. | is a quick calculation of an approximation of the current ratio. | b. | does not include all
current liabilities in the calculation. | c. | does not include inventory as part of the
numerator. | d. | includes prepaid expenses as part of the numerator. |
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21.
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A general rule to use in assessing the collection period is that
a. | it should not exceed 30 days. | b. | it can be any length as long as the customer
continues to buy merchandise. | c. | it should not greatly exceed the discount
period. | d. | it should not greatly exceed the credit term period. |
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22.
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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. |
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23.
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A successful grocery store would probably have
a. | a low inventory turnover. | b. | a high inventory turnover. | c. | zero profit
margin. | d. | low volume. |
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24.
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An aircraft company would most likely have
a. | high inventory turnover. | b. | low profit margin. | c. | high
volume. | d. | low inventory turnover. |
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25.
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Earnings per share is calculated
a. | only for common shares. | b. | only for preferred shares. | c. | for common and
preferred shares. | d. | only for bonds. |
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26.
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The following ratio is required to be presented directly on the income
statement.
a. | Current ratio | b. | Earnings per share | c. | Price-earnings
ratio | d. | Return on common shareholders’ equity. |
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27.
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The price-earnings ratio measures
a. | the ratio of the market price of each share to the earnings per
share. | b. | the ratio of the market price of each share to the total net income for the
year. | c. | the ratio of the sales price to the net income. | d. | cash flow per
share. |
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28.
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The cash to total debt coverage ratio demonstrates
a. | the company’s ability to repay its liabilities from cash generated from all
sources without having to liquidate assets. | b. | the company’s ability to repay its
liabilities from cash generated from operating activities without having to liquidate
assets. | c. | how fast the company collects cash. | d. | the company’s ability to meet interest
payments. |
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29.
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A limitation in calculating ratios in financial statement analysis is that
a. | it requires a calculator. | b. | no one other than management would be
interested in them. | c. | some account balances may reflect atypical data
at year end. | d. | they seldom identify problem areas in a company. |
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