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Exam 9: Financial Statement Analysis

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Question 81

Multiple Choice

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The Dennis Company reported net income of $50,000 on sales of $300,000. The company has total assets of $500,000 and total liabilities of $100,000. What is the company's return on equity ratio?

A) 10.0%
B) 16.7%
C) 12.5%
D) 50.0%

E) B) and D)
F) B) and C)

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Question 82

Multiple Choice

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Working capital is defined as:

A) Current assets divided by current liabilities.
B) Total assets minus total liabilities.
C) Current assets less current liabilities.
D) Current liabilities divided by total liabilities.

E) B) and C)
F) C) and D)

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Question 83

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Milton Company has total current assets of $46,000, including inventory of $10,000, and current liabilities of $20,000. The company's current ratio is:

Many companies have to monitor closely certain ratios, such as the current ratio, due to debt covenants. Selected transactions are provided below for a company that uses a perpetual inventory system; sells its merchandise at a selling price that exceeds cost; and had a current ratio of 1.85 and a quick ratio of 1.19 before the event occurred. Required: In the above table, indicate whether each transaction would increase (+), decrease (-), or not affect (0) the company's current ratio and quick ratio.

Current financial reporting standards assume that users of accounting information:

While horizontal analysis examines one item over many time periods, vertical analysis examines many items in the same interval of time.

Indicate whether each of the following statements about financial statement analysis is true or false. 1. The asset turnover ratio is calculated by dividing net income by average total assets. 2. The asset turnover ratio is likely to be high in an industry in which operations require only a minimal investment in assets. 3. Return on equity measures the wealth generated by the amount of assets invested in a business. 4. A higher value for the return on investment ratio would generally indicate more effective company management. 5. The use of financial leverage often causes a business's return on equity to be lower than its return on investment.

Financial statement analysis involves forms of comparison including:

In terms of solvency, the larger the number of times interest is earned, the better.

Select the term from the list provided that bests matches each of the following descriptions or definitions:

Financial ratio analysis is a form of horizontal analysis in that comparisons are made between different accounts in the same set of financial statements.