26 Jan c. Interim reporting 3

Ch7

a. Which of the following ratios can be used as a guide to a firm’s ability to carry debtfrom an income perspective?

1. Debt ratio

2. Debt to tangible net worth

3. Debt/equity

4. Times interest earned

5. Current ratio

b. There is disagreement on all but which of the following items as to whether it should be considered a liability in the debt ratio?

1. Short-term liabilities

2. Reserve accounts

3. Deferred taxes

4. Noncontrolling income (loss)

5. Preferred stock

c. A firm may have substantial liabilities that are not disclosed on the face of the balance

sheet from all but which of the following?

1. Leases

2. Pension plans

3. Joint ventures

4. Contingencies

5. Bonds payable

d. In computing the debt ratio, which of the following is subtracted in the denominator?

1. Copyrights

2. Trademarks

3. Patents

4. Marketable securities

5. None of the above.

e. All but which of these ratios are considered to be debt ratios?

1. Times interest earned

2. Debt ratio

3. Debt/equity

4. Fixed charge ratio

5. Current ratio

f. Which of the following statements is false?

1. The debt to tangible net worth ratio is more conservative than the debt ratio.

2. The debt to tangible net worth ratio is more conservative than the debt/equity ratio.

3. Times interest earned indicates an income statement view of debt.

4. The debt/equity ratio indicates an income statement view of debt.

5. The debt ratio indicates a balance sheet view of debt.

g. Sneider Company has long-term debt of $500,000, while Abbott Company has longterm

debt of $50,000. Which of the following statements best represents an analysis of

the long-term debt position of these two firms?

1. Sneider Company’s times interest earned should be lower than Abbott

Company’s.

2. Abbott Company’s times interest earned should be lower than Sneider Company’s.

3. Abbott Company has a better long-term borrowing ability than does Sneider

Company.

4. Sneider Company has a better long-term borrowing ability than does Abbott Company.

5. None of the above.

h. A times interest earned ratio of 0.20 to 1 means

1. That the firm will default on its interest payment.

2. That net income is less than the interest expense (including capitalized interest).

3. That cash flow exceeds the net income.

4. That the firm should reduce its debt.

5. None of the above.

i. In computing debt to tangible net worth, which of the following is not subtracted in the

denominator?

1. Patents

2. Goodwill

3. Land

4. Bonds payable

5. Both 3 and 4

j. The ratio fixed charge coverage

1. Is a cash flow indication of debt-paying ability.

2. Is an income statement indication of debt-paying ability.

3. Is a balance sheet indication of debt-paying ability.

4. Will usually be higher than the times interest earned ratio.

5. None of the above.

k. Under the Employee Retirement Income Security Act, a company can be liable for its

pension plan up to

1. 30% of its net worth.

2. 30% of pension liabilities.

3. 30% of liabilities.

4. 40% of its net worth.

5. None of the above.

l. Which of the following statements is correct?

1. Capitalized interest should be included with interest expense when computing times

interest earned.

2. A ratio that indicates a firm’s long-term debt-paying ability from the balance sheet

view is the times interest earned.

3. Some of the items on the income statement that are excluded in order to compute

times interest earned are interest expense, income taxes, and interest income.

4. Usually, the highest times interest coverage in the most recent five-year period is

used as the primary indication of the interest coverage.

5. None of the above.

m. Which of these items does not represent a definite commitment to pay out funds in the

future?

1. Notes payable

2. Bonds payable

3. Noncontrolling interests

4. Wages payable

5. None of the above.

.

Ch8

a. Which of the following is not considered to be a nonrecurring item?

1. Discontinued operations

2. Extraordinary items

3. Cumulative effect of change in accounting principle

4. Interest expense

5. None of the above.

b. Ideally, which of these ratios will indicate the highest return for an individual firm?

1. Return on assets

2. Return on assets variation

3. Return on investments

4. Return on total equity

5. Return on common equity

c. If a firm’s gross profit has declined substantially, this could be attributed to all but

which of the following reasons?

1. The cost of buying inventory has increased more rapidly than selling prices.

2. Selling prices have declined due to competition.

3. Selling prices have increased due to competition.

4. The mix of goods has changed to include more products with lower margins.

5. Theft is occurring.

d. Gross profit analysis could be of value for all but which of the following?

1. Projections of profitability

2. Estimating administrative expenses

3. Inventory for interim statements

4. Estimating inventory for insurance claims

5. Replacing the physical taking of inventory on an annual basis

e. Total asset turnover measures

1. Net income dollars generated by each dollar of sales.

2. The ability of the firm to generate sales through the use of the assets.

3. The firm’s ability to make productive use of its property, plant, and equipment

through generation of profits.

4. The relationship between the income earned on the capital invested.

5. Return to the common shareholders.

f. Equity earnings can represent a problem in analyzing profitability because

1. Equity earnings may not be related to cash flow.

2. Equity earnings are extraordinary.

3. Equity earnings are unusual.

4. Equity earnings are not from operations.

5. Equity earnings are equal to dividends received.

g. Which of the following is not a type of operating asset?

1. Intangibles

2. Receivables

3. Land

4. Inventory

5. Building

h. Earnings based on percent of holdings by outside owners of consolidated subsidiaries

are termed

1. Equity earnings.

2. Earnings of subsidiaries.

3. Investment income.

4. Noncontrolling interest.

5. None of the above.

i. Net profit margin × total asset turnover measures

1. DuPont return on assets.

2. Return on investment.

3. Return on stockholders’ equity.

4. Return on common equity.

5. None of the above.

j. Return on assets cannot rise under which of the following circumstances?

Net profit margin Total asset turnover

1. Decline Rise

2. Rise Decline

3. Rise Rise

4. Decline Decline

5. The ratio could rise underall of the above.

k. A reason that equity earnings create a problem in analyzing profitability is because

1. Equity earnings are nonrecurring.

2. Equity earnings are extraordinary.

3. Equity earnings are usually less than the related cash flow.

4. Equity earnings relate to operations.

5. None of the above.

l. Which of the following ratios will usually have the highest percent?

1. Return on investment

2. Return on total equity

3. Return on common equity

4. Return on total assets

5. There is not enough information to tell.

m. Which of the following ratios will usually have the lowest percent?

1. Return on investment

2. Return on total equity

3. Return on common equity

4. Return on total assets

5. There is not enough information to tell.

n. Which of the following items will be reported on the income statement as part of net income?

1. Prior period adjustment

2. Unrealized decline in market value of investments

3. Foreign currency translation

4. Gain from selling land

5. None of the above.

o. Noncontrolling interest in earnings is

1. The total earnings of unconsolidated subsidiaries.

2. Earnings based on the percent of holdings by the parent of unconsolidated

subsidiaries.

3. Total earnings of unconsolidated subsidiaries.

4. Earnings based on the percent of holdings by outside owners of unconsolidated

subsidiaries.

5. None of the above.

p. Which of the following could cause return on assets to decline when net profit margin

is increasing?

1. Purchase of land at year-end

2. Increase in book value

3. A stock dividend

4. Increased turnover of operating assets

5. None of the above.

Ch9

a. In 2009 and 2010, Zoret Company reported earnings per share of $0.80 and $1.00, respectively.

In 2011, Zoret Company declared a 4-for-1 stock split. For the year 2011, Zoret

Company reported earnings of $0.30 per share. The appropriate earnings per share presentation

for a three-year comparative analysis that includes 2009, 2010, and 2011 would be

2011 2010 2009

1. $0.30 $0.25 $0.80

2. $0.30 $4.00 $3.20

3. $0.30 $0.25 $0.20

4. $1.20 $0.25 $0.20

5. $1.20 $4.00 $3.20

b. The degree of financial leverage for Zorro Company was 1.50 when EBIT was reported at

$1,000,000. If EBIT goes to $2,000,000, the accompanying change in net income will be

1. $2,500,000.

2. $3,000,000.

3. $2,000,000.

4. $1,500,000.

5. $1,000,000.

c. In 2012, Zello Company declared a 10% stock dividend. In 2011, earnings per share

was $1.00. When the 2011 earnings per share is disclosed in the 2012 annual report, it

will be disclosed at

1. $1.00.

2. $1.10.

3. $1.20.

4. $0.91.

5. $0.81.

d. Which of the following ratios usually reflects investors’ opinions of the future prospects

for the firm?

1. Dividend yield

2. Book value per share

3. Price/earnings ratio

4. Earnings per share

5. Dividend payout

e. Which of the following ratios gives a perspective on risk in the capital structure?

1. Book value per share

2. Dividend yield

3. Dividend payout

4. Degree of financial leverage

5. Price/earnings ratio

f. The earnings per share ratio is computed for

1. Convertible bonds.

2. Redeemable preferred stock.

3. Common stock.

4. Nonredeemable preferred stock.

5. None of the above.

g. Increasing financial leverage can be a risky strategy from the viewpoint of stockholders

of companies having

1. Steady and high profits.

2. Low and falling profits.

3. Relatively high and increasing profits.

4. A low debt/equity ratio and relatively high profits.

5. None of the above.

h. A firm has a degree of financial leverage of 1.3. If earnings before interest and tax

increase by 10%, then net income

1. Will increase by 13.0%.

2. Will increase by 13.

3. Will decrease by 13.0%.

4. Will decrease by 13.

5. None of the above.

i. The ratio that represents dividends per common share in relation to market price per

common share is

1. Dividend payout.

2. Dividend yield.

3. Price/earnings.

4. Book value per share.

5. Percentage of earnings retained.

j. Book value per share may not approximate market value per share because

1. Investments may have a market value substantially above the original cost.

2. Land may have substantially increased in value.

3. Market value reflects future potential earning power.

4. The firm owns patents that have substantial value.

5. All of the above.

CH10

a. Which of the following could lead to cash flow problems?

1. Tightening of credit by suppliers.

2. Easing of credit by suppliers.

3. Reduction of inventory.

4. Improved quality of accounts receivable.

5. Selling of bonds.

b. Which of the following would not contribute to bankruptcy of a profitable firm?

1. Substantial increase in inventory.

2. Substantial increase in receivables.

3. Substantial decrease in accounts payable.

4. Substantial decrease in notes payable.

5. Substantial decrease in receivables.

c. Which of the following current asset or current liability accounts is not included in the

computation of cash flows from operating activities?

1. Change in accounts receivable.

2. Change in inventory.

3. Change in accounts payable.

4. Change in accrued wages.

5. Change in notes payable to banks.

d. Which of the following items is not included in the adjustment of net income to cash

flows from operating activities?

1. Increase in deferred taxes.

2. Amortization of goodwill.

3. Depreciation expense for the period.

4. Amortization of premium on bonds payable.

5. Proceeds from selling land.

e. Which of the following represents an internal source of cash?

1. Cash inflows from financing activities.

2. Cash inflows from investing activities.

3. Cash inflows from selling land.

4. Cash inflows from operating activities.

5. Cash inflows from issuing stock.

f. How would revenue from services be classified?

1. Investing inflow

2. Investing outflow

3. Operating inflow

4. Operating outflow

5. Financing outflow

g. What type of account is inventory?

1. Investing

2. Financing

3. Operating

4. Noncash

5. Sometimes operating and sometimes investing.

h. How would short-term investments in marketable securities be classified?

1. Operating activities

2. Financing activities

3. Investing activities

4. Noncash activities

5. Cash and cash equivalents

i. Which of the following is not a typical cash flow under operating activities?

1. Cash inflows from sale of goods or services.

2. Cash inflows from interest.

3. Cash outflows to employees.

4. Cash outflows to suppliers.

5. Cash inflows from sale of property, plant, and equipment.

j. A transaction that will increase working capital is

1. Purchase of marketable securities.

2. Payment of accounts payable.

3. Collection of accounts receivable.

4. Sale of common stock.

5. None of the above.

k. Working capital is defined as

1. Current assets less current liabilities.

2. Cash equivalent accounts less current liabilities.

3. Current assets less notes payable.

4. Total assets less current liabilities.

5. Current assets less cash equivalent accounts.

l. Management should use the statement of cash flows for which of the following

purposes?

1. Determine the financial position.

2. Determine cash flow from investing activities.

3. Determine the balance in accounts payable.

4. Determine the balance in accounts receivable.

5. None of the above.

m. The purchase of land by the issuance of bonds payable should be presented in a

statement of cash flows in which of the following sections?

1. Cash flows from operating activities.

2. Supplemental schedule of noncash investing and financing activities.

3. Cash flows from investing activities.

4. Cash flows from financing activities.

5. None of the above.

CH11

a. Notes to financial statements are beneficial in meeting the disclosure requirements of

financial reporting. The notes should not be used to

1. Describe significant accounting policies.

2. Describe depreciation methods employed by the company.

3. Describe principles and methods peculiar to the industry in which the company

operates when these principles and methods are predominately followed in that

industry.

4. Disclose the basis of consolidation for consolidated statements.

5. Correct an improper presentation in the financial statements.

b. Which one of the following would be a source of funds under a cash concept of funds

but would not be listed as a source under the working capital concept?

1. Sale of stock

2. Sale of machinery

3. Sale of treasury stock

4. Collection of accounts receivable

5. Proceeds from long-term bank borrowing

c. The concept of conservatism is often considered important in accounting. The

application of this concept means that in the event some doubt occurs as to how a

transaction should be recorded, it should be recorded so as to

1. Understate income and overstate assets.

2. Overstate income and overstate assets.

3. Understate income and understate assets.

4. Overstate income and understate assets.

5. Overstate cash and overstate assets.

d. Early in a period in which sales were increasing at a modest rate and plant expansion

and start-up costs were occurring at a rapid rate, a successful business would likely

experience

1. Increased profits and increased financing requirements because of an increasing

cash shortage.

2. Increased profits and decreased financing requirements because of an increasing

cash surplus.

3. Increased profits and no change in financing requirements.

4. Decreased profits and increased financing requirements because of an increasing

cash shortage.

5. Decreased profits and decreased financing requirements because of an increasing

cash surplus.

e. Which of the following ratios would best disclose effective management of working

capital by a given firm relative to other firms in the same industry?

1. A high rate of financial leverage relative to the industry average.

2. A high number of days’ sales uncollected relative to the industry average.

3. A high turnover of net working capital relative to the industry average.

4. A high number of days’ sales in inventory relative to the industry average.

5. A high proportion of fixed assets relative to the industry average.

a. If business conditions are stable, a decline in the number of days’ sales outstanding

from one year to the next (based on a company’s accounts receivable at year-end)

might indicate

1. A stiffening of the company’s credit policies.

2. That the second year’s sales were made at lower prices than the first year’s sales.

3. That a longer discount period and a more distant due date were extended to

customers in the second year.

4. A significant decrease in the volume of sales of the second year.

b. Trading on equity (financial leverage) is likely to be a good financial strategy for

stockholders of companies having

1. Cyclical high and low amounts of reported earnings.

2. Steady amounts of reported earnings.

3. Volatile fluctuation in reported earnings over short periods of time.

4. Steadily declining amounts of reported earnings.

c. The ratio of total cash, trade receivables, and marketable securities to current liabilities is

1. The acid-test ratio.

2. The current ratio.

3. Significant if the result is 2-to-1 or below.

4. Meaningless.

d. The times interest earned ratio is a primary measure of

1. Liquidity.

2. Long-term debt-paying ability.

3. Activity.

4. Profitability.

e. The calculation of the number of times bond interest is earned involves dividing

1. Net income by annual bond interest expense.

2. Net income plus income taxes by annual bond interest expense.

3. Net income plus income taxes and bond interest expense by annual bond interest

expense.

4. Sinking fund earnings by annual bond interest expense.

a. Which of the following would not be an example of the use of a multiple when valuing

common equity?

1. Multiperiod discounted earnings models

2. Price-to-earnings (PE)

3. Price-to-book

4. Price-to-operating cash flow

b. The two most popular discounted earnings models appear to be

1. Discounted abnormal earnings and residual income.

2. Free cash flow and dividend discount model.

3. Sales/market capitalization and price-earnings.

4. Price-cash flow and dividend discount.

c. Shareholders of acquired companies are often big winners, receiving on average a

premium of what in a friendly merger?

1. 10%

2. 20%

3. 30%

4. 35%

d. Which of the following was not given as a reason for acquirers paying too much in an

acquisition?

1. Overuse of conventional financial statements

2. Overbidding

3. Overoptimistic appraisal of market potential

4. Overestimation of synergies

e. Which of the following would likely be very useful when valuing a dot.com?

1. Discounted cash flow

2. Price-earnings

3. Net asset value

4. Dividend yield

TRUE/FALSE

1. When analyzing a firm’s long-term, debt-paying ability, we only want to determine the firm’s ability to pay the principal.

2. In general, the profitability of a firm is not considered to be important in determining the short-term, debt-paying ability of the firm.

3. A good times interest earned record would be indicated by a relatively high, stable coverage for the times interest earned coverage.

4. Minority shareholders’ interest in earnings of subsidiaries are included in earnings for the times interest earned coverage.

5. Equity earnings are excluded from earnings for the times interest earned coverage.

6. Capitalized interest should not be considered as part of interest in the times interest earned computation.

7. To get a better indication of a firm’s ability to cover interest payments in the long run, the noncash charges for depreciation, depletion, and amortization can be added back to the times interest earned ratio.

8. When a portion of operating lease payments is included in fixed charges, it is an effort to recognize the true total interest that the firm is paying.

9. Under generally accepted accounting principles, an item must clearly represent a commitment to pay out funds in the future in order to be classified as a liability.

10. When a firm is expensing an item faster on the tax return than on the financial statements, a deferred tax liability is the result.

11. As with the debt ratio and the debt/equity ratio, from a long-term, debt-paying ability view, the lower the debt to tangible net worth ratio, the better.

12. The debt to tangible net worth ratio is a more conservative ratio than the debt ratio.

13. A joint venture can add significant potential liabilities to the parent company that are not on the face of the balance sheet.

14. A potential significant liability is possible if the company withdraws from a multi-employer pension plan.

15. A defined benefit plan shifts the risk to the employee as to whether the pension funds will grow to provide for a reasonable pension payment upon retirement.

16. If an employee is in the pension plan, rights under this plan will be lost if the employee leaves the firm prior to receiving a vested interest.

17. The balance sheet pension liability considers the projected benefit obligation.

18. Some companies achieve benefits by hundreds of millions of dollars by a pension termination.

19. Times interest earned indicates a firm’s long-term, debt-paying ability from the balance sheet view.

20. Capitalization of interest results in interest being added to a fixed asset instead of expensed.

21. In the short run, a firm can often meet its interest obligations even when the times interest earned is less than 1.00.

22. The tax expense for the financial statements often agrees with the taxes payable.

23. Some revenue and expense items never go on the tax return, but do go on the income statement.

24. Repayment of a long-term bank loan would decrease the debt ratio.

25. Increases of profits by cutting the cost of sales would increase the times interest earned.

TRUE/FALSE

1. Profitability is the ability of the firm to generate earnings.

2. In profitability analysis, absolute numbers are more meaningful than relative numbers because the analyst needs to know if one firm earned more dollars than the other.

3. Net profit margin is net profit before noncontrolling share of earnings and nonrecurring items to total assets.

4. The use of debt with high interest charges may cause the net profit margin to be low.

5. High fixed costs in a period of low activity can cause a low net profit margin.

6. DuPont analysis breaks return on assets into net profit margin and borrowing capacity.

7. Either a drop in net profit margin or a drop in total asset turnover, or both, can cause return on assets to fall.

8. Equity earnings are usually lower than the cash generated from the investment as dividends.

9. Operating assets exclude investments, land, and intangibles from the asset base.

10. The operating ratios may give significantly different results from net earnings ratios if a firm has large amounts of nonoperating assets generating income.

11. DuPont analysis can be done with net income or operating income figures as long as the related asset base is consistent.

12. Sales to fixed assets will have the least meaning if assets are relatively new.

13. Return on investment measures the return on long-term suppliers of funds.

14. Return on investment will typically be lower than return on equity.

15. Redeemable preferred stock is best considered as equity for ratio analysis.

16. Changes in the cost of goods sold can have a substantial impact on gross profit margin.

17. In order to compute gross profit margin, the income statement must be in single-step format.

18. Ratios of profits to sales and to identifiable assets can help to analyze profitability by segment.

19. Segment data contain information about geographic markets, including foreign countries.

20. An interim period is a fiscal period less than one year.

21. Interim reporting recognizes that timeliness of data offsets lack of detail and requires only minimum data.

22. Interim reports are usually audited.

23. Interim reports are useful in analyzing the impact of seasonality.

24. Interim reports cover fiscal periods of less than one year.

25. The SEC requires interim financial data on Form 10-Q.

26. When used properly, pro forma financial information makes a positive contribution to financial reporting.

a. Vertical, common-size statement 1. Full or partial statements expressed in percentages of a given base.

b. Segment reporting 2. Requires full financial statements on a quarterly basis.

c. Interim reporting 3. All statement figures are expressed as a percentage of a base figure from that year’s statement.

d. Trend analysis 4. A breakdown by major lines of business, only required in SEC reporting.

e. Common size 5. A breakdown by major lines of business.

f. Horizontal 6. All statement figures are expressed as a percentage of base-year figures.

7. Requires estimation of some expense items.

8. A comparison of financial data over time.

9. Visual aids to understanding financial data.