Chapter 20
Analyzing Financial Statements
True / False Questions

Financial statement analysis is the application of analytical tools to general-purpose
financial statements and related data for making business decisions.
TRUE

Financial statement analysis lessens the need for expert judgment.
FALSE

External users of accounting information are often directly involved in running a
company.
FALSE
20-1

The purpose of financial statement analysis for internal users is to provide information
helpful in improving the company's efficiency or effectiveness in providing products
or services.
TRUE

Liquidity and efficiency are considered to be building blocks of financial statement
analysis.
TRUE
20-2

The four building blocks of financial statement analysis include (1) liquidity, (2)
creditworthiness, (3) solvency, and (4) profitability.
FALSE
20-3

Intracompany analysis is based on comparisons with competitors.
FALSE
20-4

A traditional rule of thumb for an acceptable acid-test ratio and current ratio is 2 to 1
for the current ratio and 1 to 1 for the acid-test ratio.
TRUE
18. Analysis of a single financial item is important but is of limited value.
TRUE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
19. Vertical analysis includes tools used to compare a company's financial condition and
performance across time.
FALSE
Difficulty: Easy
Learning Objective: 3
Type: Knowledge
20. Three of the most common tools of financial analysis include horizontal analysis, vertical
analysis, and ratio analysis.
TRUE
Difficulty: Moderate
Learning Objective: 1
Type: Knowledge
20-5
21. Comparative financial statements are reports where financial amounts are placed side by
side in columns on a single statement for analysis purposes.
TRUE
Difficulty: Easy
Learning Objective: 2
Type: Knowledge
22. Comparative analysis is used to reveal patterns in data covering successive periods.
FALSE
Difficulty: Moderate
Learning Objective: 2
Type: Knowledge
23. A trend percent is calculated by dividing the analysis period amount by the base period
amount and multiplying the result by 100.
TRUE
Difficulty: Hard
Learning Objective: 2
Type: Knowledge
24. For trend analysis, the percent change is completed by subtracting the analysis period
amount from the base period amount, dividing the result by the base period amount and
multiplying that result by 100.
FALSE
Difficulty: Hard
Learning Objective: 2
Type: Knowledge
20-6
25. Horizontal statement analysis is used to reveal changes in the relative importance of each
financial statement item.
FALSE
Difficulty: Easy
Learning Objective: 2
Type: Knowledge
26. Vertical analysis is used to reveal patterns in data covering successive periods.
FALSE
Difficulty: Easy
Learning Objective: 3
Type: Knowledge
27. Vertical analysis is a tool to evaluate individual financial statement items or group of
items in terms of a specific base amount.
TRUE
Difficulty: Easy
Learning Objective: 3
Type: Knowledge
28. The base amount for a common-size balance sheet is usually total assets.
TRUE
Difficulty: Moderate
Learning Objective: 3
Type: Knowledge
29. An advantage of common-size statements is that they reflect the relative sizes of
companies under analysis.
FALSE
Difficulty: Moderate
Learning Objective: 3
Type: Knowledge
20-7
30. Graphical analysis is useful in assessing sources of financing and identification of
investing activities.
TRUE
Difficulty: Hard
Learning Objective: 3
Type: Knowledge
31. Harbison Corporation had cash of $14,000 and total assets of $178,300. The common-size
percent for cash was 7.85%.
TRUE
Difficulty: Hard
Learning Objective: 3
Type: Application
32. Ratios can be expressed as a percent, rate, or proportion.
TRUE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
33. Ratios, like other analytical tools, are usually historically oriented.
FALSE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
34. Liquidity refers to the availability of resources to meet short-term cash requirements.
TRUE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
20-8
35. Working capital is current liabilities minus current assets.
FALSE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
36. Because debt can have the effect of increasing the return to shareholders, the use of debt is
sometimes described as financial leverage.
TRUE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
37. The larger the times interest earned ratio, the greater the risk a company incurs.
FALSE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
38. Return on total assets is a profitability measure.
TRUE
Difficulty: Hard
Learning Objective: 4
Type: Knowledge
39. Precision Company has earnings per share of $3.50, dividends per share of $0.75, and a
market price of $64.75. Its dividend yield is 21.4%.
FALSE
Difficulty: Hard
Learning Objective: 4
Type: Application
20-9
40. The debt ratio provides information about the risk created for a company's owners and
lenders when the company goes into debt.
TRUE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
41. The higher the debt ratio the higher the level of risk of not being able to meet obligations.
TRUE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
42. The debt ratio is calculated by dividing total assets by total liabilities.
FALSE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
43. Stride Rite has liabilities of $115 million and total assets of $350 million. Its debt ratio is
30.4%.
FALSE
Difficulty: Hard
Learning Objective: 4
Type: Application
44. Accounts payable turnover is a measure of liquidity.
TRUE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
20-10
45. Profit margin measures the relationship of debt to assets.
FALSE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
46. Profit margin reflects the portion of profit in each dollar of revenue.
TRUE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
47. Profit margin is calculated by dividing revenues by net income.
FALSE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
48. Ben and Jerry's had assets of $13,500,000, net income of $3,900,000, and net sales of
$167,155,000. Its profit margin was 2.3%.
TRUE
Difficulty: Hard
Learning Objective: 4
Type: Application
49. When evaluating the profit margin of a sole proprietorship, the formula should be
modified by subtracting owner's equity from net income. This factors in the value of the
owner's efforts in running the business.
FALSE
Difficulty: Hard
Learning Objective: 4
Type: Knowledge
20-11
50. The current ratio is used to evaluate the ability of a business to meet its short-term
obligations.
TRUE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
51. The current ratio is calculated by dividing current liabilities by current assets.
FALSE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
52. Harley Davidson's current assets are $400 million and its current liabilities are $250
million. Its current ratio is .63 to 1.
FALSE
Difficulty: Moderate
Learning Objective: 4
Type: Application
53. FastForward has current assets of $15,000 and current liabilities of $9,500. Its current
ratio is 1.6 to 1.
TRUE
Difficulty: Moderate
Learning Objective: 4
Type: Application
20-12
54. Harley Davidson's current ratio is .9 to 1. The industry average current ratio is 1.2. Harley
Davidson does not have a problem in covering liabilities because of its strong sales and
position in its industry.
FALSE
Difficulty: Hard
Learning Objective: 4
Type: Application
55. The acid-test ratio is also called the quick ratio.
TRUE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
56. Quick assets include cash, inventory, and receivables.
FALSE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
57. The acid-test ratio is current assets divided by current liabilities.
FALSE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
58. The acid-test ratio is a more accurate measure of a company's liquidity than the current
ratio.
TRUE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
20-13
59. The common rule of thumb is that a company's acid-test ratio should be at least 1.5 to 1.
FALSE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
60. Z-Mart's quick assets are $147,000. With current liabilities of $143,000, Z-Mart's acid-test
ratio is 1.03 to 1.
TRUE
Difficulty: Hard
Learning Objective: 4
Type: Application
61. Omega Supply's current ratio is 2 to 1. Its quick ratio is .75 to 1. Omega Supply is a good
credit risk because the ratios reveal no liquidity problem.
FALSE
Difficulty: Hard
Learning Objective: 4
Type: Knowledge
62. The gross margin ratio is gross profit divided by net sales.
TRUE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
63. The profit margin ratio is gross profit divided by net sales.
FALSE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
20-14
64. The two basic components to operating efficiency are current ratio and return on total
assets.
FALSE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
65. The gross profit ratio measures the relationship between sales and cost of goods sold.
TRUE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
66. Z-Mart had net sales of $340,500, its cost of goods sold was $257,000, and its net income
was $13,750. The gross margin ratio was 24.5%.
TRUE
Difficulty: Hard
Learning Objective: 4
Type: Application
67. J.C. Penney had net sales of $24,750 million, cost of goods sold of $16,150, and net
income of $837 million. Its gross margin ratio was 3.4%.
FALSE
Difficulty: Hard
Learning Objective: 4
Type: Application
20-15
68. A merchandising company's ability to pay its short-term obligations depends on how
quickly it sells its merchandise inventory.
TRUE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
69. The merchandise turnover ratio is used to measure profitability.
FALSE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
70. The merchandise turnover ratio is calculated by dividing average merchandise inventory
by cost of goods sold.
FALSE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
71. The days' sales in inventory is calculated by dividing ending inventory by cost of goods
sold and multiplying the result by 365.
TRUE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
20-16
72. Trekking Company's cost of goods sold was $15,550. Its average merchandise inventory
was $4,575. Its merchandise turnover was 3.4.
TRUE
Difficulty: Hard
Learning Objective: 4
Type: Application
73. Toys "R" Us had cost of goods sold of $6,900 million. Its ending inventory was $2,000
million. Therefore its days' sales in inventory was 90 days.
FALSE
Difficulty: Hard
Learning Objective: 4
Type: Application
74. The days' sales uncollected ratio measures a company's ability to manage its debt.
FALSE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
75. The days' sales uncollected ratio measures the liquidity of receivables.
TRUE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
76. The days' sales uncollected ratio is calculated by dividing accounts receivable by net sales
and multiplying the answer by 365.
TRUE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
20-17
77. A company must have less than 30 days' sales uncollected in order to have enough
liquidity.
FALSE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
78. Z-Mart had $12,000 in accounts receivable and $320,000 in net sales for the period. Its
days' sales uncollected was 13.7 days.
TRUE
Difficulty: Hard
Learning Objective: 4
Type: Application
79. Hasbro had $750 million in accounts receivable and $2,900 million in net sales for the
period. Its days' sales uncollected was 29.8.
FALSE
Difficulty: Hard
Learning Objective: 4
Type: Application
80. Accounts receivable turnover shows how often a company converts its average accounts
receivable balance into cash during the period.
TRUE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
20-18
81. A high accounts receivable turnover in comparison with competitors suggests that the firm
should tighten its credit policy.
FALSE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
82. Accounts receivable turnover is calculated by dividing net sales by average accounts
receivable.
TRUE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
83. TechCom had net sales of $480,000 and average accounts receivable of $64,000. Its
accounts receivable turnover was 7.5.
TRUE
Difficulty: Hard
Learning Objective: 4
Type: Application
84. Compaq had net sales of $10,500 million. Its average account receivables were $1,750
million. Its accounts receivable turnover was 6.
TRUE
Difficulty: Hard
Learning Objective: 4
Type: Application
20-19
85. Total asset turnover can be calculated regardless of the type of company being evaluated.
TRUE
Difficulty: Easy
Learning Objective: 4
Type: Application
86. Decision makers and other users of financial statements are especially interested in
evaluating a company's ability to use its assets in generating sales.
TRUE
Difficulty: Easy
Learning Objective: 4
Type: Application
87. Total asset turnover is calculated by dividing average total assets by net sales.
FALSE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
88. Coors had net sales of $1,860 million and average total assets of $1,738 million. Its total
asset turnover was 1.07.
TRUE
Difficulty: Hard
Learning Objective: 4
Type: Application
89. Anheuser-Busch had average total assets of $10,965 million and net sales of $11,430
million. Its total asset turnover was .96.
FALSE
Difficulty: Hard
Learning Objective: 4
Type: Application
20-20
90. A high times interest earned ratio means that a company has a high risk from borrowing.
FALSE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
91. The times interest earned formula is calculated by multiplying income by the interest rate
on a company's debt.
FALSE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
92. The times interest earned ratio is calculated by dividing income before interest and income
taxes by interest expense.
TRUE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
93. When the times interest earned ratio falls below 1.5, the default rate on liabilities increases
sharply.
TRUE
Difficulty: Hard
Learning Objective: 4
Type: Knowledge
20-21
94. X-Caliber's income before interest and income taxes was $250,000 and its interest
expense is $100,000. Its times interest earned ratio is .4.
FALSE
Difficulty: Hard
Learning Objective: 4
Type: Application
95. Dividend yield is the annual cash dividends per share distributed to common shareholders
relative to the share's market price.
TRUE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
96. Dividend yield is calculated by dividing annual cash dividends per share by earnings per
share.
FALSE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
97. Dividend yield is calculated by dividing annual cash dividends per share by the market
value per share.
TRUE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
20-22
98. GAP's earnings per share is $3.11. Its common dividend is $.36 per share and its share
price is $40 per share. Its dividend yield is .9%.
TRUE
Difficulty: Hard
Learning Objective: 4
Type: Application
99. Chevron paid $2.10 in dividends. Its earnings per share was $5.40. Its share price was
$120 per share. The dividend yield was 38.9%
FALSE
Difficulty: Hard
Learning Objective: 4
Type: Application
100. The price-earnings ratio reveals information about the stock market's expectations for a
company's future growth in earnings, dividends, and opportunities.
TRUE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
101. Dividend yield is defined as the market value per share of a company's shares divided by
its earnings per share.
FALSE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
20-23
102. The price-earnings ratio is calculated by dividing earnings per share by the market price
per share.
FALSE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
103. Quantum's earnings per share is $2.47. The dividend per share is $.25 and the market
price per share is $45. The price-earnings ratio is 5.5.
FALSE
Difficulty: Hard
Learning Objective: 4
Type: Application
104. Return on equity increases when the expected rate of return from the new assets is
greater than the interest rate on the bonds issued to finance the assets.
TRUE
Difficulty: Hard
Learning Objective: 4
Type: Knowledge
105. In periods of low income, bonds can increase return on equity because of less equity
investment.
FALSE
Difficulty: Hard
Learning Objective: 4
Type: Knowledge
20-24
106. The book value of assets is an accurate measure of current market values.
FALSE
Difficulty: Easy
Learning Objective: 4
Type: Knowledge
107. The pledged assets to secured liabilities is calculated by dividing secured liabilities by
pledged assets.
FALSE
Difficulty: Moderate
Learning Objective: 4
Type: Knowledge
108. The pledged assets to secured liabilities measures whether or not the pledged assets of
the debtor provide adequate security for secured creditors.
TRUE

Profit margin reflects the percent of net income in each dollar of net sales.
TRUE
20-25
Multiple Choice Questions

External users of financial information:
A. Are those individuals involved in managing and operating the company.
B. Include internal auditors and consultants.
C. Are not directly involved in running the company.
D. Make strategic decisions for a company.
E. Make operating decisions for a company.
20-26

The building blocks of financial statement analysis include:
A. Liquidity and efficiency.
B. Solvency.
C. Profitability.
D. Market.
E. All of these answers are correct.
20-27

Intracompany standards for financial statement analysis:
A. Are based on a company's prior performance.
B. Are set by competitors.
C. Are set by the company's industry.
D. Are based on rules of thumb.
E. Are based on a company's prior performance and on rules of thumb.
20-28

Industry standards for financial statement analysis:
A. Are based on a company's prior performance.
B. Are set by competitors.
C. Are set by the company's industry.
D. Are based on rules of thumb.
E. Are based on a company's prior performance and on rules of thumb.

Three of the most common tools of financial analysis are:
A. Financial analysis, ratio analysis, vertical analysis.
B. Ratio analysis, horizontal analysis, financial analysis.
C. Horizontal analysis, vertical analysis, ratio analysis.
D. Horizontal analysis, financial analysis, ratio analysis.
E. Vertical analysis, investment analysis, horizontal analysis.
20-29

Tools using key relationships among financial statement items are:
A. Financial analysis.
B. Horizontal analysis.
C. Investment analysis.
D. Ratio analysis.
E. Vertical analysis.

Tools comparing a company's financial condition and performance to a base amount
are:
A. Financial analysis.
B. Horizontal analysis.
C. Investment analysis.
D. Ratio analysis.
E. Vertical analysis.
20-30

Financial statements with data for two or more successive accounting periods placed
in columns side by side, sometimes with changes shown in dollar amounts and
percentages, are:
A. Cost statements.
B. Controlling statements.
C. Successive statements.
D. Comparative statements.
E. Position statements.

Horizontal analysis:
A. Is a tool used to evaluate changes in financial data across time.
B. Is also called vertical analysis.
C. Is the presentation of financial ratios.
D. Is a tool used to evaluate financial statement items in terms of a specific base
amount.
E. Is a tool used to evaluate changes in financial data across time and is the
presentation of financial ratios.

Trend analysis is also called:
A. Trend percent analysis.
B. Financial analysis.
C. Index number analysis.
D. Trend percent analysis and index number analysis.
E. Financial analysis and index number analysis.
20-31

To calculate trend percents:
A. Select a base period and assign each item for the base period statement a weight of
100%.
B. Express financial numbers from other periods as a percent of the related base period
number.
C. Subtract the analysis period number from the base period number.
D. Select a base period and assign each item for the base period statement a weight of
100% and express financial numbers from other periods as a percent of the related
base period number.
E. All of these answers are correct.
20-32

Current assets minus current liabilities is called:
A. Profit margin.
B. Financial leverage.
C. Current ratio.
D. Working capital.
E. Quick assets.

Current assets divided by current liabilities is called the:
A. Current ratio.
B. Quick ratio.
C. Working ratio.
D. Liquidity ratio.
E. Solvency ratio.
20-33

The debt ratio is used to:
A. Measure the relationship of equity to debt.
B. Describe the risk associated with a company's debts.
C. Is used only by banks when a business applies for a loan.
D. Measure the relationship of equity to debt and describe the risk associated with a
company's debts.
E. Describe the risk associated with a company's debts and is used only by banks when
a business applies for a loan.

The debt ratio is the relationship between a company's:
A. Equity and liabilities.
B. Liabilities and equity.
C. Liabilities and assets.
D. Assets and liabilities.
E. Equity and assets
20-34
20-35
20-36
Accounts payable turnover:
A. Describes how much time it takes a company to meet its obligations to suppliers.
B. Is also called inventory turnover.
C. Can be used to evaluate liquidity.
D. Describes how much time it takes a company to meet its obligations to suppliers and can
be used to evaluate liquidity.
E. All of these answers are correct.
20-37

The current ratio:
A. Is used to measure a company's profitability.
B. Is used to measure the relationship between assets and long-term debt.
C. Measures the effect of operating income on profit.
D. Is used to evaluate a company's ability to pay its short-term obligations.
E. Is used to measure a company's profitability and to evaluate a company's ability to
pay its short-term obligations.

The current ratio:
A. Is current assets divided by current liabilities.
B. Helps to assess a company's ability to pay its debts in the near future.
C. Reveals problems in a business if it is less than 1.
D. Is current assets divided by current liabilities and helps to assess a company's
ability to pay its debts in the near future.
E. All of these answers are correct.

The acid-test ratio:
A. Is also called the quick ratio.
B. Measures profitability.
C. Measures liquidity.
D. Is also called the quick ratio and measures liquidity.
E. All of these answers are correct.
20-38

The quick assets are:
A. Cash, short-term investments, prepaid expenses.
B. Cash, short-term investments, accounts receivable.
C. Cash, inventory, accounts receivable.
D. Cash, accounts receivable, prepaid expenses.
E. Accounts receivable, inventory, prepaid expenses.
20-39

The acid-test ratio differs from the current ratio:
A. Because liabilities are divided by current assets.
B. Because prepaid expenses and inventory are excluded.
C. Because it measures profitability.
D. Because it excludes short-term investments.
E. Because prepaid expenses and inventory are excluded and because it measures
profitability.

The gross margin ratio:
A. Is also called the gross profit ratio.
B. Measures a merchandising firm's ability to earn a profit from the sale of inventory.
C. Is also called profit margin ratio.
D. Is also called the gross profit ratio and measures a merchandising firm's ability to
earn a profit from the sale of inventory.
E. Measures a merchandising firm's ability to earn a profit from the sale of inventory
and is also called profit margin ratio.

The gross profit ratio:
A. Measures the relationship between net sales and cost of goods sold.
B. Is a profitability measure.
C. Measures the amount of gross profit in each dollar of sales.
D. Measures the relationship between net sales and cost of goods sold and is a
profitability measure.
E. All of these answers are correct.
20-40

The merchandise turnover ratio:
A. Is used to analyze profitability.
B. Is used to measure solvency.
C. Measures how quickly a firm sells its merchandise inventory.
D. Validates the acid-test ratio.
E. Depends on the type of inventory valuation method.

Days' sales in inventory:
A. Focuses on ending inventory.
B. Is a ratio that tells us how much inventory a firm has on hand in terms of days'
sales.
C. Is the number of days we can sell from inventory if no new items are purchased.
D. All of these answers are correct.
E. Focuses on ending inventory and is a ratio that tells us how much inventory a firm
has on hand in terms of days' sales.
20-41

The merchandise turnover ratio:
A. Is calculated by dividing cost of goods sold by average merchandise inventory.
B. Is calculated by dividing merchandise inventory by cost of goods sold.
C. Is ending inventory divided by cost of goods sold.
D. Is cost of goods sold divided by ending inventory.
E. Is cost of goods sold divided by ending inventory times 365.

Days' sales in inventory is calculated by:
A. Dividing merchandise inventory by cost of goods sold.
B. Dividing cost of goods sold by merchandise inventory.
C. Ending inventory divided by cost of goods sold times 365.
D. Cost of goods sold divided by ending inventory times 365.
E. Ending inventory divided by cost of goods sold.

The days' sales uncollected ratio is used to:
A. Measure how many days of sales remain until the end of the year.
B. Determine the number of days that have passed without collecting on accounts
receivable.
C. Identify the likelihood of collecting sales on account.
D. Estimate how much time is likely to pass before cash receipts from credit sales
equal the amount of the existing accounts receivable.
E. Measure the amount of layaway sales for a period.
20-42

The number of days' sales uncollected is calculated by:
A. Dividing accounts receivable by net sales.
B. Dividing accounts receivable by net sales and multiplying the result by 365.
C. Dividing net sales by accounts receivable.
D. Dividing net sales by accounts receivable and multiplying the result by 365.
E. Multiplying net sales by accounts receivable and dividing the result by 365.

The number of days' sales uncollected:
A. Measures how much time is likely to pass before a company receives cash receipts
from credit sales equal to the current amount of accounts receivable.
B. Is used to compare a company to other companies in the same industry.
C. Is used to compare between current and prior periods.
D. Is used to compare a company to other companies in the same industry and is used
to compare between current and prior periods.
E. All of these answers are correct.

Accounts receivable turnover measures:
A. How long it takes to sell credit inventory.
B. How often a company converts its average accounts receivable balance into cash
during the period.
C. Measures the relationship of cash sales to credit sales.
D. How long it takes to sell credit inventory and how often a company converts its
average accounts receivable balance into cash during the period.
E. How often a company converts its average accounts receivable balance into cash
during the period and measures the relationship of cash sales to credit sales.
20-43

Accounts receivable turnover is calculated by:
A. Dividing net sales by average accounts receivable.
B. Dividing net sales by average accounts receivable and multiplying by 365.
C. Dividing average accounts receivable by net sales.
D. Dividing average accounts receivable by net sales and multiplying by 365.
E. Dividing net income by average accounts receivable.
20-44

Total asset turnover is calculated by dividing:
A. Gross sales by average total assets.
B. Average total assets by gross sales.
C. Net sales by average total assets.
D. Average total assets by net sales.
E. Net accounts receivables by total assets.
20-45
20-46
20-47

The dividend yield is calculated by:
A. Dividing cash dividends per share by earnings per share.
B. Dividing earnings per share by cash dividends per share.
C. Dividing cash dividends per share by the market price per share.
D. Dividing the market price per share by cash dividends per share.
E. Dividing cash dividends by retained earnings.

A share's market value is affected by:
A. Expected growth in earnings.
B. Expected growth in dividends.
C. Expected business opportunities.
D. Expected growth in earnings and dividends.
E. All of these answers are correct.
20-48
20-49
Matching Questions

Match each of the following terms with the appropriate definitions.
A financial statement with data for two or more
successive accounting periods placed in columns side
by side, sometimes with changes shown in dollar
1. Liquidity
amounts and percents.
2. Financial statement
A tool to evaluate each financial statement item or
analysis
group of items in terms of a specific base amount.
Refers to a company's ability to generate an adequate
3. Solvency
return on invested capital.
The process of communicating information that is
relevant to investors, creditors, and others in making
4. Efficiency
investment, credit, and similar decisions.
5. Common-size
Comparative financial statements in which each
financial statements
amount is expressed as a percent of a base amount.
6. Comparative
Refers to a company's long-run financial viability
financial statement
and its ability to cover long-term obligations.
The portion of total assets provided by equity,
7. Financial reporting
calculated as total equity divided by total assets.
The application of analytical tools to generalpurpose financial statements and related data for
8. Profitability
making business decisions.
Refers to how productive a company is in using its
assets; usually measured relative to how much revenue
9. Vertical analysis
is generated for a certain level of assets.
Refers to the availability of resources to meet short10. Equity ratio
term cash requirements.
20-50
6
9
8
7
5
3
10
2
4
1