ACCOUNTANCY

REVIEW
ASSESSMENT ON
FINANCIAL STATEMENT AND RATIO ANALYSIS

1. The stockholder's annual report must include

A) a statement of cash flows.
B) an income statement.
C) a balance sheet.
D) a statement of retained earnings.
E) all of the above.

2. Total assets less net fixed assets equals

A) gross assets.
B) current assets.
C) depreciation.
D) liabilities and equity.

3. Gross profits are defined as

A) operating profits minus depreciation.
B) operating profits minus cost of goods sold.
C) sales revenue minus operating expenses.
D) sales revenue minus cost of goods sold.

4. Net profits after taxes are defined as

A) gross profits minus operating expenses.
B) sales revenue minus cost of goods sold.
C) EBIT minus interest.
D) EBIT minus interest and taxes.

5. Earnings available to common shareholders are defined as net profits

A) after taxes.
B) after taxes minus preferred dividends.
C) after taxes minus common dividends.
D) before taxes.

6. All of the following are examples of fixed assets EXCEPT

A) automobiles.
B) buildings.
C) marketable securities.
D) equipment.

7. The net value of fixed assets is also called its

A) market value.
B) par value.
C) book value.
D) price.

8. The ________ summarizes the firm's funds flow over a given period of time.
A) income statement
B) balance sheet
C) statement of cash flows
D) statement of retained earnings

9. The statement of cash flows may also be called the

A) income statement.
B) statement of retained earnings.
 C) bank statement.
D) funds statement.

10. Retained earnings on the balance sheet represents

A) net profits after taxes.
B) cash.
C) net profits after taxes minus preferred dividends.
D) the cumulative total of earnings reinvested in the firm.

11. When preparing a statement of cash flows, retained earnings adjustments are required so that which
of the following are separated on the statement?
A) Revenue and cost.
B) Assets and liabilities.
C) Depreciation and purchases.
D) Net profits and dividends.

12. A firm had the following accounts and financial data for 2005.

The firm's earnings available to common shareholders for 2005 were

A) -$224.25
B) $195.40
C) $302.40
D) $516.60

13. A firm had the following accounts and financial data for 2005.

The firm's net profit after taxes for 2005 was ________.
A) -$206.40
B) $213.80
C) $320.40
D) $206.25

14. On the balance sheet net fixed assets represent

A) gross fixed assets at cost minus depreciation expense.
B) gross fixed assets at market value minus depreciation expense.
C) gross fixed assets at cost minus accumulated depreciation.
D) gross fixed assets at market value minus accumulated deprecation.

15. Paid-in-capital in excess of par represents the amount of proceeds

A) from the original sale of stock.
B) in excess of the par value from the original sale of common stock.
C) at the current market value of common stock.
D) at the current book value of common stock.
16. Candy Corporation had pretax profits of $1.2 million, an average tax rate of 34 percent, and it paid
preferred stock dividends of $50,000. There were 100,000 shares outstanding and no interest
expense. What were Candy Corporation's earnings per share?
A) $3.91
B) $4.52
C) $7.42
D) $7.59

17. A firm had year end 2004 and 2005 retained earnings balances of $670,000 and $560,000,
respectively. The firm paid $10,000 in dividends in 2005. The firm's net profit after taxes in 2002 was
A) -$100,000.
B) -$110,000.
C) $100,000.
D) $110,000.

18. A corporation had a year end 2004 retained earnings balance of $220,000. The firm reported net
profits after taxes of $50,000 in 2005 and paid dividends in 2005 of $30,000. The firm's retained
earnings balance at year end 2005 was
A) $240,000.
B) $250,000.
C) $270,000.
D) $300,000.

19. The 2002 law that established the Public Company Accounting Oversight Board (PCAOB) was called
A) the McCain-Feingold Act.
B) the Harkins-Oxley Act.
C) the Sarbanes-Harkins Act.
D) the Sarbanes-Oxley Act.
20. The 2002 Sarbanes-Oxley Act was designed to
A) limit the compensation that could be paid to corporate CEOs.
B) eliminate the many disclosure and conflict of interest problems of corporations.
C) provide uniform international accounting standards.
D) two of the above.

21. Ag Silver Mining, Inc. has $500,000 of earnings before interest and taxes at the year end. Interest
expenses for the year were $10,000. The firm expects to distribute $100,000 in dividends. Calculate
the earnings after taxes for the firm assuming a 40 percent tax on ordinary income.

22. At the end of 2005, the Long Life Light Bulb Company announced it had produced a gross profit of $1
million. The company has also established that over the course of this year it has incurred $345,000
in operating expenses and $125,000 in interest expenses. The company is subject to a 30% tax rate
and has declared $57,000 total preferred stock dividends.
(a) How much is the earnings available for common stockholders?
(b) Compute the increased retained earnings for 2005 if the company were to declare a $4.25 common
stock dividend. The company has 15,000 shares of common stock outstanding.

23. Reliable Auto Parts has 5,000 shares of common stock outstanding. The company also has the
following amounts in revenue and expense accounts.
Calculate
(a) gross profits.
(b) operating profits.
(c) net profits before taxes.
(d) net profits after taxes (assume a 40 percent tax rate).
(e) cash flow from operations.
(f) earnings available to common stockholders.
(g) earnings per share.

24. Colonial Furniture's net profits before taxes for 2002 totaled $354,000. The company's total retained
earnings were $338,000 for 2004 year end and $389,000 for 2005 year end. Colonial is subject to a
26 percent tax rate. How large was the cash dividend declared by Colonial Furniture in 2005?

25. On December 31, 2004, the Bradshaw Corporation had $485,000 as an ending balance for its
retained earnings account. During 2005, the corporation declared a $3.50/share dividend to its
stockholders. The Bradshaw Corporation has 35,000 shares of common stock outstanding. When the
books were closed for 2005 year end, the corporation had a final retained earnings balance of
$565,000. What was the net profit earned by Bradshaw Corporation during 2005?

26. The Sunshine Company had a retained earnings balance of $850,000 at the beginning of 2005. By
the end of 2005, the company's retained earnings balance was $950,000. During 2005, the company
earned $245,000 as net profits after paying its taxes. The company was then able to pay its preferred
stockholders $45,000. Compute the common stock dividend per share in 2005 assuming 10,000
shares of common stock outstanding.

27. Ratios provide a ________ measure of a company's performance and condition.

A) definitive
B) gross
C) relative
D) qualitative

20) ________ analysis involves comparison of current to past performance and the evaluation of
developing trends.
A) Time-series
B) Cross-sectional
C) Marginal
D) Quantitative

28. To analyze the firm's financial performance, the following types of ratio analyses EXCEPT ________
may be used.
A) time-series analysis
B) cross-section analysis
C) combined analysis
D) marginal analysis

29. Time-series analysis is often used to

A) assess developing trends.
 B) correct errors of judgment.
C) reflect performance relative to some norm.
D) standardize results.

30. ________ evidence of the existence of a problem or outstanding management performance is

provided by ratio analysis.
A) Conclusive
B) Inconclusive
C) Complete
D) Definitive

31. The analyst should be careful when conducting ratio analysis to ensure that
A) the overall performance of the firm is not judged on a single ratio.
B) the dates of the financial statements being compared are the same.
C) audited statements are used.
D) the same accounting procedures were used.
E) all of the above.

32. ________ is where the firm's ratio values are compared to those of a key competitor or group of
competitors, primarily to identify areas for improvement.
A) Time-series analysis
B) Benchmarking
C) Combined analysis
D) None of the above

33. Cross-sectional ratio analysis is used to

A) correct expected problems in operations.
B) isolate the causes of problems.
C) provide conclusive evidence of the existence of a problem.
D) reflect the symptoms of a possible problem.

34. Without adjustment, inflation may tend to cause ________ firms to appear more efficient and
profitable than ________ firms, all else being the same.
A) large; smaller
B) older; newer
C) smaller; larger
D) newer; older

35. The ________ ratios are primarily measures of return.

A) liquidity
B) activity
C) debt
D) profitability

36. If the only information you were given about Ryan Corporation, a large public company in business
for many years, was that had a current ratio of 2.9, what could you determine from this?
A) Nothing, you would also need Ryan Corporation's current ratios from the last few years and the
current ratio's from the last few years of Ryan's competitors.
B) You could determine that Ryan has a liquidity problem because Ryan's current ratio is greater than
2 which is the rule of thumb for the current ratio.
C) Nothing, you would also need the current ratio's from the last few years of the S&P 500 Index.
D) You could determine that Ryan has an activity problem because Ryan's current ratio is greater
than 2 which is the rule of thumb for the current ratio.

37. If you were given the average collection period of a firm was currently 45 days, that the average
collection of the firm for the past 3 years was 30 days and that the average collection period of the
 firm's industry for the past few years and currently was 30 days, would you want to know any other
information to evaluate the effectiveness of the firm's credit and collection policies?
A) No, the firm obviously has a problem with its credit and collection policies.
B) Yes, you would also want to know what the firm's credit terms are and especially if they had
recently changed from 30 to 45 days.
C) No, the firm does not seem to have any issues with its credit and collection policies.
D) Yes, you would want to know what the average collection period was for the past few years and
currently of the market in general

38. Discuss the limitations of ratio analysis and the cautions which must be taken when reviewing a
cross-sectional and time-series analysis.

39. The ________ is useful in evaluating credit and collection policies.

A) average payment period
B) current ratio
C) average collection period
D) current asset turnover

40. The ________ measures the activity, or liquidity, of a firm's inventory.

A) average collection period
B) inventory turnover
C) quick ratio
D) current ratio

41. The ________ ratio may indicate the firm is experiencing stockouts and lost sales.
A) average payment period
B) inventory turnover
C) average collection period
D) quick

42. ABC Corp. extends credit terms of 45 days to its customers. Its credit collection would likely be
considered poor if its average collection period was
A) 30 days.
B) 36 days.
C) 47 days.
D) 57 days.

43. ________ are especially interested in the average payment period, since it provides them with a
sense of the bill-paying patterns of the firm.
A) Customers
B) Stockholders
C) Lenders and suppliers
D) Borrowers and buyers

44. A firm has a current ratio of 1; in order to improve its liquidity ratios, this firm might
A) improve its collection practices, thereby increasing cash and increasing its current and quick ratios.
B) improve its collection practices and pay accounts payable, thereby decreasing current liabilities
and increasing the current and quick ratios.
C) decrease current liabilities by utilizing more long-term debt, thereby increasing the current and
quick ratios.
D) increase inventory, thereby increasing current assets and the current and quick ratios.

45. If the inventory turnover is divided into 365, it becomes a measure of

A) sales efficiency.
B) the average age of the inventory.
C) sales turnover.
 D) the average collection period.

46. The ________ is useful in evaluating credit and collection policies.

A) average payment period
B) current ratio
C) average collection period
D) current asset turnover

47. A firm with a total asset turnover that is lower than industry standard but with a current ratio which
meets industry standard must have excessive
A) fixed assets.
B) inventory.
C) accounts receivable.
D) debt.

48. If Nico Corporation has cost of goods sold of $300,000 and inventory of $30,000, then the inventory
turnover is ________ and the average age of inventory is ________.
A) 36.5; 10
B) 10; 36.5
C) 36.0; 10
D) 10; 36.0

49. If Nico Corporation has annual purchases of $300,000 and accounts payable of $30,000, then
average purchases per day are ________ and the average payment period is ________.
A) 36.5; 821.9
B) 36.0; 833.3
C) 821.9; 36.5
D) 833.3; 36.0

Table 3.1

Information (2010 values)

1. Sales totaled $110,000
2. The gross profit margin was 25 percent.
3. Inventory turnover was 3.0.
4. There are 360 days in the year.
5. The average collection period was 65 days.
6. The current ratio was 2.40.
7. The total asset turnover was 1.13.
8. The debt ratio was 53.8 percent.

50. Inventory for CEE in 2010 was ________. (See Table 3.1)
A) $36,667
B) $32,448
 C) $27,500
D) $ 9,167

51. Notes payable for CEE in 2010 was ________. (See Table 3.1)
A) $113,466
B) $ 52,372
C) $ 41,372
D) $ 10,609
52. Accounts receivable for CEE in 2010 was ________. (See Table 3.1)
A) $14,056
B) $19,861
C) $14,895
D) $18,333
53. Net fixed assets for CEE in 2010 were ________. (See Table 3.1)
A) $45,484
B) $48,975
C) $54,511
D) $69,341
54. Total assets for CEE in 2010 were ________. (See Table 3.1)
A) $ 45,895
B) $124,300
C) $ 58,603
D) $ 97,345
55. Long-term debt for CEE in 2010 was ________. (See Table 3.1)
A) $30,763
B) $52,372
C) $10,608
D) $41,372
56. ________ is a term used to describe the magnification of risk and return introduced through the use
of fixed cost financing such as preferred stock and long-term debt.
A) Financial leverage
B) Operating leverage
C) Fixed-payment coverage
D) The acid-test
57. The ________ measures the percentage of each sales dollar remaining after ALL expenses,
including taxes, have been deducted.
A) net profit margin
B) operating profit margin
C) gross profit margin
D) earnings available to common shareholders
58. The ________ measures the overall effectiveness of management in generating profits with its
available assets.
A) net profit margin
B) price/earnings ratio
C) return on equity
D) return on total assets
59. The ________ measures the return on owners' (both preferred and common stockholders)
investment in the firm.
A) net profit margin
B) price/earnings ratio
C) return on equity
D) return on total assets
60. A firm with sales of $1,000,000, net profits after taxes of $30,000, total assets of $1,500,000, and total
liabilities of $750,000 has a return on equity of
A) 20 percent.
B) 15 percent.
 C) 3 percent.
D) 4 percent.
61. The DuPont system merges the income statement and balance sheet into two summary measures of
profitability
A) net profit margin and return on total assets.
B) net profit margin and return on equity.
C) return on total assets and return on equity.
D) net profit margin and price/earning ratio.
62. ________ is used by financial managers as a structure for dissecting the firm's financial statements to
assess its financial condition.
A) Statement of cash flows
B) The DuPont system of analysis
C) A common-size income statement
D) Cross-sectional analysis
63. In the DuPont system, the return on total assets (asset) is equal to
A) (return on equity) × (financial leverage multiplier).
B) (return on equity) × (total asset turnover).
C) (net profit margin) × (fixed asset turnover).
D) (net profit margin) × (total asset turnover).
64. The modified DuPont formula relates the firm's return on total assets (ROA) to the
A) return on equity (ROE).
B) financial leverage multiplier.
C) net profit margin.
D) total asset turnover.
65. In the DuPont system, the return on equity is equal to
A) (net profit margin) × (total asset turnover).
B) (stockholders' equity) × (financial leverage multiplier).
C) (return on total assets) × (financial leverage multiplier).
D) (return on total assets) × (total asset turnover).
66. A firm with a substandard return on total assets can improve its return on equity, all else remaining
the same, by
A) increasing its debt ratio.
B) increasing its total asset turnover.
C) decreasing its debt ratio.
D) decreasing its total asset turnover.
67. The three summary ratios basic to the DuPont system of analysis are
A) net profit margin, total asset turnover, and return on investment.
B) net profit margin, total asset turnover, and return on equity.
C) net profit margin, total asset turnover, and equity multiplier.
D) net profit margin, financial leverage multiplier, and return on equity.
68. The financial leverage multiplier is an indicator of
A) operating leverage.
B) financial leverage.
C) long-term debt.
D) current liabilities.
69. Using the DuPont system of analysis and holding other factors constant, an increase in financial
leverage will result in ________ in the return on equity.
A) an increase
B) a decrease
C) no change
D) an undetermined change
70. A firm with a total asset turnover lower than the industry standard and a current ratio which meets the
industry standard may have
A) excessive fixed assets.
B) excessive inventory.
C) excessive accounts receivable.
 D) excessive debt.
71. A firm with a total asset turnover lower than the industry standard may have
A) excessive debt.
B) excessive cost of goods sold.
C) insufficient sales.
D) insufficient fixed assets.

Table 3.2
Dana Dairy Products Key Ratios

Income Statement
Dana Dairy Products
For the Year Ended December 31, 2010

Balance Sheet
Dana Dairy Products
December 31, 2010
72. The current ratio for Dana Dairy Products in 2005 was ________. (See Table 3.2)
A) 1.58
B) 0.63
C) 1.10
D) 0.91

73. Since 2009, the liquidity of Dana Dairy Products ________. (See Table 3.2)
A) has deteriorated
B) remained the same
C) has improved
D) cannot be determined

74. The net working capital for Dana Dairy Products in 2010 was ________. (See Table 3.2)
A) $10,325
B) $ 1,425
C) -$ 1,425
D) $14,250

75. The inventory management at Dana Dairy Products ________ since 2009. (See Table 3.2)
A) has deteriorated
B) remained the same
C) has improved slightly
D) cannot be determined
76. The average collection period for Dana Dairy Products in 2010 was (See Table 3.2)
A) 32.5 days.
B) 11.8 days.
C) 25.3 days.
D) 35.9 days.
77. If Dana Dairy Products has credit terms which specify that accounts receivable should be paid in 25
days, the average collection period ________ since 2009. (See Table 3.2)
A) has deteriorated
B) remained the same
C) has improved
D) cannot be determined
78. The debt ratio for Dana Dairy Products in 2010 was ________.(See Table 3.2)
A) 50 percent
B) 11 percent
C) 55 percent
D) 44 percent
79. The gross profit margin and net profit margin for Dana Dairy Products in 2010 were ________. (See
Table 3.2)
A) 13 percent and 0.9 percent, respectively.
B) 13 percent and 1.5 percent, respectively.
C) 2 percent and 0.9 percent, respectively.
D) 2 percent and 1.5 percent, respectively.
80. The return on total assets for Dana Dairy Products for 2010 was ________. (See Table 3.2)
A) 0.9 percent
B) 5.5 percent
C) 25 percent
D) 2.5 percent
81. Using the modified DuPont formula allows the analyst to break Dana Dairy Products return on equity
into 3 components: the net profit margin, the total asset turnover, and a measure of leverage (the
financial leverage multiplier). Which of the following mathematical expressions represents the
modified DuPont formula relative to Dana Dairy Products' 2010 performance? (See Table 3.2)
A) 5.6(ROE) = 2.5(ROA) × 2.24(Financial leverage multiplier)
B) 5.6(ROE) = 3.3(ROA) × 1.70(Financial leverage multiplier)
C) 4.0(ROE) = 2.0(ROA) × 2.00(Financial leverage multiplier)
D) 2.5(ROE) = 5.6(ROA) × 0.44(Financial leverage multiplier)
82. As the financial leverage multiplier increases this may result in
A) an increase in the net profit margin and return on investment, due to the decrease in interest
expense as debt decreases.
B) an increase in the net profit margin and return on investment, due to the increase in interest
expense as debt increases.
C) a decrease in the net profit margin and return on investment, due to the increase in interest
expense as debt increases.
D) a decrease in the net profit margin and return on investment, due to the decrease in interest
expense as debt decreases.
83. Key Financial Data

Income Statement, Dreamscape, Inc.

For the Year Ended December 31, 2005
Prepare a common-size income statement for Dreamscape, Inc. for the year ended December 31, 2005.
Evaluate the company's performance against industry average ratios and against last year's results.

84. In an effort to analyze Clockwork Company finances, Jim realized that he was missing the company's
net profits after taxes for the current year. Find the company's net profits after taxes using the
following information.
Return on total assets = 2%
Total Asset Turnover = 0.5
Cost of Goods Sold = $105,000
Gross Profit Margin = 0.30
85. Construct the DuPont system of analysis using the following financial data for Key Wahl Industries
and determine which areas of the firm need further analysis.
Key Financial Data

86. Given the following balance sheet, income statement, historical ratios and industry averages,
calculate the Pulp, Paper, and Paperboard, Inc. financial ratios for the most recent year. Analyze its
overall financial situation for the most recent year. Analyze its overall financial situation from both a
cross-sectional and time-series viewpoint. Break your analysis into an evaluation of the firm's liquidity,
activity, debt, and profitability.
Income Statement
Pulp, Paper and Paperboard, Inc.
For the Year Ended December 31, 2005
Balance Sheet
Pulp, Paper and Paperboard, Inc.
December 31, 2005
 Historical and Industry Average Ratios
Pulp, Paper and Paperboard, Inc.

87. Complete the balance sheet for General Aviation, Inc. based on the following financial data.
Balance Sheet
General Aviation, Inc.
December 31, 2005

Key Financial Data (2005)

1. Sales totaled $720,000.
2. The gross profit margin was 38.7 percent.
3. Inventory turned 6 times.
4. There are 360 days in a year.
5. The average collection period was 31 days.
6. The current ratio was 2.35.
7. The total asset turnover was 2.81.
8. The debt ratio was 49.4 percent.
9. Total current assets equal $159,565.
Answer: Balance Sheet
General Aviation, Inc.
December 31, 2005

Topic: Ratio and Financial Statement Analysis

Question Status: Revised
AACSB Guidelines: Analytic skills