Practice Problems

True-false

Indicate whether each of the following statements is true or false.

1. An objective of financial statement analysis is to provide information about the company's past performance and current financial position.

2. Vertical analysis helps detect changes in a company's performance over several periods and highlights trends.

3. Common-size statements provide information about changes in dollar amounts relative to the previous periods.

4. Liquidity ratios show a company's capacity to pay maturing current liabilities.

5. A company that is quite profitable may find it difficult to pay its accounts payable.

6. Financial statement analysts must be sure that comparable data are used among companies to make the comparisons valid.

Multiple-choice

Select the best answer for each of the following questions.

The following data were abstracted from the 2007 December 31, balance sheet of Andrews Company (use for the first two questions questions):

Cash	$136,000
Marketable securities	64,000
Accounts and notes receivable, net	184,000
Merchandise inventory	244,000
Prepaid expenses	12,000
Accounts and notes payable, short-term	256,000
Accrued liabilities	64,000
Bonds payable, long-term	400,000

1. The current ratio is:

a.  1:2.

b.  2:1.

c.  1.2:1.

d.  3:1.

2. The acid-test ratio is:

a.  1:2.

b.  2:1.

c.  1.2:1.

d.  3:1.

Benson Company shows the following data on its 2011 financial statements (use for the rest of the questions ):

Accounts receivable, January 1	$720,000
Accounts receivable, December 31	960,000
Merchandise inventory, January 1	900,000
Merchandise inventory, December 31	1,020,000
Gross sales	4,800,000
Sales returns and allowances	180,000
Net sales	4,620,000
Cost of goods sold	3,360,000
Income before interest and taxes	720,000
Interest on bonds	192,000
Net income	384,000

 

3. The accounts receivable turnover is:

a.  5.5 times per year.

b.  5.714 times per year.

c.  5 times per year.

d.  6.667 times per year. 

4. The inventory turnover is:

a.  5 times per year.

b.  4.8125 times per year.

c.  3.5 times per year.

d.  4 times per year.

5. The times interest earned ratio is:

a.  4.75 times per year.

b.  3.75 times per year.

c.  2 times per year.

d.  3 times per year.

Check your answers on the next page.