Chapter 22 Quiz Practice

1 CORRECT
Which of the following would probably not be found in a summary of significant accounting policies:

long-term equity investment is carried at cost.

A)

FIFO is used in inventory valuation.

B)

Declining balance method is used to calculate depreciation for financial accounting purposes.
C)

an operating asset is disposed of for a gain.

D)

2
INCORRECT The following type of engagement is often provided for private companies:

notice to reader
A)

review engagement
B)

assurance engagement
C)

review of internal controls

D)

3
INCORRECT The ratio least likely to be of concern to those users interested in projecting a firm's future profitability is:

The current ratio.

A)

Profit margin.
B)

Investment turnover.
C)

Rate of return on investment.

D)
 Chapter 22 Quiz Practice

4
INCORRECT In assessing the success of managers, the proper test is whether management has been able to:

Increase the rate of return as the investment base increases.

A)

Increase sales at a rate greater than the industry average

B)

Increase profits year over year

C)

Increase the diluted EPS year over year.

D)

5
INCORRECT If cost of goods sold remains stable year over year with no change, and inventory balances decline, the inventory
turnover ratio will

Remain unchanged
A)

Will increase
B)

Will decrease
C)

May increase or decrease.

D)

6
INCORRECT If average inventories increased from $70,000 to $80,000 during the year just ended, which of the following statements
is true

The acid test ratio decreased.

A)

The current ratio decreased.

B)

The acid test ratio increased.

C)

Inventories have no effect on the acid test ratio.

D)
 Chapter 22 Quiz Practice

7
INCORRECT The ratio that best provides an indication of the balance between resources provided by creditors and resources
provided by owners is:

Times interest earned.

A)

The debt: equity ratio.

B)

Profit margin.
C)

Inventory turnover ratio.

D)

8
INCORRECT Leverage in a company will always result in

net losses for the company.

A)

the company being prohibited from paying dividends to its common shareholders
B)

A debt to equity ratio of greater than 1.

C)

increased volatility of the residual returns to the shareholders.

D)

9
INCORRECT Times debt service earned ratio includes in the numerator:

Net income
A)

Earnings before interest

B)

Cash flow from operations

C)

Net cash flow

D)
 Chapter 22 Quiz Practice

10
INCORRECT For a firm with a current ratio of 2 to 1, which of the following transactions will most likely cause an increase in this
ratio?

The declaration of a cash dividend.

A)

The exercise of employee stock options.

B)

The collection of accounts receivable.

C)

The payment of a 30-day note payable.

D)

11
CORRECT A company with volatile cash flows will generally want to have a current ratio that is:

Higher than the average

A)

Lower than the average

B)

Higher than 1
C)

Lower than 1
D)

12
INCORRECT In calculating the quick ratio, the following item is included:

Unearned revenue
A)

Prepaid deposits
B)

Inventory
C)

Accounts receivable
D)
 Chapter 22 Quiz Practice

13
INCORRECT Consolidated statements are useful for stakeholders looking to

Purchase shares of the company

A)

Provide loans to the company

B)

Enter into a long-term sales agreement with the company

C)

Enter into an employment contract.

D)

14
CORRECT A time series analysis is used to :

identify the extent to which changes in a company's ratios are common to the industry
A)

predict the future values of ratios

B)

fit ratios into a statistical model in an attempt to predict some type of outcome.
C)

calculate each asset and liability as a percentage of total assets

D)
 Chapter 22 Quiz Practice

he correct answer for each question is indicated by a .

1
INCORRECT Vertical analysis refers to the analytical technique of comparing accounting numbers over a period of years.

True
A)

False
B)

2
INCORRECT Private companies that use an accounting policy that do not comply with ASPE may have the following type of audit
opinion?

unqualified audit opinion

A)

qualified audit opinion

B)

adverse opinion
C)

denial of opinion
D)

3
INCORRECT The following item is an example of situation for which an analyst might restate the financial statements:

Sales for the current increased 15% from the previous year.
A)

The income statement shows nonrecurring gains.

B)

Intangible assets and goodwill represent 25% of total assets.

C)

Development costs are capitalized.

D)

4 CORRECT
The following information is available for a company: Net income $56,790; Preferred dividends $4,000 Common
dividends $10,000 Opening shareholder's equity $859,007 The return on shareholder's equity is:
 Chapter 22 Quiz Practice

4.9%
A)

6.3%
B)

6%
C)

6.6%
D)

5
INCORRECT The following information is available for a company for the current year: Net income $47,890 EBIT $57,907 Total
revenue $775,469 Total revenue for prior year $798,450 The operating margin for this company is:

7.3%
A)

6.1%
B)

6.08%
C)

7.46%
D)

6
INCORRECT A very high receivable turnover ratio relative to the industry average indicates:

The declaration of a cash dividend.

A)

That the firm's credit policy may be overly restrictive.

B)

That the firm's management utilizes its assets efficiently.

C)

A sluggish inventory.
D)
 Chapter 22 Quiz Practice

7
INCORRECT A company has the following information: 20X5 - Net income $45,860 Sales $934,902 Total assets $1,456,890 20X4 -
Net income $36,789 Sales $897,526 Total assets $1,396,622 The company's asset turnover ratio for 20X5 is:

3.2%
A)

6.56%
B)

6.4%
C)

4.5%
D)

8
INCORRECT For the debt to equity ratio, some analysts might include the following in the numerator:

Cumulative preferred shares

A)

Fair value of stock options outstanding

B)

Estimated present value of operating lease obligations

C)

Deferred tax assets

D)

9
INCORRECT Negative leverage means that

The company pays a higher interest rate than its return on investment
A)

Interest expense is lower than net profit or loss.

B)

Long-term debt is greater than shareholders' equity

C)

Current ratio is less than 1.

D)
 Chapter 22 Quiz Practice

10
CORRECT Financial risk is measured by:

Current ratio
A)

Debt to equity ratio

B)

Times interest earned

C)

Return on total assets

D)

11
INCORRECT For multi-industry corporations, segment analysis is most useful in

Evaluating profitability analysis.

A)

Evaluating the risk of the company.

B)

Assessing liquidity.
C)

Recasting the company's financial statements.

D)

12
INCORRECT The defensive interval ratio measures the company's ability to pay its:

principal and interest payments

A)

current liabilities
B)

expenses in the absence of operating cash inflows

C)

dividends
D)
 Chapter 22 Quiz Practice

13
INCORRECT An investor should expect the same return on investment

for all companies in the same industry.

A)

for a given level of risk no matter what the industry a company is in.
B)

year over year for the same company.

C)

for companies with the similar profit margins.

D)

14
CORRECT A residual analysis is used to :

identify the extent to which changes in a company's ratios are common to the industry
A)

predict the future values of ratios

B)

fit ratios into a statistical model in an attempt to predict some type of outcome.
C)

calculate each asset and liability as a percentage of total assets

D)