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Financial and Managerial Accounting: The Basis for Business Decisions, 12/e
Jan R. Williams, University of Tennessee
Susan F. Haka, Michigan State University
Mark S. Bettner, Bucknell University
Robert F. Meigs

Financial Statement Analysis

Multiple Choice Quiz

Please answer all questions


Which of the following is ordinarily computed and reported as part of the financial statements of a large corporation?
A)The current ratio,
B)The return on assets.
C)Book value per share.
D)Earnings per share.

The basic purpose in preparing classified financial statements is to:
A)Aid management in controlling expenses.
B)Develop useful subtotals which will assist users of the statements in their analysis of the company's financial position, profitability, and future prospects.
C)Create a balance sheet which measures the profitability of the business as well as its financial position.
D)Determine that the amounts shown in the financial statements are in agreement with the company's subsidiary ledgers.

How would a company's current ratio be affected if a substantial amount of accounts payable were paid in cash?
A)It would be unaffected since the transaction reduces the numerator and denominator by the same amount.
B)It would fall.
C)It would increase.
D)The change would depend on the relationship between the payables liquidated and current liabilities.

Assume that net sales are increasing faster than the rate of inflation, and that the company's gross profit rate is falling. The most likely explanation is:
A)The company's cost of purchasing merchandise is falling.
B)Operating expenses are rising.
C)Demand for the company's products is very strong.
D)The company has achieved an increase in sales volume by reducing its sales prices.

Assume that for several years, the net income of Delta-Baines (DB) has been rising as a percentage of the company's net sales. Analysts normally would interpret this to mean that:
A)DB's sales volume has been declining.
B)DB has been successful in efforts to control expenses.
C)DB's net sales are increasing faster than the rate of inflation.
D)The portion of DB's total assets financed by creditors is decreasing.

Clay Corporation earns a rate of return on common stockholders' equity of 14%. Which of the following will cause the rate of return to increase?
A)Issuing 9% bonds and investing the proceeds to earn 12%.
B)Increasing the size of the cash dividend paid on common stock.
C)An increase in the company's price-earnings ratio.
D)An increase in the market price of the company's stock.