Chapter 7

C H A P T E R 7

ANALYZING FINANCIAL STATEMENT

MULTIPLE CHOICE QUESTIONS

37. Which one of the following is primarily interested in the liquidity of a company?a. Federal governmentb. Stockholdersc. Long-term creditorsd. Short-term creditors

38. Which one of the following is not a characteristic generally evaluated in analyzing financial statements?a. Liquidityb. Profitabilityc. Marketabilityd. Solvency

39. In analyzing the financial statements of a company, a single item on the financial statementsa. should be reported in bold-face type.b. is more meaningful if compared to other financial information.c. is significant only if it is large.d. should be accompanied by a footnote.

40. Short-term creditors are usually most interested in evaluatinga. solvency.b. liquidity.c. marketability.d. profitability.

41. Long-term creditors are usually most interested in evaluatinga. liquidity and solvency.b. solvency and marketability.c. liquidity and profitability.d. profitability and solvency.

42. Stockholders are most interested in evaluatinga. liquidity and solvency.b. profitability and solvency.c. liquidity and profitability.d. marketability and solvency.

43. A stockholder is interested in the ability of a firm toa. pay consistent dividends.b. appreciate in share price.c. survive over a long period.d. all of these.

44. Comparisons of financial data made within a company are calleda. intracompany comparisons.b. interior comparisons.c. intercompany comparisons.d. intramural comparisons.

Test Bank for Accounting Principles, Eighth Edition

45. A technique for evaluating financial statements that expresses the relationship among selected items of financial statement data isa. common size analysis.b. horizontal analysis.c. ratio analysis.d. vertical analysis.

46. Which one of the following is not a tool in financial statement analysis?a. Horizontal analysisb. Circular analysisc. Vertical analysisd. Ratio analysis

47. In analyzing financial statements, horizontal analysis is aa. requirement.b. tool.c. principle.d. theory.

48. Horizontal analysis is also calleda. linear analysis.b. vertical analysis.c. trend analysis.d. common size analysis.

49. Vertical analysis is also known asa. perpendicular analysis.b. common size analysis.c. trend analysis.d. straight-line analysis.

50. In ratio analysis, the ratios are never expressed as aa. rate.b. negative figure.c. percentage.d. simple proportion.

51. The formula for horizontal analysis of changes since the base period is the current year amounta. divided by the base year amount.b. minus the base year amount divided by the base year amount.c. minus the base year amount divided by the current year amount.d. plus the base year amount divided by the base year amount.

52. Horizontal analysis evaluates a series of financial statement data over a period of timea. that has been arranged from the highest number to the lowest number.b. that has been arranged from the lowest number to the highest number.c. to determine which items are in error.d. to determine the amount and/or percentage increase or decrease that has taken place.

53. Horizontal analysis evaluates financial statement dataa. within a period of time.b. over a period of time.c. on a certain date.d. as it may appear in the future.

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Financial Statement Analysis

54. Assume the following sales data for a company:

2010 $1,000,0002009 900,0002008 750,0002007 600,000

If 2007 is the base year, what is the percentage increase in sales from 2007 to 2009?a. 100%b. 150%c. 50%d. 66.7%

55. Comparative balance sheets are usually prepared fora. one year.b. two years.c. three years.d. four years.

56. Horizontal analysis is appropriately performeda. only on the income statement.b. only on the balance sheet.c. only on the statement of retained earnings.d. on all three of these statements.

57. A horizontal analysis performed on a statement of retained earnings would not show a percentage change ina. dividends paid.b. net income.c. expenses.d. beginning retained earnings.

58. Under which of the following cases may a percentage change be computed?a. The trend of the balances is decreasing but all balances are positive.b. There is no balance in the base year.c. There is a positive balance in the base year and a negative balance in the subsequent year.d. There is a negative balance in the base year and a positive balance in the subsequent year.

59. Assume the following sales data for a company:

2009 $945,0002008 780,0002007 650,000

If 2007 is the base year, what is the percentage increase in sales from 2007 to 2008?a. 25%b. 20%c. 125%d. 143%

60. Assume the following cost of goods sold data for a company:

2009 $1,500,0002008 1,200,0002007 900,000

If 2007 is the base year, what is the percentage increase in cost of goods sold from 2007 to 2009?a. 167%b. 67%c. 60%d. 40%

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Use the following information for questions 61–62:

Moon Beam, Inc. has the following income statement (in millions):

MOON BEAM, INC.Income Statement

For the Year Ended December 31, 2008

Net Sales $180Cost of Goods Sold 120Gross Profit 60Operating Expenses 33Net Income $ 27

61. Using vertical analysis, what percentage is assigned to Cost of Goods Sold?a. 67%b. 33%c. 100%d. None of the above

62. Using vertical analysis, what percentage is assigned to Net Income?a. 100%b. 85%c. 15%d. None of the above

63. Vertical analysis is also calleda. common size analysis.b. horizontal analysis.c. ratio analysis.d. trend analysis.

64. Vertical analysis is a technique which expresses each item within a financial statementa. in dollars and cents.b. in terms of a percentage of the item in the previous year.c. in terms of a percent of a base amount.d. starting with the highest value down to the lowest value.

65. In common size analysis,a. a base amount is required.b. a base amount is optional.c. the same base is used across all financial statements analyzed.d. the results of the horizontal analysis are necessary inputs for performing the analysis.

66. In performing a vertical analysis, the base for prepaid expenses isa. total current assets.b. total assets.c. total liabilities and stockholders' equity.d. prepaid expenses.

67. In performing a vertical analysis, the base for sales revenues on the income statement isa. net sales.b. sales.c. net income.d. cost of goods available for sale.

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68. In performing a vertical analysis, the base for sales returns and allowances isa. sales.b. sales discounts.c. net sales.d. total revenues.

69. In performing a vertical analysis, the base for cost of goods sold isa. total selling expenses.b. net sales.c. total revenues.d. total expenses.

70. Each of the following is a liquidity ratio except thea. acid-test ratio.b. current ratio.c. debt to total assets ratio.d. inventory turnover.

71. A ratio calculated in the analysis of financial statementsa. expresses a mathematical relationship between two numbers.b. shows the percentage increase from one year to another.c. restates all items on a financial statement in terms of dollars of the same purchasing power.d. is meaningful only if the numerator is greater than the denominator.

72. A liquidity ratio measures thea. income or operating success of an enterprise over a period of time.b. ability of the enterprise to survive over a long period of time.c. short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for

cash.d. number of times interest is earned.

73. The current ratio isa. calculated by dividing current liabilities by current assets.b. used to evaluate a company's liquidity and short-term debt paying ability.c. used to evaluate a company's solvency and long-term debt paying ability.d. calculated by subtracting current liabilities from current assets.

74. The acid-test (quick) ratioa. is used to quickly determine a company's solvency and long-term debt paying ability.b. relates cash, short-term investments, and net receivables to current liabilities.c. is calculated by taking one item from the income statement and one item from the balance sheet.d. is the same as the current ratio except it is rounded to the nearest whole percent.

75. Walker Clothing Store had a balance in the Accounts Receivable account of $780,000 at the beginning of the year and a balance of $820,000 at the end of the year. Net credit sales during the year amounted to $8,000,000. The average collection period of the receivables in terms of days wasa. 30 days.b. 365 days.c. 10 days.d. 37 days.

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76. Parr Hardware Store had net credit sales of $5,200,000 and cost of goods sold of $4,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $600,000 and $700,000, respectively. The receivables turnover wasa. 7.4 times.b. 8.7 times.c. 6.2 times.d. 8 times. Net sales/ average acc receivable

Use the following information for questions 77–78.

Waters Department Store had net credit sales of $12,000,000 and cost of goods sold of $9,000,000 for the year. The average inventory for the year amounted to $2,000,000.

77. Inventory turnover for the year isa. 6 times.b. 10.5 times.c. 4.5 times. COGS/average inventoryd. 3 times.

78. The average number of days in inventory during the year wasa. 122 days.b. 81 days. Inventory/ COGS/365c. 61 days.d. 35 days.

79. Each of the following is included in computing the acid-test ratio excepta. cash.b. inventory.c. receivables.d. short-term investments.

80. Which one of the following would not be considered a liquidity ratio?a. Current ratiob. Inventory turnoverc. Acid-test ratiod. Return on assets

81. Asset turnover measuresa. how often a company replaces its assets.b. how efficiently a company uses its assets to generate sales.c. the portion of the assets that have been financed by creditors.d. the overall rate of return on assets.

82. Profit margin is calculated by dividinga. sales by cost of goods sold.b. gross profit by net sales.c. net income by stockholders' equity.d. net income by net sales.


Raney Corporation had net income of $200,000 and paid dividends to common stockholders of $50,000 in 2008. The weighted average number of shares outstanding in 2008 was 50,000 shares. Raney Corporation's common stock is selling for $40 per share on the New York Stock Exchange.

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83. Raney Corporation's price-earnings ratio isa. 2.5 times.b. 10 times.c. 13.3 times.d. 4 times.

84 Raney Corporation's payout ratio for 2008 isa. $4 per share.b 33.3%.c. 25%.d. 10%.

85 Holt Company reported the following on its income statement:

Income before income taxes $420,000Income tax expense 120,000Net income $300,000

An analysis of the income statement revealed that interest expense was $50,000. Holt Company's times interest earned wasa. 9 times.b. 8 times.c. 7 times.d. 6 times.

86. The debt to total assets ratio measuresa. the company's profitability.b. whether interest can be paid on debt in the current year.c. the proportion of interest paid relative to dividends paid.d. the percentage of the total assets provided by creditors.

87. Trading on the equity (leverage) refers to thea. amount of working capital.b. amount of capital provided by owners.c. use of borrowed money to increase the return to owners.d. number of times interest is earned.

88. The current assets of Kile Company are $150,000. The current liabilities are $120,000. The current ratio expressed as a proportion isa. 125%.b. 1.25 : 1c. .80 : 1d. $150,000 ÷ $120,000.

89. The current ratio may also be referred to as thea. short run ratio.b. acid-test ratio.c. working capital ratio.d. contemporary ratio.

90. A weakness of the current ratio isa. the difficulty of the calculation.b. that it doesn't take into account the composition of the current assets.c. that it is rarely used by sophisticated analysts.d. that it can be expressed as a percentage, as a rate, or as a proportion.

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91. A supplier to a company would be most interested in the company’sa. asset turnover.b. profit margin.c. current ratio.d. earnings per share.

92. Which one of the following ratios would not likely be used by a short-term creditor in evaluating whether to sell on credit to a company?a. Current ratiob. Acid-test ratioc. Asset turnoverd. Receivables turnover

93. Ratios are used as tools in financial analysisa. instead of horizontal and vertical analyses.b. because they may provide information that is not apparent from inspection of the individual

components of the ratio.c. because even single ratios by themselves are quite meaningful.d. because they are prescribed by GAAP.

94. The ratios that are used to determine a company's short-term debt paying ability area. asset turnover, times interest earned, current ratio, and receivables turnover.b. times interest earned, inventory turnover, current ratio, and receivables turnover.c. times interest earned, acid-test ratio, current ratio, and inventory turnover.d. current ratio, acid-test ratio, receivables turnover, and inventory turnover.

95. A measure of the percentage of each dollar of sales that results in net income isa. profit margin.b. return on assets.c. return on common stockholders' equity.d. earnings per share.


Risen Company had $250,000 of current assets and $90,000 of current liabilities before borrowing $50,000 from the bank with a 3-month note payable.

96. What effect did the borrowing transaction have on the amount of Risen Company's working capital?a. No effectb. $50,000 increasec. $90,000 increased. $50,000 decrease

97. What effect did the borrowing transaction have on Risen Company's current ratio?a. The ratio remained unchanged.b. The change in the current ratio cannot be determined.c. The ratio decreased.d. The ratio increased.

98. If equal amounts are added to the numerator and the denominator of the current ratio, the ratio will alwaysa. increase.b. decrease.c. stay the same.d. equal zero.

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99. The acid-test ratioa. is a quick calculation of an approximation of the current ratio.b. does not include all current liabilities in the calculation.c. does not include inventory as part of the numerator.d. does include prepaid expenses as part of the numerator.

100. If a company has an acid-test ratio of 1.2:1, what respective effects will the borrowing of cash by short-term debt and collection of accounts receivable have on the ratio?

Short-term BorrowingCollection of Receivablea. Increase No effectb. Increase Increasec. Decrease No effectd. Decrease Decrease

101. A company has a receivables turnover of 10 times. The average netceivables during the period are $500,000. What is the amount of net credit sales for the period?a. $50,000b. $5,000,000c. $600,000d. Cannot be determined from the information given

102. If the average collection period is 35 days, what is the receivables turnover?a. 9.49 timesb. 10.43 timesc. 5.22 timesd. None of these

103. A general rule to use in assessing the average collection period is thata. it should not exceed 30 days.b. it can be any length as long as the customer continues to buy merchandise.c. it should not greatly exceed the discount period.d. it should not greatly exceed the credit term period.

104. Inventory turnover is calculated by dividinga. cost of goods sold by the ending inventory.b. cost of goods sold by the beginning inventory.c. cost of goods sold by the average inventory.d. average inventory by cost of goods sold.

105. A company has an average inventory on hand of $100,000 and the days in inventory is 73 days. What is the cost of goods sold?a. $500,000b. $7,300,000c. $1,000,000d. $3,650,000

106. A successful grocery store would probably havea. a low inventory turnover.b. a high inventory turnover.c. zero profit margin.d. low volume.

107. An aircraft company would most likely havea. a high inventory turnover.b. low profit margin.c. high volume.d. a low inventory turnover.

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108. Net sales are $4,500,000, beginning total assets are $2,100,000, and the asset turnover is 3.0 times. What is the ending total asset balance?a. $1,500,000b. $900,000c. $2,100,000d. $1,200,000

109. Earnings per share is calculateda. only for common stock.b. only for preferred stock.c. for common and preferred stock.d. only for treasury stock.

110. Which of the following is not a profitability ratio?a. Payout ratiob. Profit marginc. Times interest earnedd. Return on common stockholders' equity

111. Times interest earned is also called thea. money multiplier.b. interest coverage ratio.c. coupon coverage ratio.d. premium ratio.

112. The ratio that uses weighted average common shares outstanding in the denominator is thea. price-earnings ratio.b. return on common stockholders' equity.c. earnings per share.d. payout ratio.

113. Net income does not appear in the numerator of thea. profit margin.b. return on assets.c. return on common stockholders' equity.d. payout ratio.

114.Fall Clothing Store had a balance in the Accounts Receivable account of $820,000 at the beginning of the year and a balance of $880,000 at the end of the year. Net credit sales during the year amounted to $6,120,000. The receivables turnover ratio wasa. 7.2 times.b. 7 times.c. 6.9 times.d. 6.8 times.

115. Fall Clothing Store had a balance in the Accounts Receivable account of $810,000 at the beginning of the year and a balance of $850,000 at the end of the year. Net credit sales during the year amounted to $5,814,980. The average collection period of the receivables in terms of days wasa. 50 days.b. 52.1 days.c. 365 days.d. 52.9 days.

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Luthor Corporation had net income of $160,000 and paid dividends to common stockholders of $40,000 in 2008. The weighted average number of shares outstanding in 2008 was 50,000 shares. Luthor Corporation's common stock is selling for $50 per share on the New York Stock Exchange.

116.Luthor Corporation's price-earnings ratio isa. 3.2 times.b. 15.6 times.c. 10 times.d. 5 times.

117.Luthor Corporation's payout ratio for 2008 isa. $5 per share.b. 25%.c. 20%.d. 12.5%.

118. Raye Company reported the following on its income statement:

Income before income taxes $500,000Income tax expense 150,000Net income $350,000

An analysis of the income statement revealed that interest expense was $80,000. Raye Company's times interest earned wasa. 8 times.b. 7.25 times.c. 6.25 times.d. 4.4 times.

Use the following information for questions 119-125.

The following information pertains to Soho Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments $ 40,000Accounts receivable (net) 25,000Inventory 20,000Property, plant and equipment 210,000

Total Assets $295,000

Liabilities and Stockholders’ EquityCurrent liabilities $ 60,000Long-term liabilities 85,000Stockholders’ equity—common 150,000

Total Liabilities and Stockholders’ Equity $295,000

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Income StatementSales $ 85,000Cost of goods sold 45,000Gross margin 40,000Operating expenses 20,000

Net income $ 20,000

Number of shares of common stock 6,000Market price of common stock $20Dividends per share .90

119.What is the current ratio for this company?a. 1.42b. .80c. 1.16d. .60

120.What is the receivables turnover for this company?a. 2.8 timesb. 2 timesc. 3.4 timesd. 3 times

121.What is the inventory turnover for this company?a. 2 timesb. 2.25 timesc. 1 timed. .44 times

122.What is the return on assets for this company?a. 6.8%b. 10.5%c. 11.7%d. 26.7%

123. What is the profit margin for this company?a. 42.86%b. 18.75%c. 23.5%d. 15.0%

124. What is the return on common stockholders’ equity for this company?a. 13.3%b. 5%c. 23.3%d. 53.3%

125.What is the price-earnings ratio for this company?a. 6 timesb. 2.5 timesc. 8 timesd. 4 times

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The following information pertains to Cashe Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

AssetsCash and short-term investments $ 40,000Accounts receivable (net) 30,000Inventory 25,000Property, plant and equipment 215,000

Total Assets $310,000

Liabilities and Stockholders’ EquityCurrent liabilities $ 60,000Long-term liabilities 95,000Stockholders’ equity—common 155,000

Total Liabilities and Stockholders’ Equity $310,000

Income StatementSales $ 90,000Cost of goods sold 45,000Gross margin 45,000Operating expenses 20,000

Net income $ 25,000

Number of shares of common stock 6,000Market price of common stock $20Dividends per share 1.00

126.What is the return on assets for this company?a. 6.8%b. 10.5%c. 8.1%d. 16.1%

127. What is the profit margin for this company?a. 50.0%b. 55.6%c. 23.5%d. 27.8%

128. What is the return on common stockholders’ equity for this company?a. 7.3%b. 16.1%c. 23.5%d. 53.3%

129. What is the price-earnings ratio for this company?a. 6 timesb. 4.2 timesc. 8 timesd. 4.8 times

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The following information is available for Charles Company:

2008 2007 Accounts receivable $ 360,000 $ 400,000Inventory 280,000 320,000Net credit sales 3,000,000 1,400,000Cost of goods sold 1,200,000 1,060,000Net income 300,000 170,000

130.The receivables turnover ratio for 2008 isa. 8.3 times.b. 3.9 times.c. 7.9 times.d. 10.0 times.

131.The inventory turnover ratio for 2008 isa. 4.3 times.b. 4.0 times.c. 2.0 times.d. 2.4 times.


The following amounts were taken from the financial statements of Palmer Company:

2008 2007 Total assets $800,000 $1,000,000Net sales 720,000 650,000Gross profit 352,000 320,000Net income 144,000 117,000Weighted average number of common shares outstanding 120,000 120,000Market price of common stock $36 $40

132.The return on assets ratio for 2008 isa. 18%.b. 16%.c. 36%.d. 32%.

133. The profit margin ratio for 2008 isa. 10%.b. 15%.c. 20%.d. 30%.

134.The price-earnings ratio for 2008 isa. 30 times.b. 20 times.c. 10 times.d. 5 times.


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Panza Corporation had net income of $250,000 and paid dividends to common stockholders of $50,000 in 2008. The weighted average number of shares outstanding in 2008 was 50,000 shares. Panza Corporation's common stock is selling for $40 per share on the New York Stock Exchange.135.Panza Corporation's price-earnings ratio is

a. 2 times.b. 8 times.c. 10 times.d. 5 times.

136. Panza Corporation's payout ratio for 2008 isa. $5 per share.b. 25%.c. 20%.d. 12.5%.

137.Ester’s Bunny Barn has experienced a $40,000 loss due to tornado damage to its inventory. Tornados have never before occurred in this area. Assuming that the company’s tax rate is 30%, what amount will be reported for this loss on the income statement?a. $40,000b. $28,000c. $12,000d. $36,000

138. Wenger Company reported income before taxes of $600,000 and an extraordinary loss of $150,000. Assume that the company’s tax rate is 30%. What amounts will be reported on the income statement for income before irregular items and extraordinary items, respectively?a. $420,000 and $150,000b. $420,000 and $105,000c. $495,000 and $150,000d. $495,000 and $105,000

139.Kandy Kane Corporation has income before taxes of $400,000 and an extraordinary gain of $100,000. If the income tax rate is 25% on all items, the income statement should show income before irregular items and extraordinary items, respectively, ofa. $325,000 and $100,000.b. $325,000 and $75,000.c. $300,000 and $100,000.d. $300,000 and $75,000.

140. Hardy Inc. has an investment in available-for-sale securities of $50,000. This investment experienced an unrealized loss of $3,000 during the current year. Assuming a 35% tax rate, the effect of this loss on comprehensive income will bea. no effect.b. $50,000 increase.c. $17,500 decrease.d. $3,000 decrease.

141. The disposal of a significant segment of a business is calleda. a change in accounting principle.b. an extraordinary item.c. an other expense.d. discontinued operations.

142.ABC Company reports income before income taxes of $1,800,000 and had an extra-ordinary loss of $600,000. If the tax rate is 30%,a. the income before the extraordinary item is $1,440,000.b. the extraordinary loss would be reported on the income statement at $600,000.

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c. the income before the extraordinary item is $1,260,000.d. the extraordinary loss will be reported at $180,000.

143.Evers, Inc. disposes of an unprofitable segment of its business. The operation of the segment suffered a $240,000 loss in the year of disposal. The loss on disposal of the segment was $120,000. If the tax rate is 30%, and income before income taxes was $1,500,000,a. the income tax expense on the income before discontinued operations is $342,000.b. the income from continuing operations is $1,050,000.c. net income is $1,140,000.d. the losses from discontinued operations are reported net of income taxes at $180,000.

144. Each of the following is an extraordinary item except thea. effects of major casualties, if rare in the area.b. effects of a newly enacted law or regulation.c. expropriation of property by a foreign government.d. losses attributable to labor strikes.

145. The discontinued operations section of the income statement refers toa. discontinuance of a product line.b. the income or loss on products that have been completed and sold.c. obsolete equipment and discontinued inventory items.d. the disposal of a significant segment of a business.

146. Which one of the following would be classified as an extraordinary item?a. Expropriation of property by a foreign governmentb. Losses attributed to a labor strikec. Write-down of inventoriesd. Gains or losses from sales of equipment

147. A loss on the write down of obsolete inventory should be reported asa. "other expenses and losses."b. part of discontinued operations.c. an operating expense.d. an extraordinary item.

148.If an item meets one (but not both) of the criteria for an extraordinary item, ita. only needs to be disclosed in the footnotes of the financial statements.b. may be treated as sales revenue (if it is a gain) and as an operating expense (if it is a loss).c. is reported as an "other revenue or gain" or "other expense and loss," net of tax.d. is reported at its gross amount as an "other revenue or gain" or "other expense or loss."

149. The order of presentation of nontypical items that may appear on the income statement isa. Extraordinary items, Discontinued operations, Other revenues and expenses.b. Discontinued operations, Extraordinary items, Other revenues and expenses.c. Other revenues and expenses, Discontinued operations, Extraordinary items.d. Other revenues and expenses, Extraordinary items, Discontinued operations.

150. Each of the following is a factor affecting quality of earnings excepta. alternative accounting methods.b. improper recognition.c. pro forma income.d. extraordinary items.

Additional Multiple Choice Questions

151.Comparisons can be made on each of the following bases excepta. industry averages.

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b. intercompany basis.c. intracompany basis.d. Each of these is a basis for comparison.

152. Comparisons of data within a company are an example of the following comparative basis:a. Industry averagesb. Intercompanyc. Intracompanyd. Interregional

153. Silva Corporation reported net sales of $240,000, $420,000, and $540,000 in the years 2007, 2008, and 2009 respectively. If 2007 is the base year, what is the trend percentage for 2009?a. 129%b. 135%c. 164%d. 225%

154.In vertical analysis, the base amount for each income statement item isa. gross profit.b. net income.c. net sales.d. sales.

155. When performing vertical analysis, the base amount for administrative expense is generallya. administrative expense in a previous year.b. net sales.c. gross profit.d. fixed assets.

156.Ratios that measure the short-term ability of the company to pay its maturing obligations area. liquidity ratios.b. profitability ratios.c. solvency ratios.d. trend ratios.

157. What type of ratios best measure the short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash?a. Leverageb. Solvencyc. Profitabilityd. Liquidity

158. The acid-test ratio is also known as thea. current ratio.b. quick ratio.c. fast ratio.d. times interest earned ratio.

159. The debt to total assets ratioa. is a solvency ratio.b. is computed by dividing total assets by total debt.c. measures the total assets provided by stockholders.d. is a profitability ratio.

160. An extraordinary item is one thata. occurs infrequently and is uncontrollable in nature.b. occurs infrequently and is unusual in nature.c. is material and is unusual in nature.

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d. is material and is uncontrollable in nature.

161. Galileo, Inc. decided on January 1 to discontinue its telescope manufacturing division. On July 1, the division’s assets with a book value of $630,000 are sold for $450,000. Operating income from January 1 to June 30 for the division amounted to $75,000. Ignoring income taxes, what total amount should be reported on Galileo’s income statement for the current year under the caption, Discontinued Operations?a. $75,000b. $105,000 lossc. $180,000 lossd. $255,000

162.When there has been a change in accounting principle,a. the old principle should be used in reporting the results of operations for the current year.b. the cumulative effect of the change should be reported in the current year’s retained earnings statement.c. the change should be reported retroactively.d. the new principle should be used un reporting the results of operations of the current year, but there is no

change to prior years.

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Chapter 7

Documents

Transcript of Chapter 7