Chapter 9
Financial Statement Analysis

Quiz Instructions

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1. Statements in which all items are expressed only in relative terms (percentages of a common base) are:
a. relative statements
b. horizontal statements
c. vertical statements
d. common-size statements

2. The ability of a business to pay its debts as they come due and to earn a reasonable amount of income is referred to as:
a. solvency and profitability
b. solvency and leverage
c. solvency and liquidity
d. solvency and equity

3. A company with working capital of $300,000 and a current ratio of 2.5:1 pays a $50,000 short-term liability. The amount of working capital immediately after payment is:
a. $250,000
b. $350,000
c. $300,000
d. $50,000

4. Which of the following ratios provides a solvency measure that shows the margin of safety of noteholders or bondholders and also gives an indication of the potential ability of the business to borrow additional funds on a long-term basis?
a. Ratio of net sales to assets
b. Ratio of plant assets to long-term liabilities
c. Number of days' sales in receivables
d. Rate earned on stockholders' equity

5. The tendency of the rate earned on stockholders' equity to vary disproportionately from the rate earned on total assets is sometimes referred to as:
a. solvency
b. leverage
c. yield
d. quick assets

6. Corporate annual reports typically do not contain which of the following?
a. SEC statement expressing an opinion
b. Financial highlights
c. Management report
d. Historical summary

7. Based on the following data for the current year, what is the quick ratio?

Cash $27,000
Marketable securities $23,000
Receivables $90,000
Inventory $105,000
Current liabilities $70,000

a. 2.0
b. 3.5
c. 0.7
d. 1.5

8. In vertical analysis of the balance sheet, each asset item is stated as a percent of total:
a. current assets
b. assets
c. current liabilities
d. liabilities

9. Based on the following data for the current year, what is the earnings per share on common stock?

Net income $460,000
Preferred dividends $50,000
Interest expense $24,000
Shares of common stock outstanding $50,000

a. $9.20
b. $8.68
c. $8.20
d. $7.72

10. Based on the following data, what is the rate earned on total assets?

Net income $240,000
Preferred dividends $60,000
Interest expense $120,000
Interest income $40,000
Shares of common stock outstanding $1,000,000

a. 18%
b. 28%
c. 30%
d. 36%



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