MCQs on Financial Statement Analysis for practice

1. A financial statement that shows both rupees and percentages in the report is
referred to as:
a. A Balance sheet
b. A Common size statement
c. A proportional financial statement
d. A relative statement of equity
2. Which of the following is representative of vertical analysis?
a. Vertical analysis in the income statement causes all accounts to be related as a percentage of net
b.
c.
d.
3.
a.
b.
c.
d.
4.

income.
Percentages used in vertical analysis make identifying trends difficult.
Vertical analysis in the balance sheet causes all accounts to be related as a percentage of
total assets.
Percentages can be used in the balance sheet without being associated with the numbers they
represent.
Earnings Per Share (EPS) is calculated by using the following equation:
EPS = Net Income/Average number of common shares outstanding
EPS = Net Income/Average number of common and preferred shares outstanding
EPS = Net Income- Preferred Dividends/Average number of common shares outstanding
EPS = Net Income- Preferred Dividends/Average number of preferred shares outstanding
The following data can be found in XYZ Companys balance sheet:
Assets
Current Assets:
Cash
Accounts Receivable
Inventory
Prepaid Expenses
Total Current Assets
Property, Plant, and Equip Land
Buildings and equip, net
Total Property and Equip

2012

2011

600
800
750
30
2180
2000
800
2800

300
700
550
80
1630
2000
650
2650

Total Assets

4980

4280

In the common size balance sheet what percentage would be shown next
to balance sheetinventory in 2012?
a.
b.
c.
d.
5.
a.
b.
c.
d.
6.

10.4%
15.06%
34.40%
55.32%

Which of the following is false about Dividend Yield ratio?

Dividend yield ratio = Dividends per share / Market price per share
Measures the rate of return that would be earned by an investor who buys the common stock at the
current market price.
A low dividend yield is neither bad nor good by itself.
Dividend yield ratio = Market price per share / Dividends per share.
Which of the following is a false statement about the current ratio?
a. A declining current ratio might be a sign of a deteriorating financial condition
b. A declining current ratio might be the result of eliminating obsolete inventories

7.

8.

9.

c. An improving current ratio might be the result of stockpiling inventories.

d. The general rule of thumb calls for a current ratio of 3:1
The acid-test ratio is calculated as:
a. Acid test ratio = Cash + Marketable securities / Current Liabilities.
b. Acid test ratio = Cash + Marketable securities + Inventory / Current Liabilities
c. Acid test ratio = Cash + Marketable securities + Current receivables / Current
Liabilities
d. Acid test ratio = Cash + Inventory + Current receivables / Current Liabilities
Which of the following is true of the debt-to-equity ratio?
a. Measures the portion of assets provided by creditors and the portion of assets
provided by the stockholders
b. Debt-to-equity ratio = Stockholders equity / Total liabilities
c. Creditors would like to keep the debt-to-equity ratio relatively high.
d. Common stockholders would like to keep the debt-to-equity ratio relatively low.
If earnings per share are $4.85 and JBG Company has common stock currently selling at $40 per

share, earnings per share the PE ratio is:

a. Cannot be calculated because it includes preferred stock.
b. .12125
c. 8.25
d. 194
10. Which of the following is true of the debt-to-equity ratio? Question repeated
a. Measures the portion of assets provided by creditors and the portion of assets provided by
the stockholders.
b. Debt-to-equity ratio = Stockholders equity / Total liabilities
c. Creditors would like to keep the debt-to-equity ratio relatively high.
d. Common stockholders would like to keep the debt-to-equity ratio relatively low
11. 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
b.
c.
d.

same amount.
It would fall.
It would increase.
The change would depend on the relationship between the payables liquidated and current
liabilities.

None of the above- the change would depend on whether the Current Ratio was < or = or > 1
prior ro the transaction.
12. 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.
13. Which of the following is true of debt to equity ratio?Oops, same question again
a. It measures the portion of assets provided by creditors and the portion of assets provided
by the stockholders.
b. Debt-to-equity ratio = Stockholders equity / Total liabilities
c. Creditors would like to keep the debt-to-equity ratio relatively high
d. Common stockholders would like to keep the debt-to-equity ratio relatively low
14. Profitability ratios help analysts, investors, and management answer the question of whether a
company's stock is a good investment. The market price per share of AB Company common stock is
$7.89 as of December 31, 200X. The net income for AB Company as of December 31, 200X, is

$3,476,501. Since it does not have a preferred class of stock outstanding, it paid no preferred
dividends during the year. AB Company has issued and outstanding 15,500,000 shares of common
stock. AB declared and paid a common stock dividend of $0.13 per share during December 200X.
Calculate the EPS for AB Company as of December 31, 200X.
a. $2.24
b. $0.224
c. $4.458
d. $5.14
15. Market indicator ratios help analysts, investors, and management answer the question of whether a
company's stock is a good investment. The market price per share of AB Company common stock is
$7.89 as of December 31, 200X. The net income for AB Company as of December 31, 200X, is
$3,476,501. Since it does not have a preferred class of stock outstanding, it paid no preferred
dividends during the year. AB Company has issued and outstanding 15,500,000 shares of common
stock. AB declared and paid a common stock dividend of $0.13 per share during December 200X.
Calculate the price-earnings ratio for AB Company as of December 31, 200X.
a. $0.224
b. $4.458
c. 0.01647
d. 35.22
16. Market indicator ratios help analysts, investors, and management answer the question of whether a
company's stock is a good investment. The market price per share of AB Company common stock is
$7.89 as of December 31, 200X. The net income for AB Company as of December 31, 200X, is
$3,476,501. Since it does not have a preferred class of stock outstanding, it paid no preferred
dividends during the year. AB Company has issued and outstanding 15,500,000 shares of common
stock. AB declared and paid a common stock dividend of $0.13 per share during December 200X.
Calculate the dividend yield ratio for AB Company as of December 31, 200X.
a. $0.224
b. $4.458
c. 0.01647
d. 35.22
17. 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.

18.Determine a firm's total asset turnover (TAT) if its net profit margin (NPM) is 5
percent, total assets are $8 million, and ROI is 8 percent.
a.
b.
c.
d.

1.60
2.05
2.50
4.00

Given ROI and Total assets find Net Income. Using value of Net income found in the previous
step and NPM, find Net Sales. Using the Net sales and Total Assets calculate Total Asset
Turnover.
19.

Felton Farm Supplies, Inc., has an 8 percent return on total assets of

$300,000 and a net profit margin of 5 percent. What are its sales?

a. $3,750,000
b.
c.
d.

$480,000
$300,000
$1,500,000

Which of the following would NOT improve the current ratio?

a. Borrow short term to finance additional fixed assets.
b. Issue long-term debt to buy inventory.
c. Sell common stock to reduce current liabilities.
d. Sell fixed assets to reduce accounts payable.
21.The gross profit margin is unchanged, but the net profit margin declined over
the same period. This could have happened if
a. cost of goods sold increased relative to sales
b. sales increased relative to expenses.
c. the U.S. Congress increased the tax rate.
d. dividends were decreased.
22.Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the
industry average of 1.4. This means that the company
a. will not experience any difficulty with its creditors.
b. has less liquidity than other firms in the industry.
c. will be viewed as having high creditworthiness
d. has greater than average financial risk when compared to
other firms in its industry.
23. Krisle and Kringle's debt-to-total assets (D/TA) ratio is .4. What is its debt-to20.

equity (D/E) ratio?

a.
b.
c.
d.

.2
.6
.667
.333

24.A company can improve (lower) its debt-to-total assets ratio by doing which
of the following?
a. Borrow more.
b. Shift short-term to long-term debt
c. Shift long-term to short-term debt
d. Sell common stock.
25.Kanji Company had sales last year of $265 million, including cash sales of $25
million. If its average collection period was 36 days, its ending accounts
receivable balance is closest to
. (Assume a 365-day year.)
a. $26.1 million
b. $23.7 million
c. $7.4 million
d. $18.7 million
Average daily credit sales * Average Collection Period = Average
Receivables balance