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Chapter 16 - Chapter 16"How Well Am I Doing-Financial...

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Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis True/False Questions 1. Common-size statements are financial statements of companies of similar size. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 2. One limitation of vertical analysis is that it cannot be used to compare two companies that are significantly different in size. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 3. The gross margin percentage is computed by dividing the gross margin by total assets. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium 4. The sale of used equipment at book value for cash will increase earnings per share. Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium 5. Earnings per share is computed by dividing net income (after deducting preferred dividends) by the average number of common shares outstanding. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy 6. The dividend payout ratio divided by the dividend yield ratio equals the price-earnings ratio. Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard 7. An increase in the number of shares of common stock outstanding will decrease a company's price-earnings ratio if the market price per share remains unchanged. Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 16-5
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Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis 8. A company's financial leverage is negative when its return on total assets is less than its return on common stockholders' equity. Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard 9. When computing return on common stockholders' equity, retained earnings should be included as part of common stockholders' equity. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard 10. When a retailing company purchases inventory, the book value per share of the company increases. Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium 11. If a company's acid-test ratio increases, its current ratio will also increase. Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium 12. Assuming a current ratio greater than 1, acquiring land by issuing more of the company's common stock will increase the current ratio. Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium 13. If a company successfully implements lean production, its inventory turnover ratio should decrease.
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