Chapter 16 Financial Statement Analysis

# Chapter 16 Financial Statement Analysis - Chapter 16...

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Chapter 16 Financial Statement Analysis Garrison, Managerial Accounting, 12th Edition 867 True/False Questions 1. Vertical analysis of financial statements is accomplished through the preparation of common-size statements. Answer: True Level: Easy LO: 1 2. The gross margin percentage is computed by dividing the gross margin by net income before interest and taxes. Answer: False Level: Medium LO: 1 3. If a company's return on assets is substantially higher than its cost of borrowing, then the common stockholders would normally want the company to have a relatively high debt/equity ratio. Answer: True Level: Easy LO: 2,4 4. The dividend yield ratio is calculated by dividing dividends per share by earnings per share. Answer: False Level: Easy LO: 2 5. Financial leverage is positive if the interest rate on debt is lower than the return on total assets. Answer: True Level: Medium LO: 2 6. To compute the return on total assets, net income should be adjusted by adding after- tax interest expense and preferred dividends. Answer: False Level: Medium LO: 2 7. When computing the return on common equity, the income available for common stockholders is determined by deducting preferred dividends from net income. Answer: True Level: Easy LO: 2 8. Issuing common stock will increase a company's financial leverage. Answer: False Level: Medium LO: 2

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Chapter 17 Financial Statement Analysis 868 Garrison, Managerial Accounting, 12th Edition 9. Book value per share is the key to predicting a company's future income producing ability. Answer: False Level: Easy LO: 2 10. The book value per share of common stock reflects the balance sheet carrying value of already completed transactions. Answer: True Level: Medium LO: 2 11. A company's acid-test ratio will always be less than or equal to its current ratio. Answer: True Level: Medium LO: 3 12. A company could improve its acid-test ratio by selling some equipment it no longer needs for cash. Answer: True Level: Medium LO: 3 13. As the accounts receivable turnover ratio decreases, the average collection period decreases. Answer: False Level: Medium LO: 3 14. Payment of interest owed would decrease the inventory turnover ratio. Answer: False Level: Easy LO: 3 15. When computing the times interest earned ratio, earnings before interest expense and income taxes is used in the numerator. Answer: True Level: Easy LO: 4
Chapter 16 Financial Statement Analysis Garrison, Managerial Accounting, 12th Edition 869 Multiple Choice Questions 16. The gross margin percentage is equal to: A) (Net operating income + Operating expenses)/Sales B) Net operating income/Sales C) Cost of goods sold/Sales D) Cost of goods sold/Net income Answer: A Level: Hard LO: 1 17. Earnings per share of common stock is computed by: A) dividing net income by the average number of common and preferred shares outstanding. B) dividing net income by the average number of common shares outstanding.

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Chapter 16 Financial Statement Analysis - Chapter 16...

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