NATIONAL UNIVERSITY

SAMPALOC, MANILA

FINANCIAL MANAGEMENT 1
PRELIMINARY EXAMINATION

CHOOSE THE LETTER OF THE BEST ANSWER:

1. Which one of the following is primarily interested in the liquidity of a company?
a. Federal government c. Long-term creditors
b. Stockholders d. Short-term creditors
2. Which one of the following is not a characteristic generally evaluated in analyzing financial statements?
a. Liquidity c. Marketability
b. Profitability d. Solvency
3. In analyzing the financial statements of a company, a single item on the financial statements
a. 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.
4. Short-term creditors are usually most interested in evaluating
a. solvency. c. marketability.
b. liquidity. d. profitability.
5. Long-term creditors are usually most interested in evaluating
a. liquidity and solvency. c. liquidity and profitability.
b. solvency and marketability. d. profitability and solvency.
6. Stockholders are most interested in evaluating
a. liquidity and solvency. c. liquidity and profitability.
b. profitability and solvency. d. marketability and solvency.
7. Comparisons of financial data made within a company are called
a. intracompany comparisons. c. intercompany comparisons.
b. interior comparisons. d. intramural comparisons.
8. A technique for evaluating financial statements that expresses the relationship among selected items of
financial statement data is
a. common size analysis. c. ratio analysis.
b. horizontal analysis. d. vertical analysis.
9. Which one of the following is not a tool in financial statement analysis?
a. Horizontal analysis c. Vertical analysis
b. Circular analysis d. Ratio analysis
10. In analyzing financial statements, horizontal analysis is a
a. requirement. b. tool. c. principle. d. theory.
11. Horizontal analysis is also called
a. linear analysis. c. trend analysis.
b. vertical analysis. d. common size analysis.
12. Vertical analysis is also known as
a. perpendicular analysis. c. trend analysis.
b. common size analysis. d. straight-line analysis.
13. In ratio analysis, the ratios are never expressed as a
a. rate. c. percentage.
b. negative figure. d. simple proportion.
14. The formula for horizontal analysis of changes since the base period is the current year amount
a. 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.
15. Horizontal analysis evaluates a series of financial statement data over a period of time
a. 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.
16. Horizontal analysis evaluates financial statement data
a. within a period of time. c. on a certain date.
b. over a period of time. d. as it may appear in the future.
17. Assume the following sales data for a company:
2014 $1,050,000
2013 950,000
2012 800,000
2011 550,000
If 2011 is the base year, what is the percentage increase in sales from 2011 to 2013?
a. 100% b. 90.9% c. 72.7% d. 52.4%
18. Comparative balance sheets are usually prepared for
a. one year. b. two years. c. three years. d. four years.
19. A horizontal analysis performed on a statement of retained earnings would not show a percentage change in
a. dividends paid. c. expenses.
b. net income. d. beginning retained earnings.
20. 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.
21. Assume the following sales data for a company:
2014 $945,000
2013 877,500
2012 650,000
If 2012 is the base year, what is the percentage increase in sales from 2012 to 2013?
a. 24% b. 35% c. 76% d. 135%
22. Assume the following cost of goods sold data for a company:
2014 $1,680,000
2013 1,400,000
2012 1,200,000
If 2012 is the base year, what is the percentage increase in cost of goods sold from 2012 to 2014?
a. 140% b. 40% c. 23% d. 17%
23. Darius, Inc. has the following income statement (in millions):
DARIUS, INC.
Income Statement
For the Year Ended December 31, 2013
Net Sales $300
Cost of Goods Sold 120
Gross Profit 180
Operating Expenses 44
Net Income $136

Using vertical analysis, what percentage is assigned to Cost of Goods Sold?

a. 30% b. 40% c. 100% d. None of the above
24. Darius, Inc. has the following income statement (in millions):
DARIUS, INC.
Income Statement
For the Year Ended December 31, 2013
Net Sales $300
Cost of Goods Sold 120
Gross Profit 180
Operating Expenses 44
Net Income $136

Using vertical analysis, what percentage is assigned to Net Income?

a. 100% b. 75.6% c. 45.3% d. None of the above
25. Vertical analysis is a technique which expresses each item within a financial statement
a. 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.
26. In performing a vertical analysis, the base for prepaid expenses is
a. total current assets. c. total liabilities and stockholders' equity.
b. total assets. d. prepaid expenses.
27. In performing a vertical analysis, the base for sales revenues on the income statement is
a. net sales. c. net income.
b. sales. d. cost of goods available for sale.
28. In performing a vertical analysis, the base for sales returns and allowances is
a. sales. c. net sales.
b. sales discounts. d. total revenues.
29. Each of the following is a liquidity ratio except the
a. acid-test ratio. c. debt to total assets ratio.
b. current ratio. d. inventory turnover.
30. A ratio calculated in the analysis of financial statements
a. 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.
31. A liquidity ratio measures the
a. 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.
32. The current ratio is
a. 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.
33. The acid-test (quick) ratio
a. 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.
34. Harvey Clothing Store had a balance in the Accounts Receivable account of $390,000 at the beginning of the
year and a balance of $410,000 at the end of the year. Net credit sales during the year amounted to
$3,000,000. The average collection period of the receivables in terms of days was
a. 30 days. b. 365 days. c. 274 days. d. 48.7 days.
35. Parker Hardware Store had net credit sales of $8,000,000 and cost of goods sold of $5,000,000 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 was
a. 7.7 times. b. 4.6 times. c. 11.4 times. d. 12.3 times.
36. Wagon Department Store had net credit sales of $16,000,000 and cost of goods sold of $15,000,000 for the
year. The average inventory for the year amounted to $2,000,000. Inventory turnover for the year is
a. 8 times. b. 15 times. c. 7.5 times. d. 5 times.
37. Wagon Department Store had net credit sales of $16,000,000 and cost of goods sold of $15,000,000 for the
year. The average inventory for the year amounted to $2,000,000. The average number of days in inventory
during the year was
a. 365 days. b. 48.7 days. c. 46 days. d. 30 days.
38. Each of the following is included in computing the acid-test ratio except
a. cash. b. inventory. c. receivables. d. short-term investments.
39. Which one of the following would not be considered a liquidity ratio?
a. Current ratio b. Inventory turnover c. Acid-test ratio d. Return on assets
40. Asset turnover measures
a. 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.
41. Profit margin is calculated by dividing
a. sales by cost of goods sold. c. net income by stockholders' equity.
b. gross profit by net sales. d. net income by net sales.
42. Stout Corporation had net income of $200,000 and paid dividends to common stockholders of $40,000 in
2013. The weighted average number of shares outstanding in 2013 was 50,000 shares. Stout Corporation's
common stock is selling for $75 per share on the New York Stock Exchange. Stout Corporation's price-
earnings ratio is
a. 3.8 times. b. 15 times. c. 18.8 times. d. 12 times.
43. Stout Corporation had net income of $200,000 and paid dividends to common stockholders of $40,000 in
2013. The weighted average number of shares outstanding in 2013 was 50,000 shares. Stout Corporation's
common stock is selling for $60 per share on the New York Stock Exchange. Stout Corporation's payout
ratio for 2013 is
a. $4 per share. b. 25%. c. 20%. d. 12.5%.
44. Flake Company reported the following on its income statement:
Income before income taxes $600,000
Income tax expense 150,000
Net income $450,000
An analysis of the income statement revealed that interest expense was $50,000. Flake Company's times
interest earned was
a. 13 times. b. 12 times. c. 6 times. d. 7 times.
45. The debt to total assets ratio measures
a. 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.
46. The current assets of Margo Company are $300,000. The current liabilities are $100,000. The current ratio
expressed as a proportion is
a. 300%. b. 3.0 : 1 c. .33 : 1 d. $300,000 ÷ $100,000.
47. The current ratio may also be referred to as the
a. short run ratio. c. working capital ratio.
b. acid-test ratio. d. contemporary ratio.
48. A weakness of the current ratio is
a. 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.
49. A supplier to a company would be most interested in the company’s
a. asset turnover. c. current ratio.
b. profit margin. d. earnings per share.
50. 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 ratio c. Asset turnover
b. Acid-test ratio d. Receivables turnover
51. Ratios are used as tools in financial analysis
a. 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.
52. The ratios that are used to determine a company's short-term debt paying ability are
a. 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.
53. A measure of the percentage of each dollar of sales that results in net income is
a. profit margin. c. return on common stockholders' equity.
b. return on assets. d. earnings per share.
54. West Company had $375,000 of current assets and $150,000 of current liabilities before borrowing $75,000
from the bank with a 3-month note payable. What effect did the borrowing transaction have on the amount of
West Company's working capital?
a. No effect c. $150,000 increase
b. $75,000 increase d. $75,000 decrease
55. West Company had $375,000 of current assets and $150,000 of current liabilities before borrowing $75,000
from the bank with a 3-month note payable. What effect did the borrowing transaction have on West
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.
56. The acid-test ratio
a. 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.
57. 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 Borrowing Collection of Receivable
a. Increase No effect
b. Increase Increase
c. Decrease No effect
d. Decrease Decrease
58. A company has a receivables turnover of 10 times. The average receivables during the period are $500,000.
What is the amount of net credit sales for the period?
a. $50,000 c. $500,000
b. $5,000,000 d. Cannot be determined from the information given
59. If the average collection period is 60 days, what is the receivables turnover?
a. 6.0 times b. 6.1 times c. 12.2 times d. None of these
60. A general rule to use in assessing the average collection period is that
a. 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.
61. Inventory turnover is calculated by dividing
a. 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.
62. A company has an average inventory on hand of $40,000 and the days in inventory is 73 days. What is the
cost of goods sold?
a. $200,000 b. $2,920,000 c. $400,000 d. $1,460,000
63. A successful grocery store would probably have
a. a low inventory turnover. c. zero profit margin.
b. a high inventory turnover. d. low volume.
64. An aircraft company would most likely have
a. a high inventory turnover. c. high volume.
b. low profit margin. d. a low inventory turnover.
65. Net sales are $6,000,000, beginning total assets are $2,800,000, and the asset turnover is 3.0 times. What is
the ending total asset balance?
a. $2,000,000 b. $1,200,000 c. $2,800,000 d. $2,200,000
66. Earnings per share is calculated
a. only for common stock. c. for common and preferred stock.
b. only for preferred stock. d. only for treasury stock.
67. Which of the following is not a profitability ratio?
a. Payout ratio c. Times interest earned
b. Profit margin d. Return on common stockholders' equity
68. The ratio that uses weighted average common shares outstanding in the denominator is the
a. price-earnings ratio. c. earnings per share.
b. return on common stockholders' equity. d. payout ratio.
69. Net income does not appear in the numerator of the
a. profit margin. c. return on common stockholders' equity.
b. return on assets. d. payout ratio.
70. Bria Clothing Store had a balance in the Accounts Receivable account of $920,000 at the beginning of the
year and a balance of $980,000 at the end of the year. Net credit sales during the year amounted to
$7,600,000. The receivables turnover ratio was
a. 8.0 times. b. 8.4 times. c. 7.8 times. d. 8.3 times.