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Define solvency and profitability. How are they alike?

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Solvency is the ability of a company to ...

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The relationship of each asset item as a percent of total assets is an example of vertical analysis.

A) True
B) False

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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 leverage
B) solvency and profitability
C) solvency and liquidity
D) solvency and equity

E) All of the above
F) C) and D)

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Match each item with its definition.

Premises
Horizontal analysis
Responses
Useful for comparing one company to another or a company with industry averages
Something that is both unusual and infrequent.
Occurs when a company abandons a segment.
Focuses on a company’s ability to generate net income
A percentage analysis of increases and decreases in related items in comparative financial statements.
An analysis of a company’s ability to pay its current liabilities.
This requires a restatement of prior period financial statements.
The percentage analysis of the relationship of each component in a financial statement to a total within the statement.

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Useful for comparing one company to another or a company with industry averages
Something that is both unusual and infrequent.
Occurs when a company abandons a segment.
Focuses on a company’s ability to generate net income
A percentage analysis of increases and decreases in related items in comparative financial statements.
An analysis of a company’s ability to pay its current liabilities.
This requires a restatement of prior period financial statements.
The percentage analysis of the relationship of each component in a financial statement to a total within the statement.

All of the following are typically included in the Management's Discussion and Analysis in annual reports except:


A) explanations of any significant changes between the current and prior years' financial statements.
B) management's assessment of liquidity.
C) journal entries.
D) off-balance-sheet arrangements

E) A) and B)
F) B) and D)

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The purpose of an audit is to


A) determine whether or not a company is a good investment.
B) render an opinion on the fairness of the statements.
C) determine whether or not a company complies with corporate social responsibility.
D) determine whether or not a company is a good credit risk.

E) A) and D)
F) None of the above

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The following information pertains to Carlton Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets The following information pertains to Carlton Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Liabilities and Stockholders' Equity Income Statement What are the dividends per common share for this company? A) $20.00 B) $3.33 C) $1.11 D) $0.90 Liabilities and Stockholders' Equity The following information pertains to Carlton Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Liabilities and Stockholders' Equity Income Statement What are the dividends per common share for this company? A) $20.00 B) $3.33 C) $1.11 D) $0.90 Income Statement The following information pertains to Carlton Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Liabilities and Stockholders' Equity Income Statement What are the dividends per common share for this company? A) $20.00 B) $3.33 C) $1.11 D) $0.90 The following information pertains to Carlton Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Liabilities and Stockholders' Equity Income Statement What are the dividends per common share for this company? A) $20.00 B) $3.33 C) $1.11 D) $0.90 What are the dividends per common share for this company?


A) $20.00
B) $3.33
C) $1.11
D) $0.90

E) A) and B)
F) B) and D)

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The following information pertains to Newman Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets The following information pertains to Newman Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Liabilities and Stockholders' Equity Income Statement What is the rate earned on total assets for this company? A) 8.1% B) 6.8% C) 10.5% D) 16.1% Liabilities and Stockholders' Equity The following information pertains to Newman Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Liabilities and Stockholders' Equity Income Statement What is the rate earned on total assets for this company? A) 8.1% B) 6.8% C) 10.5% D) 16.1% Income Statement The following information pertains to Newman Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Liabilities and Stockholders' Equity Income Statement What is the rate earned on total assets for this company? A) 8.1% B) 6.8% C) 10.5% D) 16.1% The following information pertains to Newman Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Liabilities and Stockholders' Equity Income Statement What is the rate earned on total assets for this company? A) 8.1% B) 6.8% C) 10.5% D) 16.1% What is the rate earned on total assets for this company?


A) 8.1%
B) 6.8%
C) 10.5%
D) 16.1%

E) C) and D)
F) A) and D)

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The report on internal control required by the Sarbanes-Oxley Act of 2002 may be prepared by either management or the company's auditors.

A) True
B) False

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Condensed data taken from the ledger of Joplin Company at December 31, 2012 and 2011, are as follows: Condensed data taken from the ledger of Joplin Company at December 31, 2012 and 2011, are as follows:

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Prepare a comparative balance ...

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Using vertical analysis of the income statement, a company's net income as a percentage of net sales is 15%; therefore, the cost of goods sold as a percentage of sales must be 85%.

A) True
B) False

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The percentage analysis of increases and decreases in individual items in comparative financial statements is called


A) vertical analysis
B) solvency analysis
C) profitability analysis
D) horizontal analysis

E) All of the above
F) A) and B)

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Prepare an Income Statement using the following data for Young Adventures for the year ended December 31, 2012: Prepare an Income Statement using the following data for Young Adventures for the year ended December 31, 2012:

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When you are interpreting financial ratios, it is useful to compare a company's ratios to some form of standard.

A) True
B) False

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Based on the following data for the current year, what is the number of days' sales in accounts receivable? Based on the following data for the current year, what is the number of days' sales in accounts receivable? A) 7.3 B) 2.5 C) 14.6 D) 25


A) 7.3
B) 2.5
C) 14.6
D) 25

E) B) and D)
F) A) and B)

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A decrease in the ratio of liabilities to stockholders' equity indicates an improvement in the margin of safety for creditors.

A) True
B) False

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What is a major advantage of using percentages rather than dollar changes in doing horizontal and vertical analysis?

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When percentages are utilized rather tha...

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The following items are reported on a company's balance sheet: The following items are reported on a company's balance sheet:

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Required:
Determine ...

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The ratio of the market price per share of common stock on a specific date to the annual earnings per share is referred to as the price-earnings ratio.

A) True
B) False

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Which of the following items should be classified as an extraordinary item on a corporate income statement?


A) gain on the retirement of a bond payable
B) loss from land condemned for public use
C) loss due to an discontinued operation
D) selling treasury stock for more than the company paid for it

E) A) and B)
F) A) and C)

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