AU60 - ASSIGNMENT 3 EXAM
QUESTIONS AND ANSWERS
An underwriter is trying to determine XYZ manufacturing efficiency using the accounts
receivable (A/R) turnover ratio. XYZs income statement shows $10 million in sales (half
of which is attributable to credit sales) and the balance sheet shows $200,000 in A/R.
What is XYZs account receivable turnover ratio? - ANSWER-25 times
An underwriter is attempting to conduct ratio analysis on a company. The underwriter
notices that the company has $2 million in cash, $1 million in marketable securities, $2
million in inventory, $2 million in accounts receivable, and $7million in current liabilities.
Which one of the following conclusions can the underwriter reach by calculating liquidity
ratios? - ANSWER-The company may not be able to meet its short term obligations
because its acid test ratio is less than one. ($2,000,000 + $1,000,000 + $2,000,000 -
$7,000,000 = less than 1)
The most recent financial statement for Buddy's Burger Hut reveal the following: current
liabilities = $50,000, marketable securities = $5,000, accounts receivable = $2,500,
cash = $50,000. Based on this information, Buddy's Burger hut's acid-test ratio is -
ANSWER-1.15 (50,000 + 5,000 + 2,500) / $50,000 = 1.15
Which one of the following statements is true? - ANSWER-If a nonfinancial company
has a debt-to-equity ratio greater than 100%, it indicates that the company is financed
mostly by debt.
Gross profit is reported on the income statement. How is gross profit calcualted? -
ANSWER-Gross profit = sales - cost of goods sold.
The "bottom line" of an income statement shows the organizations - ANSWER-Net
income
The Financial Accounting Standard Board (FASB) requires organizations to report
comprehensive income. Comprehensive income includes an organizations net income
and - ANSWER-Unrealized gains on securities available for sale.
An insurers comprehensive income includes - ANSWER-Unrealized gains and losses
on securities.
Bob's Manufacturing has been in business for one year. Which one of the following is
true regarding Bob's year-end financial statements? - ANSWER-The beginning balance
on the statement of changes in shareholders equity will show as $0.
Which one of the following describes a section of the statement of cash flow? -
ANSWER-Cash flows from investing activities.
Noncurrent Liabilities are Made Up Of - ANSWER-Long-term debt.
Shareholder Equity/ Owners Equity is Made Up Of - ANSWER-Assets MINUS liabilities.
, Net Income - ANSWER-Before Taxes Net Income - Income Taxes.
Income Statements are Made Up Of - ANSWER-Revenue, expenses, cost of goods
sold, gross profit, operating income, net income, and comprehensive income.
Statement of Changes in Shareholders Equity - ANSWER-Shares in Common Stock x
Par Value + Additional Paid in Capital = Total Paid Capital - Covers the entire period for
each major component of related capital.
Annual Percentage Change Income - ANSWER-(2015 Sales - 2014 Sales) / 2014 Sales
= Sales %
(2015 Net Income - 2014 Net Income) / 2014 Net Income = Net Income %
John is a risk management specialist for XYZ Company. John examines XYZ's financial
statements on a quarterly basis. Which one of the following best describes a reason for
this analysis? - ANSWER-A review of the financial statements help John to determine
XYZs insurance needs.
Cost of goods sold appears on the income statement of manufacturing and retail
entities. Which one f the following statements best describes cost of goods sold? -
ANSWER-Cost of goods sold reports expenses after an inventory item is sold.
Owners equity represents the capital contributed by an organizations owners plus the
organization's - ANSWER-Retain Earnings
Which one of the following statements about the balance sheet is correct? - ANSWER-
Net worth is positive whenever the value of assets exceeds the value of liabilities and
negative if the value of assets.
Which of the following describes a section of the statement of cash flow? - ANSWER-
Cash flow from financing activities.
The portion of net income that is held onto by a company and not distributed to
stockholders is called - ANSWER-Retained Earnings
Which one of the following a major purpose of the statement of cash flows? - ANSWER-
It is used to assess the ability to generate positive future cash flows.
Which one of the follow is a major purpose of the statement of cash flows? - ANSWER-
It is used to assess an organizations need for additional financing.
Common size statements are frequently used during vertical analysis. Which one of the
following is true regarding common size statements? - ANSWER-Common-size
statements are good for inter-company comparisons because they correct for
differences in company size.
Using trend analysis, an underwriter calculates the percentage change in certain items
over time. If ABC Company's sales increased from $20 million in 20X5 to $35 million in
20X6, what is the percentage change? - ANSWER-75%
QUESTIONS AND ANSWERS
An underwriter is trying to determine XYZ manufacturing efficiency using the accounts
receivable (A/R) turnover ratio. XYZs income statement shows $10 million in sales (half
of which is attributable to credit sales) and the balance sheet shows $200,000 in A/R.
What is XYZs account receivable turnover ratio? - ANSWER-25 times
An underwriter is attempting to conduct ratio analysis on a company. The underwriter
notices that the company has $2 million in cash, $1 million in marketable securities, $2
million in inventory, $2 million in accounts receivable, and $7million in current liabilities.
Which one of the following conclusions can the underwriter reach by calculating liquidity
ratios? - ANSWER-The company may not be able to meet its short term obligations
because its acid test ratio is less than one. ($2,000,000 + $1,000,000 + $2,000,000 -
$7,000,000 = less than 1)
The most recent financial statement for Buddy's Burger Hut reveal the following: current
liabilities = $50,000, marketable securities = $5,000, accounts receivable = $2,500,
cash = $50,000. Based on this information, Buddy's Burger hut's acid-test ratio is -
ANSWER-1.15 (50,000 + 5,000 + 2,500) / $50,000 = 1.15
Which one of the following statements is true? - ANSWER-If a nonfinancial company
has a debt-to-equity ratio greater than 100%, it indicates that the company is financed
mostly by debt.
Gross profit is reported on the income statement. How is gross profit calcualted? -
ANSWER-Gross profit = sales - cost of goods sold.
The "bottom line" of an income statement shows the organizations - ANSWER-Net
income
The Financial Accounting Standard Board (FASB) requires organizations to report
comprehensive income. Comprehensive income includes an organizations net income
and - ANSWER-Unrealized gains on securities available for sale.
An insurers comprehensive income includes - ANSWER-Unrealized gains and losses
on securities.
Bob's Manufacturing has been in business for one year. Which one of the following is
true regarding Bob's year-end financial statements? - ANSWER-The beginning balance
on the statement of changes in shareholders equity will show as $0.
Which one of the following describes a section of the statement of cash flow? -
ANSWER-Cash flows from investing activities.
Noncurrent Liabilities are Made Up Of - ANSWER-Long-term debt.
Shareholder Equity/ Owners Equity is Made Up Of - ANSWER-Assets MINUS liabilities.
, Net Income - ANSWER-Before Taxes Net Income - Income Taxes.
Income Statements are Made Up Of - ANSWER-Revenue, expenses, cost of goods
sold, gross profit, operating income, net income, and comprehensive income.
Statement of Changes in Shareholders Equity - ANSWER-Shares in Common Stock x
Par Value + Additional Paid in Capital = Total Paid Capital - Covers the entire period for
each major component of related capital.
Annual Percentage Change Income - ANSWER-(2015 Sales - 2014 Sales) / 2014 Sales
= Sales %
(2015 Net Income - 2014 Net Income) / 2014 Net Income = Net Income %
John is a risk management specialist for XYZ Company. John examines XYZ's financial
statements on a quarterly basis. Which one of the following best describes a reason for
this analysis? - ANSWER-A review of the financial statements help John to determine
XYZs insurance needs.
Cost of goods sold appears on the income statement of manufacturing and retail
entities. Which one f the following statements best describes cost of goods sold? -
ANSWER-Cost of goods sold reports expenses after an inventory item is sold.
Owners equity represents the capital contributed by an organizations owners plus the
organization's - ANSWER-Retain Earnings
Which one of the following statements about the balance sheet is correct? - ANSWER-
Net worth is positive whenever the value of assets exceeds the value of liabilities and
negative if the value of assets.
Which of the following describes a section of the statement of cash flow? - ANSWER-
Cash flow from financing activities.
The portion of net income that is held onto by a company and not distributed to
stockholders is called - ANSWER-Retained Earnings
Which one of the following a major purpose of the statement of cash flows? - ANSWER-
It is used to assess the ability to generate positive future cash flows.
Which one of the follow is a major purpose of the statement of cash flows? - ANSWER-
It is used to assess an organizations need for additional financing.
Common size statements are frequently used during vertical analysis. Which one of the
following is true regarding common size statements? - ANSWER-Common-size
statements are good for inter-company comparisons because they correct for
differences in company size.
Using trend analysis, an underwriter calculates the percentage change in certain items
over time. If ABC Company's sales increased from $20 million in 20X5 to $35 million in
20X6, what is the percentage change? - ANSWER-75%
