Test Bank for Intermediate Accounting, Volume 2, 6th Edition by Kin Lo
Appx A 6ce Answers Included ✅
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) Which of the following statements is correct regarding "common size financial statements"? 1)
A) Common size financial statements are a form of benchmarking.
B) Common size financial statements are a type of vertical analysis.
C) Common size financial statements are used to evaluate the liquidity of a company.
D) Common size financial statements are used primarily for horizontal analysis.
2) Which of the following practices presents income statement items as a percentage of sales? 2)
A) Vertical analysis. B) Horizontal analysis.
C) Trend analysis. D) Benchmarking.
3) Which of the following practices presents balance sheet items as a percentage of total assets? 3)
A) Horizontal analysis. B) Benchmarking.
C) Vertical analysis. D) Trend analysis.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
4) Use the financial statement information that follows to prepare common size financial statements for Example
Company Inc. for 20X1 and 20X2. Round percentages to one decimal place, e.g. 45.2%.
Example Company Inc.
Income Statement
For the years ended December 31
(in millions of dollars) 20X2 20X1
Revenue $53,400 $50,100
Cost of goods sold 36,800 32,700
Gross profit 16,600 17,400
Operating expenses 11,800 13,100
Operating profit 4,800 4,300
Interest and finance costs 900 1,000
Income before taxation 3,900 3,300
Income taxes 1,170 990
Net income $ 2,730 $ 2,310
Example Company Inc.
Balance Sheet
As at December 31
(in millions of dollars) 20X2 20X1
Assets
1
, Current assets
Cash and cash equivalents $ 1,250 $ 1,200
Accounts receivable 4,900 4,550
Inventories 5,100 4,850
Prepaid assets 200 250
Current assets 11,450 10,850
Non-current assets 36,300 28,650
Total assets $47,750 $39,500
Liabilities
Current liabilities
Accounts payable $ 5,350 $ 4,900
Other current liabilities 3,800 3,700
Current liabilities 9,150 8,600
Long-term indebtedness 16,000 9,400
Total liabilities 25,150 18,000
Equity
Common shares 1,000 1,000
Retained earnings 21,600 20,500
Equity 22,600 21,500
Total liabilities and equity $47,750 $39,500
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
5) The return on common equity (ROCE) ratio is an example of what type of ratio? 5)
A) Solvency ratio. B) Liquidity ratio.
C) Profitability ratio. D) Credit risk ratio.
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
6) Complete the table below by categorizing each ratio as a liquidity ratio, a profitability 6)
ratio, or a solvency ratio.
Ratio Category of ratio
Accounts payable turnover ratio
Accounts receivable turnover ratio
Current ratio
Earnings per share (EPS)
Gross (profit) margin
Interest coverage ratio
Inventory turnover ratio
Long-term debt to equity ratio
Profit margin on sales
Quick ratio
Return on assets
Return on equity
2
,Exhibit A-1
Example Company Inc.
Income Statement
For the years ended December 31
(in millions of dollars) 20X2 20X1
Revenue $53,400 $50,100
Cost of goods sold 36,800 32,700
Gross profit 16,600 17,400
Operating expenses 11,800 13,100
Operating profit 4,800 4,300
Interest and finance costs 900 1,000
Income before taxation 3,900 3,300
Income taxes 1,170 990
Net income $ 2,730 $ 2,310
Example Company Inc.
Balance Sheet
As at December 31
(in millions of dollars) 20X2 20X1
Assets
Current assets
Cash and cash equivalents $ 1,250 $ 1,200
Accounts receivable 4,900 4,550
Inventories 5,100 4,850
Prepaid assets 200 250
Current assets 11,450 10,850
Non-current assets 36,300 28,650
Total assets $47,750 $39,500
Liabilities
Current liabilities
Accounts payable $ 5,350 $ 4,900
Other current liabilities 3,800 3,700
Current liabilities 9,150 8,600
Long-term indebtedness 16,000 9,400
Total liabilities 25,150 18,000
Equity
Common shares 1,000 1,000
Retained earnings 21,600 20,500
Equity 22,600 21,500
Total liabilities and equity $47,750 $39,500
7) Use the information in Exhibit A-1 to calculate the return on assets (ROA) ratio for 20X2 7)
using operating profit margin and asset turnover. For interim and final calculations,
round dollar-based calculations to the nearest whole dollar, round percentages to four
decimal places (e.g. 0.1351, or 13.51%), and round ratios to one decimal place (e.g. 1.6).
8) Use the information in Exhibit A-1 to calculate the return on common equity (ROCE) 8)
ratio for 20X2 using operating earnings leverage, return on assets (ROA), and financial
leverage. Assume ROA for the year was 7.70%. For the interim and final calculations,
round dollar-based calculations to the nearest whole dollar, round percentages to four
decimal places (e.g. 0.1351, or 13.51%), and round ratios to one decimal place (e.g. 1.6).
3
, 9) Use the information in Exhibit A-1 to calculate the ratios listed below for 20X2: 9)
i) Current ratio
ii) Quick ratio
iii) Accounts receivable turnover ratio
iv) Inventory turnover ratio
v) Accounts payable turnover ratio
Use sales and cost of goods sold as proxies for credit sales and purchases, respectively.
Round ratios to one decimal place (e.g. 1.6).
10) Use the information in Exhibit A-1 to calculate the ratios listed below for 20X2: 10)
i) Long-term debt to equity ratio
ii) Interest coverage ratio
Round ratios to one decimal place (e.g. 1.6).
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Exhibit A-2
Gretta Company Inc.
Income Statement
For the years ended December 31
(in millions of dollars) 20X2 20X1
Revenue $53,400 $50,100
Cost of goods sold 36,800 32,700
Gross profit 16,600 17,400
Operating expenses 11,800 13,100
Operating profit 4,800 4,300
Interest and finance costs 900 1,000
Income before taxation 3,900 3,300
Income taxes 1,170 990
Net income $ 2,730 $ 2,310
Gretta Company Inc.
Balance Sheet
As at December 31
(in millions of dollars) 20X2 20X1
Assets
4
Appx A 6ce Answers Included ✅
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) Which of the following statements is correct regarding "common size financial statements"? 1)
A) Common size financial statements are a form of benchmarking.
B) Common size financial statements are a type of vertical analysis.
C) Common size financial statements are used to evaluate the liquidity of a company.
D) Common size financial statements are used primarily for horizontal analysis.
2) Which of the following practices presents income statement items as a percentage of sales? 2)
A) Vertical analysis. B) Horizontal analysis.
C) Trend analysis. D) Benchmarking.
3) Which of the following practices presents balance sheet items as a percentage of total assets? 3)
A) Horizontal analysis. B) Benchmarking.
C) Vertical analysis. D) Trend analysis.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
4) Use the financial statement information that follows to prepare common size financial statements for Example
Company Inc. for 20X1 and 20X2. Round percentages to one decimal place, e.g. 45.2%.
Example Company Inc.
Income Statement
For the years ended December 31
(in millions of dollars) 20X2 20X1
Revenue $53,400 $50,100
Cost of goods sold 36,800 32,700
Gross profit 16,600 17,400
Operating expenses 11,800 13,100
Operating profit 4,800 4,300
Interest and finance costs 900 1,000
Income before taxation 3,900 3,300
Income taxes 1,170 990
Net income $ 2,730 $ 2,310
Example Company Inc.
Balance Sheet
As at December 31
(in millions of dollars) 20X2 20X1
Assets
1
, Current assets
Cash and cash equivalents $ 1,250 $ 1,200
Accounts receivable 4,900 4,550
Inventories 5,100 4,850
Prepaid assets 200 250
Current assets 11,450 10,850
Non-current assets 36,300 28,650
Total assets $47,750 $39,500
Liabilities
Current liabilities
Accounts payable $ 5,350 $ 4,900
Other current liabilities 3,800 3,700
Current liabilities 9,150 8,600
Long-term indebtedness 16,000 9,400
Total liabilities 25,150 18,000
Equity
Common shares 1,000 1,000
Retained earnings 21,600 20,500
Equity 22,600 21,500
Total liabilities and equity $47,750 $39,500
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
5) The return on common equity (ROCE) ratio is an example of what type of ratio? 5)
A) Solvency ratio. B) Liquidity ratio.
C) Profitability ratio. D) Credit risk ratio.
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
6) Complete the table below by categorizing each ratio as a liquidity ratio, a profitability 6)
ratio, or a solvency ratio.
Ratio Category of ratio
Accounts payable turnover ratio
Accounts receivable turnover ratio
Current ratio
Earnings per share (EPS)
Gross (profit) margin
Interest coverage ratio
Inventory turnover ratio
Long-term debt to equity ratio
Profit margin on sales
Quick ratio
Return on assets
Return on equity
2
,Exhibit A-1
Example Company Inc.
Income Statement
For the years ended December 31
(in millions of dollars) 20X2 20X1
Revenue $53,400 $50,100
Cost of goods sold 36,800 32,700
Gross profit 16,600 17,400
Operating expenses 11,800 13,100
Operating profit 4,800 4,300
Interest and finance costs 900 1,000
Income before taxation 3,900 3,300
Income taxes 1,170 990
Net income $ 2,730 $ 2,310
Example Company Inc.
Balance Sheet
As at December 31
(in millions of dollars) 20X2 20X1
Assets
Current assets
Cash and cash equivalents $ 1,250 $ 1,200
Accounts receivable 4,900 4,550
Inventories 5,100 4,850
Prepaid assets 200 250
Current assets 11,450 10,850
Non-current assets 36,300 28,650
Total assets $47,750 $39,500
Liabilities
Current liabilities
Accounts payable $ 5,350 $ 4,900
Other current liabilities 3,800 3,700
Current liabilities 9,150 8,600
Long-term indebtedness 16,000 9,400
Total liabilities 25,150 18,000
Equity
Common shares 1,000 1,000
Retained earnings 21,600 20,500
Equity 22,600 21,500
Total liabilities and equity $47,750 $39,500
7) Use the information in Exhibit A-1 to calculate the return on assets (ROA) ratio for 20X2 7)
using operating profit margin and asset turnover. For interim and final calculations,
round dollar-based calculations to the nearest whole dollar, round percentages to four
decimal places (e.g. 0.1351, or 13.51%), and round ratios to one decimal place (e.g. 1.6).
8) Use the information in Exhibit A-1 to calculate the return on common equity (ROCE) 8)
ratio for 20X2 using operating earnings leverage, return on assets (ROA), and financial
leverage. Assume ROA for the year was 7.70%. For the interim and final calculations,
round dollar-based calculations to the nearest whole dollar, round percentages to four
decimal places (e.g. 0.1351, or 13.51%), and round ratios to one decimal place (e.g. 1.6).
3
, 9) Use the information in Exhibit A-1 to calculate the ratios listed below for 20X2: 9)
i) Current ratio
ii) Quick ratio
iii) Accounts receivable turnover ratio
iv) Inventory turnover ratio
v) Accounts payable turnover ratio
Use sales and cost of goods sold as proxies for credit sales and purchases, respectively.
Round ratios to one decimal place (e.g. 1.6).
10) Use the information in Exhibit A-1 to calculate the ratios listed below for 20X2: 10)
i) Long-term debt to equity ratio
ii) Interest coverage ratio
Round ratios to one decimal place (e.g. 1.6).
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Exhibit A-2
Gretta Company Inc.
Income Statement
For the years ended December 31
(in millions of dollars) 20X2 20X1
Revenue $53,400 $50,100
Cost of goods sold 36,800 32,700
Gross profit 16,600 17,400
Operating expenses 11,800 13,100
Operating profit 4,800 4,300
Interest and finance costs 900 1,000
Income before taxation 3,900 3,300
Income taxes 1,170 990
Net income $ 2,730 $ 2,310
Gretta Company Inc.
Balance Sheet
As at December 31
(in millions of dollars) 20X2 20X1
Assets
4
