CPCU 410 Module 7 Test Bank

1. Which of the following statements is correct regarding a company’s balance sheet?

2. The accounting equation is best represented by the formula:

3. Which one of the following is an example of a current asset?

4. Which one of the following is an example of a current liability?

5. Which one of the following statements is correct regarding a company’s balance sheet?

6. Ten years ago, ABC Company purchased an office building. The company is in the process of preparing its financial statements for the current year. Based on generally accepted accounting principles, ABC Company should record the building in their financial statements based on the building’s:

7. A corporation’s income tax liability is reflected on which one of the following financial statements?

8. A company’s net income is reported on all the following financial statements, EXCEPT:

9. Which one of the following statements is correct regarding a company’s income statement?

10. A company’s comprehensive income includes:

11. On a company’s income statement, which one of the following represents sales less cost of goods sold?

12. Comprehensive income is a measure of income that goes beyond that reported on the income statement by including items such as:

13. Cost of goods sold is reported as:

14. The profitability of a company is calculated on which one of the following financial statements?

15. Which one of the following statements is correct regarding vertical analysis based on common-size statements?

16. Which of the following statements is correct regarding vertical analysis?

17. Which of the following statements is correct regarding multiple-period vertical analysis?

18. The balance sheet for WMWM Company reveals the following:

Assets		Liabilities & Equity
Cash	5%	Accounts Payable	25%
Inventory	17%	Line of Credit	15%
Accounts Receivable	16%	Common Stock	25%
Property, Plant, and Equipment	62%	Retained Earnings	35%

Which one of the following statements is correct regarding the balance sheet?

19. When examining a company that has recently implemented growth strategies, an analyst using vertical analysis would expect to see which of the following changes?

20. If an analyst is attempting to determine if changes in the composition of a company’s assets are consistent with the company’s business strategy, the analyst would most likely select:

21. ABC Company’s common-sized financial statements indicate the following:

Account	Year B	Year A
Cash	4%	10%
Accounts Receivable	6%	4%
Inventory	23%	35%
Property and Equipment	67%	51%
Accounts Payable	15%	11%
Long-Term Debt	21%	5%
Paid-In Capital	5%	5%
Retained Earnings	59%	79%

Which one of the following statements is correct regarding their activities from Year A to Year B?

22. All of the following statements are correct regarding trend analysis, EXCEPT:

23. Which one of the following would an analyst most likely focus on when performing trend analysis on a manufacturing company?

24. An analyst’s goal is to quantify the growth rates of a company’s gross receipts and net profits over the last five years to project the company’s performance in the coming year. The analyst could accomplish this goal using:

25. John wants to quantify his company’s growth rate over the past year. Using the following data, what is the approximate growth rate?
• Net income – Year 1 – $110, 600
• Net income – Year 2 – $164,500

26. Which one of the following statements is correct regarding ratio analysis?

27. Which one of the following statements is correct regarding ratio analysis?

28. Which one of the following represents a liquidity ratio that measures an organization’s ability to meet its current financial obligations?

29. Which one of the following ratios is considered an efficiency ratio?

30. A company had the following:
• Return on Assets: 20%
• Debt to Asset ratio: 0.3
• Net income: $300,000
What is the amount of the company’s total liabilities?

31. XYZ Company has the following:
• Sales – $400,000
• Cost of Goods Sold – $300,000
• Inventory – $200,000
• Accounts Receivable – $50,000
What is the inventory turnover ratio for XYZ Company?

32. Company X and Company Y both have a return on assets (ROA) of 15%, and they both have the same amount of total assets. However, the net profit margin for Company Y is higher than the net profit margin for Company X. The probable reason for this is because:

33. XYZ Company reflects the following amounts in its year-end financial statements:
• Accounts receivable – $5,000,000
• Inventory – $10,000,000
• Credit sales – $30,000,000
• Cost of goods sold – $20,000,000
• Net income – $8,000,000
Based on these amounts, XYZ’s inventory turnover ratio is:

34. XYZ Company reflects the following amounts in its year-end financial statements:
• Accounts receivable – $5,000,000
• Inventory – $10,000,000
• Credit sales – $30,000,000
• Cost of goods sold – $20,000,000
• Net income – $8,000,000
Based on these amounts, XYZ’s accounts receivable turnover ratio is:

35. Financial statements for three companies reveal the following information:

Company	Net Income	Sales	Total Assets
Company A	$10,000	$150,000	$500,000
Company B	$12,000	$200,000	$450,000
Company C	$30,000	$400,000	$900,000

Assuming the industry benchmark for profit margin is 6.3%, which one of the following statements is correct?

36. Stacy is an underwriter for ABC Insurance Company. She was reviewing the financial ratios for an insurance applicant, as prepared by two analysis organizations. The return on equity ratio prepared by the first analysis organization was different than the return on equity prepared by the second analysis organization. Stacy determined that the reason for this discrepancy was because the first analysis organization used ending shareholders’ equity in the calculation, while the second analysis organization used average shareholders’ equity. These differing values illustrate the importance of considering:

37. A company has the following information:
• Return on equity – 20%
• Net income – $5,000,000
• Total liabilities – $15,000,000
• Sales – $20,000,000
What is the company’s return on assets?

38. Roberson Company issued financial statements containing the following information:
• Sales – $5,000,000
• Inventory – $1,000,000
• Cost of goods sold – $2,800,000
• Net income – $750,000
What is Roberson’s inventory turnover ratio?

39. QualityCo financial statements reflect the following amounts:
• Cash – $100,000
• Accounts receivable – $75,000
• Property, plant, and equipment – $225,000
• Marketable securities – $50,000
• Inventory – $150,000
• Current liabilities – $300,000
• Long-term liabilities – $500,000
Based on this information, QualityCo’s acid-test ratio is:

40. Zydex Corporation has a current ratio that is equal to the industry average for stores comparable in size and operations. If Zydex has an acid-test ratio that is lower than the industry average, an underwriter analyzing the financial statements may be concerned that:

41. Assume the following information for Shrute Company:
• Cash – $50,000
• Accounts Receivable – $25,000
• Marketable Securities – $100,000
• Inventory – $125,000
• Property and Equipment – $300,000
• Goodwill –$225,000
• State Taxes Due – $25,000
• Short-term Debt – $75,000
• Long-term Debt – $150,000
• Common Stock – $100,000
• Retained Earnings – $475,000
What is Shrute Company’s working capital?

42. Below is an excerpt from Davis Company’s common-size balance sheet for the last two years:

Description	Current	Prior
Current Assets	3.5%	15.4%
Gross Equipment	75.4%	57.8%
Total Liabilities	41.1%	27.9%
Shareholders’ Equity	58.9%	72.1%

Based on this information, which one of the following statements is correct?

43. ABC Manufacturing Company has recently used borrowings to acquire more warehouses over the last three years. After reviewing common-size financial statements for the last four years, an ratio analyst would most likely see that:

44. QualityCo financial statements reflect the following amounts:
• Cash – $100,000
• Accounts receivable – $75,000
• Property, plant, and equipment – $225,000
• Marketable securities – $50,000
• Inventory – $150,000
• Current liabilities – $300,000
• Long-term liabilities – $500,000
Based on this information, QualityCo’s current ratio is:

45. A loan officer is likely to use the debt-to-asset ratio for a loan applicant to:

46. Assume the following information for Davis Company:
• Cash – $75,000
• Accounts Receivable – $50,000
• Marketable Securities – $175,000
• Inventory – $150,000
• Property and Equipment – $400,000
• Payroll Taxes Due – $75,000
• Short-term Debt – $100,000
• Long-term Debt – $150,000
• Common Stock – $100,000
• Retained Earnings – $450,000
What is Davis Company’s working capital?

47. XYZ Company has the following:
• Cash – $300,000
• Marketable Securities – $200,000
• Accounts Receivable – $100,000
• Inventory – $800,000
• Long-term Investments – $2,000,000
• Current Liabilities – $750,000
What is the quick ratio for XYZ Company?