Accounting 203 Chapter 14 Practice Test: True and False Questions

ACCOUNTING 203
Chapter 14 Practice Test
True and False Questions
1. Horizontal analysis involves comparing two or more years’ financial data for a single company.
2. Common-size statements are statements of companies of similar size and operations.
3. The gross margin percentage is computed by dividing the gross margin by sales.
4. The dividend payout ratio is equal to the current earnings per share divided by the dividend per
share.
5. When computing the price-earnings ratio, the current market price of common stock is used.
Multiple Choice Questions
6. The formula for the gross margin percentage is:

A) (Sales- Cost of goods sold)/ Cost of goods sold
B) (Sales-Cost of goods sold)/Sales
C) Net income/ Sales
D) Net income? Cost of goods sold
7. Which of the following is not a potential source of financial leverage?

A) Long-term debt.
B) Common stock.
C) Preferred stock.
D) Current liabilities.
8. Issuing new shares of stock in a five-for-one split of common stock would:

A) decrease the book value per share of common stock.
B) increase the book value per share of common stock.
C) increase total stockholders’ equity.
D) decrease total stockholders’ equity.
9. A company’s current ratio and an acid-test ratio are both greater then 1. Payment of an account
payable of $64,500 would:
A) increase the current ratio but the acid-test ratio would not be affected.
B) increase the acid-test ratio but the current ratio would not be affected.
C) increase both the current and acid-test ratios.
D) decrease both the current and acid-test ratios.
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10. What is the effect of a purchase of inventory on account on the current ratio and on working
capital, respectively? (Assume a current ratio greater than one prior to this transaction.)
Current ratio Working capital

A) decrease no effect
B) no effect decrease
C) decrease decrease
D) no effect no effect
11. Which of the following transactions will increase a company’s current ratio?
A) Selling equipment at book value.
B) Paying off short-term creditors.
C) Selling equipment at a loss.
D) Responses a, b, and c are all correct.
12. Assuming stable business conditions, an increase in the accounts receivable turnover ratio could
be explained by:
A) stricter policies with respect to the granting of credit to customers.
B) an easing of policies with respect to the granting of credit to customers.
C) a slowdown in collecting accounts receivables from customers.
D) none of these.
13. Aristotle Company’s net income last year was $400,000. The company has 150,000 shares of
common stock and 50,000 shares of preferred stock outstanding. There was no change in the number
of common or preferred shares outstanding during the year. The company declared and paid
dividends last year of $1.10 per share on the common stock and $0.40 per share on the preferred
stock. The earnings per share of common stock is closet to:
A) $2.67.
B) $1.57.
C) $2.53.
D) $2.80.
14. Arundel Company’s net income last year was $300,000. The company has 100,000 shares of
common stock and 30,000 shares of preferred stock outstanding. There was no change in the number
of common or preferred stock. The company declared and paid dividends last year of $1.90 per share
on the common stock and $1.70 per share on the preferred stock. The earnings per share of common
stock is closest to:
A) $3.51.
B) $1.10.
C) $2.49.
D) $3.00.
15. The following data have been taken from your company’s financial records for the current year:

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Earnings per share ……….. $8
Market price per share …… $60
Dividend per share ………. $6
Book value per share ……. $75
The price-earnings ratio is:

A) 7.5 to 1.
B) 10.0 to 1.
C) 9.4 to 1.
D) 13.3 to 1.
16. Drake Company’s working capital is $22,000 and its current liabilities are $98,000. The
company’s current ratio is closet to:
A) 5.45 to 1.
B) 0.78 to 1.
C) 1.22 to 1.
D) 0.22 to 1.
17. Eraw Company has $15,000 in cash, $7,000 in marketable securities, $26,000 in current
receivables, $23,000 in inventories, and $36,000 in current liabilities. The company’s acid-test (quick)
ratio is closest to:
A) 1.33 to 1.
B) 1.14 to 1.
C) 0.72 to 1.
D) 1.97 to 1.
18. Grand Company had $120,000 in sales on account last year. The beginning accounts receivable
balance was $18,000 and the ending accounts receivable balance was $14,000. The company’s
average collection period (age of receivables) was closest to:
A) 97.33 days.
B) 48.67 days.
C) 42.58 days.
D) 54.75 days.
19. The following pertain to Bass Co.:
Merchandise purchased …………………… $1,800,000

Cost of goods sold ………………………… $2,000,000
Inventory at the end of the year …………… $400,000
The inventory turnover for the year was:

A) 10.0 times.
B) 5.0 times.
C) 4.0 times.
D) 3.6 times.

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20. Harper Company, a retailer, had cost of goods sold of $190,000 last year. The beginning
inventory balance was $22,000 and the ending inventory balance was $28,000. The company’s
inventory turnover was closest to:
A) 6.79 times.
B) 7.60 times.
C) 3.80 times.
D) 8.64 times.
Use the following to answer questions 21 to 23.
Selected financial data from Hammond Company for the most recent year appear below:
Sales …………………………… $100,000
Cost of goods sold …………….. $60,000
Dividends declared and paid ….. $5,000
Interest expense ………………. $8,000
Operating expense ……………. $18,000
The income tax rate is 30%.
21. Net operating income as a percentage of sales was closest to:

A) 14%.
B) 17%.
C) 22%.
D) 9%.
22. Net income as a percentage of sales was closest to:

A) 22%.
B) 14%.
C) 40%.
D) 10%.
23. Gross margin as a percentage of sales was closest to:

A) 40%.
B) 45%.
C) 35%.
D) 22%.
Answers:
True and False
1. T 2. F 3. T 4. F 5. T
Multiple Choice
6. B 7. B 8. A 9. C 10. A 11. D 12. A 13. C 14. C 15. A 16. D 17. A 18. B 19. C 20.
B 21. C 22. D 23. A

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ACCOUNTING 203

Chapter 14 Practice Test

True and False Questions

Multiple Choice Questions

6. The formula for the gross margin percentage is:

7. Which of the following is not a potential source of financial leverage?

8. Issuing new shares of stock in a five-for-one split of common stock would:

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Current ratio Working capital

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The price-earnings ratio is:

19. The following pertain to Bass Co.:

Merchandise purchased …………………… $1,800,000

The inventory turnover for the year was:

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Use the following to answer questions 21 to 23.

The income tax rate is 30%.

21. Net operating income as a percentage of sales was closest to:

22. Net income as a percentage of sales was closest to:

23. Gross margin as a percentage of sales was closest to:

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