52 Questions
What does the Return on Assets (ROA) measure?
Ability to generate profits from assets
Which ratio expresses a company's balance sheet liquidity in relation to its income statement?
Net working capital turnover
Why can the Return on Assets (ROA) be distorted by tax strategies?
Because it measures profit after tax
What is the significance of Return on Equity (ROE)?
Expresses total earnings of the company as a return on the owner's investment
In what scenario does a very high Sales to Net Working Capital ratio suggest that a company may be struggling?
When there is little cushion to absorb further cash requirements
What does a higher total asset turnover ratio indicate?
Increased sales with less new asset investment
Why might the net sales-to-assets ratio be less stable during periods of high sales growth?
Fixed-asset expenditures leading or lagging sales
In the context of total asset turnover, what is a cautionary factor to consider when interpreting the ratio?
Comparison with industry norms
Why is the net sales-to-NFA ratio particularly useful in analyzing fixed asset-intensive companies?
To evaluate efficiency in utilizing fixed assets
What does an improvement in the net sales-to-assets ratio suggest about a company?
On the verge of needing additional investments in assets
What does a higher sales-to-assets ratio usually indicate about a company?
The company has fixed assets contributing to its ability to make sales
In the context of accounts receivable turnover, what does a high ratio signify?
The company collects cash from credit customers more quickly
Why is calculating inventory turnover using cost of goods sold preferred?
To include the effect of markup
What does days’ sales in receivables measure in a company's financial analysis?
Average length of time cash is tied up in customer accounts
Why should one compensate for seasonality of receivables when analyzing days’ sales in receivables?
To give an accurate picture of creditworthiness
What is the principal difference between business and personal financial statement accounting, as mentioned in the text?
Employment of current values as valuation basis
In a review of financial statements, what is a task that the CPA typically performs?
Determining asset and liability valuation methods
When clients prepare their own personal financial statements, what scenario might lead to double counting of assets?
Inclusion of business assets as personal property
What task would lead to a qualified audit opinion being issued by a CPA?
Failure to follow generally accepted accounting principles (GAAP)
How are assets typically valued in personal financial statements according to the text?
Applying a combination of methods including appraisals
What is the purpose of calculating the days' COGS in inventory metric?
To measure the effect on cash of increases or decreases in the rate of inventory turnover
Why does using COGS instead of purchases to calculate accounts payable days understate the number of days' purchases in accounts payable for manufacturers?
Purchases are typically higher than COGS for manufacturers
What is the formula to calculate the days' purchases in accounts payable?
365 / Accounts payable turnover
How can the accounts payable days metric be distorted?
By seasonally high payables or receipt of a large bill just before the statement date
Which of the following is NOT mentioned in the text as a limitation of the accounts payable days metric?
It does not consider the company's profitability
What is the primary purpose of analyzing a personal financial statement when an individual is guaranteeing a loan or is the direct borrower?
To assess the individual's capacity for credit and creditworthiness
Why is it important to understand how the listed assets on a personal financial statement are titled and who has control over their sale?
To identify any potential fraud or irregularities
What is the key difference between personal financial statements and business financial statements in terms of independent assessment?
Personal financial statements do not have the benefit of independent assessment, unlike business financial statements
What is the primary difference between the accrual basis of accounting and the cash basis of accounting when preparing a personal financial statement?
The accrual basis recognizes expenses when they are incurred, while the cash basis recognizes expenses when they are paid
What is the primary purpose of the Statement of Changes in Net Worth when analyzing a personal financial statement?
To report on increases and decreases in the individual's net worth
Which asset category is typically reported at its face amount on a personal financial statement?
Cash
When valuing real estate on a personal financial statement, which approach is recommended?
Use the current market value based on an appraisal
Which of the following is the recommended approach for valuing patents, copyrights, and other intangible assets on a personal financial statement?
Estimate the discounted expected cash flow (royalty payments)
When evaluating marketable securities on a personal financial statement, what additional verification may be required if the investments are material and concentrated in a few companies or industries?
Obtain comprehensive brokerage statements and evaluate the marketability of the securities
How should closely held businesses be reported on a personal financial statement?
At the estimated current value of the investment
When evaluating a client's personal financial statement, which of the following should you consider regarding the client's investment in a closely held business?
The personal financial statement should include summarized financial information about the closely held business, such as its financial performance.
What is a potential concern regarding investments in tax shelters that were designed primarily for tax reduction?
Tax shelters can provide taxable losses that reduce the investor's personal taxes in the early years, but in later years, the taxes on partnership income can exceed the cash flow received by the partners.
When evaluating a client's personal financial statement, how should you consider the client's rights to receive future amounts, such as Social Security benefits?
Future interests should be reported at discounted amounts on the personal financial statement, assuming they do not require future service by the holder or are not contingent upon a particular event.
How should the value of retirement accounts (e.g., IRAs) be considered when evaluating a client's personal financial statement?
Retirement accounts should be reported at a discounted value on the personal financial statement to account for potential taxes and penalties upon withdrawal.
When evaluating the value of collectible assets, such as antiques or works of art, on a client's personal financial statement, what should you consider?
Collectible assets can be valued by recognized auction houses, specialized appraisers, or special interest organizations, and this valuation should be included on the personal financial statement.
Which of the following ratios measures the efficiency of a company in using its fixed assets to generate sales?
Net fixed assets (NFA) turnover
Which of the following ratios is calculated by dividing Net Sales by Net Working Capital?
Sales to net working capital (net working capital turnover)
What is the formula for calculating the Pretax Return on Assets?
Profit before tax / Total assets
If a company has a high Return on Equity (ROE) ratio, what does it suggest?
The company is generating high profits relative to its shareholders' equity
Which of the following ratios is calculated by dividing Cost of Goods Sold by Inventory?
Inventory turnover
If a company has a high accounts receivable turnover ratio, what does it signify?
The company is efficient in collecting payments from its customers
What does a high accounts receivable turnover ratio signify?
The company is collecting cash from customers quickly
Which ratio measures the efficiency of a company in using its fixed assets to generate sales?
Net fixed assets (NFA) turnover
What is the formula for calculating the days' purchases in accounts payable?
(Days in a year) / (Accounts Payable Turnover)
What does the Return on Assets (ROA) measure?
The company's profitability in relation to its total assets
Which of the following ratios is calculated by dividing Net Sales by Net Working Capital?
Sales to net working capital (net working capital turnover)
Which of the following is calculated by dividing Cost of Goods Sold by Inventory?
Inventory turnover
This quiz covers the calculation and analysis of the net sales to assets ratio, a key metric in evaluating a company's efficiency in generating sales from its assets. Learn how to interpret variations in the ratio and understand the impact of sales growth or decline on the stability of the ratio.
Make Your Own Quizzes and Flashcards
Convert your notes into interactive study material.
Get started for free
