Profitability ratios are frequently used as a basis for evaluating management’s operating effectiveness.

Profitability ratios are frequently used as a basis for evaluating management’s operating effectiveness.

19. A
solvency ratio measures the income or operating success of an enterprise for a
given period of time.

20. The current ratio is a measure of all the
ratios calculated for the current year.

21. Inventory turnover measures the number of
times on the average the inventory was sold during the period.

22. Profitability ratios are frequently used as
a basis for evaluating management’s operating effectiveness.

23. The rate of return on total assets will be
greater than the rate of return on common stockholders’ equity if the company
has been successful in trading on the equity at a gain.

24. From a creditor’s point of view, the higher
the total debt to total assets ratio, the lower the risk that the company may
be unable to pay its obligations.

25. A current ratio of 1.2 to 1 indicates that
a company’s current assets exceed its current liabilities.

26. Using borrowed money to increase the rate
of return on common stockholders’ equity is called “trading on the
equity.”

27. When the disposal of a significant
component occurs, the income statement should report both income from continuing
operations and income (loss) from discontinued operations.

28. An event or transaction should be
classified as an extraordinary item if it is unusual in nature or if it occurs
infrequently.

29. Variations among companies in the
application of generally accepted accounting principles may reduce quality of
earnings.

30. Pro forma income usually excludes items
that the company thinks are unusual or nonrecurring.

31. The three basic
tools of analysis are horizontal analysis, vertical analysis, and ratio
analysis.

32. A percentage change
can be computed only if the base amount is zero or positive.

33. In vertical analysis, the base
amount in an income statement is usually net sales.

34. Profitability
ratios measure the ability of the enterprise to survive over a long period of
time.

35. The days in
inventory is computed by multiplying inventory turnover by 365.

36. Extraordinary items
are reported net of applicable taxes in a separate section of the income
statement.


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