Exam 12: Financial Statement Analysis

Many people think that financial statements analysis is the process of calculating ratios for a company. Outline the steps necessary for an analyst to undertake before calculating the ratios. Explain how the type of analysis might differ for a bank's commercial loans officer and an investment analyst.

Financial statement analysis is the process of evaluating a company's performance based on an analysis of their financial statements.

Which of the return on investment ratios would be of most interest to the management of a firm?

Which ratio can help estimate the number of years required to pay off a company's total debt?

Activity ratios measure how efficiently or effectively a company is managing its short-term assets and short-term obligations.

The textbook identifies five common categories of ratios. What are these categories and what do they measure? Provide an example for each category.

Place the following steps involved in financial statement analysis in the proper order: I. Determine the purpose and context of the analysis. II. Develop conclusions and recommendations. III. Collect information needed for the analysis. IV. Analyze and interpret the metrics. V. Prepare common-size analysis and calculate ratios.

Why is the audit report important in the analysis of a company?

The return on assets ratio could be used for a(n)

Below are data taken from the financial statements of two companies in the same industry: Instructions a) Calculate the ROA and ROE for both companies. Assume total assets and equity have not changed from the previous year. b) As an equity investor, which company would you prefer to invest in?

When a company operates in different geographic locations it is considered to have different operating segments.

Cross-sectional analysis compares data from one company with those of another company over many periods.

An analyst is comparing two companies, a retail bookstore chain and an on-line bookstore. Which of the following liquidity ratios is most likely significantly lower for the retail bookstore?

Lenders would be most concerned with

Given the following data: sales $1,500,000; gross profit $640,000; net income after tax $40,000 and income tax expense $35,000. What is the common-size percentage for operating expenses?

An investment analyst will analyze the company's results relative to other companies.

Which of the following ratios would be considerably higher for a financial services company as opposed to a manufacturer?

Purchase of inventory for cash will

Which one of the following steps adds the most value to a financial statement analysis?

Which of the following transactions will increase the current ratio (assuming the ratio is initially greater than 1)?