Question 1

Discuss the limitations that affect financial statement analysis.

Accepted Answer

Answers will vary.
The results of financial statement analysis can be difficult to interpret and explain because of differences among industries, changing economic conditions, and the varying accounting principles and estimates made by different companies. Financial statement analysis is useful in giving an overview of a company. Studying a company's financial statements over a period of years and comparing the results to other companies in the same industry can help to reduce the ambiguity associated with the analysis results.

Question 2

The following information applies to Acorn Construction Company (ACC):
   Information on the number of shares outstanding is provided below:
   Required:Compute the following ratios for ACC for Year 2 and Year 1:(a)Number of times interest is earned(b)Earnings per share(c)Price-earnings ratio (Market prices: Year 2 $17.50 per share, Year 1 $15.00 per share)(d)Return on equity(e)Net margin

Accepted Answer

a)5.2 and 5.6b)$1.06 and $0.74c)16.51 and 20.27d)7.3% and 7.2%e)6.7% and 8.7%

Question 3

Short-term creditors are usually most interested in assessing:

Accepted Answer

A) Liquidity. 
B) Solvency. 
C) Managerial effectiveness. 
D) Profitability. 
A) Liquidity. 
B) Solvency. 
C) Managerial effectiveness. 
D) Profitability. A

Question 4

The following information applies to Markham Company:
   Additional information: Net credit sales equal $220,000 and beginning accounts receivable were $11,000.Required:Compute Markham's:(a)Quick ratio(b)Current ratio(c)Working capital(d)Accounts receivable turnover(e)Average days to collect receivables
Round your answers to two decimal places.

Accepted Answer

(a)1.27
Quick ratio = ($6,000 + $13,000)

Question 5

The following information was provided by Joseph Company as of December 31, Year 2:
   On the most recent trading date, Joseph's common shares sold at $36 and the preferred shares sold at $14.
The following information on industry averages is provided:
Earnings per share $2.06
Price-earnings ratio 13.2:1
Required: 1)Calculate Joseph Company's (a)earnings per share and (b)price-earnings ratios. Round your answer to two decimal places.2)Discuss whether you would invest in this company.

Accepted Answer

Answers will vary.1)(a)$2.36
Earnings pe

Question 6

When debt is used to finance the purchase of assets, the term or time span of the debt should always be shorter than the lifespan of the assets.

Accepted Answer

A) True 
 B)False

Question 7

In vertical analysis of a balance sheet, each item is expressed as a percentage of:

Accepted Answer

A) Total assets. 
B) Total cash. 
C) Total current assets. 
D) None of these answers choices are correct. 
A) Total assets. 
B) Total cash. 
C) Total current assets. 
D) None of these answers choices are correct.

Question 8

A limitation of financial statement analysis stems from the discretion of management to choose accounting procedures that cast the best light on the firm's performance.

Accepted Answer

A) True 
 B)False

Question 9

The following balance sheet information was provided by Western Company:   Assuming Year 2 net credit sales totaled $365,000, what was the company's average days to collect receivables? (Use 365 days in a year. Do not round your intermediate calculations. Round your answer to 2 decimal places.)

Accepted Answer

A) 25.00 days 
B) 21.50 days 
C) 28.50 days 
D) 52.00 days 
A) 25.00 days 
B) 21.50 days 
C) 28.50 days 
D) 52.00 days

Question 10

Various ratios are computed to assess different aspects of a company's financial condition and (or)strength.Required:In the table below, indicate which aspect of financial condition each specified ratio is designed to assess:

Accepted Answer

The answer of Various ratios are computed to assess different...

Question 11

The following balance sheet information is provided for Gaynor Company:   Assuming Year 2 cost of goods sold is $153,300, what is the company's inventory turnover?

Accepted Answer

A) 4.0 times 
B) 4.4 times 
C) 4.2 times 
D) None of these answers choices are correct. 
A) 4.0 times 
B) 4.4 times 
C) 4.2 times 
D) None of these answers choices are correct.

Question 12

Which of the following statements regarding horizontal analysis is not true?

Accepted Answer

A) Percentage analysis involves computing the percentage relationship between two amounts. 
B) A horizontal analysis of cost of goods sold on the income statement includes dividing gross margin by total revenue. 
C) Horizontal analysis attempts to eliminate the materiality problem of comparing firms of different sizes. 
D) In horizontal percentage analysis, a financial statement line item is expressed as a percentage of the previous balance of the same item. 
A) Percentage analysis involves computing the percentage relationship between two amounts. 
B) A horizontal analysis of cost of goods sold on the income statement includes dividing gross margin by total revenue. 
C) Horizontal analysis attempts to eliminate the materiality problem of comparing firms of different sizes. 
D) In horizontal percentage analysis, a financial statement line item is expressed as a percentage of the previous balance of the same item.

Question 13

Financial ratios can be used to assess which of the following aspects of a firm's performance?

Accepted Answer

A) Liquidity 
B) Solvency 
C) Profitability 
D) All of these answer choices are correct. 
A) Liquidity 
B) Solvency 
C) Profitability 
D) All of these answer choices are correct.

Question 14

Financial analysis typically involves some form of comparison such as changes in the same item over a number of years.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements regarding the analysis of absolute amounts of various accounts reported on the financial statements is not true?

Accepted Answer

A) Financial statement users with expertise in particular industries can look at absolute amounts and assess a company's performance in a certain area. 
B) To correctly evaluate an absolute amount, the analyst must consider its relative importance. 
C) Economic statistics such as the gross national product are built upon totals of absolute amounts reported by businesses. 
D) Using absolute amounts eliminates the problem of varying materiality levels. 
A) Financial statement users with expertise in particular industries can look at absolute amounts and assess a company's performance in a certain area. 
B) To correctly evaluate an absolute amount, the analyst must consider its relative importance. 
C) Economic statistics such as the gross national product are built upon totals of absolute amounts reported by businesses. 
D) Using absolute amounts eliminates the problem of varying materiality levels.

Question 16

Explain the difference between horizontal analysis and vertical analysis of a company's financial statements.

Accepted Answer

Answers will vary.
Horizontal analysis m

Question 17

Which of the following statements is generally not true from an investor's perspective?

Accepted Answer

A) A 1:1 current ratio is generally preferred over a 1.5:1 current ratio. 
B) A 20-day average collection period for accounts receivable is generally preferred over a 30-day average collection period. 
C) A 5% dividend yield is generally preferred over a 3% dividend yield. 
D) A 10% net margin is generally preferred over an 8% net margin. 
A) A 1:1 current ratio is generally preferred over a 1.5:1 current ratio. 
B) A 20-day average collection period for accounts receivable is generally preferred over a 30-day average collection period. 
C) A 5% dividend yield is generally preferred over a 3% dividend yield. 
D) A 10% net margin is generally preferred over an 8% net margin.

Question 18

Indicate whether each of the following statements about financial statement analysis is true or false.________ a)Working capital is a measure of the amount of current assets a company would have left after paying its current liabilities.________ b)If a transaction causes a company's working capital to increase, the transaction caused the company to become less liquid.________ c)Interpretation of a company's current ratio can be difficult because it is an absolute amount.________ d)The quick ratio is a more conservative variation of the current ratio.________ e)The quick ratio is usually calculated by using the following equation: (cash + receivables + current marketable securities)÷ current liabilities.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following is a potential limitation of financial statement analysis?

Accepted Answer

A) Lack of comparability of firms in different industries 
B) The impact of changing economic conditions 
C) The impact of having more than one acceptable alternative accounting principle for accounting for a given transaction or economic event 
D) All of these answers choices are correct. 
A) Lack of comparability of firms in different industries 
B) The impact of changing economic conditions 
C) The impact of having more than one acceptable alternative accounting principle for accounting for a given transaction or economic event 
D) All of these answers choices are correct.

Question 20

Which of the following statements about financial statements is not true?

Accepted Answer

A) The net margin ratio is a profitability ratio. 
B) The current ratio is a liquidity ratio. 
C) The debt-to-assets ratio is a liquidity ratio. 
D) The dividend yield is a stock market ratio. 
A) The net margin ratio is a profitability ratio. 
B) The current ratio is a liquidity ratio. 
C) The debt-to-assets ratio is a liquidity ratio. 
D) The dividend yield is a stock market ratio.

Discuss the limitations that affect financial statement analysis.

Short-term creditors are usually most interested in assessing:

When debt is used to finance the purchase of assets, the term or time span of the debt should always be shorter than the lifespan of the assets.

In vertical analysis of a balance sheet, each item is expressed as a percentage of:

A limitation of financial statement analysis stems from the discretion of management to choose accounting procedures that cast the best light on the firm's performance.

The following balance sheet information was provided by Western Company: Assuming Year 2 net credit sales totaled $365,000, what was the company's average days to collect receivables? (Use 365 days in a year. Do not round your intermediate calculations. Round your answer to 2 decimal places.)

Various ratios are computed to assess different aspects of a company's financial condition and (or)strength.Required:In the table below, indicate which aspect of financial condition each specified ratio is designed to assess:

The following balance sheet information is provided for Gaynor Company: Assuming Year 2 cost of goods sold is $153,300, what is the company's inventory turnover?

Which of the following statements regarding horizontal analysis is not true?

Financial ratios can be used to assess which of the following aspects of a firm's performance?

Financial analysis typically involves some form of comparison such as changes in the same item over a number of years.

Which of the following statements regarding the analysis of absolute amounts of various accounts reported on the financial statements is not true?

Explain the difference between horizontal analysis and vertical analysis of a company's financial statements.

Which of the following statements is generally not true from an investor's perspective?

Which of the following is a potential limitation of financial statement analysis?

Which of the following statements about financial statements is not true?

An Introduction to Accounting

Accounting for Accruals

Accounting for Deferrals

Accounting for Merchandising Businesses

Accounting for Inventories

Internal Control and Accounting for Cash

Accounting for Receivables

Accounting for Long-Term Operational Assets

Accounting for Current Liabilities and Payroll

Accounting for Long-Term Debt

Proprietorships, Partnerships, and Corporations

Statement of Cash Flows

The Double-Entry Accounting System

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Exam 14: Financial Statement Analysis Available Online in Connect

Discuss the limitations that affect financial statement analysis.

Short-term creditors are usually most interested in assessing:

When debt is used to finance the purchase of assets, the term or time span of the debt should always be shorter than the lifespan of the assets.

In vertical analysis of a balance sheet, each item is expressed as a percentage of:

A limitation of financial statement analysis stems from the discretion of management to choose accounting procedures that cast the best light on the firm's performance.

The following balance sheet information was provided by Western Company: Assuming Year 2 net credit sales totaled $365,000, what was the company's average days to collect receivables? (Use 365 days in a year. Do not round your intermediate calculations. Round your answer to 2 decimal places.)

Various ratios are computed to assess different aspects of a company's financial condition and (or)strength.Required:In the table below, indicate which aspect of financial condition each specified ratio is designed to assess:

The following balance sheet information is provided for Gaynor Company: Assuming Year 2 cost of goods sold is $153,300, what is the company's inventory turnover?

Which of the following statements regarding horizontal analysis is not true?

Financial ratios can be used to assess which of the following aspects of a firm's performance?

Financial analysis typically involves some form of comparison such as changes in the same item over a number of years.

Which of the following statements regarding the analysis of absolute amounts of various accounts reported on the financial statements is not true?

Explain the difference between horizontal analysis and vertical analysis of a company's financial statements.

Which of the following statements is generally not true from an investor's perspective?

Which of the following is a potential limitation of financial statement analysis?

Which of the following statements about financial statements is not true?

An Introduction to Accounting

Accounting for Accruals

Accounting for Deferrals

Accounting for Merchandising Businesses

Accounting for Inventories

Internal Control and Accounting for Cash

Accounting for Receivables

Accounting for Long-Term Operational Assets

Accounting for Current Liabilities and Payroll

Accounting for Long-Term Debt

Proprietorships, Partnerships, and Corporations

Statement of Cash Flows

The Double-Entry Accounting System

Filters