Exam 13: Financial Statement Analysis Available Online in the Connect Library

Select the term from the list provided that bests matches each of the following descriptions or definitions:

Describe the differences between the liquidity ratios, solvency ratios and profitability ratios. Identify examples of each type of ratio as well.

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

A banker may perform a financial ratio analysis to assess a firm's ability to repay debt in a timely manner.

The most frequently quoted measure of earnings performance is the stockholders' equity ratio.

Gamma Company and Chi Company are similar and similar-sized companies operating in the same industry. At the end of the most recent year, Gamma's price/earnings ratio was 22.0, and Chi's price/earnings ratio was 14.2. What conclusion would you draw based on the difference in price/earnings ratios for the two companies?

Indicate whether each of the following statements about financial statement analysis is true or false. _____ a) In horizontal percentage analysis, an item from the financial statements is expressed as a percentage of the same item from a previous year's financial statements. _____ b) The reason behind a financial statement ratio or percentage analysis result is usually self evident and does not require further study or analysis. _____ c) Horizontal analysis for several years can be done by choosing one year as a base year and calculating increases or decreases in relation to that year. _____ d) Vertical analysis compares two or more financial statement items within the same time period. _____ e) One form of horizontal analysis is the preparation of common size financial statements.

Liquidity ratios are used to analyze the long-term debt-paying ability and the composition of the financing structure of the firm.

Select the term from the list provided that bests matches each of the following descriptions or definitions:

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

You are considering an investment in Microsoft stock and wish to assess the firm's short-term debt-paying ability. All of the following ratios are used to assess liquidity except:

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

Indicate whether each of the following statements about financial statement analysis is true or false. _____ a) Solvency ratios measure a company's long-term debt paying ability and its financial structure. _____ b) A company with a high debt to assets ratio probably would be considered to have a high level of financial risk. _____ c) The debt to equity ratio and debt to assets ratio are two ways to measure the same relationship. _____ d) From the point of view of stockholders, a decline in the debt to equity ratio is always good news. _____ e) The lower the debt to equity ratio, the higher a company's financial leverage.

For Perrone Corporation, return on equity is substantially higher than return on investment. What does that tell you about the company?

Indicate whether each of the following statements is true or false. _____ a) Some forms of financial statement analysis involve identifying changes in the same item for the same company over a period of time. _____ b) Some forms of financial statement analysis involve comparing operations of different companies in the same industry. _____ c) Vertical analysis is also called trend analysis. _____ d) Horizontal analysis refers to studying the behavior of individual financial statement items over several periods. _____ e) Horizontal analysis could be done using changes in the absolute dollar amount of an item or trends in percentages.

Cost of goods sold/average inventory is the formula for which of these analytical measures?

Working capital is defined as:

Assume that you are considering purchasing some of a company's long-term bonds as an investment. Which of the company's financial statement ratios would you probably be most interested in?

Current financial reporting standards assume that users of accounting information:

A vertical analysis uses percentages to compare each of the parts of an individual statement to the whole. For example, on an income statement each item would be shown as a percentage of net sales.