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

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.

Financial ratio analysis is a form of horizontal analysis in that comparisons are made between different accounts in the same set of financial statements.

The only requirement involved in communicating useful information is that the information be accurate.

Which ratio compares the earnings per share of a company to the market price for a share of the company's stock?

Working capital is current assets divided by current liabilities.

The Phillips Company paid total cash dividends of $100,000 on 25,000 outstanding common shares. On the most recent trading day, the common shares sold at $80. What is this company's dividend yield?

Comparative income statements for Church Company are provided below: Required: Perform a horizontal analysis of Church Company's income statement by computing horizontal percentages for each item.

Horizontal analysis is also known as:

Discuss the limitations that affect financial statement analysis.

Indicate whether each of the following statements about financial statement analysis is true or false. _____ a) The asset turnover ratio is calculated by dividing net income by average total assets. _____ b) The asset turnover ratio is likely to be high in an industry in which operations require only a minimal investment in assets. _____ c) Return on equity measures the wealth generated by the amount of assets invested in a business. _____ d) A higher value for the return on investment ratio would generally indicate more effective company management. _____ e) The use of financial leverage often causes a business's return on equity to be higher than its return on investment.

Indicate whether each of the following statements is true or false. _____ a) Financial statement ratios permit comparisons over time and among different companies. _____ b) Knowledge of financial statement analysis techniques is useful to stockholders and creditors but not to the managers of a business. _____ c) The primary objective of accounting is to provide information that is stable over time. _____ d) Current accounting principles indicate that financial statements should be prepared to meet information needs of those who have a reasonably informed knowledge of business. _____ e) Financial statements are aimed at the information needs of stockholders only.

Indicate whether each of the following statements about financial statement analysis is true or false. _____ a) Net margin measures a company's immediate debt-paying ability. _____ b) Accounts receivable turnover is a direct measure of a company's uncollectible accounts expense. _____ c) Accounts receivable turnover is calculated by using the following formula: net credit sales/average accounts receivable. _____ d) Net credit sales is sales on account less sales returns and discounts. _____ e) The amount of average receivables can be calculated using the amount of receivables shown on balance sheets for the current year and previous year.

Dalton Corporation and Wander Company are in different industries. Dalton's current ratio is 1.89, while Wander's current ratio is 1.65. Therefore, is it safe to conclude that Dalton's liquidity position is better than that of Wander?

The accounting concept or principle that is perhaps the greatest single culprit in distorting the results of financial statement analysis is the:

Which of the following is not included in the computation of the quick ratio?

Indicate whether each of the following statements about financial statement analysis is true or false. _____ a) Comparing percentages derived from financial statement analysis has the drawback of varying materiality levels. _____ b) The materiality of accounting information refers to whether it is viewed as favorable (good news) or unfavorable (bad news). _____ c) Companies must account for immaterial items in compliance with generally accepted accounting principles. _____ d) To judge the materiality of an absolute financial statement amount, one must consider the size of the company reporting it. _____ e) Meaningful comparisons between two companies generally should be made using percentage analysis or ratio analysis, not absolute amounts.

Which ratios measure a company's long-term debt paying ability and its financing structure?

Select the incorrect statement regarding ratio analysis.

Grey Corporation had sales of $3,000,000, cost of sales of $2,200,000, and average inventory of $500,000. What was Grey's inventory turnover ratio for the period?

As of December 31, 2012, Grove Corporation had a current ratio of 1.29, quick ratio of 1.05, and working capital of $18,000. The company uses a perpetual inventory system and sells merchandise for more than it cost. On January 1, 2012, Grove collected $5,200 of accounts receivable. As a result of this transaction, Grove's working capital will: