Deck 22: Financial Statement Analysis

Question 1

Upon analyzing the financial statements of KER Ltd., you notice that there have been few capital asset acquisitions and that capital assets seem low relative to the type of business the company is in.This observation may mean that KER Ltd.is engaged in a(n):

A)Off-balance-sheet financing.
B)Smoothing strategy.
C)Profit maximization strategy.
D)Income tax minimization strategy.

Answer 1

A

Question 2

Which of the following analytical techniques would best be used to compare a company's performance to that of its competitors over time?

A)Cross-sectional comparison
B)Statistical multivariate ratio analysis
C)Residual analysis
D)Time-series analysis

Answer 2

C

Question 3

All of the following may be included in the numerator of the debt-to-equity ratio except:

A)Shareholder loans.
B)Retractable preferred shares.
C)Short-term bank loans.
D)Current portion of long-term debt.

Answer 3

A

Question 4

A short accounts receivable turnover ratio may mean all of the following except:

A)That the company is realizing cash from sales in a short time period.
B)Fewer old receivables that may prove to be uncollectible.
C)That customers are dictating the payment terms.
D)All of these choices are correct.

Question 5

The amount of working capital would not be affected by which of the following transactions?

A)Transfer of a long-term investment for cash
B)Issuance of a long-term note in exchange for cash
C)Sale of long-term investments for cash at a loss
D)Issuance of common shares of the corporation in exchange for noncurrent assets
E)All of these choices would affect working capital

Question 6

A financial statement analyst will look at the cash flow statement for all of the following except:

A)If cash flow is significantly larger than earnings, the company may be very conservative in its accounting practices.
B)To determine the depreciation add back.
C)If earnings with amortization added back are significantly larger than cash flow from operations, the company may be maximizing net income.
D)To see if the cash flow statement excludes certain operating expenditures.

Question 7

Information from LMN's balance sheet at December 31, 2014, is as follows in millions: Current assets: Current liabilities: What is the quick (acid-test)ratio?

A)$968/$1,044
B)$448/$204
C)$440/$324
D)$440/$204
E)None of these choices are correct

Question 8

Disclosure of significant accounting policies results from application of the:

A)full disclosure principle.
B)matching principle.
C)consistency principle.
D)reliability principle.

Question 9

Selected information from the accounting records of CDE is as follows in 000's: What was the inventory turnover for 2014?

A)5)00 times
B)4)61 times
C)5)45 times
D)None of these choices are correct

Question 10

The effect of recording a 100 percent stock dividend would be to:

A)leave working capital unaffected, decrease earnings per share, and decrease the debt to equity ratio.
B)leave working capital unaffected, decrease earnings per share, and decrease book value per share.
C)leave inventory turnover unaffected, decrease working capital, and decrease book value per share.
D)decrease the current ratio, decrease working capital, and decrease book value per share.
E)None of these choices are correct.

Question 11

DEF wrote off a $300 uncollectible account receivable against the $3,600 balance in its allowance account.Compare the current ratio before the write-off with the current ratio after the write-off.

A)The current ratio before the write-off is less than the current ratio after the write-off.
B)The current ratio before the write-off is equal to the current ratio after the write-off.
C)The current ratio before the write-off is greater than the current ratio after the write-off.
D)The current ratio cannot be determined from information given.
E)None of these choices are correct.

Question 12

In a popular business journal, JMR Ltd.was compared to KAR Corp.for the year ended December 31, 20x14.This is an example of:

A)Historical comparison.
B)Cross-sectional comparison.
C)Longitudinal comparison.
D)Yearly comparison.
E)Industrial comparison.

Question 13

Horizontal analysis:

A)is exactly the same as "vertical analysis".
B)refers to the development of percentages indicating the proportionate change in the same item over time.
C)is useful for balance sheet but not for income statement.
D)involves the expression of each item on a particular period's financial statements as a percent of one specific item which is referred to as a base.
E)None of these choices are correct.

Question 14

The rule of thumb for the current ratio is 2:1.When would a current ratio below this threshold not necessarily be a concern for a company?

A)When cash flows are steady and reliable
B)When inventories are high
C)When accounts receivable balances are high
D)None of these choices are correct

Question 15

All of the following are decisions that may be made with financial statement analysis except:

A)share offering decisions.
B)contractual decisions.
C)lending decisions.
D)share investment decisions.
E)regulatory decisions.

Question 16

Which of the following analytical techniques could be most likened to a form of trend analysis?

A)Vertical analysis
B)Residual analysis
C)Statistical multivariate ratio analysis
D)Time-series analysis

Question 17

Historical analysis is part of a(n):

A)Industrial ratio.
B)Longitudinal comparison.
C)Historical ratio.
D)Cross-sectional comparison.

Question 18

Which of the following analytical techniques uses statistical models in an attempt to predict a certain outcome?

A)Multivariate ratio analysis
B)Longitudinal comparison
C)Residual analysis
D)Cross-sectional comparison

Question 19

Upon reading the notes to the financial statements of KAR Ltd., you notice that the policies they have chosen tend to be deferring and amortizing both revenue and expenses.This approach leads you to believe that KAR Ltd.is employing a(n):

A)Income tax minimization strategy.
B)Profit maximization strategy.
C)Smoothing strategy.
D)Income tax maximization strategy.

Question 20

Selected information for HIJ in 000's is as follows: HIJ's return on average common shareholders' equity, rounded to the nearest percentage point, for 2014 is: (Round percentage answer to nearest whole percent)

A)19 percent.
B)17 percent.
C)23 percent.
D)15 percent.
E)None of these choices are correct.

Question 21

The rule of thumb for the quick ratio is 1:1.When would a quick ratio below this threshold not necessarily be a concern for a company?

A)When inventories are high
B)When accounts receivable balances are high
C)When cash flows are steady and reliable
D)None of these choices are correct

Question 22

In a popular business journal, JMR Ltd.financial data for the last five years was compared.This is an example of:

A)Yearly comparison.
B)Longitudinal comparison.
C)Industrial comparison.
D)Cross-sectional comparison.

Question 23

Upon reading the notes to the financial statements of JMR Ltd., you notice that the policies they have chosen tend to recognize revenue early in the earnings cycle while deferring costs to later periods.This approach leads you to believe that JMR Ltd.is employing a(n):

A)Profit maximization strategy.
B)Income tax minimization strategy.
C)Income tax maximization strategy.
D)Smoothing strategy.

Question 24

All of the following are examples of regulatory decisions except:

A)impact of past regulatory decisions.
B)need for rate or price increases.
C)negotiating collective agreements.
D)ability to withstand competition.

Question 25

A company has a current ratio of 2 to 1.This ratio will decrease if the company:

A)sells merchandise for more than cost and records the sale using the perpetual inventory method.
B)pays a large account payable which had been a current liability.
C)borrows cash on a six-month note.
D)receives a 5 percent stock dividend on one of its marketable securities.
E)None of these choices are correct.

Question 26

You are given the following information about JMR Corp.: What is JMR's current ratio? (Round final answer to 2 decimal places)

A)1)67:1
B)0)37:1
C)1)23:1
D)0)62:1

Question 27

Which of the following represent situations where financial statements should be recast?

A)Amortization or depreciation is removed yielding earnings before interest taxes and depreciation.
B)Interest expense is removed from net income.
C)Income statement and balance sheet are revised to reflect a different capitalization policy.
D)All of these choices are correct.

Question 28

Disclosure of significant accounting policies should include all of the following items except:

A)the depreciation methods.
B)the inventory costing methods.
C)the amortization methods.
D)the valuation method used for operational assets.

Question 29

If business conditions are stable, an increase in the number of accounts receivable turnover from one year to the next (based upon a company's accounts receivable at year-end)might indicate:

A)a stiffening of the company's credit policies.
B)a significant decrease in the volume of sales of the second year.
C)that the second year's sales were made at lower prices than the first year's sales.
D)that a longer discount period and a more distant due date were extended to customers in the second year.
E)None of these choices are correct.

Question 30

It is important for the user to understand the financial statements in order to make an informed decision.A user must generally do all of the following except:

A)If a lender, will generally use unconsolidated statements.
B)All users must be able to evaluate risks.
C)If an equity investor, will generally use consolidated statements.
D)All of these choices are correct.

Question 31

Which of the following transactions would increase a company's positive current ratio?

A)Borrow money on a short-term note
B)Use the equity method to reflect earnings of an investee
C)Repay the principal on a short-term note
D)Sell a temporary investment at a loss
E)None of these choices would increase a company's positive current ratio

Question 32

Current monetary assets divided by annual operating expenditures, which is itself divided by 365, is:

A)Debt-to-total capitalization ratio.
B)Defensive-interval ratio.
C)Debt-to-capital employed.
D)None of these choices are correct.

Question 33

The main place to look for clues as to management's reporting objectives is:

A)in the financial statements.
B)in the financial statement highlights.
C)in the management discussion and analysis section.
D)in the notes to the financial statements.

Question 34

Which of the following is a list of the types of auditors' opinions going from worst to best?

A)Unqualified, qualified, adverse, disclaimer
B)Qualified, disclaimer, adverse, unqualified
C)Disclaimer, unqualified, qualified, adverse
D)Disclaimer, unqualified, adverse, qualified
E)None of these choices are correct.

Question 35

A company with sales terms of n/30 would prefer a receivable turnover of:

A)5)
B)20.
C)10.
D)2)
E)All of these choices are equally desirable if sales terms are n/30.

Question 36

Efficiency ratios are also known as:

A)Solvency ratios.
B)Effectiveness ratios.
C)Turnover ratios.
D)Profitability ratios.

Question 37

To apply a vertical analysis to the balance sheet, the base amount usually selected is:

A)either total liabilities or total shareholders' equity.
B)total revenues.
C)total assets.
D)total liabilities.
E)total shareholders' equity.

Question 38

Overall management performance is better measured by use of the:

A)return on total assets.
B)profit margin on sales.
C)debt-equity ratio.
D)current ratio.
E)None of these choices are correct.

Question 39

Which of the following is not known as a liquidity ratio?

A)Debt-to-equity
B)Quick ratio
C)Current ratio
D)Defensive-interval ratio

Question 40

The accounts receivable turnover ratio is a measure of:

A)The average length of time that it takes to collect the accounts receivable.
B)The amount of time that it takes to create more receivables.
C)The number of days that it takes to collect the receivables.
D)None of these choices are correct.

Question 41

All of the following represent groups of ratios except:

A)Profitability ratios.
B)Effectiveness ratios.
C)Liquidity ratios.
D)Solvency ratios.

Question 42

Which of the following is not known as a solvency ratio?

A)Defensive-interval ratio
B)Debt-to-total assets
C)Debt-to-equity
D)Times interest earned

Question 43

Information concerning XYZ's common shares is as follows: What was the price-earnings ratio on common shares for 2014?

A)2)67 to 1
B)3 to 1
C)4 to 1
D)2 to 1
E)None of these choices are correct.

Question 44

All of the following are examples of contractual decisions except:

A)ability to withstand competition.
B)entering into a joint venture.
C)negotiating collective agreements.
D)accepting employment.

Question 45

Ryan Company analyzed its financial statements for the year ended December 31.During its analysis, Ryan Company compared the accounts receivable balance from 2014 to 2013.This type of analysis is called:

A)Account comparison.
B)Cross-sectional comparison.
C)Longitudinal comparison.
D)Sectional comparison.

Question 46

IFRS standards require the presentation of comparative financial statements by most companies for the current year as well as:

A)one preceding year.
B)three succeeding years.
C)four preceding years.
D)three preceding years.
E)two preceding years.

Question 47

There are certain situations where it is necessary to recast the financial statements in order to analyze them.All of the following are examples of the need to recast except:

A)Interest on long-term debt amounted to $1,000,000.
B)The income statement contains a number of gains not expected to occur in the future.
C)There have been a number of temporary differences.They remain on the balance sheet.
D)Asset purchases were made during the year.

Question 48

Vertical analysis is a(n):

A)Longitudinal comparison.
B)Industrial ratio.
C)Cross-sectional comparison.
D)Historical ratio.

Question 49

A qualified auditor's opinion means that in the judgment of the auditor:

A)a number of substantive items on the financial statements are doubtful as to their ultimate outcome.
B)one, or only a few minor, items on the financial statements are doubtful as to their ultimate outcome.
C)all items on the financial statements are in conformity with GAAP.
D)the audit was not completed.
E)None of these choices are correct.

Question 50

There still remain problems when accounting policies are disclosed for choices made among acceptable alternatives.All of the following are problems except:

A)The disclosure is specific, but the numerical information is missing.
B)Some industries do not have to disclose accounting policies.
C)There is no disclosure of crucial policies, such as revenue recognition.
D)Disclosure is generally too vague to be of use without additional information.

Question 51

A company issuing financial statements would most prefer to receive an auditor's opinion that is:

A)qualified.
B)adverse.
C)a disclaimer.
D)either qualified or unqualified.
E)unqualified.

Question 52

LMN reported the following 2014 data in 000's: LMN's average age of the receivables was (in days): (Assume 360 days in a year)

A)61 days.
B)91 days.
C)115 days.
D)37 days.
E)None of these choices are correct.

Question 53

Upon reading the notes to the financial statements of KAR Ltd., you notice that the policies they have chosen tend to be deferring revenue but expensing operating costs as incurred.This approach leads you to believe that KAR Ltd.is employing a(n):

A)Profit maximization strategy.
B)Income tax maximization strategy.
C)Smoothing strategy.
D)Income tax minimization strategy.

Question 54

RST has provided the following information in 000's on selected cash transactions for 2014: What is the increase in working capital for the year ended December 31, 2014, as a result of the above information?

A)$4,000
B)$5,600
C)$400
D)None of these choices are correct.

Question 55

If a company converted a short-term note payable into a long-term note payable, this transaction would:

A)increase only working capital.
B)decrease only working capital.
C)have no effect on either the current ratio or net working capital.
D)increase both working capital and the current ratio.
E)decrease both working capital and the current ratio.

Question 56

Common-size analysis is a(n):

A)Historical ratio.
B)Longitudinal comparison.
C)Cross-sectional comparison.
D)Industrial ratio.

Question 57

STU reported the following ratios: The financial leverage factors in 2010, 2011, and 2012 respectively, are (the parentheses indicate negative value):

A)Choice 2
B)Choice 1
C)Choice 5
D)Choice 4
E)Choice 3

Question 58

The "best" opinion that an auditor can give is a(n):

A)qualified opinion.
B)unqualified opinion.
C)adverse opinion.
D)unqualified opinion and disclaimer of opinion are equally good.
E)disclaimer of opinion.

Question 59

Solvency ratios can be further classified as:

A)Liquidity ratios.
B)Asset ratios.
C)Fixed ratios.
D)Leverage ratios.

Question 60

CDE reported the following 2014 data in 000s: CDE's inventory turnover for 2014 was:

A)6)00 times.
B)2)50 times.
C)0)33 times.
D)3)00 times.
E)None of these choices are correct.

Question 61

Which of the following ratios is an indicator of liquidity?

A)The Debt-to-Total Assets Ratio.
B)The Inventory Turnover Ratio
C)The Current Ratio.
D)The Age of Receivables Ratio.

Question 62

You are given the following information about JMR Corp.: What is JMR's quick ratio? (Round final answer to 2 decimal places)

A)1)67:1
B)0)23:1
C)0)46:1
D)1)23:1

Question 63

ABC's net accounts receivable were $1,000 at December 31, 2013 and $1,200 at December 31, 2014.Net cash sales for 2014 were $400.The accounts receivable turnover for 2014 was 5.0.What were ABC's total net sales for 2014?

A)$5,900
B)$6,400
C)$6,000
D)$11,000
E)None of these choices are correct

Question 64

Return on total assets is generally considered to be a better measure of the overall profit performance of a business than is profit margin on sales.

Question 65

All of the following are examples of lending decisions except:

A)accepting employment.
B)buy corporate bonds on the open market.
C)finance the takeover of another corporation.
D)extend normal credit terms.

Question 66

The quick ratio will always be less than or equal to the current ratio.

Question 67

The negotiating of a collective agreement is a contractual decision that may necessitate the use of financial analysis.

Question 68

Quick assets, as usually defined, include:

A)cash and accounts receivable only.
B)cash only.
C)cash, accounts receivable, short-term investments in marketable securities, only.
D)cash, accounts receivable, short-term investments in marketable securities, and inventories.
E)None of these choices are correct.

Question 69

The section on significant accounting policies describes where deviations from GAAP have occurred.

Question 70

A company which offers "n/15" credit terms assuming 360 days in year would be expected to have a receivable turnover of about 24 times a year.

Question 71

In horizontal analysis of financial statements, the base amounts used for purposes of comparison are the financial results of a previous time period.

Question 72

HIJ reported the following data for 2014 in 000's: Assuming vertical analysis, what is the relationship between current assets, operational assets, and other assets, respectively? (Rounded to the nearest percent)

A)Choice 1
B)Choice 2
C)Choice 3
D)Choice 4
E)Choice 5

Question 73

Vertical analysis of financial statements refers to the development of percentages indicating the proportionate changes in selected financial statements for two or more reporting periods.

Question 74

A clean opinion is another term to describe a company that has received an unqualified audit report.

Question 75

Vertical analysis of financial statements refers to a comparison of amounts which are expressed in terms of a base amount that is from a:

A)previous time period.
B)financial summary.
C)specific amount that is on the same financial statement.
D)either previous time period or common size statement.
E)common size statement.

Question 76

Recording the payment (as distinguished from the declaration)of a cash dividend whose declaration was already recorded will:

A)decrease both the current ratio and working capital.
B)have no effect on the current ratio or earnings per share.
C)increase the current ratio but have no effect on working capital.
D)increase both the current ratio and working capital.
E)None of these choices are correct.

Question 77

If current assets exceed current liabilities, payments to creditors made on the last day of the month will:

A)increase current ratio.
B)decrease net working capital.
C)increase net working capital.
D)decrease current ratio.
E)have no effect on either the current ratio or net working capital.

Question 78

Trend analysis is part of a(n):

A)Industrial ratio.
B)Longitudinal comparison.
C)Historical ratio.
D)Cross-sectional comparison.

Question 79

Assume the following facts for XYZ in 000's: XYZ's return on owners' equity, return on total assets, and leverage percentages (rounded to the nearest percent)are: (Round percentage answers to nearest whole percent: Do not round intermediate calculations.)

A)Choice 1
B)Choice 2
C)Choice 3
D)Choice 4
E)Choice 5

Question 80

A trade creditor will be primarily interested in the long-run profitability of the company.