Deck 18: Financial Statement Analysis

Question 1

If an analyst wishes to see how selling and general expenses of a company have changed from one year to the next, using a horizontal analysis would be the best approach.

Answer 1

True

Question 2

Which of the following BEST describes horizontal analysis?

A)Comparing figures year to year
B)Comparing a company's financial figures with other companies that are leaders
C)Showing each figure as a percentage of some other amount, such as total assets
D)Calculating key ratios to evaluate performance

Answer 2

A

Question 3

Which of the following is the base amount when performing vertical analysis of a balance sheet?

A)Gross profit
B)Total cash and cash equivalents
C)Total assets
D)Profit

Answer 3

C

Question 4

Benchmarking is the comparison of a company's current year results with an earlier year's performance.

Question 5

If an analyst wishes to compare several different companies that vary in size, which of the following types of financial statement analysis would be used?

A)Horizontal analysis
B)Common- size financial statement analysis
C)Vertical analysis
D)Ratio analysis

Question 6

Common- size statements allow the comparison of two or more companies with different amounts of net sales and assets.

Question 7

If an analyst wishes to see how sales revenue of a company has changed from one year to the next, which of the following types of financial statement analysis would be used?

A)Ratio analysis
B)Common- size financial statement analysis
C)Vertical analysis
D)Horizontal analysis

Question 8

Vertical analysis is used with the income statement, but not with the balance sheet.

Question 9

In a vertical analysis of the income statement, each line item is shown as a percentage of gross profit.

Question 10

Which of the following BEST describes trend analysis?

A)Showing each figure as a percentage of some other amount, such as total assets
B)Comparing a company's financial figures with other companies that are leaders
C)Calculating key ratios to evaluate performance
D)Showing each year's figures as a percentage of amounts for a base year

Question 11

In a vertical analysis of the income statement, each line item is shown as a percentage of profit.

Question 12

Which of the following is the definition of vertical analysis?

A)Vertical analysis is the practice of comparing a company with other companies that are leaders.
B)Vertical analysis is the analysis in which percentages are computed by selecting a base year as 100% and expressing amounts for following years as a percentage of the base amount.
C)Vertical analysis is the analysis of a financial statement that reveals the relationship of each statement item to a specified base, which is the 100% figure.
D)Vertical analysis is the study of percentage changes in comparative financial statements.

Question 13

If an analyst wishes to see a company's current assets as a percentage of total assets, a vertical analysis would be the best approach.

Question 14

If an analyst wishes to see how a company's selling and general expenses as a percentage of net sales have changed from one year to the next, which of the following types of financial statement analysis would be used?

A)Ratio analysis
B)Horizontal analysis
C)Ordinary- size financial statement analysis
D)Vertical analysis

Question 15

The profit for a company was $540 000 this year and $630 000 last year. Profit decreased by 17%.

Question 16

If an analyst wishes to see how gross profit of a company has changed from one year to the next, vertical analysis would be the best approach.

Question 17

If an analyst wishes to see how a company's profit as a percentage of net sales has changed from one year to the next, a vertical analysis would be the most appropriate approach.

Question 18

Which of the following is the base amount when performing vertical analysis of an income statement?

A)Gross profit
B)Net sales
C)Total expenses
D)Sales revenue

Question 19

Investors and creditors generally evaluate a company by using one year's data.

Question 20

Which of the following is the definition of benchmarking?

A)Benchmarking is the practice of comparing a company with other companies in that industry.
B)Benchmarking is the analysis of a financial statement that shows each item as a percentage of net sales or total assets.
C)Benchmarking is the study of percentage changes in financial statement line items year to year.
D)Benchmarking is the comparison of two companies using horizontal analysis.

Question 21

The ratio of the market price of a share to the dividends paid per share is called the earnings per share.

Question 22

The price/earnings ratio indicates the:

A)dividend yield of the company.
B)ease of selling inventory.
C)market price of $1 of earnings.
D)percentage of ordinary shares financed by debt.

Question 23

Which of the following ratios is a measure of a company's ability to pay all current liabilities if they become due immediately?

A)The acid- test ratio
B)The debt ratio
C)The inventory turnover ratio
D)The times- interest- earned ratio

Question 24

The accounts receivable turnover is an indicator of the ability of a company to collect cash from its credit customers.

Question 25

The current ratio is a key indicator of a company's ability to pay current liabilities.

Question 26

Inventory is NOT counted when computing the acid- test ratio.

Question 27

The rate of return on total assets is a way to measure a company's profitability.

Question 28

Which of the following items is a measure of a company's ability to collect receivables?

A)The inventory turnover ratio
B)The current ratio
C)The acid- test ratio
D)The day's sales in receivables

Question 29

The excess of a company's current assets over current liabilities is called working capital.

Question 30

Quick assets do NOT include inventory.

Question 31

Which of the following ratios is a measure of a company's ability to pay liabilities with current assets?

A)The current ratio
B)The price/earnings ratio
C)The inventory turnover ratio
D)The day's sales in receivables

Question 32

The debt ratio is the ratio of total debt divided by total equity.

Question 33

The times- interest- earned ratio measures the number of times that profit before interest and taxes can pay interest expense.

Question 34

Days in inventory is a ratio measure that shows how quickly a company can collect its receivables.

Question 35

The asset turnover ratio is a way to evaluate how well a company can pay its short- term liabilities.

Question 36

Which of the following ratios is used to determine how quickly and easily a company is able to sell its inventory?

A)Return on net sales
B)Inventory turnover
C)Price/earnings ratio
D)Current ratio

Question 37

The gross profit percentage is an indicator of how well a company is positioned to pay off its short- term liabilities.

Question 38

The debt- to- equity ratio shows how much the company relies on borrowing to finance its business.

Question 39

Which of the following balance sheet displays shows only percentages?

A)A balance sheet as shown in the annual report of a company
B)Horizontal analysis balance sheet
C)A vertical analysis balance sheet
D)A common- size balance sheet

Question 40

The times- interest- earned ratio shows a creditor the firm's ability to pay interest on debt.

Question 41

Days in inventory is a ratio measure that addresses:

A)how quickly a company can sell its inventory.
B)how profitable a company is.
C)how quickly a company can collect its receivables.
D)how well a company is positioned to pay its current liabilities.

Question 42

Which of the following accurately describes working capital?

A)Cost of sales divided by average inventory
B)Total debt minus shareholders' equity
C)Current assets minus inventory
D)Current assets minus current liabilities

Question 43

What kind of information does a company's rate of return on net sales provide?

A)What proportion of each dollar of sales revenue generates profit
B)The proportion of sales returns and allowances to gross sales revenue
C)What proportion of each dollar of sales revenue generates gross profit
D)How effectively a company collects cash on credit sales

Question 44

What does the debt- to- equity ratio show?

A)The ability of a company to pay off its current liabilities
B)The amount of profit earned by one share
C)The proportion of a company's total financing that is accomplished by borrowing
D)The potential for growth in the price of a share

Question 45

What kind of information does a company's asset turnover ratio provide?

A)What proportion of each dollar of sales revenue generates profit
B)How often a company acquires new assets
C)The amount of net sales generated by each dollar of assets invested
D)How well a company collects cash from its customers

Question 46

A company reports total assets of $525 000 and shareholders' equity of $395 000. Which of the following is the debt ratio?

A)0.29
B)0.55
C)0.71
D)0.25

Question 47

Peartree Company provides the following data:

A)176.3
B)129.4
C)0.008
D)252.2

Question 48

When comparing two companies, what kind of information does a company's rate of return on total assets provide?

A)How effectively each company uses assets to generate profits
B)How effectively a company collects cash on credit sales
C)How effectively each company uses leverage to finance its business
D)How much profit each company generates with each dollar of sales

Question 49

Zebra Ltd. has Cost of sales for the year of $1 900 000. The average inventory for the year is $129 000. The inventory turnover for the year is:

A)33.8.
B)65.5.
C)0.1.
D)14.7.

Question 50

What kind of information does a company's debt ratio provide?

A)What proportion of the company's debts are non- current liabilities
B)How well a company is positioned to pay off all of its long- term debt
C)How much profit is generated by each share
D)What proportion of the company's assets are financed by debt, as opposed to equity

Question 51

When comparing one company to another, what kind of information does the gross profit percentage provide?

A)How profitable each company is based on the sale of its products
B)How well each company manages the financing of its assets
C)How effective each company is at collecting its receivables
D)How much profit is generated by a share of each company

Question 52

ABC has net sales on account of $1 200 000. The average net account receivables are $600 000. The days' sales in receivables is:

A)439.8 days.
B)304.0 days.
C)8.7 days.
D)182.5 days.

Question 53

What kind of information does a company's times- interest- earned ratio provide?

A)How well a company is positioned to pay interest expense on its debt
B)How much profit is generated by each share
C)What proportion of the company's debts are non- current liabilities
D)What proportion of the company's assets are financed by debt, as opposed to equity

Question 54

What does the term financial leverage mean?

A)The proportion of a company's total capital that is financed by debt, as opposed to equity
B)The ability of a company to generate cash flows
C)The amount of profit earned by one share of ordinary shares
D)The ability of a company to pay off its current liabilities

Question 55

A corporation has 2 000 shares of $50 par, 10% preference shares, and 6 000 ordinary shares outstanding. The profit for the year is $25 0000. The earnings per share of ordinary shares would be:

A)$31.25.
B)$10.83.
C)$40.00.
D)$41.67.

Question 56

A company reports profit of $70 000 and net sales of $950 000. Which of the following is the rate of return on net sales?

A)0.05
B)0.07
C)0.20
D)0.66

Question 57

When comparing one company to another, what kind of information does the accounts receivable turnover provide?

A)How profitable each company is based on the sale of its products
B)How effective each company is at collecting cash from its credit customers
C)How well each company manages the financing of its assets
D)How much profit is generated by a share of each company

Question 58

The profit for the year ended was $300 000. The company has no preference shares. Ordinary shareholders' equity was $1 400 000 at the beginning of the year and $1 600 000 at the end of the year. The return on ordinary shareholders' equity would be:

A)21.43%.
B)20.00%.
C)18.75%.
D)87.50%.

Question 59

What kind of information does the rate of return on ordinary shareholders' equity provide?

A)How much profit each shareholder makes when he sells his shares
B)What proportion of each dollar of sales revenue generates profit
C)How much inventory is returned by customers
D)How much profit a company generates relative to its shareholders' equity

Question 60

A company has 6 000 shares of ordinary shares outstanding and no preference shares. The total ordinary shareholders' equity is $1 500 000. The book value per share of ordinary shares is:

A)$250.00.
B)$4.00.
C)$2.50.
D)$.004.

Question 61

What kind of information does the dividend yield provide?

A)How much dividend revenue a company earns on its short- term investments
B)How much an investor can expect to receive in dividends
C)How often a company pays dividends
D)How much profit each shareholder makes when he sells his shares

Question 62

Shareholders can gain extra information on the reliabilty of the information in the financial statements by consulting the:

A)Chairman's report.
B)Managing director's report.
C)Auditor's report.
D)Notes to the Statements.

Question 63

When comparing a company's results from one year to the next, what kind of information does a company's earnings per share figure provide?

A)Whether the amount of profit generated by one share has gone up or down
B)Whether the market price of a share has gone up or down
C)Whether the company's total profit has gone up or down
D)Whether the company generates more or less profit per sales dollar

Question 64

Which of the following would NOT be found in the Managing director's report?

A)Reasons for changes in profit
B)Plans to discontinue a product line
C)Plans for the future use of shareholders' funds
D)Verification that the financial statements are accurate

Question 65

The people who know most about the company are:

A)the company's executives.
B)the government.
C)the shareholders.
D)the creditors.

Question 66

The Chairman's report and Managing director's report are likely to have a positive bias about the company's past and future operations.

Question 67

What kind of information does the dividend payout ratio provide?

A)How much dividend revenue a company earns on its short- term investments
B)How much profit each shareholder makes when he sells his shares
C)What proportion of a share's earnings are paid out in dividends
D)How much the dividend is in proportion to the share's market price

Question 68

Which of the following factors might suggest that a company is having difficulty selling its inventory?

A)An increase in receivables
B)An increase in interest expense
C)A buildup of inventory balances
D)An increase in total debt

Question 69

Which of the following is a "red flag" suggesting that a company may be in trouble?

A)Cash flow from operations lower than profit
B)A reduction in inventories
C)A decline in days in inventory
D)An increase in dividend payout

Question 70

Which of the following describes the book value per share of ordinary shares?

A)The current market value of a share
B)The amount of profit per share
C)The par value of a share
D)Ordinary equity divided by number of ordinary shares outstanding