Deck 17: Analysis of Financial Statements

Question 1

The building blocks of financial statement analysis include (1)liquidity, (2)salability, (3)solvency, and (4)profitability.

Answer 1

False

Question 2

The building blocks of financial statement analysis include (1)liquidity, (2)solvency, (3)profitability, and (4)market prospects.

Answer 2

True

Question 3

The evaluation of company performance and financial condition includes evaluation of (1)past and current performance, (2)current financial position, and (3)future performance and risk.

Answer 3

True

Question 4

Financial reporting includes not only general purpose financial statements, but also information from SEC filings, press releases, shareholders' meetings, forecasts, management letters, auditor's reports, and Webcasts.

Question 5

External users of accounting information make the strategic and operating decisions of a company.

Question 6

Financial statement analysis applies analytical tools to financial statements and related data for making business decisions.

Question 7

One purpose of financial statement analysis for internal users is to provide strategic information to improve company efficiency and effectiveness in providing products and services.

Question 8

Profitability is the ability to generate positive market expectations.

Question 9

Suppliers use financial statement information in establishing credit terms.

Question 10

Evaluation of company performance does not include analysis of (1)past and current performance,
1()current financial position, and (3)future performance and risk.

Question 11

Financial analysis only refers to the communication of relevant financial information to decision makers.

Question 12

The evaluation of company performance and financial condition focuses solely on past performance.

Question 13

Market prospects are the ability to provide financial rewards sufficient to attract and retain financing.

Question 14

Profitability is the ability to provide financial rewards sufficient to attract and retain financing.

Question 15

A company's board of directors analyzes financial statements to assess future company prospects for making operating decisions.

Question 16

Liquidity and efficiency are the ability to meet short-term obligations and to efficiently generate revenue.

Question 17

External users of accounting information manage and operate the company.

Question 18

Profitability is the ability to generate future revenues and meet long-term obligations.

Question 19

Internal users of accounting information make the strategic and operating decisions of a company.

Question 20

Market prospects are the ability to generate positive market expectations.

Question 21

Horizontal analysis is the comparison of a company's financial condition and performance across time.

Question 22

Horizontal analysis is the comparison of a company's financial condition and performance to a base amount.

Question 23

A financial statement analysis report helps to reduce uncertainty in business decisions through a rigorous and sound evaluation.

Question 24

Intra-company analysis is based on comparisons with competitors.

Question 25

A good financial statement analysis report often includes the following sections: executive summary, analysis overview, evidential matter, assumptions, key factors, and inferences.

Question 26

If a company is comparing this year's financial performance to last year's financial performance, it is using horizontal analysis.

Question 27

Standards for comparison are not generally necessary when making judgments about a company's performance.

Question 28

General standards of comparisons, developed from experience, include the 2:1 level for the current ratio and 1:1 level for the acid-test ratio.

Question 29

When an item has a value in the base period and zero in the analysis period, the decrease is 0 percent.

Question 30

General-purpose financial statements include the (1)income statement, (2)balance sheet, (3)statement of stockholders' equity (or statement of retained earnings), (4)statement of cash flows, and (5)notes to these statements.

Question 31

Three of the most common tools of financial analysis include horizontal analysis, vertical analysis, and ratio analysis.

Question 32

Standards for comparison when interpreting financial statement analysis include competitor and industry performance data.

Question 33

Intra-company analysis compares a company's current performance to its own prior performance.

Question 34

A good financial report does not link interpretations and conclusions of analysis with the underlying information.

Question 35

Measures taken from a selected competitor or a group of competitors are often excellent standards of comparison for analysis.

Question 36

If a company is comparing its financial condition or performance to a base amount, it is using vertical analysis.

Question 37

Vertical analysis is the comparison of a company's financial condition and performance across time.

Question 38

When an item has a value in the base period and zero in the analysis period, the decrease is 100 percent.

Question 39

When a negative amount is in the base period and a positive amount is in the analysis period (or vice versa), a meaningful percent change cannot be calculated.

Question 40

When no value is in the base period, no percent change is computable.

Question 41

A corporation reported cash of $14,000 and total assets of $178,300. Its common-size percent for cash equals 7.85%.

Question 42

The percent change of a comparative financial statement item is computed by subtracting the analysis period amount from the base period amount, dividing the result by the base period amount and multiplying that result by 100.

Question 43

Comparative financial statements are reports that show financial amounts in side by side columns on a single statement for analysis purposes.

Question 44

The base amount for a common-size balance sheet is usually total assets.

Question 45

The percent change of a comparative financial statement item is computed by subtracting the base period amount from the analysis period amount, dividing the result by the base period amount and multiplying that result by 100.

Question 46

A ratio expresses a mathematical relation between two quantities and can be expressed as a percent, rate, or proportion.

Question 47

An advantage of common-size statements is that they reflect the dollar magnitude (size)of the different companies under analysis.

Question 48

Vertical analysis is a tool to evaluate individual financial statement items or groups of items in terms of a specific base amount.

Question 49

Analysis of a single financial number is often of limited value.

Question 50

Trend analysis is a form of horizontal analysis that can reveal patterns in data across successive periods.

Question 51

Ratios must refer to economically important relationships, such as a sale price compared to its cost.

Question 52

Earnings per share are calculated only on income from continuing operations.

Question 53

Trend analysis of financial statement items can include comparisons of relations between items on different financial statements.

Question 54

Graphical analysis of the balance sheet can be useful in assessing sources of financing.

Question 55

Liquidity refers to the availability of resources to meet short-term cash requirements.

Question 56

Horizontal analysis is used to reveal patterns in data covering successive periods.

Question 57

Horizontal analysis is used to reveal patterns in data covering two or more successive periods.

Question 58

Horizontal analysis is used to reveal changes in the relative importance of each financial statement item.

Question 59

A trend percent, or index number, is calculated by dividing the analysis period amount by the base period amount and multiplying the result by 100.

Question 60

Vertical analysis is used to reveal patterns in data covering two or more successive periods.

Question 61

A company with a high inventory turnover requires a smaller investment in inventory than one producing the same sales with a lower turnover.

Question 62

A company reports basic earnings per share of $3.50, cash dividends per share of $0.75, and a market price per share of $64.75. The company's dividend yield equals 21.4%.

Question 63

Total asset turnover reflects a company's ability to use its assets to generate sales and is an important indication of operating efficiency.

Question 64

A company that has days' sales uncollected of 30 days and days' sales in inventory of 18 days implies that inventory will be converted to cash in about 12 days.

Question 65

A high level of expected risk suggests a low price-earnings (PE)ratio.

Question 66

A company with a low inventory turnover requires a smaller investment in inventory than one producing the same sales with a higher turnover.

Question 67

The greater the times interest earned ratio, the greater the risk a company is exposed to.

Question 68

External users of financial information:

A)Make operating decisions for a company.
B)Are not directly involved in operating the company.
C)Make strategic decisions for a company.
D)Include internal auditors and consultants.
E)Are those individuals involved in managing and operating the company.

Question 69

The current ratio is calculated as current liabilities divided by current assets.

Question 70

Evaluation of company performance can include comparison and/or assessment of all but which of the following:

A)External user needs and demands.
B)Current financial position.
C)Future performance and risk.
D)Current performance.
E)Past performance.

Question 71

The return on common stockholder's equity measures a company's success in earning net income for its owners.

Question 72

The return on total assets ratio is a profitability measure.

Question 73

Working capital is computed as current liabilities minus current assets.

Question 74

Internal users of financial information:

A)Are those individuals involved in managing and operating the company.
B)Are not directly involved in operating a company.
C)Include directors and customers.
D)Include suppliers, regulators, and the press.
E)Include shareholders and lenders.

Question 75

Capital structure refers to a company's long-run financial viability and its ability to cover long-term obligations.

Question 76

The use of debt is sometimes described as financial leverage because debt can have the effect of increasing the return on equity.

Question 77

The return on total assets can be calculated as profit margin times total asset turnover.

Question 78

Financial statement analysis involves all of the following except:

A)Assuring that the company will be more profitable in the future.
B)Helping to reduce uncertainty in decision-making.
C)Helping users to make better decisions.
D)The application of analytical tools to general-purpose financial statements and related data for making business decisions.
E)Transforming accounting data into useful information for decision-making.

Question 79

The higher the accounts receivable turnover, the less quickly accounts receivable are collected.

Question 80

Efficiency refers to how productive a company is in using its assets, and is usually measured relative to how much revenue is generated from a certain level of assets.