Deck 14: Financial Statement Analysis

Question 1

The excess of current assets over current liabilities is referred to as working capital.

Answer 1

True

Question 2

Dollar amounts of working capital are difficult to assess when comparing companies of different sizes or in comparing such amounts with industry figures.

Answer 2

True

Question 3

Using measures to assess a business's ability to pay its current liabilities is called current position analysis.

Answer 3

True

Question 4

Comparable financial statements are designed to compare the financial statements of two or more corporations.

Question 5

A financial statement showing each item on the statement as a percentage of one key item on the statement is called a common-sized financial statement.

Question 6

The relationship of each asset item as a percent of total assets is an example of vertical analysis.

Question 7

On a common-sized income statement, all items are stated as a percent of total assets or equities at year-end.

Question 8

Vertical analysis refers to comparing the financial statements of a single company over several years.

Question 9

In the vertical analysis of a balance sheet, the base for current liabilities is total liabilities.

Question 10

A 15% change in sales will result in a 15% change in net income.

Question 11

In horizontal analysis, the current year is the base year.

Question 12

The analysis of increases and decreases in the amount and percentage of comparative financial statement items is referred to as horizontal analysis.

Question 13

Using vertical analysis of the income statement, a company's net income as a percentage of sales is 15%; therefore, the cost of goods sold as a percentage of sales must be 85%.

Question 14

Factors that reflect the ability of a business to pay its debts and earn a reasonable amount of income are referred to as solvency and profitability.

Question 15

Current position analysis measures a company's ability to pay its current liabilities.

Question 16

In the vertical analysis of an income statement, each item is generally stated as a percentage of total assets.

Question 17

In a common-sized income statement, each item is expressed as a percentage of net income.

Question 18

The ratio of the sum of cash, receivables, and marketable securities to current liabilities is referred to as the current ratio.

Question 19

An advantage of the current ratio is that it considers the makeup of the current assets.

Question 20

If two companies have the same current ratio, their ability to pay short-term debt is the same.

Question 21

If a firm has a quick ratio of 1, the subsequent payment of an account payable will cause the ratio to increase.

Question 22

An increase in the accounts receivable turnover may be due to an improvement in the collection of receivables or to a change in the granting of credit and/or in collection practices.

Question 23

If a company has issued only one class of stock, the earnings per share are determined by dividing net income plus interest expense by the number of shares outstanding.

Question 24

The ratio of fixed assets to long-term liabilities provides a measure of a firm's ability to pay dividends.

Question 25

The number of days' sales in receivables is one means of expressing the relationship between average daily sales and accounts receivable.

Question 26

A decrease in the ratio of liabilities to stockholders' equity indicates an improvement in the margin of safety for creditors.

Question 27

A balance sheet shows cash, $75,000; marketable securities, $115,000; receivables, $150,000; and inventories, $222,500. Current liabilities are $225,000.  The current ratio is 2.5.

Question 28

In computing the ratio of sales to assets, long-term investments are excluded from average total assets.

Question 29

Assuming that the quantities of inventory on hand during the current year were sufficient to meet all demands for sales, a decrease in the inventory turnover for the current year when compared with the turnover for the preceding year indicates an improvement in inventory  management.

Question 30

When computing the rate earned on total common stockholders' equity, preferred stock dividends are subtracted from net income.

Question 31

Solvency analysis focuses on the ability of a business to pay its current and noncurrent liabilities.

Question 32

The rate earned on total assets measures the profitability of total assets, without considering how the assets are financed.

Question 33

If the accounts receivable turnover for the current year has decreased when compared with the ratio for the preceding year, there has been an acceleration in the collection of receivables.

Question 34

If a firm has a current ratio of 2, the subsequent receipt of a 60-day note receivable on account will cause the ratio to decrease.

Question 35

The number of days' sales in inventory is one means of expressing the relationship between the cost of goods sold and inventory.

Question 36

The ratio of the market price per share of common stock on a specific date to the annual earnings per share is referred to as the price-earnings ratio.

Question 37

A firm selling food should have higher inventory turnover rate than a firm selling office furniture.

Question 38

When the rate of return on total assets ratio is greater than the rate of return on common stockholders' equity ratio, the management of the company has effectively used leverage.

Question 39

In computing the rate earned on total assets, interest expense is subtracted from net income before dividing by average total assets.

Question 40

The denominator of the rate of return on total assets ratio is the average total assets.

Question 41

Earnings per share amounts are only required to be presented for income from continuing operations and net income on the face of the statement.

Question 42

The auditor's report is where the auditor certifies that the financial statements are correct and accurate.

Question 43

When a corporation discontinues a segment of its operations at a loss, the loss should be reported as a separate item after income from continuing operations on the income statement.

Question 44

The dividend yield rate is equal to the dividends per share divided by the par value per share of common stock.

Question 45

Unusual items affecting the prior period's income statement consist of errors and changes in accounting principles.

Question 46

The report on internal control required by the Sarbanes-Oxley Act of 2002 may be prepared by either management or the company's auditors.

Question 47

Interpreting financial analysis should be considered in light of conditions peculiar to the industry and the general economic conditions.

Question 48

The effects of differences in accounting methods are of little importance when analyzing comparable data from competing businesses.

Question 49

Ratios and various other analytical measures are not a substitute for sound judgment, nor do they provide definitive guides for action.

Question 50

Which of the following is the most useful in analyzing companies of different sizes?

A) comparative statements
B) common-sized financial statements
C) price-level accounting
D) audit report

Question 51

Unusual items affecting the current period's income statement consist of changes in accounting principles and discontinued operations.

Question 52

When you are interpreting financial ratios, it is useful to compare a company's ratios to some form of standard.

Question 53

In a company's annual report, the section called management discussion and analysis provides critical information in interpreting the financial statements and assessing the future of the company.

Question 54

When a corporation discontinues a segment of its operations at a loss, the loss should be reported as a separate item before income from continuing operations on the income statement.

Question 55

A company can use comparisons of its financial data to the data of other companies and industry averages to evaluate its position.

Question 56

Reporting unusual items separately on the income statement allows investors to isolate the effects of these items on income and cash flows.

Question 57

An extraordinary item must be either unusual in nature or infrequent in occurrence.

Question 58

Comparing dividends per share to earnings per share indicates the extent to which the corporation is retaining its earnings for use in operations.

Question 59

The percentage analysis of increases and decreases in individual items in comparative financial statements is called

A) vertical analysis
B) solvency analysis
C) profitability analysis
D) horizontal analysis

Question 60

A clean audit opinion is the same as a qualified audit opinion.

Question 61

In horizontal analysis, each item is expressed as a percentage of the

A) base year figure
B) retained earnings figure
C) total assets figure
D) net income figure

Question 62

What type of analysis is indicated by the following?

A) vertical analysis
B) horizontal analysis
C) liquidity analysis
D) common-size analysis

Question 63

Based on the above data, what is the quick ratio, rounded to one decimal point?

A) 2.7
B) 2.6
C) 1.7
D) 0.9

Question 64

The relationship of $325,000 to $125,000, expressed as a ratio, is

A) 2.0
B) 2.6
C) 2.5
D) 0.45

Question 65

The percent of fixed assets to total assets is an example of

A) vertical analysis
B) solvency analysis
C) profitability analysis
D) horizontal analysis

Question 66

Assume the following sales data for a company: What is the percentage increase in sales from the preceding year to the current year?

A) 70%
B) 76.9%
C) 30%
D) 50%

Question 67

A balance sheet that displays only component percentages is a

A) trend balance sheet
B) comparative balance sheet
C) condensed balance sheet
D) common-sized balance sheet

Question 68

Based on the above data, what is the amount of quick assets?

A) $205,000
B) $203,000
C) $131,000
D) $66,000

Question 69

Assume the following sales data for a company: What is the percentage increase in sales from the preceding year to the current year?

A) 100%
B) 25%
C) 125%
D) 75%

Question 70

An analysis in which all the components of an income statement are expressed as a percentage of sales is a

A) vertical analysis
B) horizontal analysis
C) liquidity analysis
D) solvency analysis

Question 71

Percentage analyses, ratios, turnovers, and other measures of financial position and operating results are

A) a substitute for sound judgment
B) useful analytical measures
C) enough information for analysis; industry information is not needed
D) unnecessary for analysis, but reaction is better

Question 72

Horizontal analysis of comparative financial statements includes

A) development of common-sized statements
B) calculation of liquidity ratios
C) calculation of dollar amount changes and percentage changes from the previous to the current year
D) evaluation of each component in a financial statement to a total within the statement

Question 73

Horizontal analysis is a technique for evaluating financial statement data

A) for one period of time
B) over a period of time
C) on a certain date
D) as it may appear in the future

Question 74

One reason that a common-sized statement is a useful tool in financial analysis is that it enables the user to

A) judge the relative potential of two companies of similar size in different industries
B) determine which companies in a single industry are of the same value
C) determine which companies in a single industry are of the same size
D) make a better comparison of two companies of different sizes in the same industry

Question 75

The ability of a business to pay its debts as they come due and to earn a reasonable net income is

A) solvency and leverage
B) solvency and profitability
C) solvency and liquidity
D) solvency and equity

Question 76

On a common-sized balance sheet, 100% is

A) total property, plant, and equipment
B) total current assets
C) total liabilities
D) total assets

Question 77

In a vertical analysis, the base for cost of goods sold is

A) total selling expenses
B) sales
C) total expenses
D) gross profit

Question 78

In a common-sized income statement, 100% is the

A) net cost of goods sold
B) net income
C) gross profit
D) sales

Question 79

Income statement information for Sadie Company is below: Using vertical analysis of the income statement for Sadie Company, determine the gross profit margin.

A) 100%
B) 66%
C) 34%
D) 29%

Question 80

Based on the above data, what is the amount of working capital?

A) $238,000
B) $128,000
C) $168,000
D) $203,000