Deck 2: Introduction to Financial Statement Analysis

Question 1

Which of the following is NOT one of the financial statements that must be produced by a public company?

A)the balance sheet
B)the income statement
C)the statement of cash flows
D)the statement of activities

Answer 1

the statement of activities

Question 2

A delivery company is creating a balance sheet. Which of the following would most likely be considered a short-term liability on this balance sheet?

A)the depreciation over the last year in the value of the vehicles owned by the company
B)revenue received for the delivery of items that have not yet been delivered
C)a loan which must paid back in two years
D)prepaid rent on the offices occupied by the company

Answer 2

revenue received for the delivery of items that have not yet been delivered

Question 3

What are the four financial statements that all public companies must produce?

Answer 3

1. balance sheet
2. income statement
3. statement of cash flows
4. statement of stockholders' equity

Question 4

A company that produces drugs is preparing a balance sheet. Which of the following would be most likely to be considered a long-term asset on this balance sheet?

A)commercial paper held by the company
B)the inventory of chemicals used to produce the drugs made by the company
C)a patent for a drug held by the company
D)the cash reserves of the company

Question 5

The exchanges in which of the following countries or regions do NOT accept the International Financial Reporting Standards set out by the International Accounting Standards Board?

A)Germany
B)France
C)United States
D)United Kingdom

Question 6

The third party who checks annual financial statements to ensure that they are prepared according to Generally Accepted Accounting Principles (GAAP)and verifies that the information reported is reliable is the ________.

A)NYSE Enforcement Board
B)Accounting Standards Board
C)Securities and Exchange Commission (SEC)
D)auditor

Question 7

What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP)when creating financial statements?

A)It ensures that the market value of assets and debt are reported accurately.
B)It ensures that information on the performance of public companies is reported on cash-basis accounting.
C)It ensures that important budgetary information is not omitted.
D)It makes it easier to compare the financial results of different firms.

Question 8

The balance sheet shows the assets, liabilities, and stockholders' equity of a firm over a given length of time.

Question 9

Which of the following amounts would be included on the right side of a balance sheet?

A)the value of government bonds held by the company
B)the cash held by the company
C)the amount of deferred tax liability held by the company
D)the amount of money owed to the company by customers who have not yet paid for goods and services they have received

Question 10

U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form?

A)10-A
B)10-K
C)10-Q
D)10-SEC

Question 11

What is the role of an auditor in financial statement analysis?

Question 12

Which of the following best describes why a firm produces financial statements?

A)to use as a tool when planning future investments within a firm
B)to increase the intrinsic value of a firm
C)to provide a means for interested outside parties such as creditors to obtain information about a firm, with an overview of the short- and long-term financial condition of a business
D)to show the daily activities a firm has undertaken in the previous financial year, and what activities are planned for the near future

Question 13

A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company is most likely to be true?

A)Since net working capital is negative, the company will not have enough funds to meet its obligations.
B)Since net working capital is high, the company will likely have little difficulty meeting its obligations.
C)Since net working capital is very high, the company will have ample money to invest after it meets its obligations.
D)Since net working capital is nearly zero, the company is well run and will have little difficulty attracting investors.

Question 14

Which of the following is NOT a financial statement that every public company is required to produce?

A)income statement
B)statement of sources and uses of cash
C)balance sheet
D)statement of stockholders' equity

Question 15

Which of the following best describes why the left and right sides of a balance sheet are equal?

A)In a properly run business, the value of liabilities will not exceed the assets held by the company.
B)By definition, the assets plus the liabilities will be the same as the stockholders' equity.
C)The assets must equal liabilities plus stockholders' equity because stockholders' equity is the difference between the assets and the liabilities.
D)By accounting convention, the assets of a company must be equal to the liabilities of that company.

Question 16

What is the main problem in using a balance sheet to provide an accurate assessment of the value of a company's equity?

A)Valuable assets such as the company's reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet.
B)The balance sheet does not accurately represent the book value of assets held by the company.
C)The equity shown on the balance sheet does not reflect the market capitalization of the company.
D)Knowing at a single point in time what assets a firm possesses and the liabilities a firm owes does not give any indication of what those assets can produce in the future.

Question 17

Financial statements are optional accounting reports issued periodically by a firm which present information on the past performance of the firm, a summary of the firm's assets and the financing of those assets, and a prediction of the firm's future performance.

Question 18

International Financial Reporting Standards are taking root throughout the world. However, it is unlikely that the U.S. will report according to IFRS before the second half of the twenty-first century.

Question 19

In the United States, publicly traded companies can choose whether or not they wish to release periodic financial statements.

Question 20

Stockholders' equity is the difference between a firm's assets and liabilities, as shown on the balance sheet.

Question 21

Luther Corporation Consolidated Balance Sheet
December 31, 2006 and 2005 (in $ millions) Refer to the balance sheet above. The change in Luther's quick ratio from 2005 to 2006 is closest to ________.

A)a decrease of 0.01
B)an increase of 0.01
C)a decrease of 0.02
D)an increase of 0.02

Question 22

Luther Corporation Consolidated Balance Sheet
December 31, 2006 and 2005 (in $ millions) Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then Luther's market-to-book ratio would be closest to ________.

A)2.58
B)0.64
C)1.29
D)1.80

Question 23

In general, a successful firm will have a market-to-book ratio that is substantially greater than 1.

Question 24

Luther Corporation Consolidated Balance Sheet
December 31, 2006 and 2005 (in $ millions) Refer to the balance sheet above. What is Luther's net working capital in 2006?

A)$16.8 million
B)$296.0 million
C)$33.6 million
D)$8.4 million

Question 25

A company has a share price of $22.15 and 118 million shares outstanding. Its market-to-book ratio is 4.2, its book debt-equity ratio is 3.2, and it has cash of $800 million. How much would it cost to take over this business assuming you pay its enterprise value?

A)$1.9 billion
B)$3.044 billion
C)$4.566 billion
D)$3.8 billion

Question 26

The major components of stockholders' equity are ________.

A)cash, common stock, and paid-in surplus
B)common stock, paid-in surplus, and net income
C)common stock, paid-in surplus, and retained earnings
D)common stock, liabilities, and retained earnings

Question 27

A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company?

A)Investors may consider this firm to be a growth company.
B)Investors believe the company's assets are not likely to be profitable since its market value is worth less than its book value.
C)The firm's market value is more than its book value.
D)The value of the firm's assets is greater than their liquidation value.

Question 28

The above diagram shows a balance sheet for a certain company. If the company pays back all of its accounts payable today using cash, what will its net working capital be?

A)$131 million
B)$6 million
C)$88 million
D)$45 million

Question 29

Luther Corporation Consolidated Balance Sheet
December 31, 2006 and 2005 (in $ millions) Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then using the market value of equity, the debt-equity ratio for Luther in 2006 is closest to ________.

A)3.45
B)1.72
C)0.86
D)2.41

Question 30

GenCorp. has a total debt of $140 million and stockholders' equity of $50 million. It also has 26 million shares outstanding, with a market price of $4.00 per share. What is GenCorp's market debt-equity ratio?

A)0.67
B)1.08
C)2.80
D)1.35

Question 31

A 30-year mortgage loan is a ________.

A)long-term liability
B)current liability
C)current asset
D)long-term asset

Question 32

Which of the following balance sheet equations is INCORRECT?

A)Assets - Liabilities = Shareholders' equity
B)Assets = Liabilities + Shareholders' equity
C)Assets - Current liabilities = Long-term liabilities
D)Assets - Current liabilities = Long-term liabilities + Shareholders' equity

Question 33

Luther Corporation Consolidated Balance Sheet
December 31, 2006 and 2005 (in $ millions) Refer to the balance sheet above. When using the book value of equity, the debt-equity ratio for Luther in 2006 is closest to ________.

A)4.51
B)2.25
C)1.13
D)3.16

Question 34

Which of the following statements regarding the balance sheet is INCORRECT?

A)The balance sheet provides a snapshot of a firm's financial position at a given point in time.
B)The balance sheet lists a firm's assets and liabilities.
C)The balance sheet reports stockholders' equity on the right-hand side.
D)The balance sheet reports liabilities on the left-hand side.

Question 35

Cash is a ________.

A)long-term asset
B)current asset
C)current liability
D)long-term liability

Question 36

Accounts payable is a ________.

A)long-term liability
B)current asset
C)long-term asset
D)current liability

Question 37

Luther Corporation Consolidated Balance Sheet
December 31, 2006 and 2005 (in $ millions) Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then what is Luther's enterprise value?

A)-$540.0 million
B)$771.4 million
C)$385.7 million
D)$521.4 million

Question 38

Luther Corporation Consolidated Balance Sheet
December 31, 2006 and 2005 (in $ millions) Refer to the balance sheet above. Luther's current ratio for 2006 is closest to ________.

A)1.67
B)2.22
C)0.56
D)1.11

Question 39

Luther Corporation Consolidated Balance Sheet
December 31, 2006 and 2005 (in $ millions) Refer to the balance sheet above. Luther's quick ratio for 2006 is closest to ________.

A)0.87
B)1.75
C)0.88
D)1.31

Question 40

The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. What is the company's net working capital?

A)$133 million
B)$2 million
C)$89 million
D)$45 million

Question 41

Use the table for the question(s)below.

If the above balance sheet is for a retail company, how has the company's leverage changed between 2007 and 2008?

A)The company has experienced a very significant decrease in its leverage.
B)The company has experienced a significant decrease in its leverage.
C)The company has experienced no significant change in its leverage.
D)The company has experienced a significant increase in its leverage.

Question 42

What is a firm's gross profit?

A)the difference between the sales and other income generated by the firm, and all costs, taxes, and expenses incurred by a firm in a given period
B)the difference between sales revenues and the costs
C)the difference between sales revenues and cash expenditures associated with those sales
D)all of the above

Question 43

Income Statement for CharmCorp: Consider the above Income Statement for CharmCorp. All values are in millions of dollars. If CharmCorp. has 4 million shares outstanding, and its managers and employees have stock options for 2 million shares, what is its diluted EPS in 2008?

A)$0.83
B)$1.33
C)$1.67
D)$2.00

Question 44

Use the table for the question(s)below.

If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in stockholders' equity between 2007 and 2008?

A)The company is very profitable because it is obviously collecting receivables faster.
B)The company is selling its property, plant and equipment, which may result in a long-term deficiency in production capacity.
C)The company's net income in 2008 was negative.
D)No conclusions can be drawn regarding stockholders' equity without additional information.

Question 45

How does a firm select the date for preparation of its balance sheet?

Question 46

Use the table for the question(s)below.

If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in quick ratio between 2007 and 2008?

A)The company has eliminated the risk that it will experience a cash shortfall in the near future.
B)The company has reduced the risk that it will experience a cash shortfall in the near future.
C)The risk that the company will experience a cash shortfall in the near future is unchanged.
D)The company has increased the risk that it will experience a cash shortfall in the near future.

Question 47

Convex Industries has inventories of $218 million, current assets of $1.4 billion, and current liabilities of $504 million. What is its quick ratio?

A)1.17
B)0.94
C)2.81
D)2.35

Question 48

Use the table for the question(s)below.
Refer to the partial balance sheet above. If on December 31, 2005 Luther has 8 million shares outstanding trading at $15 per share, then what is Luther's market-to-book ratio?

Question 49

Company A has current assets of $42 billion and current liabilities of $41 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information?

A)Company A is less likely than Company B to have sufficient working capital to meet its short-term needs.
B)Company A has greater leverage than Company B.
C)Company A has less leverage than Company B.
D)Company A and Company B have roughly equivalent enterprise values.

Question 50

What is a firm's net income?

A)the difference between the sales and other income generated by a firm, and all costs, taxes, and expenses incurred by the firm in a given period
B)the last or "bottom" line of the income statement
C)a measure of the firm's profitability over a given period
D)all of the above

Question 51

Which of the following statements regarding the income statement is INCORRECT?

A)The income statement shows the cash flows and expenses at a given point in time.
B)The income statement shows the flow of revenues and expenses generated by a firm between two dates.
C)The last or "bottom" line of the income statement shows a firm's net income.
D)The first line of an income statement lists the revenues from the sales of products or services.

Question 52

The income statement reports the firm's revenues and expenses, and it computes the firm's bottom line of net income, or earnings.

Question 53

Which of the following is NOT an operating expense?

A)interest expense
B)depreciation and amortization
C)selling, general, and administrative expenses
D)research and development

Question 54

Income Statement for Xenon Manufacturing: Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. If Xenon Manufacturing has 20 million shares outstanding, what is its EPS in 2008?

A)$0.50
B)$0.25
C)$0.40
D)$0.60

Question 55

Use the table for the question(s)below.
Refer to the balance sheet above. If on December 31, 2005 Luther has 8 million shares outstanding trading at $15 per share, then what is Luther's enterprise value?

Question 56

What will be the effect on the balance sheet if a firm buys a new processing plant through a new loan?

Question 57

Which of the following is NOT considered to be an operating expense on the income statement?

A)administrative expenses and overhead
B)corporate taxes
C)salaries
D)depreciation and amortization

Question 58

Which ratio would you use to measure the financial health of a firm by assessing that firm's leverage?

A)debt-equity or equity multiplier ratio
B)market-to-book ratio
C)market debt-equity ratio
D)current or quick ratio

Question 59

Gross profit is calculated as ________.

A)total sales - cost of sales - selling, general, and administrative expenses - depreciation and amortization
B)total sales - cost of sales - selling, general, and administrative expenses
C)total sales - cost of sales
D)none of the above

Question 60

Use the table for the question(s)below.

If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in the balance sheet between 2007 and 2008?

A)The company is having difficulties selling its product.
B)The company has reduced its debt.
C)The company has added a major new asset in terms of plant and equipment.
D)The company has experienced a significant rise in its market value.

Question 61

Which of the following firms would be expected to have a high ROE?

A)a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals
B)a high-end fashion retailer that has a very high mark-up on all items it sells
C)a brokerage firm that has high levels of leverage
D)a grocery store chain that has very high turnover, selling many multiples of its assets per year

Question 62

Price-earnings ratios tend to be high for fast-growing firms.

Question 63

Manufacturer A has a profit margin of 2.2%, an asset turnover of 1.7 and an equity multiplier of 5.0. Manufacturer B has a profit margin of 2.5%, an asset turnover of 1.2 and an equity multiplier of 4.7.
How much asset turnover should manufacturer B have to match manufacturer A's ROE?

A)1.59%
B)3.18%
C)2.23%
D)1.27%

Question 64

Luther Corporation Consolidated Income Statement
Year ended December 31 (in $millions) Refer to the income statement above. Assuming that Luther has no convertible bonds outstanding, then for the year ending December 31, 2006 Luther's diluted earnings per share are closest to ________.

A)$1.03
B)$0.51
C)$0.82
D)$1.23

Question 65

Luther Corporation Consolidated Income Statement
Year ended December 31 (in $millions) Refer to the income statement above. Luther's operating margin for the year ending December 31, 2005 is closest to ________.

A)10.18%
B)16.29%
C)20.36%
D)24.43%

Question 66

How does a firm select the dates for preparation of its income statement?

Question 67

Luther Corporation Consolidated Income Statement
Year ended December 31 (in $millions) Refer to the income statement above. Luther's return on equity (ROE)for the year ending December 31, 2005 is closest to ________.

A)247.12%
B)98.85%
C)123.56%
D)148.27%

Question 68

Luther Corporation Consolidated Income Statement
Year ended December 31 (in $millions) Refer to the income statement above. For the year ending December 31, 2006 Luther's earnings per share is closest to ________.

A)$0.51
B)$1.03
C)$0.82
D)$1.23

Question 69

Luther Corporation Consolidated Income Statement
Year ended December 31 (in $millions)
Refer to the income statement above. Luther's return on assets (ROA)for the year ending December 31, 2005 is closest to ________.

A)17.43%
B)34.86%
C)13.94%
D)1.99%

Question 70

Use the table for the question(s)below.
Income Statement for Xenon Manufacturing:
Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. Calculate the gross margin for 2008 and 2009. What does the change in the gross margin between these two years imply about the company?

A)The efficiency of Xenon Manufacturing has significantly risen between 2008 and 2009.
B)The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them rose between 2008 and 2009.
C)The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them fell between 2008 and 2009.
D)The leverage of Xenon Manufacturing fell slightly between 2008 and 2009.

Question 71

The above data is for four regional trucking firms. Based on price-earnings ratios, which firm's stock is the best value?

A)Firm A
B)Firm B
C)Firm C
D)Firm D

Question 72

Which of the following is the LEAST likely explanation for a firm's high ROE?

A)The firm is growing.
B)The firm is able to find investment opportunities that are very profitable.
C)The firm has very efficient use of its assets.
D)The firm enjoys high sales margins.

Question 73

Which of the following firms would be expected to have a high ROE based on that firm's high profitability?

A)a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals
B)a low-end retailer that has a low mark-up on all items it sells
C)a brokerage firm that has high levels of leverage
D)a grocery store chain that has very high turnover, selling many multiples of its assets per year

Question 74

What will be the effect on the income statement if a firm buys a new processing plant through a new loan?

Question 75

Use the table for the question(s)below.
Income Statement for Xenon Manufacturing:
Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. Calculate the operating margin for 2008 and 2009. What does the change in the operating margin between these two years imply about the company?

A)The efficiency of Xenon Manufacturing has significantly risen between 2008 and 2009.
B)The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them rose between 2008 and 2009.
C)The efficiency of Xenon Manufacturing has significantly fallen between 2008 and 2009.
D)The leverage of Xenon Manufacturing fell slightly between 2008 and 2009.

Question 76

Balance Sheet The balance sheet and income statement of a particular firm are shown above. What does the account receivable days ratio tell you about this company?

A)It takes on average about 4 weeks to collect payment from its customers.
B)It takes on average about 6 weeks to collect payment from its customers.
C)It takes on average about 7 weeks to collect payment from its customers.
D)It takes on average about 11 weeks to collect payment from its customers.

Question 77

Luther Corporation Consolidated Income Statement
Year ended December 31 (in $millions) Refer to the income statement above. Luther's net profit margin for the year ending December 31, 2005 is closest to ________.

A)11.61%
B)5.80%
C)9.28%
D)13.93%

Question 78

Luther Corporation Consolidated Income Statement
Year ended December 31 (in $millions)
Refer to the income statement above. Luther's earnings before interest, taxes, depreciation, and amortization (EBITDA)for the year ending December 31, 2005 is closest to ________.

A)$271.8 million
B)$108.7 million
C)$163.1 million
D)$135.9 million

Question 79

In 2009, an agricultural company introduced a new cropping process which reduced the cost of growing some of its crops. If sales in 2008 and 2009 were steady at $30 million, but the gross margin increased from 2.8% to 3.9% between those years, by what amount was the cost of sales reduced?

A)$330,000
B)$660,000
C)$264,000
D)$462,000

Question 80

Above are portions of the balance sheet and income statement for two companies in 2008. Based upon this information, which of the following statements is most likely to be true?

A)Asset turnover ratios indicate that firm A is generating greater revenue per dollar of assets than firm B.
B)Fixed asset turnover ratios indicate that firm A generating fewer sales for the assets it employs than firm B.
C)Both asset turnover ratios and fixed asset turnover ratios indicate that firm A is generating greater revenue per dollar of assets than firm B.
D)Fixed asset turnover ratios indicate that firm A generating more sales for the assets it employs than firm B.