Deck 13: Financial Statement Analysis

Question 1

Select the incorrect statement regarding the information disclosed in financial statements.

A)The costs of providing all possible information about a firm would be prohibitively high for the business.
B)Some information disclosed in financial statements may be irrelevant to some users.
C)Financial statements should be detailed enough to answer any financial-related question an investor might have.
D)When too much information is presented users may suffer from information overload.

Answer 1

Financial statements should be detailed enough to answer any financial-related question an investor might have.

Question 2

Gleason Company and Henry Company are similar and similar-sized companies operating in the same industry.At the end of the most recent year,Gleason's price/earnings ratio was 22.0,and Henry's price/earnings ratio was 14.2.What conclusion would you draw based on the difference in price/earnings ratios for the two companies?

Answer 2

The price/earnings ratio is a measure of what investors in the stock market expect for a company.A high P/E ratio means that investors hold the company in high esteem and expect its earnings to increase in the future.The difference between P/E ratios for Gleason and Henry suggests that investors think more highly of Gleason and its future than for Henry.

Question 3

Select the incorrect statement regarding horizontal analysis.

A)Percentage analysis involves establishing the relationship of one amount to another.
B)In doing horizontal analysis,an account is expressed as a percentage of the previous balance of the same account.
C)A horizontal analysis of cost of goods sold on the income statement includes dividing net income by total revenue.
D)Percentage analysis attempts to eliminate the materiality problem of comparing firms of different sizes.

Answer 3

A horizontal analysis of cost of goods sold on the income statement includes dividing net income by total revenue.

Question 4

Which of the following is a factor involved in communicating useful information?

A)Attributes of the users
B)Purpose for which the information will be used
C)Process by which the information is analyzed
D)All of these answer choices are correct.

Question 5

An analysis procedure that uses percentages to compare each of the parts of an individual statement to a key dollar amount from the financial statements is:

A)Ratio analysis.
B)Contribution analysis.
C)Horizontal analysis.
D)Vertical analysis.

Question 6

Current financial reporting standards assume that users of accounting information:

A)have an expert's understanding of economic and financial events and conditions.
B)have a reasonably informed knowledge of business.
C)have widely differing levels of knowledge about business,and that financial reporting must meet these differing needs.
D)have only minimal knowledge of business.

Question 7

Select the correct statement regarding vertical analysis.

A)Vertical analysis of the income statement involves showing each item as a percentage of sales.
B)Vertical analysis of the balance sheet involves showing each asset as a percentage of total assets.
C)Vertical analysis examines two or more items from the financial statements of one accounting period.
D)All of these answer choices are correct.

Question 8

For Perrone Corporation,return on equity is substantially higher than return on investment.What does that tell you about the company?

Question 9

Chastain Company's current ratio for 2015 was 1.42,which was slightly above the current ratio for similar companies in its industry.Chastain's quick ratio for 2015 was 0.68,which is substantially lower than for similar companies in its industry.What conclusion would you reach based on this information?

Question 10

Financial statement analysis involves forms of comparison including:

A)Comparing changes in the same item over a number of periods.
B)Comparing key relationships within the same year.
C)Comparing key items to industry averages.
D)All of these answer choices are correct.

Question 11

Explain the difference between horizontal analysis and vertical analysis of a company's financial statements.

Question 12

Describe the differences between the liquidity ratios,solvency ratios and profitability ratios.Identify examples of each type of ratio as well.

Question 13

What is a primary drawback with examining and comparing absolute amounts from two businesses' financial statements?

Question 14

Common methods of financial statement analysis include all of the following except:

A)Incremental analysis.
B)Horizontal analysis.
C)Vertical analysis.
D)Ratio analysis.

Question 15

Discuss the limitations that affect financial statement analysis.

Question 16

The study of an individual financial statement item over several accounting periods is called:

A)Horizontal analysis.
B)Vertical analysis.
C)Ratio analysis.
D)Time and motion analysis.

Question 17

Select the incorrect statement regarding the analysis of absolute amounts of various accounts reported on the financial statements.

A)To fully appreciate an absolute amount,the analyst must consider the size of other accounts of the business.
B)Using absolute amounts eliminates the problem of varying materiality levels.
C)Economic statistics such as the gross national product are built upon totals of absolute amounts reported by businesses.
D)Financial statement users with expertise in particular industries can look at absolute amounts and assess a company's performance in a certain area.

Question 18

Select the incorrect statement regarding ratio analysis.

A)Ratio analysis involves making comparisons between different accounts in the same set of financial statements.
B)There are many different ratios available for evaluating a firm's performance.
C)Some ratios involve an account from the balance sheet and one from the income statement.
D)Ratio analysis is a specific form of horizontal analysis.

Question 19

Singleton Company is seeking a short-term loan from its local bank.The banker needs assurance that the company will be able to repay the loan.Describe three financial ratios the banker should consider including in the loan approval process.What information does each of your selected ratios provide?

Question 20

Describe the factors involved in communicating useful financial information.

Question 21

The following balance sheet information was provided by Owen Company:
Assuming that net credit sales totaled $300,000 and cost of goods sold totaled $175,000,what is the company's most recent accounts receivable turnover?

A)15 times
B)21 times
C)24 times
D)25 times

Question 22

The following balance sheet information is provided for Victor Company:
What is the company's working capital?

A)$3,810
B)$9,810
C)$18,610
D)$26,840

Question 23

Financial ratios can be used to assess which of the following aspects of a firm's performance?

A)Liquidity
B)Solvency
C)Profitability
D)All of these answer choices are correct.

Question 24

The following balance sheet information is provided for Amarillo Company:
Assume 2015 cost of goods sold is $665,000.The company's average days to sell inventory ?

A)24 days
B)30 days
C)14 days
D)None of these answer choices is correct.

Question 25

You are considering an investment in General Motors stock and wish to assess the firm's long-term debt-paying ability and its use of debt financing.All of the following ratios can be used to assess solvency except:

A)Number of times interest is earned.
B)Net margin.
C)Debt to equity ratio.
D)Debt to assets ratio.

Question 26

Which of the following is an objective of ratio analysis?

A)Assessing past performance.
B)Assessing the prospects for future performance.
C)Analyzing how a company finances its operations.
D)All of these answer choices are correct.

Question 27

Romero Company has cash of $40,000,accounts receivable of $60,000,inventory of $32,000,and equipment of $100,000.Assuming current liabilities of $48,000,this company's working capital is:

A)$12,000.
B)$52,000.
C)$84,000.
D)$144,000.

Question 28

The following balance sheet information was provided by Warner Company:
Assume 2015 net credit sales totaled $150,000.The company's average days to collect receivables is closest to:

A)9 days
B)44 days
C)71 days
D)40 days

Question 29

Richmond Company collected $400 on account.What impact will this transaction have on the firm's current ratio?

A)Increase it
B)Decrease it
C)No impact
D)Not enough information is provided to answer the question.

Question 30

The following balance sheet information is provided for Kingsport Company:
The company's current ratio is closest to:

A)0.4
B)1.4
C)1.1
D)2.3

Question 31

The following balance sheet information is provided for Frederick Company:
The company's quick (acid-test)ratio is closest to:

A)0.9
B)1.4
C)1.1
D)2.3

Question 32

Select the incorrect statement regarding the quick ratio:

A)The quick ratio equals quick assets divided by total liabilities.
B)The quick ratio is also known as the acid-test ratio.
C)The quick ratio is a conservative variation of the current ratio.
D)The quick ratio ignores some current assets that are less liquid than others.

Question 33

The following balance sheet is provided for Saslaw Company:
The company's debt to equity ratio is closest to:

A)33.4%
B)21.6%
C)54.4%
D)183.8%

Question 34

Solvency ratios are used to assess a company's:

A)Short-term debt paying ability.
B)Long-term debt paying ability.
C)Profitability.
D)Efficiency in use of its assets.

Question 35

Working capital is defined as:

A)Total assets minus total liabilities.
B)Current assets minus current liabilities.
C)Current assets divided by current liabilities.
D)Current liabilities divided by total liabilities.

Question 36

You are considering an investment in Microsoft stock and wish to assess the firm's short-term debt-paying ability.All of the following ratios are used to assess liquidity except:

A)Debt to equity ratio.
B)Inventory turnover.
C)Quick ratio.
D)Accounts receivable turnover.

Question 37

Milton Company has total current assets of $65,000,including inventory of $20,000,and current liabilities of $25,000.The company's current ratio is:

A)0.4.
B)1.8.
C)3.4.
D)2.6.

Question 38

The following balance sheet information is provided for Weaver Company:
Assuming 2015 cost of goods sold is $140,000,what is the company's inventory turnover?

A)3.4 times
B)4.4 times
C)4.0 times
D)None of these answer choices are correct.

Question 39

All of the following are considered to be measures of a company's short-term debt-paying ability except:

A)Current ratio.
B)Earnings per share.
C)Inventory turnover.
D)Average collection period.

Question 40

Jessup Company paid its sales employees $2,200 in sales commissions.What impact will this transaction have on working capital?

A)Increase it
B)Decrease it
C)No impact
D)Not enough information is provided to answer the question.

Question 41

The following partial balance sheet is provided for Trenton Company:
The company's debt to assets ratio is closest to:

A)54%
B)35%
C)67%
D)None of these answer choices are correct.

Question 42

You are considering an investment in Techno Company stock and wish to assess the company's position in the stock market.All of the following ratios can be used except:

A)Price-earnings ratio.
B)Earnings per share.
C)Dividend yield.
D)Working capital.

Question 43

The Davis Company reported net income of $60,000 on sales of $300,000.The company has total assets of $500,000 and total liabilities of $100,000.What is the company's return on equity ratio?

A)10.0%
B)12.5%
C)15.0%
D)20.0%

Question 44

The Valencia Company reported net income of $80,000 on 20,000 outstanding common shares.Preferred dividends total $12,000.On the most recent trading day,the preferred shares sold at $50 and the common shares sold at $68.This company's current price-earnings ratio is closest to:

A)15
B)17
C)20
D)None of these answer choices are correct.

Question 45

Accrual accounting requires the use of many estimates,including:

A)Uncollectible accounts expense.
B)Warranty costs.
C)Assets' useful lives.
D)All of these answer choices are correct.

Question 46

Select the incorrect statement regarding net margin.

A)Net margin refers to the average amount of each sales dollar remaining after all expenses are subtracted.
B)Net margin may be calculated in several ways.
C)The smaller the net margin the better.
D)The amount of net margin is affected by a company's choices of accounting principles.

Question 47

Beta Company provided the following balance sheet:
What is the company's plant assets to long-term liabilities ratio?

A)1.8
B)2.2
C)3.4
D)None of these answer choices are correct.

Question 48

The Monticello Company reported gross sales of $800,000,sales returns and allowances of $5,000 and sales discounts of $10,000.The company has total average assets of $500,000,of which $250,000 is property,plant,and equipment.What is the company's asset turnover ratio?

A)3,14 times
B)1.57 times
C)1.60 times
D)0.64 times

Question 49

The Marvin Company reported net income of $18,400 on gross sales of $80,000.The company has total average assets of $115,200,of which $100,000 is property,plant and equipment.The company's return on investment is closest to:

A)69.4%
B)16.0%
C)23.0%
D)18.4%

Question 50

Select the incorrect statement regarding the return on equity (ROE)measure.

A)ROE is used to measure the profitability of the firm in relation to the amount invested by stockholders.
B)A company's ROE is lower than its return on investment because ROE does not consider that part of the business that is financed by debt.
C)ROE is affected by a company's use of leverage.
D)ROE equals net income divided by total stockholders' equity.

Question 51

The accounting concept or principle that is perhaps the greatest single culprit in distorting the results of financial statement analysis is the:

A)Historical cost concept.
B)Matching principle.
C)Conservatism principle.
D)Time value of money concept.

Question 52

The Herald Company provided the following information from its financial records:
What is the company's book value per share?

A)$3.33
B)$10.67
C)$13.33
D)$10.83

Question 53

Which of the following is a potential limitation of financial statement analysis?

A)Lack of comparability of firms in different industries
B)The impact of changing economic conditions
C)The impact of having more than one acceptable alternative accounting principle for accounting for a given transaction or economic event
D)All of these answer choices are correct.

Question 54

You are considering an investment in Freedom Airlines stock and wish to assess the firm's earnings performance.All of the following ratios can be used to assess profitability except:

A)Net margin.
B)Average days to collect receivables.
C)Return on investment.
D)Asset turnover.

Question 55

On January 1,2015 Gatewood issued common stock for $20,000 cash.Which of the following statement is true?

A)Gatewood's current ratio will increase.
B)Gatewood's current ratio will decrease and Gatewood's quick ratio will increase.
C)Gatewood's quick ratio will decrease.
D)Gatewood's working capital will decrease.

Question 56

The Pittsburgh Company paid total cash dividends of $100,000 on 25,000 outstanding common shares.On the most recent trading day,the common shares sold at $80.What is this company's dividend yield?

A)25%
B)3.2%
C)5%
D)16.9%

Question 57

The Anchorage Company provided the following information from its financial records:
What is the amount of the company's earnings per share?

A)$1.33
B)$1.44
C)$1.60
D)$25.00

Question 58

The return on investment measure is also referred to as:

A)Net margin.
B)Return on assets.
C)Return on equity.
D)Return on debt.

Question 59

The Phlegar Company reported the following income for 2015:
The company's net margin is closest to:

A)12%
B)46%
C)20%
D)22%

Question 60

Which of the following statements is generally incorrect?

A)A 30-day average collection period for accounts receivable is generally preferred over a 20-day average collection period.
B)A 2:1 current ratio is generally preferred over a 1:1 current ratio.
C)A 5% dividend yield is generally preferred over a 3% dividend yield.
D)A 10% net margin is generally preferred over an 8% net margin.

Question 61

Short-term creditors are usually most interested in assessing:

A)Liquidity.
B)Solvency.
C)Managerial effectiveness
D)Profitability.

Question 62

Blumenthal Company declared and paid a cash dividend totaling $50,000 on its common stock.As a result of this transaction,the company's debt to assets ratio will:

A)Decrease.
B)Increase.
C)Remain the same.
D)Cannot be determined.

Question 63

On January 1,2015,Gatewood collected $8,200 of accounts receivable.As a result of this transaction,Gatewood's working capital will:

A)Increase.
B)Decrease.
C)Remain the same.
D)Cannot be determined.

Question 64

On January 1,2015,Gatewood paid $200 for transportation costs on merchandise it had received.Which of the following statements is incorrect?

A)Gatewood's quick ratio will decrease
B)Gatewood's current ratio will decrease
C)Gatewood's working capital will remain the same
D)Gatewood's quick ratio will decrease and its current ratio will remain the same.

Question 65

Lakeland Corporation has working capital of $440,000,and Houston Corporation has working capital of $320,000.Which of the following statements is incorrect?

A)Since working capital is an absolute amount,other factors such as size of the company and materiality will help to determine liquidity of these two companies.
B)Since Lakeland's working capital exceeds Houston's working capital,it is safe to conclude that Lakeland is more liquid than Houston.
C)If Houston Corporation is smaller than Lakeland or has lower current liabilities;Houston could be more liquid than Lakeland.
D)None of these answer choices are correct.

Question 66

Horizontal analysis is also known as:

A)Liquidity analysis.
B)Absolute analysis.
C)Trend analysis.
D)Revenue analysis.

Question 67

Blumenthal Company received cash of $2,000,000 by issuing 20-year bonds payable.As a result of this transaction,the company's current ratio will:

A)Decrease.
B)Increase.
C)Remain the same.
D)Cannot be determined.

Question 68

Cost of goods sold/average inventory is the formula for which of these analytical measures?

A)Inventory turnover
B)Number of days' sales in inventory
C)Return on investment
D)Debt to assets ratio

Question 69

Which ratio would you use to examine a company's ability to pay its debts in the short- term?

A)Earnings per share
B)Debt to assets ratio
C)Return on equity
D)Acid-test ratio

Question 70

Which type of approach should be used when evaluating corporate results using horizontal analysis?

A)Study of absolute amounts.
B)Percentages.
C)Trends.
D)All of these answer choices are correct.

Question 71

The study of an individual item or account over several accounting periods,such as months,quarters or years is known as:

A)Percentage analysis
B)Ratio analysis
C)Vertical analysis
D)Horizontal analysis

Question 72

On January 1,2015,Gatewood purchased merchandise on account for $6,000.Which of the following statements is true?

A)Gatewood's current ratio will increase and its quick ratio will decrease.
B)Gatewood's quick ratio will increase.
C)Gatewood's current ratio will decrease.
D)Gatewood's current ratio will increase and its quick ratio will increase.

Question 73

Long-term creditors are usually most interested in evaluating:

A)Liquidity
B)Managerial effectiveness
C)Solvency
D)Profitability

Question 74

Which of the following statement is correct regarding the quick ratio?

A)The numerator for the quick ratio is current assets.
B)The quick ratio is a less conservative variation of the current ratio.
C)The quick ratio is also called the working capital ratio.
D)The numerator for the quick ratio is current assets minus inventory minus prepaid expenses.

Question 75

In vertical analysis,each item is expressed as a percentage of:

A)Net income on the income statement.
B)Net sales on the income statement.
C)Total expenses on the income statement.
D)None of these answer choices are correct.

Question 76

Two ratios that provide insight on the relationship between credit sales and receivables are:

A)Current ratio and inventory turnover ratio.
B)Accounts receivable turnover and current ratio.
C)Average days to collect receivables and asset turnover.
D)Accounts receivable turnover and average days to collect receivables.

Question 77

In vertical analysis,each item is expressed as a percentage of:

A)Total cash on the balance sheet.
B)Total assets on the balance sheet.
C)Total current assets on the balance sheet.
D)None of these answer choices are correct.

Question 78

Blumenthal Company received cash of $600,000 from issuing common stock.As a result of this transaction,the company's debt to equity ratio will:

A)Decrease.
B)Increase.
C)Remain the same.
D)Cannot be determined.

Question 79

On January 1,2015 Gatewood sold inventory on account for $8,000 and recorded cost of goods sold of $6,100.Which of the following statement is incorrect?

A)Gatewood's current ratio will decrease.
B)Gatewood's quick ratio will increase.
C)Gatewood's working capital will decrease.
D)Gatewood's current ratio and working capital will decrease are both incorrect statements

Question 80

On January 1,2015,Gatewood paid $4,600 on accounts payable.Which of the following statements is incorrect?

A)Gatewood's current ratio will increase.
B)Gatewood's quick ratio will increase.
C)Gatewood's quick ratio will increase and its current ratio will decrease.
D)Gatewood's working capital will not change.