Deck 2: Introduction to Financial Statement Analysis

Question 1

The third party who checks annual financial statements to ensure that they are prepared according to International Financial Reporting Standards (IFRS)or Generally Accepted Accounting Principles (GAAP)and verifies that the information reported is reliable is the:

A)The government
B)International Accounting Standards Board (IASB)
C)Securities and Exchange Commission (SEC).
D)auditor.

Answer 1

auditor.

Question 2

On the balance sheet, short-term debt appears:

A)in the Shareholders' Equity section.
B)in the Operating Expenses section.
C)in the Current Assets section.
D)in the Current Liabilities section.

Answer 2

in the Current Liabilities section.

Question 3

Use the information for the question(s)below.
In November 2012, Perrigo Co. (PRGO)had a share price of $39.20. They had 91.33 million shares outstanding, a market-to-book ratio of 3.76. In addition, PRGO had $845.01 million in outstanding debt, $163.82 million in net income, and cash of $257.09 million.
Perrigo's market capitalization is closest to:

A)$952.16 million
B)$3,580.14 million
C)$4,168.06 million
D)$4,425.15 million

Answer 3

$3,580.14 million

Question 4

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

A)Income Statement
B)Statement of Value Added
C)Balance Sheet or Statement of Financial Position
D)Statement of Changes in Shareholders' Equity

Question 5

Which of the following balance sheet equations is INCORRECT?

A)Assets - Liabilities = Shareholders' Equity
B)Assets = Liabilities + Shareholders' Equity
C)Assets - Current Liabilities = Non-current (Long Term)Liabilities
D)Assets - Current Liabilities = Non-current (Long Term)Liabilities + Shareholders' Equity

Question 6

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

Question 7

A 30 year mortgage loan is a:

A)non-current (long-term)liability.
B)current liability.
C)current asset.
D)non-current asset.

Question 8

Use the following information for ECE incorporated:
Assets $200 million
Shareholders' Equity $100 million
Sales $300 million
Net Income $15 million
Interest Expense $2 million
If ECE's shares are currently trading at $24.00 and ECE has 25 million shares outstanding, then ECE's market-to-book ratio is closest to:

A)0.24
B)4
C)6
D)30

Question 9

The statement of financial position is also known as the:

A)balance sheet.
B)income statement.
C)statement of cash flows.
D)statement of changes in shareholders' equity.

Question 10

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

A)The balance sheet provides a snapshot of the firm's financial position at a given point in time.
B)The balance sheet lists the firm's assets and liabilities.
C)The balance sheet reports shareholders' equity in the bottom part. .
D)The balance sheet reports liabilities in the top part. .

Question 11

Dustin's Donuts experienced a decrease in the value of the trademark of a company it acquired two years ago. This reduction in value results in:

A)an impairment charge.
B)depreciation expense.
C)an operating expense.
D)goodwill.

Question 12

Use the information for the question(s)below.
In November 2012, Perrigo Co. (PRGO)had a share price of $39.20. They had 91.33 million shares outstanding, a market-to-book ratio of 3.76. In addition, PRGO had $845.01 million in outstanding debt, $163.82 million in net income, and cash of $257.09 million.
Perrigo's enterprise value is closest to:

A)$952.16 million
B)$3,580.14 million
C)$4,168.06 million
D)$4,425.15 million

Question 13

Which of the following is an example of an intangible asset?

A)Brand names and trademarks
B)Patents
C)Customer relationships
D)All of the above are intangible assets.

Question 14

Cash is a:

A)non-current asset.
B)current asset.
C)current liability.
D)non-current (long-term)liability.

Question 15

The firm's assets and liabilities at a given point in time are reported on the firm's:

A)income statement or statement of financial performance.
B)income statement or statement of financial position.
C)balance sheet or statement of financial performance.
D)balance sheet or statement of financial position.

Question 16

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

Question 17

On the balance sheet, current maturities of non-current (long-term)debt appears:

A)in the Shareholders' Equity section.
B)in the Operating Expenses section.
C)in the Current Assets section.
D)in the Current Liabilities section.

Question 18

Use the information for the question(s)below.
In November 2012, Perrigo Co. (PRGO)had a share price of $39.20. They had 91.33 million shares outstanding, a market-to-book ratio of 3.76. In addition, PRGO had $845.01 million in outstanding debt, $163.82 million in net income, and cash of $257.09 million.
Perrigo's book value of equity is closest to:

A)$952.16 million
B)$3,580.14 million
C)$4,168.06 million
D)$4,425.15 million

Question 19

How often are public companies normally required to produce their annual financial statements for reporting purposes?

A)monthly
B)quarterly
C)every six months
D)annually

Question 20

Accounts payable is a:

A)non-current (long-term)liability.
B)current asset.
C)non-current asset.
D)current liability.

Question 21

If on December 31, 2011 Luther has 8 million shares outstanding trading at $15 per share, then what is Luther's market-to-book ratio?

Question 22

Use the table for the question(s)below.
Consider the following balance sheet:

What is Luther's net working capital in 2011?

A)$12 million
B)$27 million
C)$39 million
D)$63.6 million

Question 23

Use the information for the question(s)below.
In November 2012 Perrigo Co. (PRGO)had a share price of $39.20. They had 91.33 million shares outstanding, a market-to-book ratio of 3.76. In addition, PRGO had $845.01 million in outstanding debt, $163.82 million in net income, and cash of $257.09 million.
The statement of financial performance is also known as the:

A)balance sheet.
B)income statement.
C)statement of cash flows.
D)statement of changes in shareholder's equity.

Question 24

Use the tables for the question(s)below.
Consider the following financial information:

For the year ending December 31, 2012 Luther's cash flow from financing activities is:

Question 25

Use the table for the question(s)below.
Consider the following income statement and other information:

Assuming that Luther has no convertible bonds outstanding, then for the year ending December 31, 2012 Luther's diluted earnings per share are closest to:

A)$1.01
B)$1.04
C)$1.28
D)$1.33

Question 26

Use the information for the question(s)below.
In November 2012 Perrigo Co. (PRGO)had a share price of $39.20. They had 91.33 million shares outstanding, a market-to-book ratio of 3.76. In addition, PRGO had $845.01 million in outstanding debt, $163.82 million in net income, and cash of $257.09 million.
Perrigo's earnings per share (EPS)is closest to:

A)$0.19
B)$1.79
C)$2.81
D)$3.76

Question 27

Use the table for the question(s)below.
Consider the following income statement and other information:

Which of the following adjustments is NOT correct if you are trying to calculate cash flow from financing activities?

A)Add dividends paid
B)Add any increase in long term borrowing
C)Add any increase in short-term borrowing
D)Add proceeds from the sale of shares

Question 28

Use the table for the question(s)below.
Consider the following income statement and other information:

Which of the following adjustments to net income is NOT correct if you are trying to calculate cash flow from operating activities?

A)Add increases in accounts payable
B)Add back depreciation
C)Add increases in accounts receivable
D)Deduct increases in inventory

Question 29

Use the table for the question(s)below.
Consider the following income statement and other information:

For the year ending December 31, 2012 Luther's earnings per share are closest to:

A)$0.96
B)$1.04
C)$1.28
D)$1.33

Question 30

If on December 31, 2011 Luther has 8 million shares outstanding trading at $15 per share, then what is Luther's enterprise value?

Question 31

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 32

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

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

Question 33

Use the table for the question(s)below.
Consider the following balance sheet:

If in 2012 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)0.39
B)0.76
C)1.29
D)2.57

Question 34

Use the tables for the question(s)below.
Consider the following financial information:

For the year ending December 31, 2012 Luther's cash flow from operating activities is:

Question 35

Use the table for the question(s)below.
Consider the following income statement and other information:

Which of the following is NOT a section on the cash flow statement?

A)Income generating activities
B)Investing activities
C)Operating activities
D)Financing activities

Question 36

Use the table for the question(s)below.
Consider the following balance sheet:

If in 2012 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then what is Luther's Enterprise Value?

A)-$63.3 million
B)$353.1 million
C)$389.7 million
D)$516.9 million

Question 37

Use the information for the question(s)below.
In November 2012 Perrigo Co. (PRGO)had a share price of $39.20. They had 91.33 million shares outstanding, a market-to-book ratio of 3.76. In addition, PRGO had $845.01 million in outstanding debt, $163.82 million in net income, and cash of $257.09 million.
The firm's revenues and expenses over a period of time are reported on the firm's:

A)income statement or statement of financial performance.
B)income statement or statement of financial position.
C)balance sheet or statement of financial performance.
D)balance sheet or statement of financial position.

Question 38

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 39

Use the table for the question(s)below.
Consider the following income statement and other information:

Which of the following statements regarding net income transferred to retained earnings is correct?

A)Net income = net income transferred to retained earnings - dividends
B)Net income transferred to retain earnings = net income + dividends
C)Net income = net income transferred to retain earnings + dividends
D)Net income transferred to retain earnings - net income = dividends

Question 40

Use the table for the question(s)below.
Consider the following income statement and other information:

Which of the following is NOT a reason why cash flow may not equal net income?

A)Amortization is added in when calculating net income.
B)Changes in inventory will change cash flows but not income.
C)Capital expenditures are not recorded on the income statement.
D)Depreciation is deducted when calculating net income.

Question 41

Use the following information for ECE incorporated:
Assets $200 million
Shareholder Equity $100 million
Sales $300 million
Net Income $15 million
Interest Expense $2 million
If ECE's return on assets (ROA)is 12%, then ECE's net income is:

A)$6 million
B)$12 million
C)$22 million
D)$36 million

Question 42

Use the table for the question(s)below.
Consider the following balance sheet:

When using the book value of equity, the debt to equity ratio for Luther in 2012 is closest to:

A)0.43
B)2.29
C)2.98
D)3.57

Question 43

Use the table for the question(s)below.
Consider the following balance sheet:

Luther's quick ratio for 2011 is closest to:

A)0.77
B)0.87
C)1.15
D)1.30

Question 44

Use the information for the question(s)below.
In November 2012, Perrigo Co. (PRGO)had a share price of $39.20. They had 91.33 million shares outstanding, a market-to-book ratio of 3.76. In addition, PRGO had $845.01 million in outstanding debt, $163.82 million in net income, and cash of $257.09 million.
Perrigo's debt to equity ratio is closest to:

A)0.24
B)0.50
C)0.75
D)0.89

Question 45

Use the table for the question(s)below.
Consider the following income statement and other information:

Luther's return on assets (ROA)for the year ending December 31, 2012 is closest to:

A)1.6%
B)6.7%
C)2.3%
D)2.6%

Question 46

Use the table for the question(s)below.
Consider the following income statement and other information:

Luther's price - earnings ratio (P/E)for the year ending December 31, 2012 is closest to:

A)7.9
B)10.1
C)15.4
D)16.0

Question 47

Use the tables for the question(s)below.
Consider the following financial information:

In addition to the balance sheet, income statement, and the statement of cash flows, a firm's complete financial statements will include all of the following EXCEPT:

A)Management discussion and analysis
B)Notes to the financial statements
C)Stock Exchange documentation
D)Statement of changes in shareholders' equity

Question 48

Use the table for the question(s)below.
Consider the following balance sheet:

The change in Luther's quick ratio from 2011 to 2012 is closest to:

A)a decrease of .10
B)an increase of .10
C)a decrease of .15
D)an increase of .15

Question 49

Use the following information for ECE incorporated:
Assets $200 million
Shareholder Equity $100 million
Sales $300 million
Net Income $15 million
Interest Expense $2 million
IECE's Return on Assets (ROA)is:

A)5.0%
B)8.5%
C)7.5%
D)15.0%

Question 50

Use the table for the question(s)below.
Consider the following balance sheet:

If in 2012 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 to equity ratio for Luther in 2012 is closest to:

A)1.47
B)1.78
C)2.31
D)4.07

Question 51

Use the table for the question(s)below.
Consider the following income statement and other information:

Luther's earnings before interest, taxes, depreciation, and amortization (EBITDA)for the year ending December 31, 2012 is closest to:

A)19.7 million
B)37.6 million
C)41.2 million
D)44.8 million

Question 52

Use the table for the question(s)below.
Consider the following income statement and other information:

Luther's return on equity (ROE)for the year ending December 31, 2012 is closest to:

A)2.0%
B)6.5%
C)8.4%
D)12.7%

Question 53

Use the tables for the question(s)below.
Consider the following financial information:

Off-balance sheet transactions are required to be disclosed:

A)in the management discussion and analysis.
B)in the auditor's report.
C)Stock Exchange documentation
D)in the statement of changes in shareholders' equity.

Question 54

Use the table for the question(s)below.
Consider the following income statement and other information:

Luther's Operating Margin for the year ending December 31, 2011 is closest to:

A)0.5%
B)0.7%
C)5.4%
D)6.8%

Question 55

Use the information for the question(s)below.
In November 2012, Perrigo Co. (PRGO)had a share price of $39.20. They had 91.33 million shares outstanding, a market-to-book ratio of 3.76. In addition, PRGO had $845.01 million in outstanding debt, $163.82 million in net income, and cash of $257.09 million.
Perrigo's market debt to equity ratio is closest to:

A)0.24
B)0.50
C)0.75
D)0.89

Question 56

Use the tables for the question(s)below.
Consider the following financial information:

Details of acquisitions, spin-offs, leases, taxes, and risk management activities are given:

A)in the management discussion and analysis.
B)Stock Exchange documentation
C)in the auditor's report.
D)in the notes to the financial statements.

Question 57

Use the information for the question(s)below.
In November 2012, Perrigo Co. (PRGO)had a share price of $39.20. They had 91.33 million shares outstanding, a market-to-book ratio of 3.76. In addition, PRGO had $845.01 million in outstanding debt, $163.82 million in net income, and cash of $257.09 million.
Perrigo's price-earnings ratio (P/E)is closest to:

A)15.96
B)21.85
C)29.77
D)35.64

Question 58

Use the table for the question(s)below.
Consider the following balance sheet:

Luther's current ratio for 2012 is closest to:

A)0.84
B)0.92
C)1.09
D)1.19

Question 59

Use the table for the question(s)below.
Consider the following income statement and other information:

Luther's Net Profit Margin for the year ending December 31, 2011 is closest to:

A)1.8%
B)2.7%
C)5.4%
D)16.7%

Question 60

Use the table for the question(s)below.
Consider the following income statement and other information:

Calculate Luther's return of equity (ROE), return of assets (ROA), and price-to-earnings ratio (P/E)for the year ending December 31, 2011.

Question 61

Use the following information for ECE incorporated:
Assets $200 million
Shareholder Equity $100 million
Sales $300 million
Net Income $15 million
Interest Expense $2 million
If ECE's net profit margin is 8%, then ECE's return on equity (ROE)is:

A)10%
B)12%
C)24%
D)30%

Question 62

Use the information for the question(s)below.
In November 2012, Perrigo Co. (PRGO)had a share price of $39.20. They had 91.33 million shares outstanding, a market-to-book ratio of 3.76. In addition, PRGO had $845.01 million in outstanding debt, $163.82 million in net income, and cash of $257.09 million.
Perrigo's return on equity (ROE)is closest to:

A)4.6%
B)9.1%
C)17.2%
D)27%

Question 63

If Moon Corporation has depreciation or amortization expense, which of the following is TRUE?

A)Its EBITDA /Interest Coverage ratio will be greater than its EBIT/Interest Coverage ratio.
B)Its EBITDA /Interest Coverage ratio will be less than its EBIT/Interest Coverage ratio.
C)Its EBITDA /Interest Coverage ratio will be equal to its EBIT/Interest Coverage ratio.
D)Not enough information to answer the question.

Question 64

Use the following information for ECE incorporated:
Assets $200 million
Shareholder Equity $100 million
Sales $300 million
Net Income $15 million
Interest Expense $2 million
If ECE reported $15 million in net income, then ECE's Return on Equity (ROE)is:

A)5.0%
B)7.5%
C)10.0%
D)15.0%

Question 65

Use the table for the question(s)below.
Consider the following income statement and other information:

Wyatt Oil has a net profit margin of 4.0%, a total asset turnover of 2.2, total assets of $525 million, and a book value of equity of $220 million. Wyatt Oil's current return-on-assets (ROA)is closest to:

A)8.8%
B)9.5%
C)21.0%
D)22.8%

Question 66

The inventory days ratio measures:

A)the average length of time it takes a company to sell its inventory.
B)the average length of time it takes the company's suppliers to deliver its inventory.
C)the level of sales required to keep a company's average inventory on the books.
D)the percentage change in inventory over the past year.

Question 67

Use the table for the question(s)below.
Consider the following income statement and other information:

Wyatt Oil has a net profit margin of 4.0%, a total asset turnover of 2.2, total assets of $525 million, and a book value of equity of $220 million. Wyatt Oil's current return-on-equity (ROE)is closest to:

A)8.8%
B)9.5%
C)21.0%
D)22.8%

Question 68

Use the following information for ECE incorporated:
Assets $200 million
Shareholder Equity $100 million
Sales $300 million
Net Income $15 million
Interest Expense $2 million
If ECE's return on assets (ROA)is 12%, then ECE's return on equity (ROE)is:

A)10%
B)12%
C)18%
D)22%

Question 69

If Alex Corporation takes out a bank loan to purchase a machine used in production and everything else stays the same, its equity multiplier will ________, and its ROE will ________.

A)increase; increase
B)decrease; decrease
C)increase; decrease
D)decrease; increase

Question 70

If Moon Corporation has an increase in sales, which of the following would result in no change in its EBIT margin?

A)A proportional increase in its net income
B)A proportional decrease in its EBIT
C)A proportional increase in its EBIT
D)An increase in its operating expenses

Question 71

The firm's asset turnover measures:

A)the value of assets held per dollar of shareholder equity.
B)the return the firm has earned on its past investments.
C)the firm's ability to sell a product for more than the cost of producing it.
D)how efficiently the firm is utilizing its assets to generate sales.

Question 72

Use the table for the question(s)below.
Consider the following income statement and other information:

Luther's EBIT coverage ratio for the year ending December 31, 2012 is closest to:

A)1.64
B)1.78
C)1.98
D)2.19

Question 73

Use the table for the question(s)below.
Consider the following income statement and other information:

Luther's EBIT coverage ratio for the year ending December 31, 2011 is closest to:

A)1.64
B)1.78
C)1.98
D)2.19

Question 74

If Firm A and Firm B are in the same industry and use the same production method, and Firm A's asset turnover is higher than that of Firm B, then all else equal we can conclude:

A)Firm A is more efficient than Firm B.
B)Firm A has a lower dollar amount of assets than Firm B.
C)Firm A has higher sales than Firm B.
D)Firm A has a lower ROE than Firm B.

Question 75

Use the table for the question(s)below.
Consider the following income statement and other information:

Luther's EBITDA coverage ratio for the year ending December 31, 2012 is closest to:

A)1.64
B)1.78
C)1.98
D)2.19

Question 76

The firm's equity multiplier measures:

A)the value of assets held per dollar of shareholder equity.
B)the return the firm has earned on its past investments.
C)the firm's ability to sell a product for more than the cost of producing it.
D)how efficiently the firm is utilizing its assets to generate sales.

Question 77

Suppose Novak Company experienced a reduction in its ROE over the last year. This fall could be attributed to:

A)an increase in net profit margin.
B)a decrease in asset turnover.
C)an increase in leverage.
D)a decrease in Equity.

Question 78

The DuPont Identity expresses the firm's ROE in terms of:

A)profitability, asset efficiency, and leverage.
B)valuation, leverage, and interest coverage.
C)profitability, margins, and valuation.
D)equity, assets, and liabilities.

Question 79

Use the table for the question(s)below.
Consider the following income statement and other information:

If Luther's accounts receivable were $55.5 million in 2012, then calculate Luther's accounts receivable days for 2012.

Question 80

If Moon Corporation's gross margin declined, which of the following is TRUE?

A)Its cost of goods sold increased.
B)Its cost of goods sold as a percent of sales increased.
C)Its sales increased.
D)Its net profit margin was unaffected by the decline.