Deck 13: Financial Statement Analysis

Question 1

A form of horizontal analysis that indicates the direction a business is taking is:

A)trend percentages.
B)economic value added analysis.
C)vertical analysis.
D)benchmarking.

Answer 1

A

Question 2

It is generally considered more useful to know the absolute dollar amount of change in financial statement amounts from year to year than to know the percentage change.

Answer 2

False

Question 3

When computing trend percentages:

A)the base year is always equal to 100%.
B)the base year is always the latest year.
C)the current year is always equal to 100%.
D)both B and C are correct.

Answer 3

A

Question 4

The analysis of percentage changes in comparative statements is known as:

A)benchmarking analysis.
B)horizontal analysis.
C)vertical analysis.
D)economic value added analysis.

Question 5

The percentage change in financial statement balances is computed by dividing the dollar amount change from the base (earlier)period to the later period amount by the base period dollar amount.

Question 6

The percentage change in any individual item shown on comparative financial statements is calculated by dividing the dollar amount of the change from the base period to the current period by:

A)the base-period amount.
B)the amount shown for the current period.
C)the average of the amounts shown for the base and the current periods.
D)none of the above.

Question 7

Trend analysis is most closely related to:

A)horizontal analysis.
B)economic value added analysis.
C)vertical analysis.
D)benchmarking.

Question 8

Accounts Receivable was $45,000 at the beginning of the year and $55,000 at the end of the year. The percentage change and direction of change for the year was a:

A)22% decrease.
B)22% increase.
C)18% increase.
D)18% decrease.

Question 9

Assume that the balance in Retained Earnings at the end of year is $100,000, and that it decreased by 15% during the year. The balance in Retained Earnings at the beginning of the year was closest to:

A)$120,000.
B)$117,647.
C)$115,000.
D)$ 85,000.

Question 10

Computing a percentage change in horizontal analysis requires two steps. The first step is compute the dollar amount of the change from the base period to the next period and the second step is to:

A)divide the dollar amount of the change by the current period amount.
B)multiply the dollar amount of the change by the current period amount.
C)divide the dollar amount of the change by the base-period amount.
D)multiply the dollar amount of the change by the base-period amount.

Question 11

A company reported $65,000 of income for year 1; $70,000 for year 2; and $80,000 for year 3. The percentage change in net income from year 2 to year 3 is:

A)14.29%.
B)12.50%.
C)7)15%.
D)38.46%.

Question 12

When preparing a trend analysis, a trend percent is computed as:

A)current year divided by base year.
B)dollar change in item divided by base year.
C)base year divided by current year.
D)dollar change in item divided by current year.

Question 13

A company reported $155,000 of income for year 1; $180,000 for year 2; and $200,000 for year 3. The percentage change in net income from year 1 to year 3 is computed as:

A)$45,000 / $155,000.
B)$20,000 / $155,000.
C)$45,000 / $200,000.
D)$25,000 / $200,000.

Question 14

When performing a trend analysis, the base year is generally the most recent year.

Question 15

The study of percentage changes in comparative financial statements is:

A)benchmarking.
B)vertical analysis.
C)horizontal analysis.
D)common-size statements.

Question 16

Cost of goods sold for the current year was $170,000. Last year's cost of goods sold was $190,000. The percentage change and direction of change for the current year was a:

A)11.7% increase.
B)10.5% decrease.
C)10.5% increase.
D)11.7% decrease.

Question 17

Horizontal analysis focuses on:

A)the balance sheet only.
B)percentage changes in comparative financial statements.
C)the change in key financial statement ratios over a certain time frame.
D)the changes in individual financial statement amounts as a percentage of some related total.

Question 18

When computing trend percentages:

A)the base year is generally the earliest year.
B)the base year is always the latest year.
C)the base year is always equal to 100%.
D)both A and C are correct.

Question 19

Assume that the Inventory balance at the end of the year is $125,000, and that it has increased by 5% during the year. The Inventory balance at the beginning of the year was closest to:

A)$119,048.
B)$131,579.
C)$131,250.
D)$118,750.

Question 20

Trend analysis can only be performed for income statement items.

Question 21

When using common-size financial statements to evaluate the operating results of two different companies, the gross margin of Company A is expressed as a percentage of:

A)Company B's gross margin.
B)the total gross margins of Companies A and B.
C)Company A's sales.
D)a common standard for both Company A and Company B.

Question 22

A financial statement showing each item on the statement as a percentage of one key item on the statement, called the base, is referred to as:

A)common-size statement.
B)trend analysis.
C)horizontal analysis.
D)benchmarking.

Question 23

Which of the following expresses current cost of goods sold in terms of a base year?

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

Question 24

The relationship of each individual asset as a percentage of total assets is an example of horizontal analysis.

Question 25

Expressing current operating income as a percentage of current net sales is an example of:

A)horizontal analysis.
B)economic value added.
C)ratio analysis.
D)vertical analysis.

Question 26

On a common-size income statement, each item is expressed as a percentage of:

A)gross margin.
B)operating income.
C)total revenues.
D)net income.

Question 27

Given the following data: In a vertical analysis, cash would be expressed as:

A)830%.
B)1435%.
C)12%.
D)7%.

Question 28

When performing vertical analysis of a balance sheet, net income is usually used as the base.

Question 29

On a common-size balance sheet each item is expressed as a percentage of:

A)stockholders' equity.
B)common stock.
C)common shares outstanding.
D)total assets.

Question 30

Horizontal analysis evaluates financial data:

A)for one year.
B)for the future.
C)over a period of time.
D)none of the above.

Question 31

Common-size financial statements represent a form of:

A)trend analysis.
B)horizontal analysis.
C)vertical analysis.
D)ratio analysis.

Question 32

Of the items listed below, the one most helpful in the comparison of different size companies is:

A)comparison of their net incomes.
B)horizontal analysis.
C)preparation of common-size financial statements.
D)comparison of their working capital balances.

Question 33

A vertical analysis is primarily concerned with:

A)the change in key financial statement ratios over a specified period of time.
B)the dollar amount of the change in various financial statement amounts from year to year.
C)percentage changes in the balances shown in comparative financial statements.
D)individual financial statement items expressed as a percentage of a base (which represents 100%).

Question 34

Which of the following would be most likely to reveal that cost of goods sold increased by a specific dollar amount during the year?

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

Question 35

The gross margin percent is a form of horizontal analysis.

Question 36

When performing vertical analysis, each financial statement item is shown as a percentage of the base amount.

Question 37

If the assets shown on a balance sheet are subjected to vertical analysis (using total assets as the base), a decrease in the figure for noncurrent assets from 55% to 40% would always mean that:

A)the dollar amount of current assets has decreased.
B)total noncurrent assets have decreased as a percentage of total assets.
C)both A and B are correct.
D)neither A nor B are correct.

Question 38

Which of the following is typically used as the base in a vertical analysis of a balance sheet?

A)Net income
B)Gross sales
C)Cash
D)Total assets

Question 39

Which of the following is typically used as the base in a vertical analysis of an income statement?

A)Net sales
B)Net income
C)Gross sales
D)Cash

Question 40

If a balance sheet is subjected to vertical analysis which shows that current assets (using total assets as the base)have increased from 36% to 53%, this would always mean that:

A)the dollar amount of total assets has decreased.
B)the dollar amount of total assets has increased.
C)the dollar amount of current assets has increased.
D)current assets have increased as a percentage of total assets.

Question 41

If two companies have the same dollar amount of working capital, they will be in the same financial position.

Question 42

A rising debt ratio is a positive sign because it indicates creditors are willing to increase amounts loaned to the company.

Question 43

On the statement of cash flows of a healthy company, net cash from operating activities generally exceeds net income.

Question 44

A high times-interest-earned ratio indicates difficulty in paying interest.

Question 45

On a statement of cash flows of a financially healthy company, net income should ordinarily be:

A)less than cash provided by operating activities.
B)less than depreciation expense.
C)more than depreciation expense.
D)more than cash provided by operating activities.

Question 46

Earnings per share of common stock measures the market value of one share of common stock.

Question 47

If over a period of time, a company's major source of cash is from the sale of plant assets, this may be a sign of financial difficulty.

Question 48

A firm's ability to pay current liabilities can be evaluated using working capital, the current ratio, and the debt ratio.

Question 49

On the statement of cash flows of a healthy company, net cash from operating activities generally exceeds net income because of the add-back of depreciation.

Question 50

A low inventory turnover may indicate that a company is experiencing difficulty selling its inventory.

Question 51

The current ratio is calculated as:

A)current assets divided by total liabilities.
B)current assets divided by current liabilities.
C)current assets times current liabilities.
D)total assets divided by total liabilities.

Question 52

When analyzing the statement of cash flows, which of the following statements is TRUE?

A)A company with a large cash balance is ensured success.
B)A shortage of cash can lead a company to bankruptcy.
C)Cash has no affect on the success of the company.
D)Cash is ignored when analyzing a company.

Question 53

Analysts rely solely on the statement of cash flows as a predictor of eventual success for a given company.

Question 54

A high current ratio means that a company's current assets represent a relatively large portion of total assets.

Question 55

Arnold Company's return on sales for the most recent year was 6%. Arnold Company would like to achieve a return on sales of 8% to match those of the current industry leader. This comparison is an example of:

A)intercompany analysis.
B)benchmarking.
C)analytical goal setting.
D)detail analysis.

Question 56

The rate of return on net sales shows the percentage of each sales dollar earned as net income.

Question 57

A company in the grocery store business should have a higher inventory turnover than a company in the automobile sales industry.

Question 58

Financial leverage exists when a company earns more income on borrowed money than the related interest expense on the money.

Question 59

Analyzing the statement of cash flows may help analysts determine the financial health of a company. Which of the following signs below is NOT an indicator of a financially healthy company?

A)The company's operations are a major use (not a source)of cash.
B)The company's operations are a major source (not a use)of cash.
C)The company's financing activities are not dominated by borrowing.
D)The company's investing activities include more purchases than sales of long-term assets.

Question 60

Analysts find the statement of cash flows more helpful for spotting weakness than for gauging success.

Question 61

Which of the following groups of ratios measure a company's ability to pay its current liabilities?

A)Current ratio, acid-test ratio and the times-interest-earned ratio
B)Current ratio and acid-test ratio
C)Current ratio and times-interest-earned
D)Current ration and debt ratio

Question 62

The ratio that provides an estimate of the number of days, on average, that it takes for customers to pay their account is the:

A)acid-test ratio.
B)accounts receivable turnover.
C)days' sales in receivables.
D)current ratio.

Question 63

The ratio that measures a company's ability to pay current liabilities with current assets is the:

A)acid-test ratio.
B)accounts receivable turnover.
C)inventory turnover.
D)current ratio.

Question 64

The ratio that measures the number of times that operating income can cover interest expense is the:

A)debt ratio.
B)leverage.
C)times-interest-earned ratio.
D)rate of return on total assets.

Question 65

Which of the following would be useful in determining whether a company can pay its current liabilities?

A)Quick ratio
B)Current ratio
C)Debt ratio
D)Both A and B

Question 66

The ratio that measures how rapidly inventory is sold is the:

A)cost of goods sold.
B)inventory turnover.
C)days' sales in inventory.
D)current ratio.

Question 67

Spaceship Enterprises has a current ratio of 1.9 and working capital equal to $75,000. Total current liabilities are equal to:

A)$ 75,000.
B)$ 39,474.
C)$142,500.
D)$ 83,333.

Question 68

Which of the following current assets is excluded when calculating the acid-test ratio?

A)Prepaid assets
B)Inventory
C)Accounts receivable
D)Both A and B

Question 69

Inventory turnover is calculated as:

A)average inventory for the period divided by gross profit for the period.
B)gross profit for the period divided by average inventory for the period.
C)average inventory for the period divided by cost of goods sold.
D)cost of goods sold divided by average inventory for the period.

Question 70

The ratio that states the proportion of a company's assets that is financed with debt is the:

A)debt ratio.
B)leverage.
C)times-interest-earned ratio.
D)rate of return on total assets.

Question 71

Assume a company has working capital equal to $23,000 and total current liabilities equal to $75,000. The current ratio:

A)is 0.31.
B)is 1.31.
C)is 3.26.
D)cannot be determined from this information.

Question 72

The amount of a company's net income earned for each share of its outstanding common stock is termed the:

A)dividend yield.
B)return on equity.
C)price/earnings ratio.
D)earnings per share.

Question 73

Which of the following two items is NOT included in the calculation of the numerator in the acid- test ratio?

A)Short-term investments and net current receivables
B)Inventory and net current receivables
C)Prepaid expenses and inventory
D)Cash and prepaid expenses

Question 74

Earning more income on borrowed money than the related interest expense, thereby increasing the earnings for the owners of the business, is termed:

A)debt ratio.
B)leverage.
C)times-interest-earned ratio.
D)rate of return on total assets.

Question 75

Which of the following is the best measure of a firm's ability to pay its long-term debt?

A)Debt ratio
B)Net income
C)Cash flows from financing activities
D)Current ratio

Question 76

The ratio that measures a company's success in using its assets to earn income for the persons who finance the business is the:

A)debt ratio.
B)leverage.
C)times-interest-earned ratio.
D)rate of return on total assets.

Question 77

Assume a company has a current ratio of 1.8 and working capital equal to $48,000. If the company's current liabilities are equal to $60,000, its total current assets are:

A)$ 10,800.
B)$ 54,000.
C)$ 6,000.
D)$108,000.

Question 78

The ratio that tells whether the entity can pay all its current liabilities if they come due immediately is the:

A)acid-test ratio.
B)accounts receivable turnover.
C)inventory turnover.
D)earnings per share.

Question 79

A measure of a company's ability to collect cash from credit customers is the:

A)acid-test ratio.
B)accounts receivable turnover.
C)inventory turnover.
D)earnings per share.

Question 80

Working capital is defined as:

A)current liabilities less current assets.
B)current assets less current liabilities.
C)current assets plus current liabilities.
D)total assets less total liabilities.