Deck 13: Analyzing and Interpreting Financial Statements

Question 1

A company can change from one acceptable accounting principle to another as long as the change improves the usefulness of information in its financial statements.

Answer 1

True

Question 2

Horizontal analysis is the comparison of a company's financial condition and performance to a base amount.

Answer 2

False

Question 3

Financial reporting includes not only general purpose financial statements,but also information from SEC filings,press releases,shareholders' meetings,forecasts,management letters,auditor's reports and Webcasts.

Answer 3

True

Question 4

A financial statement analysis report should include a brief table of contents to help users focus on those areas most relevant to their decisions.

Question 5

A good financial statement analysis report often includes the following sections: Executive summary,analysis overview,evidential matter,assumptions,key factors and inferences.

Question 6

One purpose of financial statement analysis for internal users is to provide information helpful in improving the company's efficiency and effectiveness in providing products and services.

Question 7

Measures taken from a selected competitor or a group of competitors are often excellent standards of comparison for analysis.

Question 8

Vertical analysis is the comparison of a company's financial condition and performance through time.

Question 9

The evaluation of company performance and financial condition includes evaluation of (1)past and current performance, (2)current financial position and (3)future performance and risk.

Question 10

Financial statement analysis is the application of analytical tools to general-purpose financial statements and related data for making business decisions.

Question 11

General standards or guidelines of comparisons include the 2 to 1 for the current ratio and 1 to 1 for the acid-test ratio.

Question 12

Standards for comparison are necessary when making judgments about a company's financial performance.

Question 13

Profitability is the company's ability to generate future revenues and meet long-term financial obligations.

Question 14

Liquidity and efficiency are considered the building blocks of financial statement analysis.

Question 15

A financial statement analysis report helps to reduce uncertainty in business decisions through a rigorous and sound evaluation.

Question 16

If a company's activities include operations that are being discontinued,the income or loss effects of the discontinued operations are included on the income statement as part of income from continuing operations.

Question 17

Extraordinary items are reported in the operating section of the income statement.

Question 18

Profitability is the ability to generate positive market expectations.

Question 19

Market prospects are the ability to provide financial rewards sufficient to attract and retain financing.

Question 20

Financial statement analysis can be used for personal investment decisions.

Question 21

The percent change is computed by subtracting the analysis period amount from the base period amount,then dividing the result by the base period amount and then multiplying that result by 100.

Question 22

Expropriation of property by a foreign government is considered an extraordinary item.

Question 23

Capital structure refers to a company's long-run financial viability and its ability to cover long-term obligations.

Question 24

Working capital is computed as current liabilities minus current assets.

Question 25

A corporation reported cash of $14,000 and total assets of $178,300.Its common-size percent for cash equals 7.85%.

Question 26

Horizontal analysis is used to reveal changes in the relative importance of each financial statement item.

Question 27

Comparative financial statements are reports that show financial amounts placed side by side in columns on a single statement for analysis purposes.

Question 28

Comparative horizontal analysis is used to reveal patterns in data covering successive periods.

Question 29

Efficiency refers to how productive a company is in using its assets and is usually measured relative to how much revenue is generated from a certain level of assets.

Question 30

Liquidity refers to the availability of resources to meet short-term cash requirements.

Question 31

Ratios can be expressed as a percent,rate or proportion.

Question 32

Total asset turnover reflects a company's ability to use its assets to generate sales and is an important indication of operating efficiency.

Question 33

Ratios analysis eliminates all of the differences of GAAP versus IFRS financial reporting.

Question 34

Trend analysis is a form of horizontal analysis that can reveal patterns in data across successive periods.

Question 35

The "cumulative effect of a change in accounting principles" is shown below extraordinary items section on the income statement.

Question 36

The greater the times interest earned ratio,the greater the risk a company is exposed to.

Question 37

The current ratio is calculated as current liabilities divided by current assets.

Question 38

Vertical analysis is a tool to evaluate individual financial statement items or groups of items in terms of a specific base amount.

Question 39

The use of horizontal and vertical analysis eliminates many differences between GAAP and IFRS,but the user must exercise some caution when drawing conclusions from these reports.

Question 40

An advantage of common-size statements is that they reflect the relative sizes of different companies under analysis.

Question 41

The higher the accounts receivable turnover,the slower the accounts receivable are collected.

Question 42

The three most common tools of financial analysis are:

A)Financial reporting,ratio analysis,vertical analysis
B)Ratio analysis,horizontal analysis,financial reporting
C)Horizontal analysis,vertical analysis,ratio analysis
D)Trend analysis,financial reporting,ratio analysis
E)Vertical analysis,political analysis,horizontal analysis

Question 43

The return on total assets can be calculated as the profit margin times the total asset turnover.

Question 44

A company that has days' sales uncollected of 30 days and days' sales in inventory of 18 days implies that inventory will be converted to cash in about 12 days.

Question 45

Financial reporting refers to:

A)The application of analytical tools to general-purpose financial statements
B)The communication of relevant financial information to decision makers
C)Financial statements only
D)Ratio analysis
E)Profitability

Question 46

The ability to meet short-term obligations and to efficiently generate revenues is called:

A)Liquidity and efficiency
B)Solvency
C)Profitability
D)Market prospects
E)Creditworthiness

Question 47

Internal users of financial information:

A)Are not directly involved in operating a company
B)Are those individuals involved in managing and operating the company
C)Include shareholders and lenders
D)Include directors and customers
E)Include suppliers,regulators and the press

Question 48

The ability to generate future revenues and meet long-term obligations is referred to as:

A)Liquidity and efficiency
B)Solvency
C)Profitability
D)Market prospects
E)Creditworthiness

Question 49

The return on total equity measures a company's success in reaching the goal of earning net income for its owners.

Question 50

The ability to provide financial rewards sufficient to attract and retain financing is called:

A)Liquidity and efficiency
B)Solvency
C)Profitability
D)Market prospects
E)Creditworthiness

Question 51

A company reports basic earnings per share of $3.50,cash dividends per share of $0.75 and a market price per share of $64.75.The company's dividend yield equal is equal to 21.4%.

Question 52

Intracompany standards for financial statement analysis:

A)Are often based on a company's prior performance
B)Are often set by competitors
C)Are set by the company's industry
D)Are based on rules of thumb
E)Are published in Dun and Bradstreet

Question 53

The ability to generate positive market expectations is called:

A)Liquidity and efficiency
B)Liquidity and solvency
C)Profitability
D)Market prospects
E)Creditworthiness

Question 54

The return on total assets ratio is a profitability measure.

Question 55

A rough guideline states that for a company with no discounts offered,days' sales uncollected should not exceed 1 times the days in its credit period.

Question 56

Guidelines (rules-of-thumb)are developed from:

A)Industry statistics from the government
B)Past experience
C)Analysis of competitors
D)Relations between financial items
E)Dun and Bradstreet

Question 57

A company with a high inventory turnover requires a smaller investment in inventory than one producing the same sales with a lower turnover.

Question 58

External users of financial information:

A)Are those individuals involved in managing and operating the company
B)Include internal auditors and consultants
C)Are not directly involved in operating the company
D)Make strategic decisions for a company
E)Make operating decisions for a company

Question 59

Industry standards for financial statement analysis:

A)Are based on a company's prior performance
B)Are set by the government
C)Are set by the financial performance and condition of the company's industry
D)Are based on rules of thumb
E)Compare a company's income with the prior year's income

Question 60

A high level of expected risk suggests a low price-earnings ratio.

Question 61

Reporting of discontinued segments includes:

A)Income or loss from operating the discontinued segment net of tax and gain or loss from disposal of the segment's net assets net of tax
B)Extraordinary items
C)Changes in accounting principle
D)Items that are both unusual and infrequent
E)Writing off of receivables

Question 62

Common-size statements:

A)Reveal changes in the relative magnitude of each financial statement item
B)Do not emphasize the relative magnitude of each item
C)Compare financial statements over time
D)Show the dollar amount of change for financial statement items
E)Consist of two or more balance sheets arranged side-by-side

Question 63

The measurement of key relations among financial statement items is known as:

A)Financial reporting
B)Horizontal analysis
C)Investment analysis
D)Ratio analysis
E)Risk analysis

Question 64

In horizontal analysis the percent change is computed by:

A)Subtracting the analysis period amount from the base period amount
B)Subtracting the base period amount from the analysis period amount
C)Subtracting the analysis period amount from the base period amount,dividing the result by the base period amount,then multiplying that amount by 100
D)Subtracting the base period amount from the analysis period amount,dividing the result by the base period amount,then multiplying that amount by 100
E)Subtracting the base period amount from the analysis amount,then dividing the result by the analysis period amount

Question 65

Trend analysis is also called:

A)Financial analysis
B)Ratio analysis
C)Index number trend analysis
D)Industry analysis
E)Output analysis

Question 66

Horizontal analysis:

A)Is a method used to evaluate changes in financial data across time
B)Is also called vertical analysis
C)Is the presentation of financial ratios
D)Is a tool used to evaluate financial statement items relative to industry statistics
E)Evaluates financial data across industries

Question 67

The common-size percent is computed by:

A)Dividing the analysis amount by the base amount
B)Dividing the base amount by the analysis amount
C)Dividing the analysis amount by the base amount and multiplying the result by 100
D)Dividing the base amount by the analysis amount and multiplying the result by 1,000
E)Subtracting the base amount from the analysis amount and multiplying the result by 100

Question 68

Financial statements with data for two or more successive accounting periods placed in columns side by side,sometimes with changes shown in dollar amounts and percents,are referred to as:

A)Period-to-period statements
B)Controlling statements
C)Successive statements
D)Comparative statements
E)Serial statements

Question 69

The comparison of a company's financial condition and performance to a base amount is known as:

A)Financial reporting
B)Horizontal ratios
C)Investment analysis
D)Risk analysis
E)Vertical analysis

Question 70

A company's sales in 2010 were $250,000 and in 2011 were $287,500.Using 2010 as the base year,the sales trend percent for 2011 is:

A)87%
B)100%
C)115%
D)15%
E)13%

Question 71

Which of the following financial statements sections includes information on the background on a company,its industry and its economic setting?

A)Executive summary
B)Analysis overview
C)Evidential conclusions
D)Factor analysis
E)Inferences

Question 72

Based on the data given below,which of the following statements are true?
$$\begin{array} { | l | r | r | } \hline \text { Case } & \begin{array} { c } \text { Aralysis } \\\text { Period }\end{array} & \begin{array} { c } \text { Base } \\\text { Period }\end{array} \\\hline \text { A } & \$ 1,500 & \$ ( 4,500 ) \\\hline \text { B } & ( 1,000 ) & 2,000 \\\hline \text { C } & 8,000 & \cdots \\\hline \text { D } & 0 & \$ 10,000 \\\hline\end{array}$$

A)The percent change for case C is 100%
B)A percent change either cannot be computed or is not meaningful for cases A,B,C and D
C)A percent change either cannot be computed or is not meaningful for case C
D)A percent change either cannot be computed or is not meaningful for cases B and C
E)A percent change either cannot be computed or is not meaningful for cases A,B and C

Question 73

Which of the following items is not likely to be considered an extraordinary item?

A)Loss from an unexpected union strike
B)Condemnation of property by the city government
C)Loss of use of property due to a new and unexpected environmental regulation
D)Loss due to an earthquake in Florida
E)Expropriation of property by a foreign government

Question 74

Selected comparative income statement amounts for a company are shown below.Using 2010 as the base year for a horizontal analysis,compute the account with the most significant change.
$\begin{array}{|l|r|r|}\hline&2010&2011\\\hline \text { Sales } & \$ 400,000 & \$ 520,000 \\\hline \text { General and Administrative Expenses } & \$ 27,000 & \$ 29,700 \\\hline \text { Interest Expense } & \$ 1,000 & \$ 1,700 \\\hline \text { Miscellaneous Expense } & \$ 100 & \$ 200\\\hline \end{array}$

A)Sales
B)General and Administrative Expenses
C)Interest Expense
D)Miscellaneous Expense
E)Cannot be determined from the given data

Question 75

A change in inventory reporting from LIFO to FIFO is:

A)An extraordinary item
B)A discontinued item
C)Not allowed once lower of cost or market is applied
D)Allowed,if it improves the usefulness of information in the financial statements
E)Not reported,as it is considered a change in accounting estimate

Question 76

In which comparative financial statements is each amount expressed as a percentage of a base amount?

A)Asset comparative statements
B)Percentage comparative statements
C)Common-size comparative statements
D)Sales comparative statements
E)General-purpose financial statements

Question 77

Extraordinary items:

A)Are not reported on a corporate income statement
B)Are included in income from operations
C)Are unusual and infrequent
D)Include changes in accounting principle
E)Are disclosed before discontinued operations on the income statement

Question 78

Comparative financial statements in which each amount is expressed as a percentage of a base amount and in which the base amount is expressed as 100%,are called:

A)Comparative statements
B)Common-size comparative statements
C)General-purpose financial statements
D)Base line statements
E)Index statements

Question 79

The comparison of a company's financial condition and performance across time is known as:

A)Horizontal analysis
B)Vertical analysis
C)Political analysis
D)Financial reporting
E)Investment analysis

Question 80

The dollar change for a financial statement item is calculated by:

A)Subtracting the analysis period amount from the base period amount
B)Subtracting the base period amount from the analysis period amount
C)Subtracting the analysis period amount from the base period amount,dividing the result by the base period amount,then multiplying that amount by 100
D)Subtracting the base period amount from the analysis period amount,dividing the result by the base period amount,then multiplying that amount by 100
E)Subtracting the base period amount from the analysis amount,then dividing the result by the base amount