Deck 15: Financial Statement Analysis

Question 1

In the vertical analysis of a balance sheet, the base for current liabilities is total liabilities.

Answer 1

False

Question 2

Industrial statistics should be taken as absolute norms as far as standards for comparability.

Answer 2

False

Question 3

Small sample sizes for an industrial report rarely cause a comparability problem in using standards.

Answer 3

False

Question 4

Terms of sale can produce statistical variations among companies within the same industry.

Question 5

Common-size analysis expresses each item in a financial statement as a percent of a base amount.

Question 6

Labor markets can impact industrial statistics and standards.

Question 7

Horizontal analysis involves comparing two or more years' financial data for a single company.

Question 8

An example of horizontal analysis is the increase in cost of goods sold by 25% from Year 1 to Year 2.

Question 9

In vertical analysis of the income statement, cost of goods sold is represented by 100%.

Question 10

The use of common-size analysis makes comparisons more meaningful because percentages eliminate the effects of size.

Question 11

For meaningful analysis, ratios should be compared with a standard.

Question 12

Liquidity ratios measure the ability of a company to meet its current obligations.

Question 13

Two major forms of common-size analysis are horizontal analysis and vertical analysis.

Question 14

In vertical analysis of the balance sheet, total liabilities are represented by 100%.

Question 15

In horizontal analysis, the base year can be the immediately preceding period, or it can be a period further in the past.

Question 16

Common-size statements are statements of companies of similar size and operations.

Question 17

Companies in the same industry may use different accounting methods, diminishing the usefulness of some industrial averages.

Question 18

Industrial figures, standards and statistics should be used with so much care that they are not a very good reference point to compare companies.

Question 19

A primary purpose of vertical analysis is to observe trends over a three-year period.

Question 20

A number of online sources contain competitive information on individual company's ratios.

Question 21

Profitability ratios assess the ability of a company to meets its long- and short-term obligations.

Question 22

The quick ratio should be larger than the current ratio.

Question 23

Inventory turnover is a measure of liquidity that focuses on efficient use of inventory.

Question 24

The _____________________ gives the number of days inventory is held before being sold.

Question 25

The _________________ is a measure of liquidity that compares only the most liquid assets with current liabilities.

Question 26

____________ are fractions or percentages computed by dividing one account or line-item amount by another.

Question 27

_____________________ expresses a line item as a percentage of some other line item for the same period.

Question 28

When computing the quick ratio, a short-term note receivable would be included.

Question 29

The dividend payout ratio is equal to common dividends divided by (Net Income − Preferred Dividends).

Question 30

All debt is considered in the computation of the quick ratio.

Question 31

Jill's Market has an inventory turnover of 120 times.Scott's Market has a turnover of 128 times.Scott's is more effective in managing inventory.

Question 32

The ________________ is a measure of the ability of a company to pay its short-term liabilities out of short-term assets.

Question 33

The current ratio is a measure of the ability of a company to pay its short-term liabilities out of short-term assets.

Question 34

How long it takes a company to turn its receivables into cash is known as the ________________.

Question 35

For meaningful analysis, ratios should be compared with a ____________.

Question 36

The inventory turnover ratio measures the number of days the average balance of accounts receivable is outstanding before being converted into cash.

Question 37

The measures of the ability of a company to meets its long- and short-term obligations are known as _______________.

Question 38

_________________ expresses a line item as a percentage of some prior-period amount.

Question 39

Dividing the market price of a share of stock by the earnings per share gives the price-earnings ratio.

Question 40

_________________ measure the ability of a company to meet its current obligations.

Question 41

Investors who prefer gains through appreciation will generally prefer a ___________ dividend payout ratio.

Question 42

Which of the following items is generally used as a base in vertical analysis to express as its percentage the line items on the balance sheet?

A) Owner's equity
B) Depreciation expense
C) Total assets
D) Cost of goods sold

Question 43

Which of the following expresses each item as a percentage of some prior-period amount?

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

Question 44

Horizontal analysis is analysis

A) of percentage changes over two or more years.
B) in which all items are presented as a percentage of one selected item on a financial statement.
C) in which a statistic is calculated for the relationship between two items on a single financial statement or for two items on different financial statements.
D) of all ratios that increased or decreased over past accounting periods.

Question 45

In vertical analysis

A) a base amount is required.
B) a base amount is optional.
C) the same base is used across all financial statements analyzed.
D) the results of the horizontal analysis are necessary inputs for performing the analysis.

Question 46

Which of the following types of analysis is useful in computing the relationships among the components of the financial statements for the same period?

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

Question 47

____________________ represents the percentage of each sales dollar that remains after all expenses have been subtracted.

Question 48

Which of the following analysis expresses each item in a financial statement as a percent of a base amount?

A) Variance analysis
B) Standard analysis
C) Vertical analysis
D) Horizontal analysis

Question 49

The ________________ is computed by dividing a company's total liabilities by its total assets.

Question 50

Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time

A) that has been arranged from the highest amount to the lowest amount.
B) that has been arranged from lowest amount to the highest amount.
C) to determine which items are in error.
D) to determine the amount and/or percentage increase or decrease that has taken place.

Question 51

In vertical analysis, line items on the income statement are generally expressed as a percentage of

A) net income.
B) net sales.
C) cost of goods sold.
D) total assets.

Question 52

A company measures how efficiently it is using its assets by calculating the _______________.

Question 53

Which of the following analysis are the two major techniques of common-size analysis?

A) Standard analysis and regression analysis
B) Receivable analysis and profitability analysis
C) Linear analysis and budget analysis
D) Horizontal analysis and vertical analysis

Question 54

The ___________________ is calculated by dividing the market price per share by earnings per share.

Question 55

Which of the following is also referred to as horizontal analysis?

A) Progressive analysis
B) Variance analysis
C) Trend analysis
D) Budget analysis

Question 56

The _________________ uses the income statement to assess a company's ability to service its debt.

Question 57

The ratios that allow investors, creditors, and managers to evaluate the extent to which invested funds are being used efficiently are called ____________.

Question 58

Creditors would like the debt-to-equity ratio to be _______, indicating that stockholders have financed most of the assets of the firm.

Question 59

The ________________ is calculated by dividing total liabilities by total stockholders' equity.

Question 60

______________ and ____________ are the two major sources of capital.

Question 61

Which of the following statements is true of trend analysis?

A) It tracks the percentage changes of items in financial statements over several years.
B) It computes percentages by dividing one account or line-item amount by another.
C) It expresses the line item as a percentage of some other line item for the same period.
D) It measure the ability of a company to meet its current obligations.

Question 62

An aircraft company would most likely have

A) a high inventory turnover.
B) a low profit margin.
C) high volume.
D) a low inventory turnover.

Question 63

A high accounts receivable turnover ratio indicates

A) customers are making payments quickly.
B) a large portion of the company's sales are on credit.
C) many customers are not paying their receivables.
D) the company's sales have increased.

Question 64

Swanson Company had $250,000 of current assets and $90,000 of current liabilities before borrowing $60,000 from the bank with a 3-month note payable.What effect did the borrowing transaction have on Swanson Company's current ratio?

A) The ratio remained unchanged.
B) The change in the current ratio cannot be determined.
C) The ratio decreased.
D) The ratio increased.

Question 65

The ratios that are used to determine a company's short-term debt paying ability are

A) asset turnover, times interest earned, current ratio, and account receivable turnover.
B) times interest earned, inventory turnover, current ratio, and accounts receivable turnover.
C) times interest earned, quick ratio, current ratio, and inventory turnover.
D) current ratio, quick ratio, accounts receivable turnover, and inventory turnover.

Question 66

A ratio analysis of financial statements indicates:

A) the investment opportunities available to an organization.​
B) the ability of an organization to meet short-term obligations.
C) the competitiveness of an organization.
D) the marketability of the finished product of an organization.

Question 67

Which of the following statements is true about the quick ratio?

A) The quick ratio does not include inventory as part of the numerator.
B) The quick ratio does not include accounts payable in the denominator.
C) The quick ratio is an approximation of the debt ratio.
D) The quick ratio reflects the dividends paid by a company.

Question 68

If equal amounts are added to the numerator and the denominator of a current ratio equal to one, the ratio will

A) increase.
B) decrease.
C) remain the same.
D) equal zero.

Question 69

If sales revenue in Year 1 equals $500,000, Year 2 equals $510,000, and Year 3 equals $540,000, the percentage to be assigned for Year 3 in a trend analysis, assuming that Year 1 is the base year, is:

A) 100%.
B) 159%.
C) 125%.
D) 108%.

Question 70

The quick ratio

A) is used to quickly determine a company's leverage and long-term debt-paying ability.
B) relates cash, marketable securities, and net receivables to current liabilities.
C) is calculated by taking one item from the income statement and one item from the balance sheet.
D) is the same as the current ratio except it is rounded to the nearest whole percent.

Question 71

For meaningful analysis, ratios are best compared with

A) historical company averages.
B) industrial averages.
C) historical company averages and industrial averages.
D) no standard.

Question 72

Which of the following characteristics of a company's financial position is analyzed by accounts receivable turnover and inventory turnover ratios?

A) The marketability
B) The profitability
C) The growth prospects
D) The liquidity

Question 73

Which of the following is a common measure of the liquidity of a company?

A) The profit ratio
B) The quick ratio
C) The growth ratio
D) The equity ratio

Question 74

Liquidity ratios include the _____.

A) price-earnings ratio
B) debt-equity ratio
C) dividend payout ratio
D) inventory turnover ratio

Question 75

Which of the following categories of ratios includes the current ratio?

A) Liquidity ratios
B) Leverage ratios
C) Debt ratios
D) Valuation ratios

Question 76

Assume the following sales data for a company:
If Year 1 is the base year, what is the percentage increase in sales from Year 1 to Year 5?

A) 100%
B) 180%
C) 50%
D) 55.5%

Question 77

Many industrial averages and figures are published in the each of the following except?

A) Key Business Ratios, Dun and Bradstreet
B) The Almanac of Business and Industrial Financial Ratios, Prentice-Hall
C) Annual Random Studies, Robert Morris Associates
D) Standard and Poor's Industry Survey, Standard & Poor's
E) Dow Jones-Irwin Business and Investment Almanac, Dow Jones-Irwin

Question 78

Which of the following formulas is used to calculate the inventory turnover ratio?

A) Cost of Goods Sold / Ending Inventory
B) Sales / Beginning Inventory
C) Cost of Goods Sold / Average Inventory
D) Sales / Total Inventory

Question 79

Which of the following ratios is used by short-term creditors to assess the debt-paying ability of a company?

A) Return on sales ratio
B) Current ratio
C) Inventory turnover ratio
D) Equity ratio

Question 80

Which of the following ratios signal success in the just-in-time (JIT) manufacturing environment?

A) A low profitability ratio
B) A high inventory turnover ratio
C) A low equity ratio
D) A high times-interest-earned ratio