Deck 16: Financial Statement Analysis

Question 1

In general,the greater the investment risk taken,the higher the return required as compensation.

Answer 1

True

Question 2

The lower the current ratio,the more likely the company will be able to meet its liabilities.

Answer 2

False

Question 3

The use of rule-of-thumb measures is superior to comparison of financial measures or ratios of the same company over a period of time.

Answer 3

False

Question 4

Accounting methods may be a source of incomparability among companies.

Question 5

Profitability is the ability to pay bills when due and to meet unexpected needs for cash.

Question 6

Interim financial statements are not subject to a full audit by an independent auditor.

Question 7

Liquidity is the ability to earn a satisfactory net income.

Question 8

Disclosure of segment information is useful in the analysis of diversified companies.

Question 9

The analysis of risk and return is important to both investors and creditors.

Question 10

Most public companies issue interim financial statements to the public on a quarterly basis.

Question 11

A limitation of using industry norms in financial performance evaluation is that some companies in the same industry may not be strictly comparable.

Question 12

Form 10-QK refers to the annual report filed with the SEC.

Question 13

Both diversified companies and conglomerates operate in a single,well-defined industry.

Question 14

Diversified companies are required to report information that includes certain revenue and expense items and assets for each of its segments.

Question 15

Rule-of-thumb measures are the most precise and best standards of comparison in financial performance evaluation.

Question 16

A a rule of thumb,a business starts to have trouble when its current liabilities to net worth ratio exceeds 50%.

Question 17

Financial statement analysis is used to show how items in a company's financial statements relate to the company's financial performance objectives.

Question 18

In a diversified company,segments may be represented by different industries,geographical markets,and major customers.

Question 19

Companies in the same industry are not required to use the same methods to value inventory and to depreciate similar assets.

Question 20

Interim financial statements report data for a period of less than one year.

Question 21

Annual financial statements are subjected to a full audit by an independent auditor.

Question 22

It is possible for horizontal analysis to indicate an increase in revenues from one year to another and a decrease in net income.

Question 23

In a common-size income statement,each item is expressed as a percentage of net income.

Question 24

For details about the financial histories of companies,one could consult publications of Moody's and Standard & Poor's.

Question 25

Determining the percentage change in an item from one year to the next is a type of horizontal analysis.

Question 26

The quick ratio and the current ratio are measures of short-term debt-paying ability.

Question 27

For an index number,the base year is set at 100 percent.

Question 28

Horizontal analysis will result in common-size statements.

Question 29

Common-size statements are useful in assessing the changes in the composition of statements over time.

Question 30

Companies file their quarterly reports with the SEC on Form 8-Q.

Question 31

When using an index number,one sets the most recent number in a series equal to 100.

Question 32

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

Question 33

Vertical analysis will reveal the percentage of net sales consumed by salaries expense.

Question 34

In a common-size income statement,net sales is represented by 100 percent.

Question 35

A 20 percent change in net sales will result in a 20 percent change in net income.

Question 36

In horizontal analysis,the base year is the most current year being examined.

Question 37

In a common-size balance sheet,total liabilities are represented by 100 percent.

Question 38

Trend analysis requires the establishment of a base year for comparison purposes.

Question 39

The most complete financial newspaper in the United States is The Wall Street Journal.

Question 40

Vertical analysis is the same as trend analysis.

Question 41

Declining profitability and liquidity ratios are indications that a company may not survive.

Question 42

Asset turnover is most closely associated with a company's liquidity position.

Question 43

Both profit margin and asset turnover affect a company's return on assets.

Question 44

The choice of accounting methods does not affect cash flows except for possible differences in income taxes.

Question 45

The receivable turnover is useful in assessing the effectiveness of credit policies.

Question 46

The operating cycle is equal to days' sales uncollected plus days' inventory on hand minus days' payable.

Question 47

Ratio analysis is useful only if the ratio states a meaningful relationship between two numbers.

Question 48

The price/earnings (P/E)ratio is an indication of investor confidence in a company.

Question 49

A write-down of assets which results in a decrease in earnings may indicate that earnings will be poor in the future.

Question 50

Payables turnover measures the relative size of accounts payable.

Question 51

Per the Sarbanes-Oxley Act of 2002,a compensation committee,comprised of a public corporation's top executives,must be established to determine the salaries and wages of its employees.

Question 52

The sale of plant assets and the payment of dividends will increase free cash flow.

Question 53

Consistency requires that a company use the same accounting procedures as other companies in the same industry.

Question 54

Inventory turnover is a measure of liquidity that focuses on the relative size of inventory.

Question 55

The interest coverage ratio and the debt to equity ratio are measures of profitability.

Question 56

It is in the best interests of a company to base executive compensation on multiple performance measures.

Question 57

Dividend yield is a liquidity ratio.

Question 58

The inventory turnover measures the relative size of the inventory and the effectiveness of credit policies.

Question 59

Per the Sarbanes-Oxley Act of 2002,public corporations must establish a compensation committee to determine how its top executives will be compensated.

Question 60

The cash flow yield equals net cash flows from operating activities divided by net sales.

Question 61

Which of the following must be reported by diversified companies for each of their operating segments?

A)Segment profit or loss,expenses,and earnings per share
B)Segment profit or loss,certain revenue and expense items,and segment assets
C)Assets,liabilities,and earnings per share
D)Segment profit or loss,expenses,and unidentifiable assets

Question 62

One reason that a common-size statement is a useful tool in financial performance evaluation is that it enables the user to

A)make better comparisons of two companies of different sizes in the same industry.
B)determine which companies in a single industry are of the same size.
C)judge the relative potential of two companies of similar size in different industries.
D)determine which companies in a single industry are of the same value.

Question 63

Write-downs and restructurings increase current operating income and decrease future income by shifting future costs to the future periods.

Question 64

Vertical analysis of comparative financial statements includes the

A)development of common-size statements.
B)calculation of dollar amount changes and percentage changes from the previous to the current year.
C)use of an index number.
D)All of these choices.

Question 65

A company is referred to as a diversified company or a conglomerate if it operates in

A)many related industries.
B)many unrelated industries.
C)many and varied locations throughout the world.
D)one single major industry.

Question 66

The existence of diversified companies makes which of the following very difficult?

A)Comparison with industry norms
B)The preparation of interim financial statements
C)Use of more than one depreciation or inventory method
D)The compilation of segment information

Question 67

Which of the following situations severely limits the use of industry norms as standards of comparison?

A)The fact that little information exists on industry norms
B)The existence of conglomerates
C)The presentation of segmented information
D)A downward turn in the economy

Question 68

Which of the following companys would be required to files its Form 10-K electronically?

A)A privately-held corporation with 1,500 shareholders.
B)A municipality with $20 million in assets.
C)A public company with 520 shareholders.
D)All of these choices.

Question 69

Publicly held corporations must file annual reports with the SEC.All such reports are available

A)only to the SEC,the company's owners and management,and the company's auditors.
B)only to other SEC companies and the issuing company's owners and management.
C)only to the SEC,the company's management,and the company's auditors.
D)to the general public.

Question 70

Useful information,including details about a company's financial history,industry data,and credit ratings is available from

A)the SEC.
B)Standard & Poor's.
C)The Wall Street Journal.
D)a company's website.

Question 71

To find the most comprehensive information about a company's performance during the year,one would look to

A)interim financial statements.
B)the annual report sent to the SEC.
C)The Wall Street Journal.
D)the annual report sent to stockholders.

Question 72

One of the best places to look for early signals of change in a company's profitability is the

A)Form 10-K.
B)Form 10-Q.
C)Form 8-K.
D)annual report sent to stockholders.

Question 73

In a common-size income statement for a retail store,the 100 percent amount is for

A)net revenues.
B)cost of goods sold.
C)gross profit.
D)net income.

Question 74

The quality of earnings refers to the substance of earnings and their sustainability into future periods.

Question 75

A general rule in choosing among alternative investments is the greater the risk taken,the

A)greater the return required.
B)lower the potential expected.
C)greater the price of the investment.
D)lower the profits expected.

Question 76

To assess the quality of a company's reported earnings,it is necessary to know the estimates and methods it uses to compute income.

Question 77

Which of the following is the least useful in evaluating a relationship as either favorable or unfavorable?

A)Past and current performances of the company
B)Industry averages
C)Past performance of the company
D)Rule-of-thumb measures

Question 78

A ratio of net income of $100,000 to sales of $1,000,000 can be stated as

A)Net income is 1/10,or 10 percent,of sales.
B)For every dollar of sales,the company has an average net income of 10 cents.
C)The ratio of sales to net income is 10 to 1 (10:1),or sales are 10 times net income.
D)All of these choices.

Question 79

In trend analysis,each item is expressed as a percentage of the

A)net income amount.
B)total assets amount.
C)base year amount.
D)retained earnings amount.

Question 80

The ability to pay bills when due and to meet unexpected needs for cash most closely describes

A)cash flow adequacy.
B)long-term solvency.
C)liquidity.
D)profitability.