Deck 12: Financial Statement Analysis

Question 1

We use vertical analysis to express each income statement item as a percentage of sales.

Answer 1

True

Question 2

If the base-year amount is zero,we can't calculate a percentage change under horizontal analysis.

Answer 2

True

Question 3

Vertical analysis calculates the amount and percentage change of an account over time.

Answer 3

False

Question 4

A low receivables turnover ratio is a positive sign that a company can quickly turn its receivables into cash.

Question 5

We can use ratios to help evaluate a firm's performance and financial position.

Question 6

Every liquidity ratio is calculated using one or more current asset accounts.

Question 7

The receivables turnover ratio measures how many times,on average,a company collects its receivables during the year.

Question 8

The average days in inventory converts the inventory turnover ratio into days.

Question 9

We measure income statement accounts at a point in time and balance sheet accounts over a period of time.

Question 10

Vertical analysis expresses each item in a financial statement as a percentage of the same base amount.

Question 11

An extremely high inventory turnover ratio may be a signal that the company is losing sales due to inventory shortages.

Question 12

Horizontal analysis analyzes trends in financial statement data for a single company over time.

Question 13

We use horizontal analysis to analyze trends in financial statement data,such as the dollar amount of change and the percentage change,for one company over time.

Question 14

The average collection period converts the receivables turnover ratio into days.

Question 15

For vertical analysis,we express each balance sheet item as a percentage of sales.

Question 16

Using horizontal analysis,if the base year is negative and the following year is positive,the percentage change is just as useful as if the base year and the following year were both positive.

Question 17

Solvency refers to a company's ability to pay its current liabilities while liquidity refers to a company's ability to pay its long-term liabilities.

Question 18

A low inventory turnover ratio usually is a positive sign and indicates that inventory is selling quickly.

Question 19

Ratios that compare an income statement account with a balance sheet account should express the balance sheet account as an average of the beginning and ending balances.

Question 20

We use vertical analysis for income statement accounts,but not balance sheet accounts.

Question 21

Growth stocks have high expectations of future earnings growth,and therefore,usually trade at higher PE ratios.

Question 22

We calculate the times interest earned ratio by dividing net income by interest expense.

Question 23

The price-earnings (PE)ratio compares a company's share price with its earnings per share.

Question 24

The gross profit ratio is calculated as gross profit divided by net sales.

Question 25

The location where a loss is reported in the income statement does not really matter as long as the loss is reported.

Question 26

We report extraordinary items separately,net of taxes,near the bottom of the income statement just below discontinued operations.

Question 27

If an item meets one but not both criteria for extraordinary item treatment,it is correctly excluded from extraordinary items and included with other revenue and expenses.

Question 28

The acid-test ratio is always smaller than the current ratio.

Question 29

Asset turnover measures sales volume in relation to the investment in assets,and is calculated as net sales divided by average total assets.

Question 30

Profit margin measures the income earned on each dollar of sales,and is calculated by dividing net income by net sales.

Question 31

Value stocks have lower share prices in relationship to their fundamental ratios,and therefore,trade at lower PE ratios.

Question 32

A discontinued operation is the sale or disposal of any long-term asset.

Question 33

We use the times interest earned ratio to compare interest payments with a company's income available to pay those charges.

Question 34

Other things being equal,the higher the debt to equity ratio,the higher the risk of bankruptcy.

Question 35

We report any profits or losses on discontinued operations in the current year,separately from profits and losses on the portion of the business that will continue.

Question 36

A low current ratio indicates that a company has sufficient current assets to pay current liabilities as they become due.

Question 37

When using a company's current earnings to estimate future earnings performance,investors normally should exclude discontinued operations and extraordinary items.

Question 38

Return on equity is calculated by dividing the stock return by average stockholders' equity.

Question 39

Return on assets is calculated as net income divided by ending total assets.

Question 40

To be an extraordinary item,an event that produces a gain or loss must be either unusual in nature or infrequent in occurrence.

Question 41

Which of the following ratios is most useful in evaluating liquidity?

A)Acid-test ratio.
B)Return on equity.
C)Profit marginy ratio.
D)Asset turnover.

Question 42

Comparing changes in net income for one company over time is an example of:

A)Vertical analysis.
B)Horizontal analysis.
C)Diagonal analysis.
D)Both vertical and horizontal analysis.

Question 43

Use of a longer useful life for depreciation is an example of conservative accounting.

Question 44

Which of the following is not a common type of comparison in accounting?

A)Comparisons of sales growth between companies.
B)Comparisons of earnings per share between companies.
C)Comparisons of earnings this year with earnings for the same company last year.
D)Comparisons to industry.

Question 45

Comparing operating expenses as a percentage of sales is an example of:

A)Vertical analysis.
B)Horizontal analysis.
C)Diagonal analysis.
D)Both vertical and horizontal analysis.

Question 46

Horizontal analysis examines trends in a company

A)Over time.
B)Between income statement accounts in the same year.
C)Between balance sheet accounts in the same year.
D)Between income statement and balance sheet accounts in the same year.

Question 47

A larger estimation of the allowance for uncollectible accounts,the write-down of overvalued inventory and the use of a shorter useful life for depreciation are all examples of conservative accounting.

Question 48

When using vertical analysis,we express income statement accounts as a percentage of

A)Net income.
B)Gross profit.
C)Sales.
D)Total assets.

Question 49

Which of the following is an example of horizontal analysis?

A)Comparing gross profit across companies.
B)Comparing gross profit with operating expenses.
C)Comparing assets with equity.
D)Comparing the change in sales over time.

Question 50

The following is an example of:

A)Vertical analysis.
B)Horizontal analysis.
C)Diagonal analysis.
D)Both vertical and horizontal analysis.

Question 51

Aggressive accounting practices result in reporting higher income,higher assets,and lower liabilities.

Question 52

Which of the following is an example of horizontal analysis?

A)Comparing COGS with sales.
B)Comparing net income across companies.
C)Comparing debt with equity.
D)Comparing the growth in sales over time.

Question 53

Conservative accounting practices are those that result in reporting lower income,lower assets,and higher liabilities.

Question 54

When using vertical analysis,we express balance sheet accounts as a percentage of

A)Sales.
B)Total assets.
C)Total liabilities.
D)Total stockholders' equity.

Question 55

Conservative accounting practices are those that result in reporting higher income,higher assets,and lower liabilities.

Question 56

Which of the following is an example of vertical analysis?

A)Comparing gross profit across companies.
B)Comparing income statement items as a percentage of sales.
C)Comparing debt with industry averages.
D)Comparing the change in sales over time.

Question 57

Which of the following ratios is most useful in evaluating liquidity?

A)Return on assets.
B)Return on equity.
C)Debt to equity ratio.
D)Current ratio.

Question 58

Which of the following is correct?

Question 59

The following is an example of:

A)Vertical analysis.
B)Horizontal analysis.
C)Diagonal analysis.
D)Both vertical and horizontal analysis.

Question 60

Changes in accounting estimates usually have no effect on a company's underlying cash flows.

Question 61

The acid-test ratio is most similar to the:

A)Current ratio.
B)Debt to equity ratio.
C)Times interest earned ratio.
D)Inventory turnover ratio.

Question 62

When a company sells land for cash and makes a $25,000 gain:

A)Its acid-test ratio decreases.
B)Its current ratio decreases.
C)Its debt to equity ratio decreases.
D)Cannot determine from the given information.

Question 63

Assuming a current ratio of 1.0,how will the purchase of inventory with cash affect the ratio?

A)Increase the current ratio.
B)No change to the current ratio.
C)Decrease the current ratio.
D)Could either increase or decrease the current ratio.

Question 64

Use the following information to answer the next two questions:
Recent financial statement data for Harmony Health Foods (HHF)Inc.is shown below.

HHF's times interest earned ratio is:

A)3.47.
B)1.72.
C)2.47.
D)10.0.

Question 65

Which of the following is not a solvency ratio?

A)Time interest earned ratio.
B)The debt to equity ratio.
C)The current ratio.
D)All of the other options are solvency ratios.

Question 66

Which of the following is a positive sign that a company is selling its inventory quickly?

A)A low inventory turnover ratio.
B)A high inventory turnover ratio.
C)A low average days in inventory.
D)Both a high inventory turnover ratio and a low average days in inventory.

Question 67

Which of the following is a sign that a company cannot quickly turn its receivables into cash?

A)A high receivables turnover ratio.
B)A low receivables turnover ratio.
C)A low average collection period.
D)Both a high receivables turnover ratio and a low average collection period.

Question 68

Use the following information to answer the next three questions:
A partial balance sheet ($s in thousands)for Captain D's Sportswear is shown below.

The current ratio is:

A)1.98.
B)1.58.
C)1.17.
D)0.66.

Question 69

Assume a company's current ratio and acid-test ratio are less than 1.0 before it purchases inventory on credit.When it makes the purchase:

A)Its current ratio decreases.
B)Its acid-test ratio decreases.
C)Its current ratio remains unchanged.
D)Its acid-test ratio remains unchanged.

Question 70

When a company with a current ratio of 1.2 pays a current liability:

A)Its current ratio decreases.
B)Its current ratio increases.
C)Its current ratio remains unchanged.
D)Its debt to equity ratio increases.

Question 71

The acid-test ratio is:

A)The liquidity ratio divided by the equity ratio.
B)Current assets minus inventory divided by current liabilities minus accounts payable.
C)Cash,net receivables,and current investments divided by current liabilities.
D)Cash divided by accounts payable.

Question 72

Use the following information to answer the next two questions:
Recent financial statement data for Harmony Health Foods (HHF)Inc.is shown below.

HHF's debt to equity ratio is:

A)0.75.
B)1.13.
C)0.38.
D)1.80.

Question 73

The current ratio is calculated as:

A)Current assets divided by noncurrent assets.
B)Current assets divided by current liabilities.
C)Current liabilities divided by noncurrent liabilities.
D)Current liabilities divided by current assets.

Question 74

Which of the following is a sign that a company can quickly turn its receivables into cash?

A)A low receivables turnover ratio.
B)A high receivables turnover ratio.
C)A high average collection period.
D)Both a low receivables turnover ratio and a high average collection period.

Question 75

Use the following information to answer the next three questions:
A partial balance sheet ($s in thousands)for Captain D's Sportswear is shown below.

The debt to equity ratio is:

A)0.33.
B)0.77.
C)1.17.
D)1.30.

Question 76

Which of the following is a negative sign that a company is not selling its inventory quickly?

A)A low inventory turnover ratio.
B)A high inventory turnover ratio.
C)A low average days in inventory.
D)Both a high inventory turnover ratio and a low average days in inventory.

Question 77

Assuming a current ratio of 1.0 and an acid-test ratio of 0.75,how will the purchase of inventory with cash affect each ratio?

A)Increase the current ratio and increase the acid-test ratio.
B)No change to the current ratio and decrease the acid-test ratio.
C)Decrease the current ratio and decrease the acid-test ratio.
D)Increase the current ratio and decrease the acid-test ratio.

Question 78

Which of the following ratios is most useful in evaluating solvency?

A)Debt to equity ratio.
B)Current ratio.
C)Receivables turnover ratio.
D)Inventory turnover ratio.

Question 79

Assuming an acid-test ratio of 1.0,how will the purchase of inventory with cash affect the ratio?

A)Increase the acid-test ratio.
B)No change to the acid-test ratio.
C)Decrease the acid-test ratio.
D)Could either increase or decrease the acid-test ratio.

Question 80

Use the following information to answer the next three questions:
A partial balance sheet ($s in thousands)for Captain D's Sportswear is shown below.

The acid-test ratio is:

A)0.25.
B)0.88.
C)1.17.
D)1.58.