Deck 17: Analysis of Financial Statements

Question 1

General-purpose financial statements include the (1) income statement, (2) balance sheet, (3) statement of stockholders' equity (or statement of retained earnings), (4) statement of cash flows, and (5) notes to these statements.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

Financial analysis only refers to the communication of relevant financial information to decision makers.

Answer 3

False

Question 4

A company's board of directors analyzes financial statements to assess future company prospects for making operating decisions.

Question 5

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 6

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.

Question 7

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

Question 8

Intracompany analysis is based on comparisons with competitors.

Question 9

Profitability is the ability to generate positive market expectations.

Question 10

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

Question 11

Evaluation of company performance does not include analysis of (1) past and current performance, (2) current financial position, and (3) future performance and risk.

Question 12

External users of accounting information make the strategic and operating decisions of a company.

Question 13

Standards for comparison when interpreting financial statement analysis include competitor and industry performance data.

Question 14

Profitability is the ability to generate future revenues and meet long-term obligations.

Question 15

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

Question 16

Financial statement analysis lessens the need for expert judgment.

Question 17

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

Question 18

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 19

Financial statement analysis may be used for personal investment decisions.

Question 20

The building blocks of financial statement analysis include (1) liquidity, (2) salability, (3) solvency, and (4) profitability.

Question 21

The base amount for a common-size balance sheet is usually total assets.

Question 22

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

Question 23

Analysis of a single financial number is often of limited value.

Question 24

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

Question 25

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

Question 26

Trend analysis of financial statement items can include comparisons of relations between items on different financial statements.

Question 27

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

Question 28

An advantage of common-size statements is that they reflect the dollar magnitude (size) of the different companies under analysis.

Question 29

A good financial report does not link interpretations and conclusions of analysis with the underlying information.

Question 30

Earnings per share are calculated only on income from continuing operations.

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

A trend percent, or index number, is calculated by dividing the analysis period amount by the base period amount and multiplying the result by 100.

Question 37

General standards of comparisons include the 2:1 level for the current ratio and 1:1 level for the acid-test ratio.

Question 38

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

Question 39

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

Question 40

Three of the most common tools of financial analysis include horizontal analysis, vertical analysis, and ratio analysis.

Question 41

A rough guideline states that for a company with no discounts offered, days' sales uncollected should not exceed 1 1/3 times the days in its credit period.

Question 42

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

Question 43

The higher the accounts receivable turnover, the less quickly accounts receivable are collected.

Question 44

A corporation reported cash of $14,000 and total assets of $178,300. Its common-size percent for cash equals 7.85%.
($14,000/$178,300) x 100 = 7.85%

Question 45

The use of debt is sometimes described as financial leverage because debt can have the effect of increasing the return on equity.

Question 46

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

Question 47

Graphical analysis of the balance sheet can be useful in assessing sources of financing.

Question 48

Ratios, like other analysis tools, are only historically oriented.

Question 49

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 50

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

Question 51

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

Question 52

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

Question 53

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

Question 54

Working capital is computed as current liabilities minus current assets.

Question 55

A ratio expresses a mathematical relation between two quantities and can be expressed as a percent, rate, or proportion.

Question 56

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

Question 57

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

Question 58

The return on total assets ratio is a profitability measure.

Question 59

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 60

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

Question 61

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 62

Three of the 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 63

Financial statement analysis:

A) Is the application of analytical tools to general-purpose financial statements and related data for making business decisions.
B) Involves transforming accounting data into useful information for decision-making.
C) Helps users to make better decisions.
D) Helps to reduce uncertainty in decision-making.
E) All of these.

Question 64

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 65

The building blocks of financial statement analysis include:

A) Liquidity and efficiency.
B) Solvency.
C) Profitability.
D) Market prospects.
E) All of these.

Question 66

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 67

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 68

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 69

Financial reporting refers to:

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

Question 70

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 71

Evaluation of company performance can include comparison and/or assessment of:

A) Past performance.
B) Current performance.
C) Current financial position.
D) Future performance and risk.
E) All of these.

Question 72

A financial statement analysis report usually includes:

A) An executive summary.
B) An analysis overview.
C) Evidential matter.
D) Assumptions.
E) All of these.

Question 73

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 74

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 equals 21.4%.
$0.75/$64.75 = 1.16%

Question 75

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 76

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 77

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 78

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 79

Standards for comparisons in financial statement analysis include:

A) Intracompany standards.
B) Competitors' standards.
C) Industry standards.
D) Guidelines (rules of thumb).
E) All of these.

Question 80

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.