Deck 12: Financial Statement Analysis

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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 15

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

Question 16

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

Question 17

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 18

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

Question 19

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.If the base year is negative and the following year is positive,the percentage change is not useful.

Question 20

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

Question 21

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

Question 22

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

Question 23

We report discontinued items separately,net of taxes,near the bottom of the income statement.

Question 24

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 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

The location where a loss is reported in the income statement does not really matter as long as the loss is reported.The location of a loss in the income statement does matter as investors attempt to determine if the loss is recurring or a one-time occurrence.

Question 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

A discontinued operation is the sale or disposal of any long-term asset.A discontinued operation is the sale or disposal of a significant component of a business.

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

Which of the following types of analysis allows for the comparison of financial statement items between companies of different size?

A)Horizontal approach
B)Vertical approach
C)Diagonal approach

Question 42

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.

Question 43

Brady's Inflation Needle Co.reports accounts receivable of $100,000 in 2017 and $250,000 in 2018.Using horizontal analysis,what would be the percentage increase or decrease in accounts receivable?

A)60% decrease
B)60% increase
C)150% decrease
D)150% increase

Question 44

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

A)Sales.
B)Total assets.
C)Total liabilities.

Question 45

______ analysis identifies the relative contribution made by each financial statement line item.

A)Ratio
B)Vertical
C)Horizontal

Question 46

To perform a vertical analysis of a balance sheet,you would divide each line item on the statement by ______.

A)total assets
B)net income
C)sales

Question 47

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

A)Vertical analysis.
B)Horizontal analysis.
C)Diagonal analysis.

Question 48

Ronaldo Soccer Shop's income statement reports sales of $100,000;cost of goods sold of $46,000,operating expenses of $34,000,interest expense of $15,000,income tax expense of $2,000,and net income of $3,000.If you were to perform a vertical analysis of this income statement,you would divide each of these income statement line items by:

A)$100,000
B)$46,000
C)$34,000

Question 49

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

A)Net income.
B)Gross profit.
C)Sales.

Question 50

Trend analysis and time-series analysis refer to ____ analysis.

A)horizontal
B)vertical
C)ratio

Question 51

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

Question 52

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.

Question 53

Common-size analysis is another term used for ____ analysis.

A)Ratio
B)Vertical
C)Horizontal

Question 54

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

Question 55

To calculate a year-to-year percentage change in any financial statement line item such as sales,you should take the current year's amount,subtract the prior year's amount,then divide by ______,and finally multiply the result by 100.

A)net income
B)total assets
C)the current year's amount
D)the prior year's amount

Question 56

To perform a vertical analysis of an income statement,you would divide each line item on the statement by ______.

A)sales
B)net income
C)total assets

Question 57

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 58

The following is an example of: $$\begin{array} { | l | r | r | } \hline & \text { Amount } & \% \\\hline \text { Cash } & \$ 300,000 & 6.0 \\\hline \text { Accounts receivable } & 500,000 & 10.0 \\\hline \text { Inventory } & 800,000 & 16.0 \\\hline \text { Long-term assets } & \underline {3,400,000} & \underline { 68.0 } \\\hline \text { Total assets } & \$ 5,000,000 & 100.0 \\\hline\end{array}$$

A)Vertical analysis.
B)Horizontal analysis.
C)Diagonal analysis.

Question 59

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

Question 60

The following is an example of:

A)Vertical analysis.
B)Horizontal analysis.
C)Diagonal analysis.

Question 61

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.

Question 62

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.

Question 63

The type of analysis used to analyze trends in financial statement data over time is:

A)Horizontal analysis
B)Vertical analysis
C)Diagonal analysis

Question 64

Which of the following is not a solvency ratio?

A)Time interest earned ratio.
B)The debt to equity ratio.
C)The current ratio.

Question 65

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.

Question 66

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.

Question 67

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.

Question 68

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 69

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 70

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 71

Which of the following is correct?

A)The receivables turnover ratio depicts the company's frequency of cash collections.
B)The inventory turnover ratio can be used to assess the company's frequency of selling inventory.
C)The current ratio reflects the company's ability to pay current debt.
D)All of these.

Question 72

The acid-test ratio is most similar to the:

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

Question 73

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.

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.

Question 75

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.

Question 76

Horizontal analysis is used to analyze trends in financial statement data over time:

A)For one company
B)Between two companies
C)Across an industry

Question 77

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 78

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

A)Acid-test ratio.
B)Return on equity.
C)Profit margin ratio.

Question 79

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

A)Vertical analysis.
B)Horizontal analysis.
C)Diagonal analysis.

Question 80

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

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