Question 1

Financial statement analysis is an exact science.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements is incorrect?

Accepted Answer

A) It is possible for some markets to be more efficient than others. 
B) It is possible for markets to be efficient with respect to some information and inefficient with respect to other information. 
C) The market is likely to be more efficient with respect to companies where there is greater analyst following. 
D) The market is totally efficient with respect to companies providing regular dividends to investors.

Question 3

You have prepared a trend series for Company XYZ for three years, 2004-2006 inclusive, using 2004 as the base year. Below are selected data.
$\begin{array}{lccc} 
& 2004 & 2005 & 2006 \
\text { Sales } & 100 & 120 & 135 \
\text { Net Income } & 99 & 118 & 128 \
\text { Total Assets } & 100 & 119 & 130
\end{array}$
-From the above information, you can infer that:

Accepted Answer

A) rate of sales growth has decreased. 
B) net income to sales (return on sales) is increasing over time. 
C) asset turnover is decreasing over time. 
D) None of the above

Question 4

You have been provided the following information about High Inc. $\begin{array}{lll}\text { (in thousands of dollars) }&2005&2006\
\text { Current assets } & \$ 158 & \$ 163 \
\text { Long-term assets } & \$ 453 & \$ 502 \
\text { Current liabilities } & \$ 102 & \$ 143 \
\text { Long-term liabilities } & \$ 302 & \$ 348 \
\text { Net income } & \$ 32 & \$ 42
\end{array}$
-Owner's equity for 2006 is:

Accepted Answer

A) $20,000. 
B) $154,000. 
C) $174,000. 
D) $207,000.

Question 5

The current ratio is used to evaluate a company's operating performance.

Accepted Answer

A) True 
 B)False

Question 6

The current ratio will always be greater than or equal to the acid test ratio.

Accepted Answer

A) True 
 B)False

Question 7

On January 1, 2005, Systil Corporation issues $50 million, 10-year bonds with a coupon rate of 10%. Interest is payable annually at the end of the year. If the required return on bonds of similar risk at January 1, 2006, is 8%, what will be the price of the bonds be at this date?

Accepted Answer

A) $56.71 million 
B) $56.25 million 
C) $44.24 million 
D) $43.86 million

Question 8

All other things being equal, the lower a company's cost of equity the higher will be its stock price.

Accepted Answer

A) True 
 B)False

Question 9

You have been provided the following information about High Inc. $\begin{array}{lll}\text { (in thousands of dollars) }&2005&2006\
\text { Current assets } & \$ 158 & \$ 163 \
\text { Long-term assets } & \$ 453 & \$ 502 \
\text { Current liabilities } & \$ 102 & \$ 143 \
\text { Long-term liabilities } & \$ 302 & \$ 348 \
\text { Net income } & \$ 32 & \$ 42
\end{array}$
-Working capital for 2005 is:

Accepted Answer

A) $56,000. 
B) $20,000. 
C) $151,000. 
D) $207,000.

Question 10

Following is some financial information of Dell Inc. $$\begin{array} { l r r } 
& 2006 &  { 2005 } \
\text { Revenues } & \$ 49,205 & \$ 41,444 \
\text { Net income } & 3,043 & 2,645 \
\text { Total assets } & 23,215 & 19,311 \
\text { Shareholder's equity } & 6,485 & 6,280 \
\text { Cash flow from operations } & 5,310 & 3,670 \
\text { Basic earnings per share } & 1.21 & 1.03 \
\text { Book value per share } & 2.61 & 2.46 \
\text { Closing stock price } & 33.44 & 23.86
\end{array}$$
-What is Dell's profit margin for 2005?

Accepted Answer

A) 6.27% 
B) 6.18% 
C) 6.38% 
D) 6.86%

Question 11

Liquidity of a company is generally defined as a measure of:

Accepted Answer

A) the ability of a company to pay its employees in a timely manner. 
B) the ability to pay interest and principal on all debt. 
C) the ability to pay dividends. 
D) the ability to pay current liabilities.

Question 12

Which of the following statements concerning financial ratios is incorrect?

Accepted Answer

A) Accounting principles and methods used by a company will not affect financial ratios. 
B) The informational value of a ratio in isolation is limited. 
C) A ratio is one number expressed as a percentage or fraction of another number. 
D) Calculation of financial ratios is not sufficient for a complete financial analysis of a company.

Question 13

$$\begin{array}{l}
\text { Rivaz Corporation }\
\begin{array} { l r } 
& 2005 \
\text { Net Income } & \$ 3,000 \
\text { Dividends } & \$ 1,000 \
\text { Total Assets } - 12 / 31 / 05 & \$ 35,000 \
\text { Total Liabilities } - 12 / 31 / 05 & \$ 21,225 \
\text { Number of shares outstanding } & 1,000 \
\text { Cost of Equity } & 12 \%
\end{array}
\end{array}$$
-Assuming total assets grew by $5,000 from 2004 to 2005, what is the return on assets of Rivaz Corporation for 2005?

Accepted Answer

A) 9.23% 
B) 8.57% 
C) 10.00% 
D) 6.15%

Question 14

Which of the following ratios would be considered useful in assessing operating profitability?

Accepted Answer

A) Total debt to equity ratio 
B) Acid-test ratio 
C) Gross profit margin 
D) Profit to equity ratio

Question 15

When calculating the return on assets, you should use average total assets.

Accepted Answer

A) True 
 B)False

Question 16

Dividend yield is defined as dividends divided by shareholders' equity.

Accepted Answer

A) True 
 B)False

Question 17

If a company receives an unqualified audit opinion it means the auditors:

Accepted Answer

A) did not complete a full audit and therefore do not feel qualified to give an opinion on financial statements. 
B) are providing assurance that the company will remain financially viable for at least the next year. 
C) are providing assurance that the company's financial statements fairly present company's financial performance and position. 
D) are providing assurance that the company's financial statements are free from misstatement, fraudulent accounting and fairly indicate future performance.

Question 18

The Management Discussion and Analysis Section of an annual report:

Accepted Answer

A) is required by the SEC. 
B) is optional but normally included in the annual report. 
C) is required by the SEC only if the company has suffered from unfavorable trends or there are significant uncertainty concerning liquidity of the company. 
D) is required by the SEC only if they have a qualified audit opinion.

Question 19

In a common-size balance sheet, total assets are expressed as 100 percent.

Accepted Answer

A) True 
 B)False

Question 20

Inventory turnover is generally a more important ratio for a manufacturing firm than a service firm.

Accepted Answer

A) True 
 B)False

Exam 1: Overview of Financial Statement Analysis

Financial statement analysis is an exact science.

Which of the following statements is incorrect?

The current ratio is used to evaluate a company's operating performance.

The current ratio will always be greater than or equal to the acid test ratio.

On January 1, 2005, Systil Corporation issues $50 million, 10-year bonds with a coupon rate of 10%. Interest is payable annually at the end of the year. If the required return on bonds of similar risk at January 1, 2006, is 8%, what will be the price of the bonds be at this date?

All other things being equal, the lower a company's cost of equity the higher will be its stock price.

Liquidity of a company is generally defined as a measure of:

Which of the following statements concerning financial ratios is incorrect?

Which of the following ratios would be considered useful in assessing operating profitability?

When calculating the return on assets, you should use average total assets.

Dividend yield is defined as dividends divided by shareholders' equity.

If a company receives an unqualified audit opinion it means the auditors:

The Management Discussion and Analysis Section of an annual report:

In a common-size balance sheet, total assets are expressed as 100 percent.

Inventory turnover is generally a more important ratio for a manufacturing firm than a service firm.