Deck 12: Financial Statement Analysis

Question 1

In a common-size balance sheet, the 100% amount is:

A) current assets.
B) working capital.
C) total assets.
D) total stockholders' equity.

Answer 1

C

Question 2

Which of the following statements is true regarding vertical analysis?

A) Vertical analysis compares financial data for a single entity over time.
B) Vertical analysis is used to compare companies of different sizes.
C) Vertical analysis compares trends of one company with a different company.
D) Vertical analysis expresses one item of a statements as a percentage of another item in a different statement.

Answer 2

B

Question 3

The percentage analysis of increases and decreases in individual items in comparative financial statements is called:

A) vertical analysis.
B) solvency analysis.
C) profitability analysis.
D) horizontal analysis.

Answer 3

D

Question 4

Emerald Company issued additional shares of stock. Which of the following is true with regard to the effect of the stock issuance transaction on Emerald's ratio computations?

A) Earnings per share decreases
B) The debt to equity ratio increases
C) The asset turnover ratio increases
D) Return on equity remained unchanged

Question 5

Ruby Company sold inventory on credit. Its gross profit percentage is 23%. The effect of this transaction is that the:

A) current ratio was unchanged.
B) earnings per share increased.
C) working capital decreased.
D) debt to equity ratio increased.

Question 6

Which of the following profitability ratios would be determined through a common-size vertical analysis of the income statement?

A) Gross profit percentage
B) Return on assets
C) Return on equity
D) Earnings per share

Question 7

In considering equity and debt financing, which of the following statements is generally true?

A) The lower the measure of the long-term debt to equity ratio, the greater the likelihood that the company will have difficulty in meeting its obligation in some future period.
B) Interest and dividend payments are not required to be made by the issuing company.
C) The higher the measure of the debt to equity ratio, the greater the likelihood that the company will have difficulty in meeting its obligation in some future period.
D) Most companies prefer to have no debt and rely exclusively on equity financing.

Question 8

What type of analysis is indicated by the following?

A) Vertical analysis
B) Horizontal analysis
C) Liquidity analysis
D) Common-size analysis

Question 9

Return ratios are measures of the relationship between the:

A) profit earned and the investment made in the company by the various groups of creditors and investors.
B) revenue earned and the total equity of a company.
C) total equity of a company and its cash flows for the period.
D) profitability and liquidity aspects of a company.

Question 10

Horizontal analysis of comparative financial statements includes the:

A) development of common-size statements.
B) calculation of liquidity ratios.
C) calculation of dollar amount changes and percentage changes from the previous to the current year.
D) evaluation of financial statement data.

Question 11

Percentage analyses, ratios, turnovers, and other measures of financial position and operating results are:

A) a substitute for sound judgment.
B) useful analytical measures.
C) enough information for analysis, industry information is not needed.
D) unnecessary for analysis, but reaction is better.

Question 12

An analysis in which all the components of an income statement are expressed as a percentage of net sales is called:

A) vertical analysis.
B) horizontal analysis.
C) liquidity analysis.
D) common-size analysis.

Question 13

The percent of fixed assets to total assets is an example of:

A) vertical analysis.
B) solvency analysis.
C) profitability analysis.
D) horizontal analysis.

Question 14

Which of the following generally indicates a positive change?

A) Earnings per share decreases
B) The debt to total assets ratio increases
C) The acid test ratio decreases
D) The return on equity increases

Question 15

Horizontal analysis is analysis in which:

A) financial statement lines are expressed as a percent of the base (earliest) year.
B) all items are presented as a percentage of one selected item on the financial statement.
C) a statistic is calculated for the relationship between two items on a single financial statement or for two items on different financial statements.
D) ratios are presented for the past two accounting periods.

Question 16

A banker is analyzing a company which operates in the automotive industry. Which of the following will likely be the banker's most important consideration in determining whether the company should receive a loan?

A) The automotive plant's capacity.
B) Inflation has been consistently high for several years.
C) The company has state-of-the-art automated equipment which enhances the efficiency of its operating process.
D) The company has a large amount of interest payments related to other outstanding loans.

Question 17

Which of the following is considered a profitability ratio?

A) Return on equity
B) Acid test ratio
C) Inventory turnover ratio
D) Debt to equity ratio

Question 18

Each of the following is included in a public company's MD&A except:

A) material trends, events, or known uncertainties.
B) statements about what management expects to occur in the future.
C) management's views of the financial condition and performance of the company.
D) names and experience of the company's managers, directors, and officers.

Question 19

In a common-size income statement, the 100% amount is:

A) net income.
B) operating income.
C) gross profit.
D) net sales.

Question 20

Which of the following statements is true regarding horizontal analysis?

A) It can only be used with balance sheet accounts.
B) It can only be used with income statement accounts.
C) It expresses each financial statement line item as a percent of the largest amount on the statement.
D) It expresses each financial statement line item as a percent of the earliest year amount.

Question 21

Britt Company
Selected data from Britt Company's financial statements are provided below.


- Refer to the selected financial data for Britt Company. Assume that competitors in Britt's industry have an average inventory turnover ratio of 20.8 times in 2012. Britt's inventory turnover ratio for 2012 indicates that the company:

A) has too little inventory on hand at the end of 2012.
B) is pricing its products too low.
C) is selling its inventory much more quickly than the industry average.
D) may have problems with generating sales.

Question 22

Kirby Deuce Corporation
Selected data from the financial statements of Kirby Deuce Corporation are presented below.


-Refer to the financial information for Kirby Deuce Corporation. Earnings per share for 2012 is:

A) $0.79.
B) $0.76.
C) $1.57.
D) $0.49.

Question 23

Which of the following ratios is most useful in indicating a company's profitability?

A) Operating cash flow ratio
B) Profit margin ratio
C) Dividend payout ratio
D) Dividend yield ratio

Question 24

Inventory turned over seven times during the year at Prosser Electronics. Similar electronics retailers have an inventory turnover equal to twelve times per year. What explains Prosser's state of inventory management?

A) Prosser sold too much inventory during the year.
B) Prosser needs to increase sales and decrease the amount of inventory on hand.
C) Prosser is performing much better than its competitors.
D) Prosser should increase the amount of goods on hand to accommodate the growth in inventory demand.

Question 25

Kirby Deuce Corporation
Selected data from the financial statements of Kirby Deuce Corporation are presented below.


- Refer to the financial information for Kirby Deuce Corporation. The price to earnings ratio for 2012 is:

A) 17.77.
B) 20.63.
C) 20.36.
D) 18.97.

Question 26

Which of the following results is generally considered favorable?

A) A large decrease in the accounts receivable turnover ratio.
B) An increase in the inventory turnover ratio.
C) An increase in sales along with a larger decrease in the gross profit percentage.
D) A decrease in the operating cash flow ratio.

Question 27

Chartreuse, Inc. Information from the financial statements of Chartreuse, Inc. is provided below.
Refer to the information for Chartreuse, Inc. Earnings per share for 2012 would be reported as:

A) $1.08.
B) $1.20.
C) $1.29.
D) $1.43.

Question 28

The return on assets ratio:

A) considers the investments made by all creditors and stockholders of the company.
B) reflects investments made only by creditors of the company.
C) is based on average stockholders' equity as compared to net income for the period.
D) is a measure of the company's liquidity.

Question 29

The following information pertains to Raleigh Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets


- What is the price to earnings ratio for this company?

A) 6.01 times
B) 4.24 times
C) 8.05 times
D) 9.60 times

Question 30

Britt Company
Selected data from Britt Company's financial statements are provided below.


- Refer to the selected financial data for Britt Company. Britt's current ratio for 2012 is:

A) 0.60.
B) 0.99.
C) 1.34.
D) 1.68.

Question 31

Liquidity analysis is required to:

A) evaluate a company's profitability.
B) assess a company's ability to pay its current liabilities.
C) be reported in the financial statements for all publicly traded companies.
D) provide information about a company's capital structure.

Question 32

The following information is available for Gomez Company.: Which of the following statements is correct?

A) The price to earnings ratio is 20 and a share of common stock was selling for 20 times the amount of earnings per share at the end of 2011.
B) The price to earnings ratio is 5.0% and a share of common stock was selling for 5.0% more than the amount of earnings per share at the end of 2011.
C) The price to earnings ratio is 10 and a share of common stock was selling for 125 times the amount of earnings per share at the end of 2011.
D) The market price per share and the earnings per share are not statistically related to each other.

Question 33

The following information pertains to Raleigh Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets


- What is the earnings per share on common stock?

A) $9.38
B) $8.38
C) $1.00
D) $5.00

Question 34

Which of the following is an example of liquidity analysis?

A) Total liabilities are divided by total assets.
B) Net income is divided by average total assets.
C) Net income is divided by the average number of common shares outstanding.
D) Quick assets are divided by current liabilities.

Question 35

Stanwick, Inc. wants to measure the relationship between profitability and the investment made by stockholders. To measure this Stanwick should use the:

A) return on equity ratio.
B) earnings per share.
C) net profit margin percentage.
D) operating margin percentage.

Question 36

Britt Company
Selected data from Britt Company's financial statements are provided below.


- Refer to the selected financial data for Britt Company. Which of the following statements is true regarding the company's liquidity?

A) Based on the current ratio, the company's ability to meet its short-term obligations appears to have deteriorated at the end of 2012 compared to 2011.
B) The quick ratio decreased from 2011 to 2012.
C) The operating cash flow ratio increased from 2011 to 2012.
D) Based on the quick ratio, the company appears to be in a better position to pay its current obligations at the end of 2012 compared to 2011.

Question 37

Earnings per share is an indication of how much:

A) cash the company has for each share of all outstanding stock.
B) earnings the company has for each share of outstanding common stock.
C) earnings the company has for each share of all outstanding stock.
D) dividends the company paid for each share of outstanding common stock.

Question 38

Which of the following is a measure of liquidity?

A) Current ratio
B) Earnings per share
C) Accounts receivable turnover ratio
D) Return on common equity

Question 39

Which of the following is considered a measure of short-term liquidity?

A) Gross profit percentage
B) Quick ratio
C) Dividend yield ratio
D) Return on assets ratio

Question 40

Britt Company
Selected data from Britt Company's financial statements are provided below.


-Refer to the selected financial data for Britt Company. Assume that competitors in Britt's industry have an average receivable turnover ratio of 7.8 times in 2012. Britt's receivable turnover ratio for 2012 is:

A) an indicator that Britt has tightened its credit policies.
B) of no value to bankers and other creditors.
C) indicating that Britt's collection policies are less strict than those of its competitors.
D) significantly above the industry average.

Question 41

Which one of the following is not a characteristic generally evaluated in ratio analysis?

A) Liquidity
B) Profitability
C) Solvency
D) Marketability

Question 42

Short-term creditors are usually most interested in assessing:

A) marketability.
B) profitability.
C) operating results.
D) liquidity.

Question 43

DuPont analysis recognizes that the return on equity can be broken down into three aspects, which include all of the following except:

A) net profit percentage.
B) total leverage.
C) total liquidity.
D) asset turnover ratio.

Question 44

Hsu Company reported the following on its income statement: An analysis of the income statement revealed that interest expense was $80,000. Hsu Company's times interest earned was:

A) 8.16 times.
B) 6.25 times.
C) 5.25 times.
D) 5.91 times.

Question 45

The number of times interest charges are earned is computed as:

A) net income plus interest charges, divided by interest charges.
B) income before income tax plus interest charges, divided by interest charges.
C) net income divided by interest charges.
D) income before income tax divided by interest charges.

Question 46

Devon Manufacturing, Inc.
The following information is available for Devon Manufacturing for the year ended December 31, 2012:


-Refer to Devon Manufacturing, Inc. DuPont analysis return on equity (ROE) for Devon is:

A) 32.78%.
B) 34.51%.
C) 35.48%.
D) 38.69%.

Question 47

The quick ratio:

A) is generally larger than the current ratio.
B) decreases when a company's assets becomes more liquid.
C) increases when a company has more cash sales than credit sales.
D) is larger when a company's assets are more liquid.

Question 48

Airport Gift Mart, Inc. reported the following amounts in its financial statements: From 2011 to 2012, the company's efficiency in managing inventory is:

A) declining, because the inventory turnover ratio is decreasing.
B) improving, because the inventory turnover ratio is increasing.
C) declining, because the inventory turnover ratio is increasing.
D) improving, because the inventory turnover ratio is decreasing.

Question 49

Which of the following debt management ratios is the most inclusive for measuring the degree to which a company relies on outsiders for financing?

A) Debt to equity ratio
B) Times interest earned ratio
C) Long-term debt to equity ratio
D) Long-term debt to total assets ratio

Question 50

Opal Company purchased inventory on credit. The effect of this transaction is that the:

A) earnings per share decreased.
B) earnings per share increased.
C) working capital increased.
D) debt to equity ratio increased.

Question 51

Amethyst Company paid off a $100,000 two-year note payable. The effect of this transaction is that the:

A) current ratio decreased.
B) earnings per share increased.
C) working capital increased.
D) debt to equity ratio increased.

Question 52

The quick ratio differs from the current ratio in that it:

A) represents the amount of cash on hand instead of the total current assets.
B) excludes inventories and accounts receivable from the numerator of the fraction because of obsolescence and possible collection problems.
C) is a stricter measure of a company's ability to pay its current obligations.
D) signals the need to liquidate short-term investments when it drops below 2.0.

Question 53

The current assets of Lane Enterprises are considered very liquid at December 31, 2012. This means that Lane:

A) has a larger quick ratio than current ratio.
B) must decrease its liquidity in order to appear more favorable to potential investors.
C) should attempt to borrow money in order to remain in business.
D) is able to pay its current obligations using its current assets.

Question 54

Sapphire Company declared and paid $1 million in dividends to its common stockholders. The effect of this transaction is that the:

A) earnings per share decreased.
B) earnings per share increased.
C) current ratio increased.
D) debt to equity ratio increased.

Question 55

Faultless, Inc.
Selected data from Faultless' financial statements are provided below.


- Refer to the financial information presented for Faultless, Inc. Which of the following is true regarding the debt management ratios for Faultless between 2011 and 2012?

A) The debt to equity and debt to assets ratios both increased.
B) The debt to equity and total debt to assets ratios both decreased.
C) The debt to equity and long-term debt to equity ratios both decreased.
D) The debt to equity ratio decreased and the debt to assets ratios increased.

Question 56

If a company's current ratio is 2.2 and the current liabilities are $400,000, then the current assets are:

A) $1,280,000.
B) $880,000.
C) $420,000.
D) $181,818.

Question 57

The inventory turnover ratio is represented by which of the following formulas?

A) Net credit sales / Average inventory
B) Average inventory / Net credit sales
C) Cost of goods sold / Average inventory
D) Average inventory / Cost of goods sold

Question 58

Below are selected financial data for Bouquet, Inc. Bouquet's debt to equity ratio for 2012 is:

A) increasing, which may be a cause of concern for the company.
B) increasing, which is always a good sign from the viewpoint of investors.
C) decreasing, which may be a cause of concern for the company.
D) decreasing, which is always a good sign from the viewpoint of investors.

Question 59

Most companies:

A) agree that a current ratio of 0.75 is sufficient for business operations.
B) try to maintain protection from creditors by keeping only a small amount of cash available.
C) are not concerned with the debt management ratios when cash flows are good.
D) strive for an appropriate balance between debt and equity financing.

Question 60

Devon Manufacturing, Inc.
The following information is available for Devon Manufacturing for the year ended December 31, 2012:


-Refer to Devon Manufacturing, Inc. The total leverage per the DuPont analysis computation is:

A) 2.30
B) 2.64
C) 12.40
D) 15.20

Question 61

____________________ assets generally include cash, accounts receivable, and short-term investments.

Question 62

Bloom's Garden Center Company
Selected data from the financial statements of Bloom's Garden Center Company are provided below.


- Refer to the selected data provided for Bloom's Garden Center Company. Which of the following would result from a horizontal analysis of Bloom's balance sheet?

A) Accounts receivable increased by $23,000 or 47.92% during 2012.
B) Accounts receivable is five times larger than inventory in 2012.
C) Accounts receivable is 13.39% of total assets in 2012.
D) The accounts receivable turnover ratio is 7.56 in 2012.

Question 63

Nue Company
Information from Nue Company's financial statements is provided below.


- Refer to the information provided for Nue Company. The debt to equity ratio for 2012 is:

A) an indicator that Nue Company's ability to meet current interest payments to creditors is increasing.
B) increasing slightly from 2011 to 2012.
C) an indicator that for every $1 of capital that has been provided by stockholders, creditors provided $0.83.
D) an indicator that Nue Company's reliance on stockholders for funding decreased from 2011 to 2012.

Question 64

____________________ represents the return on each share of stock owned by an investor.

Question 65

Nue Company
Information from Nue Company's financial statements is provided below.


- Refer to the information provided for Nue Company. The net profit margin percentage for 2012 is:

A) 14.32%
B) 16.00%
C) 18.95%
D) 24.11%

Question 66

Bloom's Garden Center Company
Selected data from the financial statements of Bloom's Garden Center Company are provided below.


- Refer to the selected data provided for Bloom's Garden Center Company. Which of the following would be found through ratio analysis of Bloom's financial statements?

A) The receivable turnover ratio is 7.56 in 2012.
B) Cost of goods sold increased by $50,000 or 17.24% in 2012.
C) Accounts receivable increased by $23,000 during 2012.
D) Total assets increased by 15.22% during 2012.

Question 67

In ____________________ analysis, each financial statement line item is expressed as a percent of a base year, which is typically the earliest year shown.

Question 68

Nue Company
Information from Nue Company's financial statements is provided below.


- Refer to the information provided for Nue Company. The times interest earned ratio for 2012:

A) increased, which indicates that the company's creditors will be pleased.
B) decreased, which indicates that the company has less cash to pay interest on its debt.
C) indicates a decline in the company's ability to pay its liabilities when they come due.
D) indicates that the company cannot meet its current year interest payments out of current year earnings.

Question 69

Bloom's Garden Center Company
Selected data from the financial statements of Bloom's Garden Center Company are provided below.


-Refer to the selected data provided for Bloom's Garden Center Company. Which of the following would result from a horizontal analysis of Bloom's income statement?

A) Net sales increased by $110,000 during 2012, or 32.35% of the 2011 amount.
B) Gross profit is 46.67% of net sales for 2012.
C) Accounts receivable is 13.39% of total assets in 2012.
D) The accounts receivable turnover ratio is 7.56 in 2012.

Question 70

The ability of a business to pay its debts as they come due and to earn a reasonable amount of income is referred to as:

A) solvency and leverage.
B) solvency and profitability.
C) solvency and liquidity.
D) solvency and equity.

Question 71

____________________ refers to the likelihood that a company will be able to pay its current obligations as they come due.

Question 72

In ____________________ analysis, each financial statement line item is expressed as a percent of the largest amount on the statement, which is net sales or total assets for the income statement or balance sheet, respectively.

Question 73

Bloom's Garden Center Company
Selected data from the financial statements of Bloom's Garden Center Company are provided below.


- Refer to the selected data provided for Bloom's Garden Center Company. Which of the following would result from a vertical analysis of Bloom's income statement?

A) The accounts receivable turnover ratio is 7.56 in 2012.
B) Gross profit is 46.67% of net sales for 2012.
C) Cost of goods sold decreased by $50,000 or 17.24% during 2012.
D) Net sales is 84.91% of total assets for 2012.

Question 74

Bloom's Garden Center Company
Selected data from the financial statements of Bloom's Garden Center Company are provided below.


-Refer to the selected data provided for Bloom's Garden Center Company. Which of the following would result from a horizontal analysis of Bloom's income statement?

A) Cost of goods sold is 53.33% of net sales for 2012.
B) Gross profit is 46.67% of net sales for 2012.
C) Cost of goods sold decreased by $50,000 or 17.24% during 2012.
D) Inventory decreased by $6,000 or 20% during 2011.

Question 75

Bathing Beauties Swimwear Company (BBSC) is a retailer of specialty swimwear. During 2012, BBSC expanded its retail business by adding 30 new retail stores. The following information is obtained from the comparative financial statements included in the company's 2012 Form 10-K (all amounts are in $ thousands).
Using the information provided, address the following questions for each fiscal year-end:

Question 76

Nue Company
Information from Nue Company's financial statements is provided below.


-Refer to the information provided for Nue Company. Which of the following statements is true concerning Nue's debt management activities?

A) The company has a smaller percentage of capital from stockholders at the end of 2012 than at the end of 2011.
B) The company relied more on creditors for financing during 2012 than in 2011.
C) Nue Company improved its debt to equity ratio.
D) Relative to 2011, Nue Company is in a weaker position at the end of 2012 to finance capital expenditures from cash flow generated by operating activities.

Question 77

____________________ is the process of applying analytical tools to a company's financial statements to understand the company's financial health.

Question 78

A higher ____________________ ratio indicates a greater ability to generate profits from sales.

Question 79

Nue Company
Information from Nue Company's financial statements is provided below.


-Refer to the information provided for Nue Company. Return on equity for 2012 is:

A) 18.75%
B) 21.43%
C) 23.85%
D) 27.26%

Question 80

Various financial ratios, including return ratios, are categorized as ____________________ ratios.