Deck 16: Financial Statement Analysis

Question 1

A primary purpose of vertical analysis is to observe trends over a three-year period.

Answer 1

False

Question 2

Common-size statements are statements of companies of similar size and operations.

Answer 2

False

Question 3

Terms of sale can produce statistical variations among companies within the same industry.

Answer 3

True

Question 4

In vertical analysis of the balance sheet,total liabilities are represented by 100 percent.

Question 5

Liquidity ratios measure the ability of a company to meet its current obligations.

Question 6

Two major forms of common-size analysis are horizontal analysis and vertical analysis.

Question 7

In horizontal analysis,the base year can be the immediately preceding period,or it can be a period further in the past.

Question 8

Common-size analysis expresses each item in a financial statement as a percent of a base amount.

Question 9

In the vertical analysis of a balance sheet,the base for current liabilities is total liabilities.

Question 10

Small sample sizes for an industrial report rarely cause a comparability problem in using standards.

Question 11

A number of online sources contain competitive information on individual company's ratios.

Question 12

Horizontal analysis involves comparing two or more years' financial data for a single company.

Question 13

An example of horizontal analysis is the increase in cost of goods sold by 25 percent from 2011 to 2012.

Question 14

Industrial figures,standards and statistics should be used with so much care that they are not a very good reference point to compare companies.

Question 15

Labor markets can impact industrial statistics and standards.

Question 16

Industrial statistics should be taken as absolute norms as far as standards for comparability.

Question 17

Companies in the same industry may use different accounting methods,diminishing the usefulness of some industrial averages.

Question 18

In vertical analysis of the income statement,cost of goods sold is represented by 100 percent.

Question 19

The use of common-size analysis makes comparisons more meaningful because percentages eliminate the effects of size.

Question 20

For meaningful analysis,ratios should be compared with a standard.

Question 21

The current ratio is a measure of the ability of a company to pay its short-term liabilities out of short-term assets.

Question 22

When computing the quick ratio,a short-term note receivable would be included.

Question 23

All debt is considered in the computation of the quick ratio.

Question 24

Dividing the market price of a share of stock by the earnings per share gives the price-earnings ratio.

Question 25

Jill's Market has an inventory turnover of 120 times.Scott's Market has a turnover of 128 times.Scott's is more effective in managing inventory.

Question 26

For meaningful analysis,ratios should be compared with a ____________.

Question 27

The dividend payout ratio is equal to common dividends divided by (Net Income - Preferred Dividends).

Question 28

____________ are fractions or percentages computed by dividing one account or line-item amount by another.

Question 29

The ________________ is a measure of the ability of a company to pay its short-term liabilities out of short-term assets.

Question 30

The quick ratio should be larger than the current ratio.

Question 31

The _____________________ gives the number of days inventory is held before being sold.

Question 32

Inventory turnover is a measure of liquidity that focuses on efficient use of inventory.

Question 33

Profitability ratios assess the ability of a company to meets its long- and short-term obligations.

Question 34

The _________________ is a measure of liquidity that compares only the most liquid assets with current liabilities.
or

Question 35

The measures of the ability of a company to meets its long- and short-term obligations are known as _______________.

Question 36

How long it takes a company to turn its receivables into cash is known as the ________________.

Question 37

The inventory turnover ratio measures the number of days the average balance of accounts receivable is outstanding before being converted into cash.

Question 38

_________________ expresses a line item as a percentage of some prior-period amount.

Question 39

_________________ measure the ability of a company to meet its current obligations.

Question 40

_____________________ expresses a line item as a percentage of some other line item for the same period.

Question 41

The ________________ is computed by dividing a company's total liabilities by its total assets.

Question 42

The ________________ is calculated by dividing total liabilities by total stockholders' equity.

Question 43

Investors who prefer gains through appreciation will generally prefer a ___________ payout ratio.

Question 44

A company measures how efficiently it is using its assets by calculating the _______________.

Question 45

Horizontal analysis is also known as

A)linear analysis.
B)vertical analysis.
C)trend analysis.
D)budget analysis.

Question 46

In vertical analysis,line items on the balance sheet are generally expressed as a percentage of

A)total liabilities.
B)net income.
C)total assets.
D)cost of goods sold.

Question 47

Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time

A)that has been arranged from the highest amount to the lowest amount.
B)that has been arranged from lowest amount to the highest amount.
C)to determine which items are in error.
D)to determine the amount and/or percentage increase or decrease that has taken place.

Question 48

In vertical analysis

A)a base amount is required.
B)a base amount is optional.
C)the same base is used across all financial statements analyzed.
D)the results of the horizontal analysis are necessary inputs for performing the analysis.

Question 49

In horizontal analysis,each item is expressed as a percentage of the

A)retained earnings figure.
B)total assets figure.
C)net income figure.
D)base year figure.

Question 50

Horizontal analysis is analysis

A)of percentage changes over several years.
B)in which all items are presented as a percentage of one selected item on a financial statement.
C)in which a statistic is calculated for the relationship between two items on a single financial statement or for two items on different financial statements.
D)of all ratios that increased or decreased over past accounting periods.

Question 51

______________ and ____________ are the two major sources of capital.
or

Question 52

The type of analysis that is concerned with the relationships among the components of the financial statements is to prepare a

A)vertical analysis.
B)trend analysis.
C)profitability analysis.
D)ratio analysis.

Question 53

Creditors would like the debt-to-equity ratio to be _______,indicating that stockholders have financed most of the assets of the firm.

Question 54

The ratios that allow investors,creditors,and managers to evaluate the extent to which invested funds are being used efficiently are called ____________.

Question 55

Vertical analysis is a technique that expresses each item in a financial statement

A)in dollars and cents.
B)as a percent of the item in the previous year.
C)as a percent of a base amount.
D)starting with the highest value down to the lowest value.

Question 56

The two major techniques for financial analysis are

A)horizontal analysis and circular analysis.
B)receivable analysis and profitability analysis.
C)vertical analysis and budget analysis.
D)common-size analysis and ratio analysis.

Question 57

The ___________________ is calculated by dividing the market price per share by earnings per share.

Question 58

The _________________ uses the income statement to assess a company's ability to service its debt.

Question 59

In vertical analysis,line items on the income statement are generally expressed as a percentage of

A)net income.
B)net sales.
C)cost of goods sold.
D)total assets.

Question 60

____________________ represents the percentage of each sales dollar that is left over from net income after all expenses have been subtracted.

Question 61

If equal amounts are added to the numerator and the denominator of a current ratio equal to one,the ratio will

A)increase.
B)decrease.
C)remain the same.
D)equal zero.

Question 62

An aircraft company would most likely have

A)a high inventory turnover.
B)a low profit margin.
C)high volume.
D)a low inventory turnover.

Question 63

The accounts receivable turnover and inventory turnover ratios are used to analyze

A)long-term debt-paying ability.
B)profitability.
C)leverage.
D)liquidity.

Question 64

The quick ratio

A)does not include inventory as part of the numerator.
B)does not include all current liabilities in the calculation.
C)is a quick calculation of an approximation of the current ratio.
D)includes prepaid expenses as part of the numerator.

Question 65

A successful grocery store would probably have

A)a low inventory turnover.
B)a high inventory turnover.
C)zero profit margin.
D)low volume.

Question 66

Trend analysis is analysis

A)of percentage changes over several years.
B)in which all items are presented as a percentage of one selected item on a financial statement.
C)in which a statistic is calculated for the relationship between tow items on a single financial statement or for two items on different financial statements.
D)of all ratios that increased or decreased over past accounting periods.

Question 67

Assume the following sales data for a company: If 2006 is the base year,what is the percentage increase in sales from 2006 to 2010?

A)100%
B)180%
C)50%
D)55.5%

Question 68

Short-term creditors are usually most interested in assessing

A)leverage.
B)liquidity.
C)marketability.
D)profitability.

Question 69

A high accounts receivable turnover ratio indicates

A)customers are making payments quickly.
B)a large portion of the company's sales are on credit.
C)many customers are not paying their receivables.
D)the company's sales have increased.

Question 70

For meaningful analysis,ratios are best compared with

A)historical company averages.
B)industrial averages.
C)historical and industrial averages.
D)no standard.

Question 71

Which one of the following would not be considered a liquidity ratio?

A)current ratio
B)inventory turnover ratio
C)quick ratio
D)return on total assets ratio

Question 72

The quick ratio

A)is used to quickly determine a company's leverage and long-term debt-paying ability.
B)relates cash,marketable securities,and net receivables to current liabilities.
C)is calculated by taking one item from the income statement and one item from the balance sheet.
D)is the same as the current ratio except it is rounded to the nearest whole percent.

Question 73

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

A)liquidity
B)profitability
C)leverage
D)marketability

Question 74

Swanson Company had $250,000 of current assets and $90,000 of current liabilities before borrowing $60,000 from the bank with a 3-month note payable.What effect did the borrowing transaction have on Swanson Company's current ratio?

A)The ratio remained unchanged.
B)The change in the current ratio cannot be determined.
C)The ratio decreased.
D)The ratio increased.

Question 75

Many industrial averages and figures are published in the each of the following except?

A)Key Business Ratios,Dun and Bradstreet
B)The Almanac of Business and Industrial Financial Ratios,Prentice-Hall
C)Annual Random Studies,Robert Morris Associates
D)Standard and Poor's Industry Survey,Standard & Poor's
E)Dow Jones-Irwin Business and Investment Almanac,Dow Jones-Irwin

Question 76

If year one equals $800,000,year two equals $840,000,and year three equals $896,000,the percentage to be assigned for year three in a trend analysis,assuming that year 1 is the base year,is

A)100%.
B)89%.
C)105%.
D)112%.

Question 77

The ratios that are used to determine a company's short-term debt paying ability are

A)asset turnover,times interest earned,current ratio,and account receivable turnover.
B)times interest earned,inventory turnover,current ratio,and accounts receivable turnover.
C)times interest earned,quick ratio,current ratio,and inventory turnover.
D)current ratio,quick ratio,accounts receivable turnover,and inventory turnover.

Question 78

A common measure of liquidity is

A)return on total assets.
B)accounts receivable turnover.
C)return on sales.
D)debt to equity ratio.

Question 79

The inventory turnover is calculated by dividing

A)cost of goods sold by the ending inventory.
B)cost of goods sold by the beginning inventory.
C)cost of goods sold by the average inventory.
D)average inventory by cost of goods sold.

Question 80

The current ratio is a

A)liquidity ratio.
B)profitability ratio.
C)leverage ratio.
D)cash flow ratio.