Deck 14: Financial Statement Analysis

Question 1

Vertical analysis refers to comparing the financial statements of a single company over several years.

Answer 1

False

Question 2

In horizontal analysis, the current year is the base year.

Answer 2

False

Question 3

Current position analysis is used by short-term creditors to assess how quickly they will be repaid.

Answer 3

True

Question 4

Comparative financial statements are designed to compare the financial statements of two or more corporations.

Question 5

Using vertical analysis of the income statement, a company's net income as a percentage of sales is 15%; therefore, the cost of goods sold as a percentage of sales must be 85%.

Question 6

The relationship of each asset item as a percent of total assets is an example of vertical analysis.

Question 7

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

Question 8

The excess of current assets over current liabilities is referred to as working capital.

Question 9

The analysis of increases and decreases in the amount and percentage of comparative financial statement items is referred to as horizontal analysis.

Question 10

The ratio of the sum of cash, receivables, and marketable securities to current liabilities is referred to as the current ratio.

Question 11

An advantage of the current ratio is that it considers the makeup of the current assets.

Question 12

A 15% change in sales will result in a 15% change in net income.

Question 13

Factors that reflect the ability of a business to pay its debts and earn a reasonable amount of income are referred to as solvency, profitability, and liquidity.

Question 14

Using measures to assess a business's ability to pay its current liabilities is called current position analysis.

Question 15

Dollar amounts of working capital are difficult to assess when comparing companies of different sizes or in comparing such amounts with industry figures.

Question 16

A financial statement showing each item on the statement as a percentage of one key item on the statement is called a common-sized financial statement.

Question 17

In a common-sized income statement, each item is expressed as a percentage of net income.

Question 18

If two companies have the same current ratio, their ability to pay short-term debt is the same.

Question 19

On a common-sized income statement, all items are stated as a percent of total assets or equities at year-end.

Question 20

In the vertical analysis of an income statement, each item is generally stated as a percentage of total assets.

Question 21

A decrease in the ratio of liabilities to stockholders' equity indicates an improvement in the margin of safety for creditors.

Question 22

In computing the asset turnover ratio, long-term investments are excluded from average total assets.

Question 23

The ratio of fixed assets to long-term liabilities provides a measure of a firm's ability to pay dividends.

Question 24

The ratio of the market price per share of common stock on a specific date to the annual earnings per share is referred to as the price-earnings ratio.

Question 25

An increase in the accounts receivable turnover may be due to a change in how credit is granted and/or in collection practices.

Question 26

When computing the return on common stockholders' equity, preferred stock dividends are subtracted from net income.

Question 27

A firm selling food should have higher inventory turnover rate than a firm selling office furniture.

Question 28

A balance sheet shows cash, $75,000; marketable securities, $115,000; receivables, $150,000; and inventories, $222,500. Current liabilities are $225,000. The current ratio is 2.5.

Question 29

The number of days' sales in receivables is one means of expressing the relationship between average daily sales and accounts receivable.

Question 30

Assuming that the quantities of inventory on hand during the current year were sufficient to meet all demands for sales, a decrease in the inventory turnover for the current year when compared with the turnover for the preceding year indicates an improvement in inventory management.

Question 31

The denominator of the return on total assets ratio is the average total assets.

Question 32

If a firm has a quick ratio of 1, the subsequent payment of an account payable will cause the ratio to increase.

Question 33

Solvency analysis focuses on the ability of a business to pay its current and noncurrent liabilities.

Question 34

In computing the return on total assets, interest expense is subtracted from net income before dividing by average total assets.

Question 35

If a company has issued only one class of stock, the earnings per share are determined by dividing net income plus interest expense by the number of shares outstanding.

Question 36

If a firm has a current ratio of 2, the subsequent collection of a 60-day note receivable on account will cause the ratio to decrease.

Question 37

The return on total assets measures the profitability of total assets, without considering how the assets are financed.

Question 38

The number of days' sales in inventory is one means of expressing the relationship between the cost of goods sold and inventory.

Question 39

When the return on total assets is greater than the return on common stockholders' equity, the management of the company has effectively used leverage.

Question 40

If the accounts receivable turnover for the current year has decreased when compared with the ratio for the preceding year, there has been an acceleration in the collection of receivables.

Question 41

An unusual item is often related to current operations and occurs infrequently.

Question 42

A company can compare its financial data to the data of other companies and industry averages to evaluate its position.

Question 43

Comparing dividends per share to earnings per share indicates the extent to which the corporation is retaining its earnings for use in operations.

Question 44

When a corporation discontinues a segment of its operations at a loss, the loss should be reported as a separate item after income from continuing operations on the income statement.

Question 45

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

Question 46

The report on internal control required by the Sarbanes-Oxley Act of 2002 may be prepared by either management or the company's auditors.

Question 47

Ratios and various other analytical measures are not a substitute for sound judgment, nor do they provide definitive guides for action.

Question 48

The auditor's report is where the auditor certifies that the financial statements are correct and accurate.

Question 49

When you are interpreting financial ratios, it is useful to compare a company's ratios to the same ratios from a prior period or to the ratios of another company in the same industry.

Question 50

Analyzing a company's performance should take into account conditions peculiar to the industry and the general economic conditions.

Question 51

If Epsilon Company's price-earnings ratio on common stock is greater than Iota Company's, then Iota Company would be expected to have the best potential for future common stock price appreciation.

Question 52

Earnings per share amounts are only required to be presented for income from continuing operations and net income on the face of the statement.

Question 53

Unusual items affecting the current period's income statement consist of changes in accounting principles and discontinued operations.

Question 54

Which of the following is the most useful in analyzing companies of different sizes?

A)comparative statements
B)common-sized financial statements
C)price-level accounting
D)audit report

Question 55

In a company's annual report, the section called Management Discussion and Analysis provides critical information for interpreting the financial statements and assessing the future of the company.

Question 56

The effects of differences in accounting methods are of little importance when analyzing comparable data from competing businesses.

Question 57

Reporting unusual items separately on the income statement allows investors to isolate the effects of these items on income and cash flows.

Question 58

The dividend yield is equal to the dividends per share divided by the par value per share of common stock.

Question 59

A clean audit opinion is not the same as an unmodified opinion.

Question 60

Unusual items affecting the prior period's income statement consist of changes in or errors in applying accounting principles.

Question 61

Based on the data for Harding Company, what is the quick ratio, rounded to one decimal point?

A)2.7
B)2.6
C)1.7
D)0.9

Question 62

Assume the following sales data for a company: What is the percentage increase in sales from the preceding year to the current year?

A)100%
B)25%
C)125%
D)75%

Question 63

Based on the data for Harding Company, what is the amount of working capital?

A)$238,000
B)$128,000
C)$168,000
D)$203,000

Question 64

The relationship of $325,000 to $125,000, expressed as a ratio, is

A)2.0
B)2.6
C)2.5
D)0.45

Question 65

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

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

Question 66

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

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

Question 67

In a common-sized income statement, 100% is the

A)net cost of goods sold
B)net income
C)gross profit
D)sales

Question 68

In a common-sized balance sheet, 100% is

A)total property, plant, and equipment
B)total current assets
C)total liabilities
D)total assets

Question 69

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 if industry information is available

Question 70

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

A)vertical analysis
B)horizontal analysis
C)liquidity analysis
D)solvency analysis

Question 71

A balance sheet that displays only component percentages is a

A)trend balance sheet
B)comparative balance sheet
C)condensed balance sheet
D)common-sized balance sheet

Question 72

In a vertical analysis, the base for cost of goods sold is

A)total selling expenses
B)sales
C)total expenses
D)gross profit

Question 73

Horizontal analysis is a technique for evaluating financial statement data

A)for one period of time
B)over a period of time
C)on a certain date
D)as it may appear in the future

Question 74

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 75

Based on the data for Harding Company, what is the amount of quick assets?

A)$205,000
B)$203,000
C)$131,000
D)$66,000

Question 76

What type of analysis is indicated by the following?

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

Question 77

One reason that a common-sized statement is a useful tool in financial analysis is that it enables the user to

A)judge the relative potential of two companies of similar size in different industries
B)determine which companies in a single industry are of the same value
C)determine which companies in a single industry are of the same size
D)make a better comparison of two companies of different sizes in the same industry

Question 78

Assume the following sales data for a company: What is the percentage increase in sales from the preceding year to the current year?

A)70%
B)76.9%
C)30%
D)50%

Question 79

Income statement information for Sadie Company is below: Using vertical analysis of the income statement for Sadie Company, determine the gross profit margin.

A)100%
B)66%
C)34%
D)29%

Question 80

Horizontal analysis of comparative financial statements includes

A)development of common-sized 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 each component in a financial statement to a total within the statement