Deck 12: Financial Statement Analysis

Question 1

After the figure for net income appears on the income statement, __________ data is computed.

Answer 1

earnings per share

Question 2

The three ways to analyze financial statements are by using horizontal, vertical, and ratio analysis.

Answer 2

True

Question 3

Which section of the income statement does NOT report net of income taxes or net of income tax savings?

Answer 3

Continuing operations section

Question 4

Reporting income from continuing operations helps investors make predictions about a company's future earnings.

Question 5

Everyday business activities are reported in the __________ section.

Question 6

Financial statement analysis is only used for comparing the company's current performance with the company's past performance.

Question 7

What is other income/(expenses)? Provide three examples?

Question 8

Predictions about a company's future earnings can best be inferred from the:

A) cumulative effect of changes in accounting principles section.
B) discontinued operations section.
C) continuing operations section.
D) extraordinary items section.
E) earnings per share.

Question 9

When a company sells off part of the business, this would be reported in the __________ section.

Question 10

Diluted earnings per share is:

A) always lower than basic earnings per share.
B) always higher than basic earnings per share.
C) a figure that can be higher or lower than earnings per share.
D) computed only if the company does not have convertible preferred shares.
E) always the same as basic earnings per share.

Question 11

A(n) ________ is a distinguishable part of a business that is subject to a different set of risks and returns than other parts of the business.

A) extraordinary event
B) business segment
C) product line
D) manufacturing line
E) operating segment

Question 12

What may an income statement include after continuing operations?

Question 13

The last section of an income statement report (before earnings per share data) is __________.

Question 14

Basic earnings per share (EPS) is determined using:

A) authorized common shares.
B) issued common shares.
C) outstanding common shares.
D) treasury shares.
E) authorized preferred shares.

Question 15

After income from continuing operations, the next section on an income statement is __________.

Question 16

Other income (such as rental income) and other expenses (such as interest expense) are listed immediately after:

A) gross profit.
B) operating expenses.
C) operating income.
D) income tax expense.
E) profit.

Question 17

What is retrospective application?

Question 18

In order to do a complete financial analysis, you should have at least five years of figures available for comparison.

Question 19

Financial statement analysis indicates only that a problem may exist and offers clues as to what the problem might be.

Question 20

A distinguishable part of a business that is subject to a different set of risks and returns than other parts of the business is called a __________.

Question 21

The revenue of Rick's Motorcycles for the years 2009, 2010, and 2011 is $75,000, $100,000 ,and $200,000, respectively. If 2009 is the base year, the trend percentage for 2010 is:

A) 33%.
B) 100%.
C) 133%.
D) (62.5%).
E) 25%.

Question 22

What type of application is required per IFRS and ASPE when changing from the application of one principle to another?

Question 23

Patty's Baker has cost of goods sold for the years 2011, 2010, and 2009 respectively of $28,600, $26,900, and $25,600. If 2009 is the base year, the trend percentage for 2011 is:

A) 111.72%.
B) 11.72%.
C) 105.08%.
D) 5.08%.
E) 104.9%.

Question 24

The most recent period in a horizontal analysis is called the __________ period.

Question 25

Tayler Company's cash reported on the balance sheets for 2009 and 2010 was as follows: $235,000 in 2009; $245,300 in 2010. The percentage change for cash from 2009 to 2010 was __________.

Question 26

If current assets were $100,000 in 2009 and $88,000 in 2010, what was the amount of increase or decrease in percentage terms from 2009 to 2010? (Round to the nearest percent.)

A) Increase of 14%
B) Decrease of 14%
C) Increase of 12%
D) Decrease of 12%
E) Decrease if 25%

Question 27

Rick's Sporting Goods reported $23,400 in A/R in 2010 and $25,100 in A/R in 2009. The percentage change for A/R from 2009 to 2010 was __________.

Question 28

Horizontal analysis is only done on the income statement.

Question 29

The sales of Mark's Online for the years 2009, 2010, and 2011 are $40,000, $60,000, and $80,000, respectively. If 2009 is the base year, the trend percentage for 2010 is:

A) 0%..
B) 150%.
C) 200%.
D) 133%.
E) 105%.

Question 30

Computing trend percentages over a period of years helps to indicate the direction in which the business is going.

Question 31

If cash is $4,450 in 2010 and $3,670 in 2009, what is the percentage increase or decrease from 2009 to 2010?

Question 32

A comparison of the amounts for the same item in the financial statements of two or more periods is called __________ analysis.

Question 33

What is the formula for determining the percentage change in an account from one year to the next year?

Question 34

Kacee's sales were $13,444 in 2010 and $12,898 in 2009. The percentage change in Kacee's sales from 2009 to 2010 was __________.

Question 35

In computing trend percentages, the most recent year amounts become the base and are always set to 100%.

Question 36

Eagle Creek Outfitters sells hiking and other outdoor equipment. It also sells a few trail books and outdoor guides about the area. What would the revenue from the books and guides be recorded as in their income statement?

Question 37

Knowing the dollar amount of change from year-to-year in an account is less relevant than knowing the percentage change.

Question 38

Determining the percentage changes in line items on financial statements for two consecutive years is called __________ analysis.

Question 39

Explain the difference between basic EPS and diluted EPS.

Question 40

Which analysis deals with the percentage of changes in certain items over a period of years?

Question 41

Common-size statements are useful when comparing a company's performance against that of a similar, but not necessarily the same-sized, company.

Question 42

Net sales at Kelly's Bakery increased from $40,000 to $60,000 and its cost of goods sold increased from $20,000 to $40,000, then vertical analysis based on net sales would show the following percentages for cost of goods sold (rounded to the nearest percent):

A) 40% and 20%.
B) 10% and 30%.
C) 50% and 67%.
D) 67% and 40%.
E) 33% and 50%

Question 43

The base amounts for a vertical analysis are net income and total equity.

Question 44

A common-size comparative statement shows:

A) dollars and percents.
B) dollars only.
C) percents only.
D) dollar increases and decreases.
E) dollar decreases and increases.

Question 45

By using only percentages in common-size statements, the statements emphasize dollar value bias.

Question 46

Comparative reports in which each item is expressed as a percentage of a base amount without dollar amounts are called:

Question 47

For vertical analysis purposes, the base item on the income statement is __________.

Question 48

Net income was $45,000 in 2009 and $60,000 in 2010. The percentage increase or decrease in net income from 2009 to 2010 was __________.

Question 49

Common-size statements use the same percentages that are computed during a __________ analysis, but no dollar amounts are shown.

Question 50

If Rick's net sales increased from $40,000 to $80,000 and its operating expenses increased from $30,000 to $50,000, then, using vertical analysis based on net sales, what percentages would show for operating expenses for the two periods (to the nearest tenth of a percent)?

Question 51

For vertical analysis purposes, the base item on the balance sheet is __________.

Question 52

Common-size statements should NOT be used to compare a company's performance against the industry average.

Question 53

Sobey's would probably benchmark with other:

A) general merchandise retailers.
B) big box retailers.
C) grocery chains.
D) companies that sell food.
E) companies that produce food.

Question 54

Statements that are often used to compare similar businesses are called:

Question 55

In a common-size income statement, selling expenses are 55%. This means that they are 55% of:

A) net income.
B) net sales.
C) gross profit.
D) net profit.
E) total expenses.

Question 56

If total assets are $6,000, what is the common-size figure of cash, assuming that cash has a balance of $2,400?

Question 57

A useful tool to compare the performance of similar companies is to do a __________ analysis on each one.

Question 58

Comparing your company with a leading company in the same category of business is called __________.

Question 59

If a person compares the net sales of two companies as absolutes, and ignores the relative percentages, we can infer that this comparison contains dollar value bias.

Question 60

A vertical analysis differs from a horizontal analysis in that an item is selected as the base amount and all other items are computed as a percentage of the base amount.

Question 61

The following is a common-sized income statement for Alpha and Beta Companies.

Which company has the best cost of goods sold?

Question 62

To determine the ability of a company to service debt, you would calculate the debt ratio.

Question 63

From the following, complete the common-size income statement for Isaiah's Sporting Goods using net sales as the base. (Round to nearest tenth of a percent.)

Question 64

A solvency ratio is defined as a way to evaluate a company's stock performance.

Question 65

Inventory turnover would be highest for which of the following?

A) Home builder
B) Grocery store
C) Car dealership
D) Heavy equipment dealer
E) Plane manufacturer

Question 66

A solvency ratio is defined as the ability for a company to meet long-term obligations or take on more debt.

Question 67

The lower the times interest earned ratio, the more likely:

A) a default in payment will occur.
B) a business needs to borrow money.
C) a business will suffer a loss.
D) interest payments can be made.
E) a business can pay its debt.

Question 68

If days in receivables is 35 days, this means that from the date of:

A) purchase to the date of payment is 35 days.
B) sale to the date of receipt of payment is 35 days.
C) discount to the date of receipt of payment is 35 days.
D) invoice to the date of payment is 35 days.
E) sale to the date of invoice is 35 days.

Question 69

According to the Risk Management Association, the debt ratio for most companies ranges from 0.57 - 0.67.

Question 70

Which of the following would NOT be a red flag in a financial statement analysis?

A) Short number of days' in accounts receivable
B) Decreased cash flow
C) High debt ratio
D) Low inventory turnover
E) Earning problems

Question 71

A liquidity ratio is defined as the ability to meet short-term obligations with current assets.

Question 72

The quick ratio is the most widely used liquidity ratio.

Question 73

Asset management ratios measure how efficiently a company utilizes its operating assets.

Question 74

Which of the following would be a red flag in a financial statement analysis?

A) High debt ratio
B) High inventory turnover
C) High current ratio
D) High earnings per share
E) Cash flow higher than net income

Question 75

A profitability ratio is defined as a measure of a company's ability to generate net income.

Question 76

The formula "net income minus preferred dividends divided by average common shareholders' equity" yields:

A) return on common shareholders' equity.
B) return on assets.
C) earnings per common share.
D) return on sales.
E) rate of return.

Question 77

The following is a common-sized income statement for Alpha and Beta Companies.

Which company had the lower net income as a percentage of sales?

Question 78

The ratio that indicated how many days it takes to turn accounts receivable into cash is the:

A) accounts receivable turnover ratio.
B) average turnover ratio.
C) average collection period.
D) quick assets turnover ratio.
E) accounts receivable ratio.

Question 79

Carla's Fashions has an average days' in receivable of 30 days. You could infer that Carla's:

A) bills her customers quarterly.
B) bills her customers monthly.
C) has an accounts receivable turnover of 6.
D) has an accounts receivable turnover of 4.
E) has an accounts receivable turnover of 0.

Question 80

Working capital is defined as total assets divided by total liabilities.