Deck 17: Financial Statement Analysis

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

Current position analysis indicates a company's ability to liquidate current liabilities.

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

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

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

Question 17

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

Question 18

The percentage analysis of increases and decreases in corresponding items in comparative financial statements is referred to as horizontal analysis.

Question 19

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

Question 20

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

Question 21

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

Question 22

In computing the rate earned on total assets, interest expense is subtracted from net income before dividing by 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 rate earned on total assets measures the profitability of total assets, without considering how the assets are financed.

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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 32

An increase in the accounts receivable turnover may be due to an improvement in the collection of receivables or to a change in the granting of credit and/or in collection practices.

Question 33

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

Question 34

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 35

In computing the ratio of net sales to assets, long-term investments are excluded from average total assets.

Question 36

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 37

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 38

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

Question 39

A balance sheet shows cash, $75,000; marketable securities, $115,000; receivables, $150,000 and $222,500 of inventories. Current liabilities are $225,000. The current ratio is 2.5 to 1.

Question 40

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

Question 41

An extraordinary loss of $300,000 that results in income tax savings of $90,000 should be reported as an extraordinary loss (net of tax) of $210,000 on the income statement.

Question 42

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 43

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 44

Unusual items affecting the prior period's income statement consist of errors and change in accounting principles.

Question 45

An extraordinary item must be either unusual in nature or infrequent in occurrence.

Question 46

Ratios and various other analytical measures are a substitute for sound judgment, nor do they provide definitive guides for action.

Question 47

A clean audit opinion is the same as a qualified audit opinion.

Question 48

Those unusual items reported as deductions from income from continuing operations should be listed net of the related income tax.

Question 49

In a company's annual report, the section called management discussion and analysis provides critical information in interpreting the financial statements and assessing the future of the company.

Question 50

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

Question 51

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

Question 52

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

Question 53

Interpreting financial analysis should be considered in light of conditions peculiar to the industry and the general economic conditions.

Question 54

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

Question 55

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

Question 56

When you are interpreting financial ratios, it is useful to compare a company's ratios to some form of standard.

Question 57

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

Question 58

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 59

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

Question 60

A company can use comparisons of its financial data to the data of other companies and industry values to evaluate its position.

Question 61

Assume the following sales data for a company: What is the percentage increase in sales from 2014 to 2015?

A) 100%
B) 65%
C) 165%
D) 60.1%

Question 62

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 63

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 64

Based on the above data, what is the amount of quick assets?

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

Question 65

Assume the following sales data for a company: What is the percentage increase in sales from 2014 to 2015?

A) 75%
B) 66.7%
C) 25%
D) 150%

Question 66

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

A) 2.0 to 1
B) 2.6 to 1
C) 2.5 to 1
D) 0.45 to 1

Question 67

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) the evaluation of each component in a financial statement to a total within the statement.

Question 68

Based on the above data, what is the amount of working capital?

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

Question 69

What type of analysis is indicated by the following?

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

Question 70

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 71

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

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

Question 72

Under which of the following cases may a percentage change be computed?

A) There is no amount in the base year.
B) There is a negative amount in the base year and a negative amount in the subsequent year.
C) The trend of the amounts is decreasing but all amounts are positive.
D) There is a negative amount in the base year and a positive amount in the subsequent year.

Question 73

Which of the following below generally 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 74

A balance sheet that displays only component percentages is called

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

Question 75

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

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

Question 76

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 77

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) solvency analysis

Question 78

One reason that a common-size 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 79

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

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

Question 80

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.