Deck 13: Analyzing and Interpreting Financial Statements

Question 1

The building blocks of financial statement analysis include (1) liquidity, (2) salability, (3) solvency, and (4) profitability.

Answer 1

False

Question 2

Financial reporting includes not only general purpose financial statements, but also information from SEC filings, press releases, shareholders' meetings, forecasts, management letters, auditor's reports, and Webcasts.

Answer 2

True

Question 3

Financial analysis only refers to the communication of relevant financial information to decision makers.

Answer 3

False

Question 4

Financial statement analysis lessens the need for expert judgment.

Question 5

Profitability is the ability to generate future revenues and meet long-term obligations.

Question 6

Standards for comparison are not generally necessary when making judgments about a company's performance.

Question 7

Liquidity and efficiency are the ability to meet short-term obligations and to efficiently generate revenue.

Question 8

Financial statement analysis is the application of analytical tools to general-purpose financial statements and related data for making business decisions.

Question 9

Intra-company analysis is based on comparisons with competitors.

Question 10

Measures taken from a selected competitor or a group of competitors are often excellent standards of comparison for analysis.

Question 11

External users of accounting information make the strategic and operating decisions of a company.

Question 12

Market prospects are the ability to provide financial rewards sufficient to attract and retain financing.

Question 13

Profitability is the ability to generate positive market expectations.

Question 14

Evaluation of company performance does not include analysis of (1) past and current performance, (2) current financial position, and (3) future performance and risk.

Question 15

Financial statement analysis may be used for personal financial investment decisions.

Question 16

One purpose of financial statement analysis for internal users is to provide strategic information to improve company efficiency and effectiveness in providing products and services.

Question 17

A company's board of directors analyzes financial statements to assess future company prospects for making operating decisions.

Question 18

Standards for comparison when interpreting financial statement analysis include competitor and industry performance data.

Question 19

The evaluation of company performance and financial condition includes evaluation of (1) past and current performance, (2) current financial position, and (3) future performance and risk.

Question 20

General-purpose financial statements include the (1) income statement, (2) balance sheet, (3) statement of stockholders' equity (or statement of retained earnings), (4) statement of cash flows, and (5) notes to these statements.

Question 21

Horizontal analysis is used to reveal patterns in data covering successive periods.

Question 22

Trend analysis is a form of horizontal analysis that can reveal patterns in data across successive periods.

Question 23

Earnings per share are calculated only on income from continuing operations.

Question 24

General standards of comparisons, developed from experience, include the 2:1 level for the current ratio and 1:1 level for the acid-test ratio.

Question 25

Comparative financial statements are reports that show financial amounts in side by side columns on a single statement for analysis purposes.

Question 26

Three of the most common tools of financial analysis include horizontal analysis, vertical analysis, and ratio analysis.

Question 27

Vertical analysis is used to reveal patterns in data covering two or more successive periods.

Question 28

Analysis of a single financial number is often of limited value.

Question 29

The percent change of a comparative financial statement item is computed by subtracting the analysis period amount from the base period amount, dividing the result by the base period amount and multiplying that result by 100.

Question 30

A good financial statement analysis report often includes the following sections: executive summary, analysis overview, evidential matter, assumptions, key factors, and inferences.

Question 31

If a company is comparing this year's financial performance to last year's financial performance, it is using horizontal analysis.

Question 32

If a company is comparing its financial condition or performance to a base amount, it is using vertical analysis.

Question 33

A good financial report does not link interpretations and conclusions of analysis with the underlying information.

Question 34

A financial statement analysis report helps to reduce uncertainty in business decisions through a rigorous and sound evaluation.

Question 35

Trend analysis of financial statement items can include comparisons of relations between items on different financial statements.

Question 36

A trend percent, or index number, is calculated by dividing the analysis period amount by the base period amount and multiplying the result by 100.

Question 37

Horizontal analysis is the comparison of a company's financial condition and performance to a base amount.

Question 38

Horizontal analysis is used to reveal changes in the relative importance of each financial statement item.

Question 39

Vertical analysis is the comparison of a company's financial condition and performance across time.

Question 40

Vertical analysis is a tool to evaluate individual financial statement items or groups of items in terms of a specific base amount.

Question 41

The return on total assets can be calculated as profit margin times total asset turnover.

Question 42

The higher the accounts receivable turnover, the less quickly accounts receivable are collected.

Question 43

Liquidity refers to the availability of resources to meet short-term cash requirements.

Question 44

A company with a high inventory turnover requires a smaller investment in inventory than one producing the same sales with a lower turnover.

Question 45

Ratios must refer to economically important relationships, such as a sale price compared to its cost.

Question 46

An advantage of common-size statements is that they reflect the dollar magnitude (size) of the different companies under analysis.

Question 47

Graphical analysis of the balance sheet can be useful in assessing sources of financing.

Question 48

The greater the times interest earned ratio, the greater the risk a company is exposed to.

Question 49

Efficiency refers to how productive a company is in using its assets, and is usually measured relative to how much revenue is generated from a certain level of assets.

Question 50

A corporation reported cash of $14,000 and total assets of $178,300. Its common-size percent for cash equals 7.85%.
($14,000/$178,300) * 100 = 7.85%

Question 51

The base amount for a common-size balance sheet is usually total assets.

Question 52

Working capital is computed as current liabilities minus current assets.

Question 53

Capital structure refers to a company's long-run financial viability and its ability to cover long-term obligations.

Question 54

Total asset turnover reflects a company's ability to use its assets to generate sales and is an important indication of operating efficiency.

Question 55

The use of debt is sometimes described as financial leverage because debt can have the effect of increasing the return on equity.

Question 56

The current ratio is calculated as current liabilities divided by current assets.

Question 57

The return on common stockholder's equity measures a company's success in earning net income for its owners.

Question 58

A ratio expresses a mathematical relation between two quantities and can be expressed as a percent, rate, or proportion.

Question 59

A company that has days' sales uncollected of 30 days and days' sales in inventory of 18 days implies that inventory will be converted to cash in about 12 days.

Question 60

A rough guideline states that for a company with no discounts offered, days' sales uncollected should not exceed 1 1/3 times the days in its credit period.

Question 61

Industry standards for financial statement analysis:

A)Are based on a single competitor's financial performance.
B)Are set by the government.
C)Are available for the financial performance and condition of the company's industry.
D)Are based on rules of thumb.
E)Compare a company's income with its prior year's income.

Question 62

Standards for comparisons in financial statement analysis do not include:

A)Intra-company standards.
B)Competitors' standards.
C)Industry standards.
D)Management standards.
E)Guidelines (rules of thumb).

Question 63

Three of the most common tools of financial analysis are:

A)Financial reporting, ratio analysis, vertical analysis.
B)Ratio analysis, horizontal analysis, financial reporting.
C)Horizontal analysis, vertical analysis, ratio analysis.
D)Trend analysis, financial reporting, ratio analysis.
E)Vertical analysis, political analysis, horizontal analysis.

Question 64

The ability to meet short-term obligations and to efficiently generate revenues is called:

A)Liquidity and efficiency.
B)Solvency.
C)Profitability.
D)Market prospects.
E)Creditworthiness.

Question 65

The comparison of a company's financial condition and performance across time is known as:

A)Horizontal analysis.
B)Vertical analysis.
C)Political analysis.
D)Financial reporting.
E)Investment analysis.

Question 66

Financial statement analysis involves all of the following except:

A)The application of analytical tools to general-purpose financial statements and related data for making business decisions.
B)Transforming accounting data into useful information for decision-making.
C)Helping users to make better decisions.
D)Helping to reduce uncertainty in decision-making.
E)Assuring that the company will be more profitable in the future.

Question 67

The ability to provide financial rewards sufficient to attract and retain financing is called:

A)Liquidity and efficiency.
B)Solvency.
C)Profitability.
D)Market prospects.
E)Creditworthiness.

Question 68

Financial reporting refers to:

A)The application of analytical tools to general-purpose financial statements.
B)The communication of financial information useful for decision making.
C)General-purpose financial statements only.
D)Ratio analysis only.
E)Profitability.

Question 69

The measurement of key relations among financial statement items is known as:

A)Financial reporting.
B)Horizontal analysis.
C)Investment analysis.
D)Ratio analysis.
E)Risk analysis.

Question 70

The return on total assets ratio is a profitability measure.

Question 71

A company reports basic earnings per share of $3.50, cash dividends per share of $0.75, and a market price per share of $64.75. The company's dividend yield equals 21.4%.
Dividend yield = cash dividend per share/market price per share
$0.75/$64.75 = 1.16%

Question 72

The building blocks of financial statement analysis do not include:

A)External analyst services.
B)Solvency.
C)Profitability.
D)Market prospects.
E)Liquidity and efficiency.

Question 73

Evaluation of company performance can include comparison and/or assessment of all but which of the following?

A)Past performance.
B)Current performance.
C)Current financial position.
D)Future performance and risk.
E)External user needs and demands.

Question 74

The ability to generate positive market expectations is called:

A)Liquidity and efficiency.
B)Liquidity and solvency.
C)Profitability.
D)Market prospects.
E)Creditworthiness.

Question 75

Internal users of financial information:

A)Are not directly involved in operating a company.
B)Are those individuals involved in managing and operating the company.
C)Include shareholders and lenders.
D)Include directors and customers.
E)Include suppliers, regulators, and the press.

Question 76

Guidelines (rules-of-thumb) are general standards of comparison developed from:

A)Industry statistics from the government.
B)Past experience.
C)Analysis of competitors.
D)Relations between financial items.
E)Dun and Bradstreet.

Question 77

The ability to generate future revenues and meet long-term obligations is referred to as:

A)Liquidity and efficiency.
B)Solvency.
C)Profitability.
D)Market prospects.
E)Creditworthiness.

Question 78

Intra-company standards for financial statement analysis:

A)Are based on a company's prior performance and relations between its financial items.
B)Are often set by competitors.
C)Are set by the company's industry through published statistics.
D)Are based on rules of thumb.
E)Are published in Dun and Bradstreet.

Question 79

External users of financial information:

A)Are those individuals involved in managing and operating the company.
B)Include internal auditors and consultants.
C)Are not directly involved in operating the company.
D)Make strategic decisions for a company.
E)Make operating decisions for a company.

Question 80

A high level of expected risk suggests a low price-earnings (PE) ratio.