Deck 13: Analysis of Financial Statements

Question 1

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

Answer 1

False

Question 2

Market prospects are the ability to generate positive market expectations.

Answer 2

True

Question 3

External users of accounting information manage and operate the company.

Answer 3

False

Question 4

Profitability is the ability to generate positive market expectations.

Question 5

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

Question 6

Financial statement analysis applies analytical tools to financial statements and related data for making business decisions.

Question 7

A company's board of directors analyzes financial statements to improve operating performance and evaluate the performance of individual entry-level employees.

Question 8

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

Question 9

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 10

Profitability is the ability to provide financial rewards sufficient to attract and retain financing.

Question 11

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

Question 12

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

Question 13

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

Question 14

Internal users of accounting information manage and operate the company.

Question 15

One purpose of financial statement analysis for internal users is to provide information to improve efficiency and effectiveness.

Question 16

Market prospects is the ability to meet short-term obligations.

Question 17

Financial analysis does not include assessing future performance and risk because financial statements are based on past performance.

Question 18

Auditors use financial statements to assess "fair presentation" of financial results.

Question 19

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

Question 20

The evaluation of company performance and financial condition focuses solely on past performance.

Question 21

When an item has a value in the base period and zero in the analysis period, the decrease is 0 percent.

Question 22

Intra-company analysis is based on comparisons with competitors.

Question 23

Intra-company analysis compares a company's current performance to its own prior performance.

Question 24

An example of a guideline (or rule of thumb) for comparison is the 2:1 level for the current ratio and 1:1 level for the acid-test ratio.

Question 25

An example of an intracompany comparison is comparing Apple's profit margin to the industry's profit margin.

Question 26

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

Question 27

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

Question 28

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 29

When no value is in the base period, no percent change is computable.

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

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

Question 32

When a negative amount is in the base period and a positive amount is in the analysis period (or vice versa), a meaningful percent change cannot be calculated.

Question 33

The key factors section of a financial statement analysis report includes both quantitative and qualitative indicators of company performance.

Question 34

The executive summary of a financial statement analysis report includes the evidential matter, assumptions, and inferences for the report.

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

When an item has a value in the base period and zero in the analysis period, the decrease is 100 percent.

Question 40

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

Question 41

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

Question 42

Earnings per share is calculated using income before interest and income taxes.

Question 43

To be useful, a ratio must refer to economically important relationships, such as a sale price compared to its cost.

Question 44

Trend analysis is computing percents that show patterns in data across periods.

Question 45

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

Question 46

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

Question 47

Horizontal analysis is used to understand the relative importance of each financial statement item.

Question 48

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

Question 49

A corporation reported cash of $14,000, total assets of $178,300, and net income of $50,000. Its common-size percent for cash equals 7.85%.

Question 50

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

Question 51

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

Question 52

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

Question 53

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

Question 54

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

Question 55

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

Question 56

An advantage of common-size statements is that they show patterns in data across periods.

Question 57

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

Question 58

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

Question 59

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

Question 60

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

Question 61

Capital structure measures a company's ability to earn net income from sales.

Question 62

The purposes of financial statement analysis include all of the following except:

A) Providing information to improve efficiency and effectiveness.
B) Providing information for managing and operating the company.
C) Helping external users assess performance.
D) Helping the board of directors monitor management's performance.
E) Assuring that the company will not be the subject of an IRS audit.

Question 63

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

Question 64

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%.

Question 65

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

Question 66

Low expectations of future performance result in a low price-earnings (PE) ratio.

Question 67

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 68

The greater the times interest earned ratio, the greater the risk a company will not be able to pay interest expense.

Question 69

The return on total assets ratio is a profitability measure.

Question 70

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

Question 71

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

Question 72

Working capital is computed as current liabilities minus current assets.

Question 73

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

Question 74

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

Question 75

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 76

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

Question 77

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 78

Debt financing is considered riskier than equity financing because of its required payments of interest and principal.

Question 79

External users of financial information:

A) Are those individuals involved in managing and operating the company.
B) Include internal auditors and managers.
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

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.