Deck 17: Analysis of Financial Statements

Question 1

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

Answer 1

False

Question 2

Market prospects are the ability to generate positive market expectations.

Answer 2

True

Question 3

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 3

True

Question 4

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

Question 5

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

Question 6

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 7

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 8

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

Question 9

Suppliers use financial statement information in establishing credit terms.

Question 10

Market prospects are 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) salability, (3) solvency, and (4) profitability.

Question 12

Profitability is the ability to generate positive market expectations.

Question 13

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

Question 14

External users of accounting information manage and operate the company.

Question 15

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

Question 16

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

Question 17

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 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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 31

Intra-company analysis is based on comparisons with competitors.

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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 38

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

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

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

Question 41

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

Question 42

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

Question 43

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

Question 44

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

Question 45

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

Question 46

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

Question 47

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

Question 48

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

Question 49

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

Question 50

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

Question 51

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 52

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

Question 53

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 54

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

Question 55

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

Question 56

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

Question 57

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

Question 58

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

Question 59

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

Question 60

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 61

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

Question 62

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

Question 63

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 64

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

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

Question 65

External users of financial information:

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

Question 66

Financial statement analysis involves all of the following except:

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

Question 67

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

Question 68

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

Question 69

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

Question 70

The return on total assets ratio is a profitability measure.

Question 71

Working capital is computed as current liabilities minus current assets.

Question 72

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 73

Internal users of financial information:

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

Question 74

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

Question 75

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

Question 76

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

Question 77

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

Question 78

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

Question 79

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

Question 80

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.