Deck 7: Financial Statement Analysis

Question 1

In the horizontal analysis of the income statement, each item is generally stated as a percentage of net income.

Answer 1

True

Question 2

Horizontal analysis evaluates financial statement data

A)within a period of time.
B)over a period of time.
C)on a certain date.
D)as it may appear in the future.

Answer 2

B

Question 3

Inventory turnover measures the number of times on the average the inventory was sold during the period.

Answer 3

True

Question 4

In ratio analysis, the ratios are never expressed as a

A)rate.
B)negative figure.
C)percentage.
D)simple proportion.

Question 5

Horizontal analysis is appropriately performed

A)only on the income statement.
B)only on the balance sheet.
C)only on the statement of retained earnings.
D)on all three of these statements.

Question 6

Horizontal, vertical, and circular analyses are the most common tools of financial statement analysis.

Question 7

Stockholders are most interested in evaluating

A)liquidity and solvency.
B)profitability and solvency.
C)liquidity and profitability.
D)marketability and solvency.

Question 8

Intracompany comparisons of the same financial statement items can often detect changes in financial relationships and significant trends.

Question 9

Horizontal analysis is also called

A)linear analysis.
B)vertical analysis.
C)trend analysis.
D)common size analysis.

Question 10

Measures of a company's liquidity are concerned with the company's ability to service long-term debt.

Question 11

Liquidity ratios compare current assets to current liabilities because it is assumed that current liabilities will be paid out of current assets.

Question 12

Common size analysis expresses each item within a financial statement in terms of a percent of a base amount.

Question 13

A technique for evaluating financial statements that expresses the relationship among selected items of financial statement date is

A)common size analysis.
B)horizontal analysis.
C)ratio analysis.
D)vertical analysis.

Question 14

In a vertical analysis of an income statement, each item on the income statement is expressed as a percentage of sales.

Question 15

In analyzing the financial statements of a company, a single item on the financial statements

A)should be reported in bold-face type.
B)is more meaningful compared to other financial information.
C)is significant only if it is large.
D)should be accompanied by a footnote.

Question 16

Profitability ratios are frequently used as a basis for evaluating management's operating effectiveness.

Question 17

Comparative balance sheets are usually prepared for

A)one year.
B)two years.
C)three years.
D)four years.

Question 18

Which of the following is primarily interested in the liquidity of a company?

A)Federal government
B)Stockholders
C)Long-term creditors
D)Short-term creditors

Question 19

Assume the following sales data for a company $$\begin{array} { l r } 2008 & \$ 1,000,000 \\2007 & 900,000 \\2006 & 750,000 \\2005 & 500,000\end{array}$$
If 2005 is the base year, what was the percentage increase in sales from 2005 to 2007?

A)100%
B)180%
C)80%
D)55.5%

Question 20

The formula for horizontal analysis of changes since the base period is the current year amount

A)divided by the base year amount.
B)minus the base year amount divided by the base year amount.
C)minus the base year amount divided by the current year amount.
D)plus the base year amount divided by the base year amount.

Question 21

A company has an average inventory on hand of $80,000 and the average days to sell inventory is 73 days.What is the cost of goods sold?

A)$400,000.
B)$5,840,000.
C)$800,000.
D)$2,920,000.

Question 22

A limitation in calculating ratios in financial statement analysis is that

A)it requires a calculator.
B)no one other than management would be interested in them.
C)some account balances may reflect atypical data at year end.
D)they seldom identify problem areas in a company.

Question 23

Vertical analysis is a technique which expresses each item within a financial statement

A)in dollars and cents.
B)in terms of a percentage of the item in the previous year.
C)in terms of a percent of a base amount.
D)starting with the highest value down to the lowest value.

Question 24

Which of the following is considered to be the least liquid current asset?

A)inventory
B)cash
C)accounts receivable
D)land

Question 25

The ratios that are used to determine a company's short-term debt paying ability are

A)asset turnover, times interest earned, current ratio, and receivables turnover.
B)times interest earned, inventory turnover, current ratio, and receivables turnover.
C)times interest earned, acid-test ratio, current ratio, and inventory turnover.
D)current ratio, acid-test ratio, receivables turnover, and inventory turnover.

Question 26

The current ratio is

A)calculated by dividing current liabilities by current assets.
B)used to evaluate a company's liquidity and short-term debt paying ability.
C)used to evaluate a company's solvency and long-term debt paying ability.
D)calculated by subtracting current liabilities from current assets.

Question 27

A ratio calculated in the analysis of financial statements

A)expresses a mathematical relationship between two numbers.
B)shows the percentage increase from one year to another.
C)restates all items on a financial statement in terms of dollars of the same purchasing power.
D)is meaningful only if the numerator is greater than the denominator.

Question 28

Vertical analysis is also called

A)common size analysis.
B)horizontal analysis.
C)ratio analysis.
D)trend analysis.

Question 29

A liquidity ratio measures the

A)income or operating success of an enterprise over a period of time.
B)ability of the enterprise to survive over a long period of time.
C)short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash.
D)number of times interest is earned.

Question 30

Times interest earned is also called the

A)money multiplier.
B)interest coverage ratio.
C)coupon coverage ratio.
D)premium ratio.

Question 31

Susie's Sweets Candy Shop had a balance in the Accounts Receivable account of $780,000 at the beginning of the year and a balance of $820,000 at the end of the year.Net credit sales during the year amounted to $5,840,000.The average collection period of the receivables in terms of days was

A)30 days.
B)365 days.
C)100 days.
D)50 days.

Question 32

Each of the following is a limitation of financial statement analysis except

A)alternative accounting methods.
B)comparability of firms.
C)cost.
D)estimates.

Question 33

In ratio analysis, comparisons can be made to _______________________, __________________, or _________________________.

Question 34

______________________ evaluates financial statement data by expressing each item in a financial statement as a percent of a base amount.The base amount on the income statement is typically __________________ while the base amount on the balance sheet is typically ___________________.

Question 35

The use of alternative accounting methods

A)is not a problem in ratio analysis because the footnotes disclose the method used.
B)may be a problem in ratio analysis even if disclosed.
C)is not a problem in ratio analysis since eventually all methods will lead to the same end.
D)is only a problem in ratio analysis with respect to inventory.

Question 36

The acid-test (quick) ratio

A)is used to quickly determine a company's solvency and long-term debt paying ability.
B)relates cash, short-term investments, and net receivables to current liabilities.
C)is calculated by taking one item from the income statement and one item from the balance sheet.
D)is the same as the current ratio except it is rounded to the nearest whole percent.

Question 37

A weakness of the current ratio is

A)the difficulty of the calculation.
B)that it doesn't take into account the composition of the current assets.
C)that it is rarely used by sophisticated analysts.
D)that it can be expressed as a percentage, as a rate, or as a proportion.

Question 38

The debt to total asset ratio measures

A)the company's profitability.
B)whether interest can be paid on debt in the current year.
C)the proportion of interest paid relative to dividends paid.
D)the percentage of the total assets provided by creditors.

Question 39

In performing a vertical analysis, the base for sales revenues on the income statement is

A)net sales.
B)sales.
C)net income.
D)cost of goods available for sale.

Question 40

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

A)total selling expenses.
B)net sales.
C)total revenues.
D)total expenses.

Question 41

The receivables turnover is calculated by dividing _________________ by average ___________________.

Question 42

The asset turnover is measured by dividing ______________________ by _________________.

Question 43

___________________ evaluates a series of financial statement data over a period of time.