Deck 13: Analyzing and Interpreting Financial Statements

Question 1

External users of accounting information manage and operate the company.

Answer 1

False

Question 2

Market prospects are the ability to generate positive market expectations.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

Suppliers use financial statement information in establishing credit terms.

Question 8

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

Question 9

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

Question 10

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

Question 11

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 12

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

Question 13

Profitability is the ability to generate positive market expectations.

Question 14

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 15

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

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

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

Intra-company analysis is based on comparisons with competitors.

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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 29

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 30

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

Question 31

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 32

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

Question 33

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

Question 34

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.

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

If a company is comparing its financial condition or performance to a base amount in the same time period,it is using vertical analysis.

Question 40

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

Question 41

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

Question 42

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

Question 43

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

Question 44

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

Question 45

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

Question 46

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

Question 47

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

Question 48

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

Question 49

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

Question 50

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

Question 51

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 52

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

Question 53

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

Question 54

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

Question 55

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

Question 56

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

Question 57

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 58

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 59

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

Question 60

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

Question 61

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

Question 62

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

Question 63

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

Question 64

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

Question 65

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

Question 66

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 67

Working capital is computed as current liabilities minus current assets.

Question 68

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

Question 69

Working capital is computed as current assets minus current liabilities.

Question 70

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

Question 71

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

Question 72

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

Question 73

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 74

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

Question 75

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

Question 76

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

Question 77

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

Question 78

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

Question 79

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

Question 80

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