Deck 4: Analysis of Financial Statements

Question 1

The current ratio is calculated by dividing current assets by current liabilities.

Answer 1

True

Question 2

There is more than one way to calculate the ROE.

Answer 2

True

Question 3

The current ratio is calculated by dividing current assets minus inventory by current liabilities.

Answer 3

False

Question 4

Vertical analysis of an income statement is obtained by using Net Profit as a constant and dividing every figure on the income statement by Net Profit.

Question 5

Market ratios determine how well a company is marketing its products.

Question 6

Liquidity ratios measure the ability of a firm to meet its long -term obligations.

Question 7

Vertical analysis of a balance sheet is obtained by using Total Liabilities as a constant and dividing every figure on the balance sheet by Total Liabilities.

Question 8

As long as you choose your method of financial analysis carefully, any single method will provide you with enough information to completely evaluate your firm

Question 9

Horizontal Analysis is obtained by determining the dollar value change in an account from a base period to a successive time period.

Question 10

Operating cash flow per share is a much better predictor of company stability than earnings per share.

Question 11

Vertical analysis of an income statement is obtained by using Net Sales as a constant and dividing every figure on the income statement by Net Sales.

Question 12

It is advantageous for managers to increase debt financing and exhibit an increased ROE.

Question 13

A ratio is a relationship between two numbers, expressed as a fraction.

Question 14

Vertical analysis of a balance sheet is obtained by using Total Assets as a constant and dividing every figure on the balance sheet by Total Assets.

Question 15

If a company has no debt financing, its return on equity equals its return on assets.

Question 16

A single ratio always provides us with meaningful information.

Question 17

Horizontal Analysis is obtained by determining the percentage change in an account from a base period to a successive time period.

Question 18

Market ratios indicate what price investors are willing to pay for ownership in the company.

Question 19

Profitability ratios determine how well a firm is using its assets and sales revenue to generate a positive return for its owners.

Question 20

As the debt to asset ratio increases, the ROE decreases.

Question 21

Too much credit sales may overstate the earnings of a company.

Question 22

If a company has a 70 percent debt to total assets ratio, approximately 70 cents of every dollar of assets is owed to the company creditors.

Question 23

Leverage ratios measure the firm's ability to use its own money to fund operations.

Question 24

The higher the accounts receivable turnover, the lower the average collection period.

Question 25

Table 4 -1. Income Statement

Refer to Table 4 -1. Using a vertical analysis of January data, Cost of Goods were approximately percent.

A) 30.05
B) 0.3041
C) 35.65
D) 30.41

Question 26

When comparing income statement items to balance sheet items in a single ratio, we use the average of the items on the balance sheet.

Question 27

Table 4 -1. Income Statement

Refer to Table 4 -1. Between January and February, the items that did not change in dollar value included all of the following EXCEPT

A) Payroll Taxes.
B) Depreciation.
C) Rent.
D) Janitorial.
E) Officer's Salary.

Question 28

The operating cash flow per share ratio uses information from the statement of cash flows and the income statement.

Question 29

Table 4 -1. Income Statement

The U.S. Government raised the minimum wage from $4.75 to $5.25 between 1996 and 1997. What was the percentage change in the minimum wage?

A) 9.52
B) -9.52
C) 10.53
D) -10.53

Question 30

Table 4 -1. Income Statement

Refer to Table 4 -1. Using a vertical analysis of January data, Payroll Taxes were approximately percent

A) 0.0796
B) 0.0737
C) 7.96
D) 7.37

Question 31

Table 4 -1. Income Statement

Refer to Table 4 -1. Using horizontal analysis, Payroll Taxes _ percent. _ by approximately _

A) decreased; 9.52
B) increased; 10.52
C) decreased; 10.52
D) increased; 9.52

Question 32

When comparing income statement items to balance sheet items in a single ratio, we use the average of the items on the income statement.

Question 33

If the total asset turnover ratio is less than one, then the average total assets are not generating enough sales.

Question 34

Methods of analyzing financial statements include

A) horizontal analysis.
B) vertical analysis.
C) ratio analysis.
D) all of the above.
E) only A and C above.

Question 35

Table 4 -1. Income Statement

In 2003 the Handy Yogurt shop had $267,386 in Gross Revenues; in 2004, they had $215,398. What is the percentage change in sales?

A) -24.14%
B) 24.14%
C) 19.44%
D) -19.44%

Question 36

Table 4 -1. Income Statement

Last year Sam earned $25,000 and received no bonus. This year he earned the same amount but received a $2,000 bonus. What was the percentage change in his annual earnings?

A) 7.41
B) 8.00
C) -92.00
D) -11.20

Question 37

Table 4 -1. Income Statement

In 2005, the Handy Yogurt shop had $345,265 in Gross Revenues; in 2006, they had $357,388. What is the percentage change in sales?

A) -3.39%
B) 3.39%
C) -3.51%
D) 3.51%

Question 38

Activity ratios indicate how efficiently a business is using its assets.

Question 39

We can obtain the financial reports of publicly held corporations by

A) reading trade journals.
B) calling the company directly.
C) using published data in sources such as Value Line.
D) using EDGAR on the Internet.
E) all of the above.

Question 40

Table 4 -1. Income Statement

Refer to Table 4 -1. Using horizontal analysis, Net Profit percent. _ by approximately

A) decreased; 44.22
B) increased; 79.27
C) decreased; 79.27
D) increased; 44.22

Question 41

Refer to Table 4 -2. The Total Asset Turnover ratio for 2007 was approximately

A) 1.44.
B) 1.49.
C) 1.54.
D) 1.47.

Question 42

indicate what price investors are willing to pay for ownership in the company.

A) Activity ratios
B) Leverage ratios
C) Liquidity ratios
D) Market ratios
E) Profitability ratios

Question 43

Refer to Table 4 -2. The current ratio for this company in 2007 was approximately

A) 1.28.
B) 1.94.
C) 1.19.
D) 1.24.

Question 44

Refer to Table 4 -2. The Fixed Asset Turnover ratio for 2008 was approximately

A) 2.37.
B) 2.29.
C) 1.52.
D) 2.22.

Question 45

are used to determine how well a company is managing its assets.

A) Activity ratios
B) Leverage ratios
C) Liquidity ratios
D) Market ratios
E) Profitability ratios

Question 46

Refer to Table 4 -2. The Debt to Total Assets ratio for 2008 was approximately

A) 0.51.
B) 0.36.
C) 1.95.
D) 0.71.

Question 47

Refer to Table 4 -2. The current ratio for this company in 2008 was approximately

A) 1.19.
B) 1.94.
C) 1.24.
D) 1.28.

Question 48

Refer to Table 4 -2. The Fixed Asset Turnover ratio for 2007 was approximately

A) 2.12.
B) 2.09.
C) 2.37.
D) 2.26.

Question 49

determine how well the firm is using its assets and sales revenue to generate a positive return for its owners.

A) Activity ratios
B) Leverage ratios
C) Liquidity ratios
D) Market ratios
E) Profitability ratios

Question 50

Liquidity ratios include the

A) A and B above.
B) A and C above.
C) current ratio.
D) inventory turnover ratio.
E) quick ratio.

Question 51

Refer to Table 4 -2. The Debt to Equity ratio for 2007 was approximately

A) 0.93.
B) 0.54.
C) 2.07.
D) 1.07.

Question 52

Refer to Table 4 -2. The percentage change in sales from 2007 to 2008 was approximately

A) 4.54.
B) -4.76.
C) -4.54.
D) 4.76.
E) 45.4.

Question 53

Table 4 -1. Income Statement

are used to measure the ability of a firm to meet its short -term creditor's claims.

A) Activity ratios
B) Leverage ratios
C) Liquidity ratios
D) Market ratios
E) Profitability ratios

Question 54

indicate how much of a company's net worth and asset commitment are being financed with debt.

A) Activity ratios
B) Leverage ratios
C) Liquidity ratios
D) Market ratios
E) Profitability ratios

Question 55

Refer to Table 4 -2. The percentage change in fixed assets between 2007 and 2008 was approximately

A) 6.25.
B) -6.25.
C) -6.66.
D) 6.66.

Question 56

Refer to Table 4 -2. The Gross Profit Margin ratio for 2008 was approximately

A) 2.04.
B) 2.11.
C) 0.49.
D) 0.47.

Question 57

Refer to Table 4 -2. The Gross Profit Margin ratio for 2007 was approximately

A) 0.55.
B) 0.44.
C) 0.53.
D) 0.45.

Question 58

Refer to Table 4 -2. The Debt to Total Assets ratio for 2007 was approximately

A) 0.84.
B) 0.52.
C) 1.19.
D) 1.94.

Question 59

Refer to Table 4 -2. The Total Asset Turnover ratio for 2008 was approximately

A) 4.16.
B) 1.52.
C) 2.37.
D) 2.22.

Question 60

Refer to Table 4 -2. The Debt to Equity ratio for 2008 was approximately

A) 2.05.
B) 1.05.
C) 0.51.
D) 1.95.
E) 0.95.

Question 61

Which of the following formulas is used to determine Fixed Asset Turnover?

A) fixed assets/gross sales
B) cost of goods sold/fixed assets
C) net sales/fixed assets
D) fixed assets/net sales
E) gross sales/fixed assets

Question 62

The balance sheet for Jim's Hardware has the following items listed. Current Liabilities, $25,345; Long -Term Debt, $100,000; Total Liabilities, $125,345; Total Assets, $325,490. What is the Owner's Equity for this company?

A) $200,145
B) $25,345
C) $225,490
D) Cannot calculate with the information provided.

Question 63

The Handy Dandy Corporation has an income statement that indicates that Earnings Before Taxes is $2,375,486 and it pays taxes at 35% of earnings. It currently has 1 million shares of common stock outstanding and does not issue preferred stock. What is this corporation's approximate Earnings per Share?

A) $1.54
B) $0.42
C) $0.65
D) $2.38

Question 64

Operating Cash Flow per share

A) uses information from the income statement and the balance sheet.
B) uses information from the statement of cash flows and the income statement.
C) uses information from the balance sheet and the statement of cash flows.
D) all of the above.

Question 65

Carl's Toy Factory had the following items listed on its balance sheet. Cash, 1,590; Accounts Receivable, 5,746; Accounts Payable, 9,563; Inventory, 7,879; Equipment, 35,743; Land, 50,000; Buildings, 135,487; Mortgage, 125,276. Based on this information what was Carl's current ratio?

A) 2.14
B) 1.37
C) 1.59
D) 0.77

Question 66

A company has the following information on their income statement and balance sheet: Total Sales $345,678; Returns and Allowances $15,500; Cost of Goods Sold $175,000; Total Assets $500,000; Current Assets $25,000. What is their Fixed Asset Turnover ratio?

A) 0.691
B) 0.695
C) 0.728
D) 0.660
E) 0.368

Question 67

In 2004, James had Cost of Goods of 358,358; in 2005, they were 365,069. On the last day 2004 his Inventory was 45,675, and on the last day of 2005 it was 51,559. What is the Inventory Turnover for James' Television Sales Shop for 2005?

A) 7.51
B) 7.44
C) 7.34
D) 7.37

Question 68

Liquidity ratios can be obtained from information on the balance sheet, while Activity Ratios require information obtained from the

A) income statement, balance sheet, and statement of cash flows.
B) balance sheet only.
C) income statement only.
D) income statement and balance sheet.
E) none of the above

Question 69

Carl's Toy Factory had the following items listed on its balance sheet. Cash, 1,590; Accounts Receivable, 5,746; Accounts Payable, 9,563; Inventory, 7,879; Equipment, 35,743; Land, 50,000; Buildings, 135,487; Mortgage, 125,276. Based on this information what was Carl's quick ratio?

A) 1.59
B) 2.14
C) 0.77
D) 1.37

Question 70

In 2005, The Handy Catering Service had cash sales of 254,134, credit sales of 125,371, and total sales of 379,505. Accounts Receivable were 9,765. What was Accounts Receivable Turnover?

A) 19.43
B) 33.36
C) 12.84
D) 26.02
E) There is not enough information provided to answer this question.

Question 71

Earnings per share

A) is easy to manipulate.
B) may overstate the profitability of the company.
C) does not separate cash sales from credit sales on the income statement.
D) all of the above.

Question 72

In 2005, Joan had Cost of Goods of 58,358; in 2006, they were 65,069. On the last day 2005 her Inventory was 675, and on the last day of 2006 it was 1,559. What is the Inventory Turnover for Joan's Coffee Shop for 2006?

A) 58.25
B) 55.25
C) 41.74
D) 52.25

Question 73

The Handy Dandy Corporation has an income statement that indicates that Operating Income is $2,375,486 and Net Profit is $1,375,486. It currently has 2 million shares of common stock outstanding and does not issue preferred stock. What is this corporation's approximate Earnings per Share?

A) $0.69
B) $1.18
C) $0.46
D) $0.79
E) $0.19

Question 74

Earnings per share differs from operating cash flow per share in that

A) EPS uses less shares in its calculation than cash flow per share does.
B) EPS uses net income and operating cash flow uses actual cash flow per share.
C) EPS is a market ratio.
D) EPS uses the balance sheet and the income statement.

Question 75

If a company's stock currently sells in the marketplace for $55 per share, and the book value of this stock is $25 per share, what is the Price Earnings ratio if the Earnings per Share is $3.00?

A) 0.12
B) 0.05
C) 8.33
D) 18.33

Question 76

The Handy Dandy Corporation has an income statement that indicates that Operating Income is $2,375,486 and Net Profit is $1,375,486. It currently has 2 million shares of common stock outstanding and 1 million shares of preferred stock that pays a dividend of $1.00 per share. What is this corporation's approximate Earnings per Share?

A) $0.69
B) $0.19
C) $0.79
D) $1.18
E) $0.46

Question 77

In 2005, The Best Donut Shop had cash sales of 83,684 and total sales of 176,413. Accounts Receivable were 3,275. What was Accounts Receivable Turnover?

A) 28.31
B) 25.55
C) 53.37
D) 39.71

Question 78

In 2005, The Handy Catering Service had cash sales of 254,134, credit sales of 125,371, and total sales of 379,505. Accounts Receivable were 9,765. If there are 365 days in 2005, what was the Average Collection Period?

A) 18.78 days
B) 9.39 days
C) 28.43 days
D) 14.03 days
E) There is not enough information provided to answer this question.

Question 79

The balance sheet for Jim's Hardware has the following items listed. Current Liabilities, $25,345; Long -Term Debt, $100,000; Total Liabilities, $125,345; Total Assets, $325,490. What is the Debt to Equity Ratio for this company?

A) 0.385
B) 0.499
C) 0.307
D) 0.626
E) 0.198