Question 1

The primary objective of external financial reporting is to:
A)enhance the ability of the company to acquire financial capital from external sources.
B)accurately provide financial results for tax purposes.
C)comply with external regulations and requirements of government and professional associations.
D)provide useful information to decision makers,especially investors and creditors.

Accepted Answer

The primary objective of external financial reporting is to provide useful information to decision makers, especially investors and creditors, to allow them to make informed decisions about whether to provide financial capital to the company. Compliance with external regulations and requirements is important, but it is not the primary objective. Accurately providing financial results for tax purposes is important, but it is not the primary objective of external financial reporting.

Question 2

Which of the following statements is not true?
A)Horizontal analyses help financial statement users recognize changes that unfold over time.
B)Vertical analyses focus on relationships between items on the same financial statement.
C)Ratio analyses focus on relationships between items on one or more of the financial statements.
D)Horizontal analyses help financial statement users recognize changes that occur between companies.

Accepted Answer

Horizontal analyses compare changes over time within a single company's financial statements, not changes between different companies.

Question 3

Vertical analysis:
A)identifies the relative contribution made by each financial statement line item.
B)identifies trends over time.
C)provides an understanding of the relationships among various items on financial statements by expressing the differences in terms of dollars.
D)involves comparing amounts across different financial statements.

Accepted Answer

Vertical analysis involves expressing each line item on a financial statement as a percentage of a base amount. This allows for a comparison of the relative contribution made by each line item to the overall financial picture of the company.

Question 4

Often loan agreements require the borrower to comply with certain requirements,such as maintaining a particular current ratio or limiting future borrowing.To decide if a company has complied with its loan covenants,a creditor would look at the company's:
A)financial statements.
B)chart of accounts.
C)bank statements.
D)charter.

Accepted Answer

Loan covenants are typically based on financial measures or ratios, which are reflected in the company's financial statements. Therefore, a creditor would look at the company's financial statements to determine if it has complied with its loan covenants. Chart of accounts and bank statements may also be useful, but the primary source of information would be the financial statements. The charter is a legal document that outlines the purpose and structure of the company, but it would not provide information on the company's financial performance or compliance with loan covenants.

Question 5

The fixed asset turnover ratio is a profitability ratio.

Accepted Answer

The fixed asset turnover ratio measures how efficiently a company is generating revenue from its fixed assets and is therefore a measure of profitability.

Question 6

Which of the following analysis techniques does not pertain to changes over time?
A)Trend analysis
B)Horizontal analysis
C)Time-series analysis
D)Vertical analysis

Accepted Answer

Vertical analysis is a technique that compares items on a financial statement to a base item to evaluate the relative size of each item. It does not pertain to changes over time. The other three techniques (trend analysis, horizontal analysis, and time-series analysis) all involve analyzing changes over time.

Question 7

The general goal of horizontal analyses is to identify significant trends.

Accepted Answer

Horizontal analysis compares financial data over time to identify trends or changes in performance. Therefore, the general goal of horizontal analysis is to identify significant trends.

Question 8

A company with a high inventory turnover requires a larger investment in inventory than another company of similar sales with a lower inventory turnover.

Accepted Answer

A company with a higher inventory turnover requires a smaller investment in inventory because it is selling and replenishing its inventory more quickly, allowing for a faster turnover of inventory.

Question 9

Horizontal analysis:
A)is used to identify trends over time.
B)identifies the relative contribution made by each financial statement line item.
C)provides an understanding of the relationships among various items on financial statements.
D)involves comparing amounts across different financial statements.

Accepted Answer

Horizontal analysis is a technique used to compare financial data over a certain period of time to identify trends and changes. Therefore, option A is the best choice. The other options, B, C, and D are not accurate descriptions of horizontal analysis.

Question 10

Horizontal analysis involves:
A)Comparing individual financial statement line items with each other to understand the relationships between line items.
B)Comparing individual financial statement line items to some benchmark,typically similar competitors' financial statement line items.
C)Comparing individual financial statement line items over time.
D)Comparing individual financial statement line items that have been arranged horizontally from highest to lowest dollar amounts.

Accepted Answer

Horizontal analysis involves comparing individual financial statement line items over time. This allows for the identification of trends and changes in performance over time. Options A and B describe vertical analysis, while option D is not an accurate description of any type of financial analysis.

Question 11

Financial statement analysis is useful for:
A)evaluating a company's success in meeting the challenges that it faces.
B)selecting the most appropriate accounting rules to follow.
C)determining the market price of a company's stock.
D)comparing US companies with foreign companies.

Accepted Answer

Financial statement analysis helps to evaluate a company's success in meeting the challenges it faces by analyzing its financial statements, ratios, and other metrics to determine its financial health and performance. It can help identify strengths and weaknesses and provide useful information for decision-making. While financial analysis can also provide information for selecting accounting rules to follow and comparing companies with their foreign counterparts, its primary purpose is to evaluate a company's performance. The market price of a company's stock is affected by many factors beyond financial performance and is not the primary purpose of financial statement analysis.

Question 12

Benchmarks are useful when evaluating a company's performance.

Accepted Answer

Benchmarks provide a standard of comparison for a company's performance, allowing for a more comprehensive evaluation of its strengths and weaknesses in relation to its competitors or industry peers.

Question 13

The lower the receivables turnover,the slower accounts receivable are being collected.

Accepted Answer

The receivables turnover ratio measures how quickly a company collects its accounts receivable. A lower turnover implies that the company is taking longer to collect its outstanding payments.

Question 14

Trend data can be measured in dollar amounts or percentages.

Accepted Answer

Trend data can be measured in both dollar amounts and percentages depending on the context and purpose.

Question 15

Horizontal analysis is the comparison of each financial statement amount to another amount on the same financial statement.

Accepted Answer

Horizontal analysis involves comparing financial statement amounts over different periods, typically by calculating the percentage change from one period to the next, rather than comparing amounts within the same financial statement.

Question 16

The higher the times interest earned ratio,the greater the risk of nonpayment of interest.

Accepted Answer

The higher the times interest earned ratio, the lower the risk of nonpayment of interest.

Question 17

Vertical analysis is the comparison of a company's financial information over time.

Accepted Answer

Vertical analysis is a method of financial statement analysis in which each entry for each of the three major categories of accounts (assets, liabilities, and equities) in a balance sheet is represented as a proportion of the total account. This technique shows the relationship between individual financial statement items and total sales or total assets, rather than comparing financial information over time, which is done in horizontal analysis.

Question 18

If the debt-to-assets ratio is 0.73,it means that 73% of the company's financing has been provided by stockholders' equity.

Accepted Answer

The debt-to-assets ratio is calculated by dividing total liabilities by total assets. Therefore, the ratio of 0.73 means that 73% of the company's financing has been provided by debt, not stockholders' equity.

Question 19

Liquidity measures the ability of a company to meet its long-term financial obligations.

Accepted Answer

Liquidity measures a company's ability to meet their short-term financial obligations, not their long-term financial obligations. Long-term obligations are typically measured by solvency ratios.

Question 20

If earnings per share (EPS)increases,it must mean that the company's net income has increased.

Accepted Answer

An increase in EPS does not solely depend on an increase in net income; it can also result from a decrease in the number of outstanding shares due to share buybacks or other factors.

Quiz 13: Measuring and Evaluating Financial Performance

The primary objective of external financial reporting is to:

Which of the following statements is not true?

Vertical analysis:

Often loan agreements require the borrower to comply with certain requirements,such as maintaining a particular current ratio or limiting future borrowing.To decide if a company has complied with its loan covenants,a creditor would look at the company's: