Deck 9: Analyzing Financial Statements

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

Standards for comparison of performance are necessary when making judgments about a company's performance.

Answer 3

True

Question 4

Intercompany analysis is based on internal comparisons.

Question 5

Financial statement analysis is the application of analytical tools to general-purpose financial statements and related data for making business decisions.

Question 6

Financial statement analysis lessens the need for expert judgment.

Question 7

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

Question 8

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

Question 9

Liquidity and efficiency are considered to be building blocks of financial statement analysis.

Question 10

A trend percent is calculated by dividing the analysis period amount by the base period amount and multiplying the result by 100.

Question 11

The purpose of financial statement analysis for internal users is to provide information helpful in improving the company's efficiency or effectiveness in providing products or services.

Question 12

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

Question 13

External users of accounting information are often directly involved in running a company.

Question 14

Standards for comparison for interpreting financial statement analysis include: intracompany,credit standing,and industry.

Question 15

Guidelines or rules of thumb should be always be applied in financial analysis.

Question 16

Analysis measures taken from a selected competitor or group of competitors are often the best standards of comparisons.

Question 17

Evaluation of company performance includes (1)past and current performance,(2)current financial position,and (3)future performance and risk.

Question 18

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

Question 19

General-purpose financial statements include the (1)income statement,(2)balance sheet,(3)statement of changes in equity,(4)statement of cash flows,and (5)notes related to the statements.

Question 20

A company's board of directors analyzes financial statements to assess future company prospects for investing and lending decisions.

Question 21

Return on total assets is a profitability measure.

Question 22

Vertical analysis includes tools used to compare a company's financial condition and performance across time.

Question 23

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

Question 24

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

Question 25

Because debt can have the effect of increasing the return to shareholders,the use of debt is sometimes described as financial leverage.

Question 26

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

Question 27

Working capital is current liabilities minus current assets.

Question 28

Seinfield Corporation had cash of $16,000 and total assets of $178,300.The common-size percent for cash was 7.85%.

Question 29

For trend analysis,the percent change is completed 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 30

Analysis of a single financial item is important but is of limited value.

Question 31

An advantage of common-size statements is that they reflect the relative sizes of companies under analysis.

Question 32

A traditional rule of thumb for an acceptable acid-test ratio and current ratio is 2 to 1 for the current ratio and 1 to 1 for the acid-test ratio.

Question 33

Ratios,like other analytical tools,are usually historically oriented.

Question 34

Graphical analysis is useful in assessing sources of financing and identification of investing activities.

Question 35

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

Question 36

When a company goes into debt,the debt ratio provides information about the risk created for the company's owners and lenders.

Question 37

Ratios can be expressed as a percent,rate,or proportion.

Question 38

Kreuger Corp has earnings per share of $4.50,dividends per share of $0.85,and a market price of $64.75.Its dividend yield is 21.4%.

Question 39

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

Question 40

The larger the times interest earned ratio,the greater the risk a company incurs.

Question 41

Off the Record's current ratio is.9 to 1.The industry average current ratio is 1.2.Off the Record does not have a problem in covering liabilities because of its strong sales and position in its industry.

Question 42

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

Question 43

Profit margin reflects the portion of profit in each dollar of revenue.

Question 44

The higher the debt ratio the higher the level of risk of not being able to meet obligations.

Question 45

The acid-test ratio is also called the quick ratio.

Question 46

When evaluating the profit margin of a sole proprietorship,the formula should be modified by subtracting owner's equity from profit.This will factor in the value of the owner's efforts in running the business.

Question 47

The acid-test ratio is a more accurate measure of a company's liquidity than the current ratio.

Question 48

Profit margin measures the relationship of debt to assets.

Question 49

Off the Record's quick assets are $127,000.With current liabilities of $143,000,Off the Record's acid-test ratio is 1.03 to 1.

Question 50

The common rule of thumb is that a company's acid-test ratio should be at least 1.5 to 1.

Question 51

The debt ratio is calculated by dividing total assets by total liabilities.

Question 52

Accounts payable turnover is a measure of liquidity.

Question 53

David Company had assets of $13,500,000,profit of $3,900,000,and net sales of $167,155,000.Its profit margin was 2.3%.

Question 54

Quick assets include cash,inventory,and receivables.

Question 55

Stride Rite has liabilities of $112 million and total assets of $350 million.Its debt ratio is 30.4%.

Question 56

Profit margin is calculated by dividing revenues by profit.

Question 57

Maggis has current assets of $19,000 and current liabilities of $9,500.Its current ratio is 1.6 to 1.

Question 58

The current ratio is used to evaluate the ability of a business to meet its short-term obligations.

Question 59

Chicago's Best has current assets of $100 million and current liabilities of $50 million.Its current ratio is .63 to 1.

Question 60

The acid-test ratio is current assets divided by current liabilities.

Question 61

The days' sales uncollected ratio measures the liquidity of receivables.

Question 62

The days' sales in inventory is calculated by dividing ending inventory by cost of goods sold and multiplying the result by 365.

Question 63

The profit margin ratio is gross profit divided by net sales.

Question 64

Power Co.had $750,000 in accounts receivable and $2,800,000 in net sales for the period.Its days' sales uncollected was 29.8.

Question 65

The days' sales uncollected ratio is calculated by dividing accounts receivable by net sales and multiplying the answer by 365.

Question 66

The gross profit ratio measures the relationship between sales and cost of goods sold.

Question 67

Popeye Supply's current ratio is 3 to 1.Its quick ratio is 2 to 1.Popeye Supply is a good credit risk because the ratios reveal no liquidity problem.

Question 68

Chicago Company's cost of goods sold was $19,250.Its average merchandise inventory was $4,575.Its merchandise turnover was 4.2.

Question 69

Accounts receivable turnover shows how often a company converts its average accounts receivable balance into cash during the period.

Question 70

The merchandise turnover ratio is calculated by dividing average merchandise inventory by cost of goods sold.

Question 71

A company must have less than 30 days' sales uncollected in order to have enough liquidity.

Question 72

A merchandising company's ability to pay its short-term obligations depends on how quickly it sells its merchandise inventory.

Question 73

The gross margin ratio is gross profit divided by net sales.

Question 74

The merchandise turnover ratio is used to measure profitability.

Question 75

TSN had $12,000 in accounts receivable and $320,000 in net sales for the period.Its days' sales uncollected was 13.7 days.

Question 76

Sleep Sack had net sales of $650,500,its cost of goods sold was $357,000,and its profit was $13,750.The gross margin ratio was 45.1%.

Question 77

The days' sales uncollected ratio measures a company's ability to manage its debt.

Question 78

Holding Co.had cost of goods sold of $600,000.Its ending inventory was $200,000.Therefore,its days' sales in inventory was 90 days.

Question 79

Needle Co.had net sales of $28 million,cost of goods sold of $16 million,and profit of $8 million.Its gross margin ratio was 3.4%.

Question 80

The two basic components to operating efficiency are current ratio and return on total assets.