Deck 12: Financial Statement Analysis

Question 1

A banker assessing a loan application and an equity analyst making an investment decision would perform the same type of analysis of a company.

Answer 1

True

Question 2

When analyzing companies that have diverse business activities, analysts should NOT rely on segmented information.

Answer 2

True

Question 3

Retrospective analysis is using the past to predict future trends.

Answer 3

False

Question 4

An investment analyst will analyze the company's results relative to other companies.

Question 5

Trend analysis is used to examine one period of a company's information.

Question 6

Times series analysis compares the data from one company with the data from another company.

Question 7

The objective of MD&A is to allow the user to see the company through the eyes of management.

Question 8

Historical results CANNOT be used as a foundation for predicting future outcomes.

Question 9

Financial statement users value the auditors' opinion as the auditor is an independent third party.

Question 10

Cross-sectional analysis compares data from one company with those of another company over many periods.

Question 11

A company is required to disclose information related to the segment(s) in a note to the financial statements if it has only one distinctive operating segment.

Question 12

The auditor's report guarantees the accuracy of the information presented in the financial statements.

Question 13

Retrospective analysis reviews past trends in order to help predict the future.

Question 14

When a company operates in different geographic locations this is known as operating segments.

Question 15

It is important that the conclusion of an analysis differentiates between factual results and the analysts' opinion.

Question 16

An investment analyst will only focus on historic results as future growth will not impact shareholder decisions.

Question 17

The audit report guarantees the accuracy of financial information contained in the financial statements.

Question 18

Analyzing financial data on the same company over time is called cross-sectional analysis.

Question 19

Financial statement analysis is the process of evaluating a company's performance based on an analysis of their financial statements.

Question 20

Prospective analysis is known as a forward-looking analysis.

Question 21

Analysts use financial statements for their analysis for all of the following reasons EXCEPT

A) corporate performance.
B) employee satisfaction.
C) lending decisions.
D) risks related to the investment.

Question 22

Ratios are more conclusive than attention directing.

Question 23

Which of the following best represents a company following the product differentiation strategy?

A) gourmet grocery store
B) discount grocery store
C) discount retailer
D) dollar store

Question 24

Which one of the following steps adds the most value to an analysis?

A) determine the purpose of the analysis
B) develop conclusions
C) analyze and interpret the ratios
D) prepare common-size analysis

Question 25

Product differentiation strategy is to

A) provide superior service at a premium price.
B) provide superior service at a low price.
C) provide regular service at a low price.
D) provide regular service at a high price.

Question 26

Why is the audit report important in the analysis of a company?

A) It guarantees the accuracy of the information in the financial statements.
B) It guarantees the accuracy of the internal controls of the company.
C) The auditors are hired by management to assess the appropriateness of the accounting policies chosen.
D) The auditors are an independent third party expressing an opinion on the fairness of the financial statements.

Question 27

Common-size analysis involves converting the percentage values in the financial statements to dollar values.

Question 28

An analysis can be performed by a(n)

A) credit rating agency.
B) potential investors.
C) creditors.
D) all of the above.

Question 29

Ratios exhibit the relationship between figures from year to year and the reason for the changes year to year.

Question 30

A low-cost producer focuses on

A) providing goods and services at highest possible costs and selling at high prices.
B) providing goods and services at lowest possible costs and selling at high prices.
C) providing goods and services at highest possible costs and selling at low prices.
D) providing goods and services at lowest possible costs and selling at low prices.

Question 31

Common-size income statement analysis uses net revenues as a base for all percentages.

Question 32

An analysis would include

A) calculating ratios.
B) looking at relationships with the financial statements.
C) comparing results with industry benchmarks.
D) all of the above.

Question 33

The auditor's report confirms that

A) the financial statements are error free.
B) the information contained in the auditor's report is negative information.
C) the statements present fairly the financial condition of a company.
D) the auditor has qualifications to make on the information.

Question 34

Return on equity is a measure of performance from management's perspective.

Question 35

Place the following steps involved in financial statement analysis in the proper order: I. Determine the purpose and context of the analysis
II) Develop conclusions and recommendations
III) Collect information needed for the analysis
IV) Analyze and interpret the metrics
V) Prepare common-size analysis and calculate ratios

A) I, III, V, IV, II
B) I, II, III, IV, V
C) V, I, III, IV, II
D) IV, III, V, I, II

Question 36

Which of the following best represents a low-cost producer?

A) gourmet grocery store
B) discount grocery store
C) high end retailer
D) specialty store

Question 37

Ratio analysis provides a complete picture of the general financial health and wellbeing of a company.

Question 38

Fully diluted earnings per share is a worst case scenario.

Question 39

In order to understand a company's business, an analyst must understand the corporation's strategy. Which of the following is an example of a corporate strategy?

A) being a high-cost producer
B) following product simplification
C) being a low-cost producer
D) being a low-volume producer

Question 40

Common-size analysis is useful for making comparisons across the various financial statements.

Question 41

Which of the following depicts earnings per share?

A) Net income ÷ number of common shares
B) Net income ÷ weighted average number of common shares
C) (Net income - preferred dividend) ÷ weighted average number of common shares
D) (Net income - preferred dividend) ÷ number of common shares

Question 42

The analysis of financial statements to assist in predicting future results is an example of

A) historical analysis.
B) retrospective analysis.
C) retroactive analysis.
D) prospective analysis.

Question 43

On a common-size income statement, all items are shown as

A) percentages of net income.
B) percentages of total assets.
C) percentages of gross revenue.
D) percentages of gross profit.

Question 44

Consider the following income statement data for Odem Inc.:
Based on common-size analysis, which of the following statements is correct?

A) The increase in sales revenue in 2016 was caused by higher selling and administrative expenses.
B) The company's cost to sales ratio improved in 2016.
C) The increase in gross profit in 2016 was due to increased sales.
D) Net income as a percent of sales declined in 2016.

Question 45

How are prepaid accounts used in each of the following ratios?

Question 46

Given the following data: sales $1,500,000; gross profit $640,000; net income $40,000 and income tax expense $35,000. What is the common-size percentage for the cost of sales?

A) 3.0%
B) 37.7%
C) 42.7%
D) 57.3%

Question 47

Which of the following is NOT an example of cross sectional analysis?

A) determining how the growth in sales from one company differed from that of another company
B) comparing growth in sales across different industries
C) determining the growth in sales for a company over a five-year period
D) comparing total sales across companies in the same industry for the past three years

Question 48

Cross-sectional analysis involves examining a company's financial data

A) across account classifications.
B) as percentages of net sales or total assets.
C) and comparing it with other companies.
D) across time periods.

Question 49

Which of the following is a short-term liquidity ratio?

A) debt/equity ratio
B) profit margin ratio
C) quick ratio
D) return on assets ratio

Question 50

EBITDAR is best described as

A) earnings before income, taxes, depreciation, acquisitions and restructuring.
B) earnings before interest, taxes, depreciation, acquisitions and restructuring.
C) earnings before income, taxes, discounts, acquisitions and restructuring.
D) equity before interest, taxes, depreciation, acquisitions and restructuring.

Question 51

Which of the following descriptions best describes trend analysis?

A) converting dollar values on the financial statements to percentages of a specific base amount
B) comparing data from one company to with those of another company over the same period
C) examining company information from multiple periods
D) using historical information as a basis for predicting future outcomes

Question 52

Which of the following is NOT a general category of ratios?

A) performance
B) short-term liquidity
C) long-term liquidity
D) financial leverage

Question 53

To see if a company's cost of sales is increasing proportionately with sales, an analyst would use

A) raw financial data.
B) common-size analysis.
C) trend analysis.
D) prospective analysis.

Question 54

Consider the following income statement data for Odem Inc.:
The common-size percentage for selling and administration costs in 2016 was

A) 21.2%.
B) 23.1%.
C) 43.5%.
D) 77.0%.

Question 55

Review of the financial statements revealed the following for Glitter Inc.: Sales $1,250,000, Net income $37,500, Total assets $650,000, Long-term debt $750,000, Interest expense $65,000 and Cost of goods sold $775,000. When preparing common-size financial statements, interest expense would be shown as

A) 10.0%.
B) 9.3%.
C) 8.4%.
D) 5.2%.

Question 56

Given the following data: sales $1,500,000; gross profit $640,000; net income $40,000 and income tax expense $35,000. What is the common-size percentage for operating expenses?

A) 37.7%
B) 42.7%
C) 95.0%
D) 97.3%

Question 57

Ratios are useful in explaining the

A) relationships between financial data.
B) differences between companies.
C) trends within industries.
D) reasons for financial performance.

Question 58

An analytical tool for comparing two companies of different sizes is

A) common-size statements.
B) short-term liquidity.
C) financial leverage.
D) performance.

Question 59

Which of the following descriptions best describes cross-sectional analysis?

A) converting dollar values on the financial statements to percentages of a specific base amount
B) comparing data from one company to with those of another company over the same period
C) examining company information from multiple periods
D) using historical information as a basis for predicting future outcomes

Question 60

Purchase of inventory for cash will

A) increase the current ratio.
B) decrease the current ratio.
C) increase the quick ratio.
D) decrease the quick ratio.

Question 61

Which of the return on investment ratios would be of most interest to the management of a firm?

A) return on assets
B) return on debt
C) return on equity
D) return on profits

Question 62

Two companies have an identical amount of current assets and current liabilities. Chelmsford Inc. has 40% of its current assets invested in inventory, whereas Hanmer Corp. has 30% of its current assets invested in inventory. Which of the following statements is true?

A) Chelmsford will have the higher quick ratio.
B) Chelmsford will have the higher current ratio.
C) The companies are equally liquid because their current ratios are the same.
D) Chelmsford is less liquid than Hanmer.

Question 63

The return on assets ratio could be used for a(n)

A) financing decision.
B) liquidity decision.
C) investment decision.
D) debt-to-equity decision.

Question 64

Which of the following companies would be least likely to calculate accounts receivable turnover ratios?

A) a restaurant
B) a construction company
C) a consulting firm
D) an insurance office

Question 65

When preparing common-size analysis of a statement of income, the base is normally

A) Net income.
B) Operating expenses.
C) Revenues.
D) Cost of goods sold.

Question 66

Changes in the profit margin ratio could indicate changes in any of the following EXCEPT changes in

A) sales volume.
B) product profitability.
C) the cost structure.
D) the pricing policy.

Question 67

Which of the following depicts the quick ratio?

A) (cash + accounts receivable + short-term investments) ÷ current liabilities
B) (cash + accounts receivable) ÷ total assets
C) (current assets - current liabilities) ÷ total assets
D) (cash + inventory) ÷ current liabilities

Question 68

All of the following measure activity except for

A) accounts receivable turnover.
B) inventory turnover.
C) equity turnover.
D) accounts payable turnover.

Question 69

Which of the return on investment ratios would be of most interest to the owners of a company?

A) return on assets
B) return on interest
C) return on debt
D) return on equity

Question 70

Which of the following descriptions best describes common-size analysis?

A) converting dollar values on the financial statements to percentages of a specific base amount
B) comparing data from one company to with those of another company over the same period
C) examining company information from multiple periods
D) using historical information as a basis for predicting future outcomes

Question 71

Use the following information for questions 80-81.
The following data was taken from the accounting records of Whalen Corporation:
The return on equity for 2016 is

A) 20.0%.
B) 21.4%.
C) 26.7%.
D) 46.7%.

Question 72

Lenders would be most concerned with

A) debt to equity ratio.
B) EPS.
C) inventory turnover.
D) price earnings ratio.

Question 73

Review of the financial statements revealed the following for Glitter Inc.: Sales $1,250,000, Net income $37,500, Total assets $650,000, Long-term debt $750,000, Interest expense $65,000 and Cost of goods sold $775,000. What is the Glitter's gross profit margin closest to?

A) 3%
B) 38%
C) 52%
D) 62%

Question 74

Use the following information for questions 80-81.
The following data was taken from the accounting records of Whalen Corporation:
The return on assets for 2016 is

A) 15.6%.
B) 16.5%.
C) 17.4%.
D) 18.5%.

Question 75

Which of the following represents the debt/equity ratio?

A) total liabilities ÷ total shareholders' equity
B) total liabilities ÷ (total liabilities + shareholders' equity)
C) total liabilities ÷ (total assets - shareholders' equity)
D) total long-term liabilities ÷ (total long-term liabilities + shareholders' equity)

Question 76

Use the following information for questions 83-85.
Luminus Corporation's books revealed the following for 2016 and 2015:
The current ratio for the 2016 year-end is

A) 2.85.
B) 2.62.
C) 1.29.
D) 1.02.

Question 77

Which of the following depicts the current ratio?

A) (current assets - inventory) ÷ current liabilities
B) currents assets ÷ total assets
C) (current assets - inventory) ÷ total assets
D) current assets ÷ current liabilities

Question 78

Use the following information for questions 83-85.
Luminus Corporation's books revealed the following for 2016 and 2015:
The quick ratio for the 2016 year-end is

A) 1.99.
B) 1.69.
C) 1.52.
D) 1.29.

Question 79

Consider the following income statement data for Odem Inc.: What was the 2016 net profit margin before income tax closest to?

A) 16.8%
B) 23.1%
C) 30.0%
D) 53.1%

Question 80

Use the following information for questions 83-85.
Luminus Corporation's books revealed the following for 2016 and 2015:
The number of days to collect the average receivable in 2016 was

A) 28 days.
B) 29 days.
C) 30 days.
D) 31 days.