Deck 10: Financial Statement Analysis

Question 1

Meaningful analysis of financial statements will include either horizontal or vertical analysis, but NOT both.

Answer 1

False

Question 2

Horizontal analysis evaluates financial statements by expressing each item in a financial statement as a percentage of the base amount.

Answer 2

False

Question 3

If the base-year revenue is $ 8,606 and the increase between the past year and the current year is 515, then the revenue increased by 6%.

Answer 3

True

Question 4

Industry averages are used to compare companies within the same industry.

Question 5

Horizontal analysis is also known as common size analysis.

Question 6

Non-financial information may include a discussion of a company's mission, goals, objectives, and its market position.

Question 7

Investors will want to assess the probability of receiving a dividend and the growth potential of the share price of the company.

Question 8

In a horizontal analysis, if there is a negative amount in the base year and a positive amount in the next year, then no percentage change can be calculated.

Question 9

An intercompany comparative analysis involves comparing an item or financial relationship of one company with the same item or relationship in one or more competing companies.

Question 10

In a vertical analysis of a merchandising company, all items on the income statement are expressed as a percentage of net sales.

Question 11

Vertical analysis evaluates financial statement data over different periods of time.

Question 12

If a company has sales of $ 110,000 in 2020 and $ 154,000 in 2021, the percentage increase in sales from 2020 to 2021 is 40%.

Question 13

A borrower's liquidity is very important in evaluating the safety of a long-term loan.

Question 14

In a vertical analysis of the balance sheet, all items are expressed as a percentage of total assets.

Question 15

A long-term lender would look at the company's solvency to determine a company's ability to survive a long period of time.

Question 16

Horizontal analysis will measure the percentage change over two or more periods.

Question 17

The vertical percentage formula divides the analysis amount by the base amount.

Question 18

When a company is compared on an intracompany basis, the company will compare its ratios with other companies in the same industry.

Question 19

The objective to financial reporting is to provide capital providers useful information for decision making.

Question 20

In a horizontal analysis, if an item has a small value in the base year and a large value in the next year, the percentage change will NOT be meaningful.

Question 21

If a company has an acid-test ratio significantly higher than the current ratio, it means that the company has a significant amount of inventory.

Question 22

The higher the percentage of total debt to total assets, the greater the risk that the company will be unable to meet its maturing obligations.

Question 23

The term "vertical analysis" means that we view financial statement data from up to down (or down to up) across more than one period.

Question 24

The inventory turnover measures the average number of times that the inventory is sold during the period.

Question 25

Generally, the faster inventory is sold, the more cash there is tied up in inventory and the higher chance there is of inventory becoming obsolete.

Question 26

Ratio analysis expresses the relationship among selected items of financial statement data.

Question 27

The three categories used to measure a company are ratios, which analyze a company's liquidity, profitability, and permanency.

Question 28

If the current assets are $ 841,000 and the current liabilities are $ 541,000 then the current ratio of the company is 1.55:1.

Question 29

Profitability ratios measure a company's ability to survive over a long period of time.

Question 30

Debt to total assets is a ratio which measures a company's solvency.

Question 31

Solvency ratios are used to measure a company's short-term ability to pay its maturing obligations and to meet unexpected needs for cash.

Question 32

A current ratio of 2:1 means that for every $ 1 of current assets, the company has $ 2 of current liabilities.

Question 33

A vertical analysis can compare companies of differing sizes.

Question 34

A higher receivable turnover than last year means that the company is collecting their receivable slower this year than last year.

Question 35

The collection period for accounts receivable is calculated by dividing 365 days by the receivables turnover.

Question 36

Current ratio is total assets divided by total liabilities.

Question 37

The interest coverage ratio gives an indication of a company's ability to make its interest payments as they come due.

Question 38

A vertical analysis of a servicing company will have all items on the income statement expressed as a percentage of revenue.

Question 39

From a lender's point of view, a high ratio of debt to total assets is desirable.

Question 40

The receivables turnover is used to assess the liquidity of the accounts receivable.

Question 41

Gross profit margin is the profit of a company divided by its net sales.

Question 42

The payout ratio measures the percentage of profit distributed as cash dividends.

Question 43

Most companies with stable earnings have a low payout ratio.

Question 44

Free cash flow is the amount of excess cash a company generates after paying to maintain its current physical plant.

Question 45

Profitability ratios measure a company's operating success for a specific period of time.

Question 46

Which of the following is NOT commonly used as a tool of analysis?

A) productive capacity analysis
B) vertical analysis
C) horizontal analysis
D) ratio analysis

Question 47

A company's financial information can best be analyzed by ignoring the external information that may affect the company.

Question 48

Short-term creditors are usually most interested in evaluating

A) solvency.
B) liquidity.
C) marketability.
D) profitability.

Question 49

Which one of the following is NOT a characteristic generally evaluated in analyzing financial statements?

A) liquidity
B) profitability
C) marketability
D) solvency

Question 50

Free cash flow refers to the amount of excess cash it generates after paying to maintain its current productive capacity.

Question 51

Earnings per share is only expressed in terms of the common shares, NOT the preferred shares.

Question 52

Investors who are interested in purchasing a company's shares for growth potential will be interested in companies with a low payout ratio.

Question 53

In analyzing the financial statements of a company, a single item on the financial statements

A) should be reported in bold-faced type.
B) is more meaningful if compared to other financial information.
C) is significant only if it is large.
D) should be accompanied by a footnote.

Question 54

Long-term creditors are usually most interested in evaluating

A) liquidity and solvency.
B) solvency and marketability.
C) liquidity and profitability.
D) profitability and solvency.

Question 55

Return on asset ratio is calculated as profit divided by average total assets.

Question 56

Earnings per share is a measure of the profit earned on each preferred share.

Question 57

A strong corporate governance process, including an active board of directors and audit committee, is essential to ensuring the quality of information.

Question 58

Investors who are interested in purchasing company shares for the income potential will be interested in a company with a high payout ratio.

Question 59

Asset turnover measures how efficiently a company uses its sales to generate assets.

Question 60

A company can NEVER have negative earnings per share.

Question 61

When horizontal analysis is used to measure the percentage change between any two periods of time, this is known as

A) horizontal percentage of the base-period amount.
B) horizontal analysis period amount.
C) horizontal base period amount.
D) horizontal percentage change for period.

Question 62

Under which of the following scenarios may a percentage change be calculated?

A) The trend of the balances is decreasing but all balances are positive.
B) There is no balance in the base year.
C) There is a negative balance in the base year and a negative balance in the subsequent year.
D) There is a negative balance in the base year and a positive balance in the subsequent year.

Question 63

Software Inc. reported revenue of $ 500,000 in 2022, $ 446,500 in 2021, and $ 458,000 in 2020. The trend percentage for 2022 revenue using 2020 as the base period is

A) 91.6%.
B) 109.2%.
C) 112.0%.
D) 97.5%.

Question 64

Vertical analysis is a technique that expresses each item within a financial statement

A) in dollars and cents.
B) in terms of a percentage of the item in the previous year.
C) in terms of a percent of a base amount.
D) starting with the highest value down to the lowest value.

Question 65

Horizontal analysis is a technique for evaluating financial statement data

A) within a period of time.
B) over a period of time.
C) on a certain date.
D) as it may appear in the future.

Question 66

Lovely Things Boutique reported revenue of $ 500,000 in 2021 and $ 446,500 in 2020. The horizontal percentage change from 2020 to 2021 is

A) 9%.
B) 10%.
C) 11%.
D) 12%.

Question 67

Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time

A) that has been arranged from the highest number to the lowest number.
B) that has been arranged from the lowest number to the highest number.
C) to determine which items are in error.
D) to determine the amount and/or percentage increase or decrease that has taken place.

Question 68

Assume the following sales data for a company: 2022 $ 1,000,000
2021 900,000
2020 750,000
2019 500,000
If 2019 is the base year, what is the percentage increase in sales from 2019 to 2021?

A) 100%
B) 180%
C) 80%
D) 55.5%

Question 69

Horizontal analysis is also known as

A) linear analysis.
B) vertical analysis.
C) trend analysis.
D) common size analysis.

Question 70

Shareholders are most interested in evaluating

A) liquidity and solvency.
B) profitability and solvency.
C) liquidity and profitability.
D) marketability and solvency.

Question 71

Comparison with industry averages for diversified companies has

A) less relevance than intracompany and intercompany comparisons.
B) more relevance than intracompany and intercompany comparisons.
C) the best results for investors.
D) the same amount of relevance as intracompany and intercompany comparisons.

Question 72

Vertical analysis is also known as

A) perpendicular analysis.
B) common size analysis.
C) trend analysis.
D) straight-line analysis.

Question 73

In performing a vertical analysis for a merchandising company, the base for sales on the income statement is

A) net sales.
B) total revenues.
C) profit.
D) cost of goods available for sale.

Question 74

Comparisons of financial data made within a company are called

A) intracompany comparisons.
B) interior comparisons.
C) intercompany comparisons.
D) intramural comparisons.

Question 75

A shareholder is interested in the ability of a firm to

A) pay consistent dividends.
B) appreciate in share price.
C) survive over a long period.
D) all of these

Question 76

Horizontal analysis is used mainly in

A) linear analysis.
B) intercompany analysis.
C) common size analysis.
D) intracompany analysis.

Question 77

Horizontal analysis is appropriately performed

A) only on the income statement.
B) only on the balance sheet.
C) only on the statement of retained earnings.
D) on all three of these statements.

Question 78

In performing a vertical analysis, the base for prepaid expenses is

A) total current assets.
B) total assets.
C) total liabilities and shareholders' equity.
D) prepaid expenses.

Question 79

An intracompany comparative analysis is the process of

A) comparing an item or financial relationship within a company in the current year with one or more prior years.
B) comparing an item or financial relationship within a company to the internally prepared master budget in order to highlight variances.
C) comparing an item or financial relationship of one company with historical data compiled by one or more competing companies.
D) comparing an item or financial relationship of one company with the same item or relationship in one or more competing companies.

Question 80

Intercompany comparisons are useful for understanding a company's

A) short-term goals.
B) ability to repay debt.
C) competitive position.
D) changes in financial relationships.