Deck 17: Financial Statement Analysis

Question 1

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.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

If a company has sales of $110,000 in 2012 and $154,000 in 2013, the percentage increase in sales from 2012 to 2013 is 40%.

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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 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

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

Question 12

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

Question 13

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

Question 14

A vertical analysis can compare companies of differing sizes.

Question 15

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

Question 16

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%.

Question 17

Horizontal analysis is also known as common size analysis.

Question 18

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

Question 19

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 20

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

Question 21

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

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

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

Question 24

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

Question 25

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 26

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

Question 27

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 28

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

Question 29

Debt to Total Assets is a ratio which measures a company's solvency.

Question 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

Current Ratio is total assets divided by total liabilities.

Question 36

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 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

Most companies with stable earnings have a low payout ratio.

Question 42

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 43

Short-term creditors are usually most interested in evaluating

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

Question 44

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

Question 45

Comparisons of financial data made within a company are called

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

Question 46

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

Question 47

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

Question 48

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

Question 49

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 50

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 51

A company can never have negative earnings per share.

Question 52

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

Question 53

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

Question 54

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

Question 55

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 56

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

Question 57

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

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

Question 58

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.

Question 59

Shareholders are most interested in evaluating

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

Question 60

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 61

Horizontal analysis is also known as

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

Question 62

Horizontal analysis is used mainly in

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

Question 63

In performing a vertical analysis, a 10% increase in net sales combined with an 8% increase in total expenses will cause profit to

A) increase by 10%.
B) decrease by 10%.
C) increase by 2%.
D) decrease by 2%.

Question 64

A ratio calculated in the analysis of financial statements

A) expresses a mathematical relationship between two numbers.
B) shows the percentage increase from one year to another.
C) restates all items on a financial statement in terms of dollars of the same purchasing power.
D) is meaningful only if the numerator is greater than the denominator.

Question 65

A liquidity ratio measures the

A) operating success of a company over a period of time.
B) ability of a company to survive over a long period of time.
C) short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash.
D) number of times interest is earned or "covered".

Question 66

Under which of the following cases 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 67

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 68

In performing a vertical analysis for a merchandising company, the base for sales returns and allowances is

A) sales.
B) cost of goods sold.
C) net sales.
D) total revenues.

Question 69

Vertical analysis is also known as

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

Question 70

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 71

Assume the following sales data for a company: $$\begin{array} { l r } 2015 & \$ 1,000,000 \\2014 & 900,000 \\2013 & 750,000 \\2012 & 500,000\end{array}$$ If 2012 is the base year, what is the percentage increase in sales from 2012 to 2014?

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

Question 72

In performing a vertical analysis for a service company, the base for salaries expense is

A) total selling expenses.
B) revenues.
C) total revenues.
D) total expenses.

Question 73

Winter Clothing Store had a balance in the Accounts Receivable account of $780,000 at the beginning of the year and a balance of $820,000 at the end of the year. Net credit sales during the year amounted to $5,840,000. The collection period of the receivables was

A) 30 days.
B) 365 days.
C) 100 days.
D) 50 days.

Question 74

Pine Hardware Store had net credit sales of $3,900,000 and cost of goods sold of $3,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $600,000 and $700,000, respectively. The receivables turnover ratio was

A) 5.6 times.
B) 6.5 times.
C) 4.6 times.
D) 6 times.

Question 75

The current ratio is

A) calculated by dividing current liabilities by current assets.
B) used to evaluate a company's liquidity and short-term debt-paying ability.
C) used to evaluate a company's solvency and long-term debt-paying ability.
D) calculated by subtracting current liabilities from current assets.

Question 76

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 77

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 78

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 79

Vertical analysis is a technique which 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 80

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.