Deck 17: Analyzing Financial Statements

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

Financial statement analysis lessens the need for expert judgment.

Question 7

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

Question 8

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

Question 9

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

Question 10

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 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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 18

Intercompany analysis is based on internal comparisons.

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

Return on total assets is a profitability measure.

Question 24

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

Question 25

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

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

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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 35

For trend analysis, the percent change is completed by subtracting the analysis periodamount from the base period amount, dividing the result by the base period amount and multiplying that result by 100.

Question 36

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 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

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

Question 42

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

Question 43

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

Question 44

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

Question 45

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 46

Maggis has current assets of $19,000 and current liabilities of $9,500. Its current ratio is1.6 to 1.

Question 47

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

Question 48

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

Question 49

Quick assets include cash, inventory, and receivables.

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

Question 52

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 53

Profit margin is calculated by dividing revenues by profit.

Question 54

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 andposition in its industry.

Question 55

Accounts payable turnover is a measure of liquidity.

Question 56

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

Question 57

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

Question 58

Profit margin measures the relationship of debt to assets.

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

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

Question 61

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

Question 62

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

Question 63

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

Question 64

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

Question 65

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 66

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

Question 67

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

Question 68

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

Question 69

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 70

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 71

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 72

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

Question 73

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

Question 74

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 75

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

Question 76

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 77

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

Question 78

The merchandise turnover ratio is used to measure profitability.

Question 79

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

Question 80

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