Deck 12: Financial Statement Analysis

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

Retrospective analysis is using the past to predict future trends.

Question 10

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

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

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

When a company operates in different geographic locations it is considered to have different operating segments.

Question 18

Prospective analysis is known as a forward-looking analysis.

Question 19

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

Question 20

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

Question 21

The diversity of operations can make it difficult to compare companies and also affects the trend analysis for the same company.

Question 22

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

Question 23

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

Question 24

Financial measures or ratios that are not prepared using information taken directly from these financial statements are referred to as or GAAP financial measures.

Question 25

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

Question 26

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

Question 27

Activity ratios help an analyst assess the company's management of its working capital.

Question 28

The current ratio should normally be 1.0 or less.

Question 29

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

Question 30

Activity ratios measure how efficiently or effectively a company is managing its short-term assets and short-term obligations.

Question 31

"Window dressing" is a term used when a company postpones transactions to produce a more desirable number to be used in ratio calculations.

Question 32

Free cash flow is a commonly used non-IFRS financial measure.

Question 33

The current ratio is an activity ratio.

Question 34

Fully diluted earnings per share is a worst case scenario.

Question 35

When calculating the EPS, the cumulative preferred dividends must be removed even if the dividends have not been declared and paid.

Question 36

Accounting policy choices will affect the financial statement but do not impact the ratios determined.

Question 37

Ratios are more conclusive than attention directing.

Question 38

Investors should be cautious when using non-IFRS financial measures and industry metrics because there are no standard definitions for these measures.

Question 39

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

Question 40

Non-IFRS financial measures can only be taken from unaudited financial information.

Question 41

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 42

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 43

EBITDAR is best described as

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

Question 44

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 45

Financial statement analysis can be performed by a(n)

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

Question 46

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 47

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 48

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 49

Financial statement 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 50

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 51

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 52

Historic financial results

A) help a lender determine the company's ability to service debt.
B) predict future cash flows with accuracy.
C) are not really needed for a financial analysis.
D) replace the need for financial projections.

Question 53

In accounting terms, the different business activities that the firm engages in or the different geographic regions it does business in are referred to as

A) operating activities.
B) business segments.
C) operating segments.
D) operating divisions.

Question 54

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 55

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 56

The descriptive sections of the annual report that provides insight into what the company does and the types of risks it faces is referred to as

A) the audit opinion.
B) the industry overview.
C) notes to the financial statements.
D) management discussion and analysis.

Question 57

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 58

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 59

Which one of the following steps adds the most value to a financial statement analysis?

A) Determine the purpose of the analysis.
B) Develop conclusions.
C) Analyze and interpret the ratios.
D) Prepare common-size analysis.

Question 60

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 61

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 62

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 63

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 64

Given the following data: sales $1,500,000; gross profit $640,000; net income after tax $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 65

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 66

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 67

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 68

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 69

All of the following measure activity except for

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

Question 70

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 71

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 72

Review of the financial statements revealed the following for Jekyll 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 73

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

A) liquidity
B) activity
C) solvency
D) leverage

Question 74

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 75

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 76

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 77

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 78

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 79

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

Question 80

Review of the financial statements revealed the following for Hyde 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 Hyde's gross profit margin closest to?

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