Deck 13: Financial Statement Analysis

Question 1

Horizontal analysis is analysis

A) of dollar changes and percentage changes over two or more years.
B) in which all items are presented as a percentage of one selected item on a financial statement.
C) in which a statistic is calculated for the relationship between two items on a single financial statement or for two items on different financial statements
D) of all ratios that increased or decreased over past accounting periods.

Answer 1

A

Question 2

A banker is analyzing a company which operates in the petroleum industry. Which of the following might be a major consideration in determining whether the company should receive a loan?

A) The petroleum industry suffers from political pressures concerning the selling price of its products.
B) Inflation has been high for several years in a row.
C) All companies in the petroleum industry use the same accounting principles.
D) The company has a large amount of interest payments related to many outstanding loans.

Answer 2

D

Question 3

To review the current market price of the stock, one should review the

A) balance sheet.
B) income statement.
C) statement of cash flows.
D) none of these; it is not on the financial statements.

Answer 3

D

Question 4

Which of the following is the most serious limitation to financial statement analysis of publicly traded companies?

A) Some companies do not use GAAP.
B) Inflation can distort comparisons between years.
C) Some companies report nonoperating items such as extraordinary gains and losses, while others do not.
D) Different industries use different account names.

Question 5

A financial analyst is comparing two companies. Which of the following would cause major problems in the evaluation process?

A) One company has a fiscal year that ends on October 31, while the other company has a fiscal year that ends on August 31.
B) One company reported nonoperating activities, while the other company did not.
C) The companies operate in different industries.
D) Inflation has been low for the past several years.

Question 6

Sunshine Farm Supply
Following are selected data from the financial statements of Sunshine Farm Supply:

Refer to the data for Sunshine Farm Supply. Which of the following results would be found through a vertical analysis of the balance sheet or the income statement of Sunshine Farm Supply?

A) Accounts receivable increased $22,000 during 2016.
B) Total assets increased $70,000 during 2016.
C) Cost of goods sold increased $50,000 or 23.8% during 2016.
D) Gross profit is 57.9% of net sales for 2016.

Question 7

Which of the following statements is true regarding horizontal analysis?

A) Horizontal analysis can only be used with balance sheet accounts.
B) Horizontal analysis can only be used with income statement accounts.
C) Horizontal analysis can only be used with retained earnings accounts.
D) Time series analysis is an advanced statistical technique for horizontal analysis.

Question 8

Which of the following statements is true regarding valuation amounts on the balance sheet?

Question 9

The calculations for some profitability ratios are the same as the calculations for common-size analysis of the income statement. Which of the following profitability ratios would also be determined through a common-size analysis of the income statement?

A) Gross profit ratio
B) Debt-to-equity ratio
C) Acid-test ratio
D) Earnings per share

Question 10

What is the minimum number of years for which publicly traded companies must include the following statements in their annual report filed with the SEC?

Question 11

Sunshine Farm Supply
Following are selected data from the financial statements of Sunshine Farm Supply:

Refer to the data for Sunshine Farm Supply. Which of the following would result from a horizontal analysis of its balance sheet?

A) Accounts receivable increased $22,000 or 57.9% during 2016.
B) Accounts receivable is five times larger than Merchandise inventory in 2016.
C) Accounts receivable is 13.3% of total assets for 2016.
D) Merchandise inventory is 2.7% of total assets for 2016.

Question 12

Sunshine Farm Supply
Following are selected data from the financial statements of Sunshine Farm Supply:

Refer to the data for Sunshine Farm Supply. Which of the following would result from a horizontal analysis of its income statement?

A) Cost of goods sold is 45.5% of net sales for 2016.
B) Gross profit is 42.1% of net sales for 2016.
C) Cost of goods sold decreased $50,000 or 23.8% during 2016.
D) Accounts receivable total 13.3% of total assets for 2016.

Question 13

Sunshine Farm Supply
Following are selected data from the financial statements of Sunshine Farm Supply:

Refer to the data for Sunshine Farm Supply. Which of the following would not result from a vertical analysis of its balance sheet?

A) Accounts receivable increased $22,000 or 36.7% during 2016.
B) Accounts receivable is five times larger than Merchandise inventory in 2016.
C) Accounts receivable is 13.3% of total assets for 2016.
D) Merchandise inventory is 2.7% of total assets for 2016.

Question 14

Sunshine Farm Supply
Following are selected data from the financial statements of Sunshine Farm Supply:

Refer to the data for Sunshine Farm Supply. Which of the following would result from a vertical analysis of its income statement?

A) Accounts receivable increased $22,000 or 57.9% during 2016.
B) Gross profit is 57.9% of net sales for 2016.
C) Cost of goods sold increased $50,000 or 23.8% during 2016.
D) Net sales increased $110,000 or 28.9% during 2016.

Question 15

Starship Inc.'s gross profit ratio increased from 36.5% in 2015 to 48.6% in 2016. What is the trend in this change?

A) An upward trend
B) A downward trend
C) It depends on whether net sales increased or decreased during the period.
D) Trends cannot be determined without the dollar amount of the increase provided.

Question 16

Trend analysis is analysis

A) of dollar changes and percentage changes over several years.
B) in which all items are presented as a percentage of one selected item on a financial statement.
C) in which a statistic is calculated for the relationship between two items on a single financial statement or for two items on different financial statements.
D) of all ratios that increased or decreased over past accounting periods.

Question 17

The dollar change and percentage change in the accounts receivable account from 2013 to 2014 is calculated for Allison Corporation. This is an example of

A) horizontal analysis
B) vertical analysis
C) profitability analysis
D) solvency assessment

Question 18

Which of the following statements is true regarding vertical analysis?

A) Common-size financial statements can be used to compare businesses of different sizes.
B) Vertical analysis can only be used with balance sheet accounts.
C) Vertical analysis can only be used with income statement accounts.
D) Vertical analysis can only be used with retained earnings accounts.

Question 19

Which of the following is least useful in evaluating a company's financial statements?

A) Comparison with government economic data for the economy as a whole
B) Comparison with other companies in the same industry
C) Comparison of the company's current period data with accounting data from 5 years ago
D) Comparison of the company's current period data with that of the last year

Question 20

Which of the following considerations is most important for a stockholder when evaluating whether to purchase stock in a company?

A) Will earnings per share be distributed to stockholders?
B) Will the company earn a fair return on the amount invested by the stockholders?
C) Will the key ratios be reported on the balance sheet?
D) Will cash flows from operations exceed the amount of net income for the period?

Question 21

Which of the following ratios is least useful in evaluating a company's ability to pay its current debts as they become due?

A) Current ratio
B) Debt-to-equity ratio
C) Debt service coverage ratio
D) Acid-test ratio

Question 22

Pinecrest Company
Use the selected data from Pinecrest Company's financial statements to answer the following question.

Refer to the data for Pinecrest Company. Competitors in Pinecrest Company's industry have an average inventory turnover of 20.8 times. Its inventory
Turnover for 2016

A) indicates that the company has too little inventory on hand at the end of 2016.
B) indicates that the company is pricing its products too low.
C) is equal to the number of days' sales in the company's inventory.
D) indicates that the market may be reacting to problems in the sales department by reducing demand for the company's products.

Question 23

Which of the following is considered a liquidity analysis tool?

A) Gross profit ratio
B) Acid-test ratio
C) Dividend yield ratio
D) Return on assets ratio

Question 24

If Crab Shack Company has a current ratio of 2.5 and current assets of $195,000, the amount of working capital is:

A) $117,000
B) $330,000
C) $380,000
D) $78,000

Question 25

Which of the following is a measure of the time that it takes to convert current assets into cash?

A) Accounts receivable turnover ratio
B) Cash to cash operating cycle
C) Number of days' sales in inventory
D) Working capital

Question 26

Pinecrest Company
Use the selected data from Pinecrest Company's financial statements to answer the following question.

Refer to the data for Pinecrest Company. Which of the following statements is true?

A) Net income must be at least $36,000 for 2016.
B) Net income must be less than $36,000 for 2016.
C) Cash flows from operating activities is twice as large as net income for 2016.
D) The amount of net income for 2016 cannot be determined based on the data provided.

Question 27

Which of the following is a total dollar measure of liquidity?

A) Accounts receivable turnover ratio
B) Cash to cash operating cycle
C) Number of days' sales in inventory
D) Working capital

Question 28

Pinecrest Company
Use the selected data from Pinecrest Company's financial statements to answer the following question.

Refer to the data for Pinecrest Company. Competitors in Pinecrest Company's industry have an average accounts receivable turnover of 10.8 times. Pinecrest reported accounts receivable at December 31, 2016 of $42,000 and has normal credit terms requiring payment within 30 days. Pinecrest's accounts receivable turnover for 2016 is:

A) probably indicating that the company probably has stricter credit terms and policies than the industry as a whole, which may repel potential buyers.
B) of no value to bankers and other creditors.
C) less efficient in its collection policies in 2016 than the industry as a whole.
D) less than the industry, which means that its customers are paying on their accounts in a more timely manner than are customers reflected by the industry average.

Question 29

What numerators are used in the computation of the following ratios?

Question 30

Refer to the data for Computech Industries. Based on this information, what is Computech's inventory turnover ratio for the current period?

A) 1.67 times
B) 2.73 times
C) 0.33 times
D) 3.00 times

Question 31

Refer to the data for Computech Industries. Based on this information, what is Computech's number of days' sales in inventory assuming a 360 day year?

A) 132 days
B) 216 days
C) 1,091 days
D) 120 days

Question 32

Pinecrest Company
Use the selected data from Pinecrest Company's financial statements to answer the following question.

Refer to the data for Pinecrest Company. The amount of working capital at the end of 2016 is

A) $ 36,000
B) $ 44,000
C) $ 99,000
D) $174,000

Question 33

You want to know whether selling and administrative expenses were reasonable for the past year, based on the level of sales. The best analysis for obtaining this information is:

A) trend analysis
B) vertical analysis
C) horizontal analysis
D) liquidity analysis

Question 34

If Mussel Company has working capital of $540,000 and a current ratio of 3 to 1, the amount of current assets is:

A) $540,000
B) $810,000
C) $270,000
D) $405,000

Question 35

Refer to the data for Computech Industries. Based on this information, what is the accounts receivable turnover for the current period?

A) 10.0 times
B) 12.5 times
C) 11.1 times
D) 14.3 times

Question 36

In a vertical analysis of the income statement, the 100% amount is

A) Net income
B) Gross profit
C) Operating income
D) Net sales

Question 37

Pinecrest Company
Use the selected data from Pinecrest Company's financial statements to answer the following question.

Refer to the data for Pinecrest Company. The current ratio for 2016 is

A) 0.60 to 1
B) 0.99 to 1
C) 1.34 to 1
D) 1.68 to 1

Question 38

Refer to the data for Computech Industries. Based on this information, what is Computech's number of days' sales in receivables assuming a 360 day year?

A) 32.4 days
B) 36.0 days
C) 28.8 days
D) 25.2 days

Question 39

Pinecrest Company
Use the selected data from Pinecrest Company's financial statements to answer the following question.

Refer to the data for Pinecrest Company. Which of the following statements is true?

A) The current ratio increased from 2015 to 2016.
B) The acid-test ratio decreased from 2015 to 2016.
C) The amount of working capital decreased from 2015 to 2016.
D) Assuming extreme conditions do not exist, the company appears to be in a worse position to pay its current debts at the end of 2016 compared to 2015.

Question 40

In a vertical analysis of the balance sheet, the 100% amount is

A) Current assets
B) Working capital
C) Total assets
D) Total stockholders' equity

Question 41

The current ratio

A) is generally smaller than the quick ratio.
B) decreases when a company becomes more liquid.
C) increases when a company allows more customers to charge on account instead of collecting cash.
D) is larger when a company is more liquid.

Question 42

Which of the following generally indicates a positive change?

A) Earnings per share decreases
B) The debt service coverage decreases
C) The acid-test ratio decreases
D) The number of days' sales in inventory decreases

Question 43

Turnover ratios differ from the current and quick ratios in that they

A) are based on working capital instead of cash.
B) are based on a point of time instead of a period of time.
C) are activity ratios.
D) measure the profitability of a company instead of its liquidity.

Question 44

Which of the following formulas gives the inventory turnover ratio?

A) Net credit sales/Average inventory
B) Average inventory/Net credit sales
C) Cost of goods sold/Average inventory
D) Average inventory/Cost of goods sold

Question 45

If the current ratio is 3 to 1 and the working capital is $100,000, then the current assets are

A) $150,000
B) $200,000
C) $300,000
D) $450,000

Question 46

Which of the following statements is generally considered desirable?

A) A large decrease in accounts receivable turnover ratio
B) A decrease in the number of days' sales in receivables
C) An increase in sales along with a larger decrease in the gross profit ratio
D) A decrease in the cash flow from operations to current liabilities ratio

Question 47

Liquidity analysis is required

A) in order to evaluate the profitability over past accounting periods.
B) to assess the nearness to cash of a company's assets and liabilities.
C) to be reported in the financial statements for all companies publicly traded.
D) when a company reports nonrecurring items in its financial statements.

Question 48

The operating cycle of a manufacturer is the length of time between the

A) purchase of raw materials and the sale of the goods.
B) sale of the goods and the collection of any outstanding receivables from the sale of the product
C) purchase of raw materials and collection of any outstanding receivables from the sale of the product.
D) purchase of raw materials and the production of goods.

Question 49

The acid-test ratio differs from the current ratio in that it

A) represents the amount of cash on hand instead of the amount of working capital.
B) excludes inventories and accounts receivable from the numerator of the fraction because of obsolescence and possible nonpayment.
C) is a stricter test of a company's ability to pay its current debts as they are due.
D) signals the need to liquidate marketable securities when it drops below 5 to 1.

Question 50

Assume the current ratio for Horizon Surf Supplies is 2 to 1. If the company purchased supplies on credit, the effect of this transaction is to:

A) increase the current ratio
B) decrease the current ratio
C) have no effect on the current ratio
D) decrease cash

Question 51

Which of the following is true regarding the relationship of the current ratio to the quick ratio?

A) The current ratio is based on a more conservative measure of liquidity.
B) Both focus on the relationship between part or all of the firm's current assets and all of its current liabilities.
C) Both focus on the relationship between all of the firm's current assets and part or all of its current liabilities.
D) For a company in the service industry, the current ratio and quick ratio will be significantly different.

Question 52

Most companies

A) are not concerned with the management of working capital because cash flows are good.
B) strive for a balance between current assets and current liabilities.
C) try to maintain protection from the creditors by keeping only a small amount of cash available.
D) agree that working capital of $3,000,000 is sufficient for business operations.

Question 53

The current and quick ratios have two limitations. These ratios

A) emphasize the ineffectiveness of analysts' calculations, and focus on liquid assets at a point in time instead of a period of time.
B) focus on cash instead of working capital, and they represent a point in time instead of covering a period of time.
C) focus on working capital instead of cash, and they represent a point in time instead of covering a period of time.
D) are ignored by most creditors, and focus on working capital instead of cash.

Question 54

Moonbeam Gift Shop's inventory turned over six times during the year. Similar gift shops have an inventory turnover equal to twelve times per year. What explains Moonbeam's state of inventory management?

A) Moonbeam sold too much inventory during the year.
B) Moonbeam needs to increase sales and decrease the amount of inventory on hand.
C) Moonbeam is performing twice as well as its competitors.
D) Moonbeam should increase the amount of goods on hand to accommodate the additional inventory demand.

Question 55

Which of the following will decrease working capital?

A) Collection of accounts receivable
B) Purchase of a new computer with cash
C) Payment of salaries payable
D) Purchase of merchandise on credit

Question 56

Which of the following is an example of liquidity analysis?

A) Bonds payable are divided by total liabilities and stockholders' equity.
B) Net income is divided by total assets.
C) Net income is divided by the number of shares of stock outstanding
D) Current assets are divided by current liabilities.

Question 57

Sandy Shores, Inc. reported the following amounts in its financial statements: From 2015 to 2016, the company's management of inventory is

A) declining, because the number of days' sales in inventory is getting larger.
B) increasing, because the number of days' sales in inventory is getting larger.
C) declining, because the number of days' sales in inventory is getting smaller
D) increasing, because the number of days' sales in inventory is getting smaller

Question 58

The cash-to-cash operating cycle is the number of days' sales in

A) receivables and working capital.
B) receivables and plant assets.
C) inventory and receivables.
D) inventory and plant assets.

Question 59

Seashell Company is considered "very liquid" for the year ended December 31, 2016. This means that Seashell

A) has a small quick ratio.
B) must decrease its liquidity in order to appear favorable to stockholders.
C) should sell plant assets in order to remain in business.
D) is able to pay its current debts using its current assets.

Question 60

Which of the following ratios is used to analyze a company's liquidity?

A) Return on assets ratio
B) Inventory turnover ratio
C) Earnings per share
D) Asset turnover ratio

Question 61

Which of the following ratios is the best measure in analyzing a company's ability to pay interest on long-term debt and to repay the long-term debt over several years

A) Debt-to-equity ratio
B) Times interest earned ratio
C) Debt service coverage ratio
D) Acid-test ratio

Question 62

Paint Company
Following are selected data from Paint Company's financial statements.

Refer to the Paint Company data. The company's debt-to-equity ratio was 0.83 to 1 in 2016 and 0.89 to 1 in 2015. Which of the following statements is true concerning Paint?

A) The company has a smaller percentage of capital from owners at the end of 2016 than at the end of 2015.
B) The company relied more on creditors for financing during 2016 than in 2015.
C) The company is improving its debt-to-equity ratio.
D) The company appears to be in a weaker position at the end of 2016 to finance capital expenditures from cash flow generated by operating activities.

Question 63

Paint Company
Following are selected data from Paint Company's financial statements.

Refer to the Paint Company data. The company's times interest earned ratio for 2016

A) shows an increase in the company's ability to pay its current debt when it comes due.
B) indicates the company cannot meet its current year interest payments out of current year earnings.
C) increased, which indicates the company's lenders will be pleased.
D) decreased, which indicates the company has more cash to pay interest on its debt.

Question 64

Paint Company
Following are selected data from Paint Company's financial statements.

Refer to the Paint Company data. The company's debt service coverage ratio for 2016 indicates that the

A) company's ability to pay principal and interest to creditors has declined.
B) company has more net income available to allocate to stockholders after the payment of debt.
C) company had significantly changes in current assets and current liabilities during the period.
D) company generates about $2 of cash from operations to cover every $1 of debt.

Question 65

Carlton, Inc. presented the following information in a note to its financial statements for the year ending December 31, 2016: The company has a loan agreement with Beachside Bank that states:
1) The current ratio should remain at least 2.0 to 1 at all times.
2) The debt-to-equity ratio should not exceed .7 to 1 at any time.
3) The times-interest-earned should be 5.0 or better.
4) The inventory-turnover should be 4.0 or better.
The ratios at year-end are: current ratio, 2.3 to 1; debt-to-equity ratio, .6 to 1; times-interest-earned, 7.1; and inventory-turnover, 3.7. Which of the following statements is true?

A) Carlton was in default because of the inventory turnover.
B) Carlton was in default because of the current ratio.
C) Carlton was in default because of the debt-to-equity ratio.
D) Carlton was in default because of the times-interest-earned.

Question 66

Auto Industries Company reported the following on its income statement: If the income statement also shows interest expense equal to $80,000, what is the company's times interest earned
Ratio?

A) 5 times
B) 8 times
C) 5.25 times
D) 6.25 times

Question 67

Below are selected data from the financial statements of Moriarty Company. The debt-to-equity ratio for 2016 is

A) increasing, which should be a major cause of concern for Moriarty Company.
B) increasing, which should be a good sign in investors' eyes.
C) decreasing, which should be a major cause of concern for Moriarty Company.
D) decreasing, which should be a good sign in investors' eyes.

Question 68

Which of the following solvency ratios is the best measure of a company's ability to pay interest and maturing principal amounts on its long-term debt?

A) Debt-to-equity ratio
B) Times interest earned ratio
C) Debt service coverage ratio
D) Earnings per share

Question 69

Paint Company
Following are selected data from Paint Company's financial statements.

Refer to the Paint Company data. The cash flow from operations to capital expenditures ratio for 2016 is an indicator that Paint Company

A) has been effectively able to use operations to finance its acquisitions of productive assets.
B) has increased profits by $13,000.
C) has decreased cash, but is offset by the increase in net income.
D) has net income that is more than it would have been had dividends of $30,000 been paid.

Question 70

The net assets of a company are equal to

A) current assets less current liabilities.
B) total assets less current assets.
C) long-term assets less accumulated depreciation.
D) the stockholders' equity.

Question 71

Solvency and liquidity differ in a company's ability

A) to show a profit.
B) to remain in business over a long or short period of time.
C) to collect cash from customers during the short- or long-term.
D) to increase gross profit percentages over long or short periods of time.

Question 72

Which of the following solvency ratios is the best measure to determine the degree to which a company relies on outsiders for funds?

A) Debt-to-equity ratio
B) Times interest earned ratio
C) Debt service coverage ratio
D) Cash flow from operations to capital expenditures ratio

Question 73

Paint Company
Following are selected data from Paint Company's financial statements.

Refer to the Paint Company data. Paint's debt­to­equity ratio for 2016 is:

A) an indicator that Paint Company's ability to meet current interest payments to creditors is increasing.
B) increasing slightly from 2015 to 2016.
C) an indicator that for every $1 of capital that stockholders provided, creditors provided $0.83.
D) an indicator that Paint Company has relied on stockholders for funds more in 2015 than in 2016.

Question 74

Santana Company issued additional shares of common stock. The effect of the transaction is

A) the earnings per share increased.
B) the debt-to-equity ratio increased.
C) the earnings per share decreased.
D) the asset turnover ratio decreased.

Question 75

In considering equity and debt financing, which of the following statements is true?

A) Compared to equity financing, debt is a more expensive source of funding.
B) Interest and dividends payments are required to be made by the issuing corporation.
C) In general, the higher the proportion of total debt-to-equity ratio, the greater the likelihood the firm will have difficulty in meeting its obligations in some future period.
D) Most firms prefer to have no debt and rely on equity financing.

Question 76

The cash flow from operations to capital expenditures ratio measures a company's ability to

A) use operations to finance its acquisitions of productive assets.
B) use cash flows from capital expenditure transactions to maintain working capital.
C) increase its capital expenditures as a result of profitable operations.
D) pay its current bills from profits made using productive assets.

Question 77

A solvency measure that focuses specifically on the extent to which a company relies on outsiders for funds is:

A) cash flow from operations to capital expenditures ratio.
B) debt service coverage ratio.
C) times interest earned ratio.
D) debt-to-equity ratio.

Question 78

Return ratios are measures of the relationship between the

A) income earned and the investment made in the company by the various groups.
B) revenue earned and the total equity of a company.
C) total equity of a company and its cash flows for the period.
D) profitability and liquidity aspects of a company.

Question 79

Scrubber, Inc. presented the following information in a note to its financial statements for the year ending December 31, 2016: The company has a loan agreement with Mountain State Bank that states:
1) The current ratio should remain at least 2.0 to 1 at all times.
2) The debt-to-equity ratio should not exceed .7 to 1 at any time.
3) The company must maintain $75,000 cash at all times.
The ratios at year-end are: current ratio, 2.3 to 1 and debt-to-equity ratio, .2 to 1. The amount of cash on the bank statement is $75,400, but the cash account after the adjustments from the bank reconciliation has a balance of
$74,900. Has Scrubber violated its loan agreement?

A) No
B) Yes, the cash balance is less than $75,000.
C) Yes, the current ratio is .3 or 30% larger than the agreement indicates.
D) Yes, the cash balance is less than $75,000, and the debt-to-equity ratio is overstated.

Question 80

The following items appear on the balance sheet of The Piano Company at the end of 2016 and 2015: Between 2015 and 2016

A) The Piano Company's debt-to-equity ratio and current ratio both increased.
B) The Piano Company's debt-to-equity ratio and current ratio both decreased.
C) The Piano Company's debt-to-equity ratio increased and its debt-to-total assets ratio decreased.
D) The Piano Company's debt-to-equity ratio decreased and its debt-to-total assets ratio increased.