Deck 14: Analyzing Financial Statements

Question 1

Which of the following ratios represents an indication of investors' expectations concerning a firm's growth potential?

A) Earnings per share
B) Return on equity
C) Price-earnings ratio
D) Asset turnover

Answer 1

C

Question 2

Which of the following ratios is a comparison of a financial statement number to a market value number?

A) Price-earnings ratio
B) Return on equity
C) Return on sales
D) Debt ratio

Answer 2

A

Question 3

Management uses financial statement analysis for

A) Operating, investing, and financing decisions
B) Investing decisions
C) Operating and financing decisions
D) Financing decisions

Answer 3

A

Question 4

Which of the following is one of the purposes of financial statement analysis?

A) Diagnosis
B) Prognosis
C) Both diagnosis and prognosis
D) Neither diagnosis nor prognosis

Question 5

When analyzing financial statements, diagnosis is

A) The prediction of how a business will perform in the future
B) The identification of the trends in past numbers
C) The prediction of how many employees will lose their jobs in the coming year
D) The identification of where a business has problems

Question 6

The ability a company has to pay its debts in the short run is its

A) Leverage
B) Liquidity
C) Efficiency
D) Profitability

Question 7

When analyzing financial statements, prognosis is

A) The prediction of how a business will perform in the future
B) The identification of the trends in past numbers
C) The prediction of how many employees will lose their jobs in the coming year
D) The identification of where a business has problems

Question 8

Which of the following ratios is used to measure the profit earned on each dollar of sales in a firm?

A) Current ratio
B) Asset turnover
C) Return on sales
D) Return on equity

Question 9

What ratio is used to measure a firm's liquidity?

A) Debt ratio
B) Asset turnover
C) Current ratio
D) Return on equity

Question 10

Which of the following ratios is used to measure a firm's efficiency at using its assets?

A) Current ratio
B) Asset turnover
C) Return on sales
D) Return on equity

Question 11

Which of the following ratios is the fundamental measure of overall company performance?

A) Return on equity
B) Current ratio
C) Asset turnover
D) Return on sales

Question 12

Which of the following ratios is used to measure a firm's leverage?

A) Debt ratio
B) Current ratio
C) Asset turnover
D) Return on equity

Question 13

Which of the following ratios is used to measure the profit earned on each dollar invested in a firm?

A) Current ratio
B) Asset turnover
C) Return on sales
D) Return on equity

Question 14

Which of the following ratios represents the proportion of borrowed funds used to acquire the company's assets?

A) Return on assets
B) Return on sales
C) Debt ratio
D) Current ratio

Question 15

External users of financial statements use financial statement analysis for

A) Operating, investing, and financing decisions
B) Investing decisions
C) Operating and financing decisions
D) Financing decisions

Question 16

Financial statement analysis is greatly enhanced when financial ratios are compared with

A) Past values
B) Future values
C) Values for other firms in the same industry
D) Both past values and values for other firms in the same industry

Question 17

Which of the following is a measure of the liquid position of a corporation?

A) Price earnings ratio
B) Debt ratio
C) Current ratio
D) Asset turnover

Question 18

Which of the following ratios is calculated using only balance sheet numbers?

A) Price earnings ratio
B) Return on sales
C) Asset turnover
D) Current ratio

Question 19

Which of the following statements best describes financial statement analysis?

A) Financial statement analysis involves relationships and trends.
B) Financial statement analysis evaluates future performance.
C) Measurements for a specific company should be compared only with the past.
D) All of these are correct.

Question 20

Relationships between financial statement amounts are called

A) Financial statement analyses
B) Financial ratios
C) Liquidity ratios
D) DuPont ratios

Question 21

Partial information from Blain Company's balance sheet is as follows: What is Blain's current ratio?

A) 0.26
B) 0.30
C) 1.80
D) 3.60

Question 22

Which of the following ratios is calculated using only income statement numbers?

A) Debt ratio
B) Return on sales
C) Return on equity
D) Current ratio

Question 23

Which of the following ratios is calculated using numbers from both the income statement and the balance sheet?

A) Current ratio
B) Price-earnings ratio
C) Return on equity
D) Return on sales

Question 24

Which of the following is NOT included in the DuPont framework of the return on equity ratio?

A) Return on sales
B) Current ratio
C) Asset turnover
D) Asset-to-equity ratio

Question 25

The balance sheet at the end of the current year of operations indicates the following: If net income is $115,000 for 2012, what is the return on equity for 2012 (round percent to one decimal point)?

A) 10.6%
B) 11.7%
C) 12.4%
D) 15.6%

Question 26

Which of the following below generally is the most useful in analyzing companies of different sizes?

A) Comparative statements
B) Common-sized financial statements
C) Price-level accounting
D) Audit report

Question 27

Exhibit 14-1 Selected information for Isaac Company is as follows:
Refer to Exhibit 14-1. Isaac's return on sales, rounded to the nearest percentage point, is

A) 20 percent.
B) 21 percent.
C) 26 percent.
D) 40 percent.

Question 28

In a common-size income statement, each item on the statement is expressed as a percentage of

A) Revenue
B) Expenses
C) Net income
D) Gross profit

Question 29

Exhibit 14-3 Selected information for Alastair Company is as follows:
Refer to Exhibit 14-3. What is the percentage that would be given to current assets on a common-size balance sheet (round to the nearest percent)?

A) 20 percent.
B) 49 percent
C) 77 percent
D) 100 percent

Question 30

Exhibit 14-2 The balance sheet at the end of the first year of operations indicates the following:
Refer to Exhibit 14-2. If sales revenue for 2012 is $950,000, what is the asset turnover for 2012 (round to two decimal places)?

A) 2.64
B) 1.58
C) 0.96
D) 0.60

Question 31

Which of the following transactions could increase a firm's current ratio?

A) Purchase of inventory for cash
B) Payment of accounts payable
C) Collection of accounts receivable
D) Purchase of temporary investments for cash

Question 32

Exhibit 14-2 The balance sheet at the end of the first year of operations indicates the following:
Refer to Exhibit 14-2. What is the debt ratio for 2012 (rounded to one decimal places)?

A) 37.9%
B) 40.0%
C) 22.1%
D) 41.7%

Question 33

Exhibit 14-3 Selected information for Alastair Company is as follows:
Refer to Exhibit 14-3. What is the percentage that would be given to cost of goods sold on a common-size income statement (round to the nearest percent)?

A) 20 percent.
B) 49 percent
C) 77 percent
D) 100 percent

Question 34

A useful tool in financial statement analysis is the common-size financial statement. What does this tool enable the financial analyst to do?

A) Evaluate financial statements of companies within a given industry of approximately the same value.
B) Determine which companies in the same industry are at approximately the same stage of development.
C) Ascertain the relative potential of companies of similar size in different industries.
D) Compare the mix of revenue, and expenses, and determine efficient use of resources within a company over time or between companies within a given industry without respect to relative size.

Question 35

In a common-size balance sheet, each item on the balance sheet is typically expressed as a percentage of

A) Assets
B) Net income
C) Equity
D) Sales revenue

Question 36

The return on equity ratio under the DuPont framework is computed as

A) Net income/Revenue
B) Revenue/Assets
C) Assets/Equity
D) Net income/Equity

Question 37

Exhibit 14-3 Selected information for Alastair Company is as follows:
Refer to Exhibit 14-3. What is the percentage that would be given to sales revenue on a common-size income statement (round to the nearest percent)?

A) 20 percent.
B) 49 percent
C) 77 percent
D) 100 percent

Question 38

On December 31, 2010 and 2011, Taft Corporation had 100,000 shares of common stock issued and outstanding. Additional information is as follows: The price-earnings ratio on common stock at December 31, 2011, was

A) 10
B) 12
C) 14
D) 16

Question 39

Exhibit 14-1 Selected information for Isaac Company is as follows:
Refer to Exhibit 14-1. Isaac's return on equity, rounded to the nearest percentage point, is

A) 20 percent.
B) 21 percent.
C) 28 percent.
D) 40 percent.

Question 40

When using common-size statements

A) Data may be selected for the same business as of different dates, or for two or more businesses as of the same date
B) Relationships should be stated in terms of ratios
C) Dollar changes are reported over a period of at least three years
D) All of these are correct

Question 41

Exhibit 14-5 Selected financial statement numbers for Frederick Company are given below:
Refer to Exhibit 14-5. Using the information above, calculate Frederick's accounts receivable turnover (round to two decimal places).

A) 13.39 times
B) 66.94 times
C) 3.67 times
D) 8.64 times

Question 42

Exhibit 14-5 Selected financial statement numbers for Frederick Company are given below:
Refer to Exhibit 14-5. Using the information above, calculate Frederick's inventory turnover (round to two decimal places).

A) 2.37 times
B) 66.94 times
C) 43.22 times
D) 8.64 times

Question 43

Which of the following ratios is decomposed using the DuPont framework?

A) Return on equity
B) Asset turnover
C) Assets-to-equity ratio
D) Return on sales

Question 44

Exhibit 14-4 The following data came from the financial statements of the Cheviot Company:
Refer to Exhibit 14-4. Compute the return on equity.

A) 40%
B) 50%
C) 30%
D) 60%

Question 45

Which of the following ratios is used to measure a firm's leverage?

A) Net income ¸ Equity
B) Sales ¸ Assets
C) Assets ¸ Equity
D) Net income ¸ Sales

Question 46

Which ratio represents how a company is managing its property, plant, and equipment?

A) Average collection period for accounts receivable
B) Accounts receivable turnover
C) Inventory turnover
D) Property, plant, and equipment turnover

Question 47

Exhibit 14-4 The following data came from the financial statements of the Cheviot Company:
Refer to Exhibit 14-4. Compute the return on sales.

A) 25%
B) 33%
C) 40%
D) 50%

Question 48

Which ratio represents how many times during the year a company is collecting its receivables?

A) Average collection period for accounts receivable
B) Accounts receivable turnover
C) Inventory turnover
D) Fixed asset turnover

Question 49

The ratio that reflects the mix of sources of financing for a company is the

A) Current ratio
B) Debt-to-equity ratio
C) Price-earnings ratio
D) Times interest earned ratio

Question 50

Exhibit 14-5 Selected financial statement numbers for Frederick Company are given below:
Refer to Exhibit 14-5. Using the information above, calculate Frederick's average collection period (round to two decimal places).

A) 99.46 days
B) 27.26 days
C) 42.25 days
D) 5.45 days

Question 51

Which of the following ratios is used to measure a firm's efficiency?

A) Net income ¸ Equity
B) Sales ¸ Assets
C) Assets ¸ Equity
D) Net income ¸ Sales

Question 52

Which ratio represents how many times a company replenishes its inventory during the year?

A) Average collection period for accounts receivable
B) Accounts receivable turnover
C) Inventory turnover
D) Fixed asset turnover

Question 53

Borrowing that allows a company to purchase more assets than its stockholders are able to pay for is

A) Leverage
B) Profitability
C) Efficiency
D) Liquidity

Question 54

Which of the following ratios is NOT an efficiency ratio?

A) Fixed asset turnover
B) Inventory turnover
C) Debt-to-equity
D) Days' sales in inventory

Question 55

Exhibit 14-5 Selected financial statement numbers for Frederick Company are given below:
Refer to Exhibit 14-5. Using the information above, calculate Frederick's number of days' sales in inventory (round to two decimal places).

A) 154.01 days
B) 8.45 days
C) 42.25 days
D) 27.26 days

Question 56

Exhibit 14-4 The following data came from the financial statements of the Cheviot Company:
Refer to Exhibit 14-4. Compute the asset-to-equity ratio (round to two decimal places).

A) 1.20
B) 1.40
C) 1.25
D) 1.15

Question 57

Exhibit 14-4 The following data came from the financial statements of the Cheviot Company:
Refer to Exhibit 14-4. Compute the asset turnover (round to two decimal places).

A) 1.25
B) 1.40
C) 1.50
D) 1.60

Question 58

Which of the following ratios is used to measure a firm's profitability?

A) Liabilities ¸ Equity
B) Sales ¸ Assets
C) Assets ¸ Equity
D) Net income ¸ Sales

Question 59

Exhibit 14-5 Selected financial statement numbers for Frederick Company are given below:
Refer to Exhibit 14-5. Using the information above, calculate Frederick's fixed asset turnover (round to two decimal places).

A) 3.67 times
B) 13.39 times
C) 66.94 times
D) 2.39 times

Question 60

Which of the following is NOT included in the DuPont framework?

A) A measure of profitability
B) A measure of efficiency
C) A measure of market share
D) A measure of leverage

Question 61

Exhibit 14-6 The following data came from the financial statements of Petrini Company:
Refer to Exhibit 14-6. Given the information above, compute the assets-to-equity ratio (rounded to two decimal places) for Petrini Company.

A) 0.46
B) 0.54
C) 0.86
D) 1.86

Question 62

In general, most companies have significant noncash expenses that reduce net income and also cause the cash flow-to-net income ratio to be

A) Greater than 1
B) Equal to 1
C) Less than 1
D) None of these are correct

Question 63

Which cash flow ratio reflects a company's ability to finance its capital expansion through cash from operations?

A) Cash flow-to-operating profit
B) Cash flow-to-net income
C) Cash flow frequency
D) Cash flow adequacy

Question 64

Exhibit 14-6 The following data came from the financial statements of Petrini Company:
Refer to Exhibit 14-6. Given the information above, compute the debt-to-equity ratio (rounded to two decimal places) for Petrini Company.

A) 0.86
B) 1.86
C) 1.16
D) 0.54

Question 65

The particular analytical measures chosen to analyze a company may be influenced by all BUT which one of the following?

A) Industry type
B) Capital structure
C) Diversity of business operations
D) Product quality or service effectiveness

Question 66

Exhibit 14-7 The following data came from the financial statements of the Green Company:
Refer to Exhibit 14-7. Compute the cash flow adequacy ratio.

A) 2.57
B) 4.09
C) 16.36
D) 2.12

Question 67

When analyzing a company's debt ratio, if the ratio has a value that is equal to one, then the company has

A) No debt
B) More debt than equity
C) Equal amounts of debt and equity
D) No stockholders' equity

Question 68

Which one of these is NOT one of the benchmarking problems that arises when analyzing financial statements?

A) Reported financial statement numbers may actually be a measurement of different things
B) Companies that are being compared may be conglomerates
C) Not all companies use the same accounting practices
D) All of these are benchmarking problems

Question 69

When analyzing a company's debt-to-equity ratio, if the ratio has a value that is greater then one, then the company has

A) Less debt than equity
B) More debt than equity
C) Equal amounts of debt and equity
D) None of these are correct

Question 70

Exhibit 14-6 The following data came from the financial statements of Petrini Company:
Refer to Exhibit 14-6. Given the information above, compute the debt ratio (rounded to two decimal places) for Petrini Company.

A) 0.46
B) 2.15
C) 0.86
D) 1.86

Question 71

The ratio that indicates if a borrowing company will be able to meet its required interest payments is the

A) Current ratio
B) Debt-to-equity ratio
C) Price-earnings ratio
D) Times interest earned ratio

Question 72

The financial statements for Kobe Corporation revealed that sales revenue was $1,581,000 and that the following were the ending account balances:

Question 73

The cash flow adequacy ratio is computed as

A) Cash from operations ¸ Cash from investing activities
B) Cash from operations ¸ Cash from financing activities
C) Cash from operations ¸ Cash paid for capital expenditures
D) Cash from investing activities ¸ Cash from operations

Question 74

Amherst, Inc.'s financial statements contained the following information:

Question 75

Which of the following is NOT a situation when it would be important to analyze cash flow information because net income is NOT giving an accurate portrayal of the economic performance of the company?

A) When a company is growing rapidly
B) When a company is striving to present a stellar financial record
C) When a company has a negative operating cash flow
D) When a company has several large noncash expenses

Question 76

The following data came from the financial statements of Petrini Company: Compute the times interest earned ratio (rounded to two decimal places) for Petrini Company.

A) 130 times
B) 129 times
C) 122 times
D) 139 times

Question 77

When analyzing a company's debt-to-equity ratio, if the ratio has a value that is equal to one, then the company has

A) Less debt than equity
B) More debt than equity
C) Equal amounts of debt and equity
D) None of these are correct

Question 78

Exhibit 14-7 The following data came from the financial statements of the Green Company:
Refer to Exhibit 14-7. Compute the cash flow-to-net income ratio.

A) 2.57
B) 4.09
C) 16.36
D) 2.12

Question 79

When analyzing a company's assets-to-equity ratio, if the ratio has a value that is equal to one, then the company has

A) No debt
B) More debt than equity
C) Equal amounts of debt and equity
D) No stockholders' equity

Question 80

Which cash flow ratio reflects the extent to which accrual accounting adjustments and assumptions have been included in net income?

A) Cash flow-to-operating profit
B) Cash flow-to-net income
C) Cash flow frequency
D) Cash flow adequacy