Deck 14: Financial Performance Measurement

Question 1

It is in the best interests of a company to base executive compensation on a single performance measure.

Answer 1

False

Question 2

Per the Sarbanes-Oxley Act of 2002,a compensation committee,comprised of a public corporation's top executives,must be established to determine the salaries and wages of its employees.

Answer 2

False

Question 3

Accounting methods may be a source of incomparability among companies.

Answer 3

True

Question 4

Financial statement analysis can be both past- and future-oriented.

Question 5

In general,the greater the investment risk taken,the lower the return required as compensation.

Question 6

Companies file their quarterly reports with the SEC on Form 8K.

Question 7

Disclosure of segment information is useless in the analysis of diversified companies.

Question 8

Form 10-Q refers to the annual report filed with the SEC.

Question 9

The most complete financial newspaper in the United States is the Financial Times.

Question 10

Interim financial statements are subjected to a full audit by an independent auditor.

Question 11

Liquidity is the ability to earn a satisfactory net income.

Question 12

Investors,creditors,and customers are considered external users of financial statements.

Question 13

Per the Sarbanes-Oxley Act of 2002,public corporations must establish a compensation committee to determine how its top executives will be compensated.

Question 14

Profitability is the ability to pay bills when due and to meet unexpected needs for cash.

Question 15

A limitation of using industry norms in financial performance evaluation is that some companies in the same industry may not be comparable.

Question 16

The use of rule-of-thumb measures is not an exact science and should be used with great care.

Question 17

The analysis of risk and return is important to both investors and creditors.

Question 18

Both diversified companies and conglomerates operate in a single,well-defined industry.

Question 19

Past performance is rarely a good indicator of future performance.

Question 20

Rule-of-thumb measures are the best standards of comparison in financial performance evaluation.

Question 21

For details about the financial histories of companies,one could consult publications of Moody's and Standard & Poor's.

Question 22

The quality of a company's earnings refers to the substance of earnings and their sustainability into future accounting periods.

Question 23

Most companies issue interim financial statements to the public on a monthly basis.

Question 24

Companies in the same industry are required to use the same methods to value inventory and to depreciate similar assets.

Question 25

The comparison of financial measures or ratios of the same company over a period of times is superior to the use of rule-of-thumb measures.

Question 26

Trend analysis requires the establishment of a base year for comparison purposes.

Question 27

A reduction in the value of an asset below its carrying value on the balance sheet is called a restructuring.

Question 28

Interim financial statements report data for a period of more than one year.

Question 29

In a diversified company,segments may be represented by different industries,geographical markets,and major customers.

Question 30

Vertical analysis is the same as common-size analysis.

Question 31

Earnings caused by one-time items are typically sustained in the future.

Question 32

The annual report of a publicly held corporation usually does not contain the auditors' report.

Question 33

Both write-downs and restructurings reduce current operating income and boost future income by shifting future costs to the current period.

Question 34

One-time decreases in earnings always indicate that earnings will be poor in the future.

Question 35

Quality of earnings is only affected by accounting methods and accounting estimates.

Question 36

Vertical analysis will result in common-size statements.

Question 37

If two companies have identical net sales and use different inventory methods,income from continuing operations will likely be identical also.

Question 38

Full disclosure in financial statements reduces problems in the interpretation of financial statements.

Question 39

Different accounting methods will often have different effects on net income.

Question 40

Accounting estimates rarely affect the reported income of a company.

Question 41

Inventory turnover is a measure of liquidity that focuses on the relative size of inventory.

Question 42

Days' payable measures the relative size of accounts payable.

Question 43

In a common-size balance sheet,total assets are represented by 100 percent.

Question 44

Common-size statements are useful in assessing the changes in the composition of statements over time.

Question 45

Trend analysis is a variation on horizontal analysis.

Question 46

To calculate cash flows to assets and cash flows to sales,one needs the figure for net cash flows from financing activities.

Question 47

A 20 percent change in net sales will result in a 20 percent change in net income.

Question 48

Dividends yield is a market strength ratio.

Question 49

Ratio analysis is useful only if the ratio states a meaningful relationship between two numbers.

Question 50

In a common-size income statement,net income is represented by 100 percent.

Question 51

In a common-size income statement,each item is expressed as a percentage of net revenues.

Question 52

The index number used in trend analysis is computed by dividing the base year amount by the index year amount,and multiplying that result by 100.

Question 53

Horizontal analysis will reveal,for example,the percentage of net sales consumed by salaries expense.

Question 54

When using an index number,one sets the first (oldest)number in a series equal to 100.

Question 55

A primary purpose of vertical analysis is to observe trends over a five-year period.

Question 56

In horizontal analysis,the base year is the most current year being examined.

Question 57

It is possible for horizontal analysis to indicate a decrease in revenues from one year to another and an increase in net income.

Question 58

The quick ratio and the debt to equity ratio are measures of short-term debt-paying ability.

Question 59

The cash flow yield equals net income divided by net cash flows from operating activities.

Question 60

Determining the percentage change in an item from one year to the next is a type of horizontal analysis.

Question 61

The ability to pay bills when due and to meet unexpected needs for cash most closely describes

A) liquidity.
B) long-term solvency.
C) profitability.
D) cash flow adequacy.

Question 62

The operating cycle is equal to days' sales uncollected plus days' inventory on hand.

Question 63

Declining profitability and liquidity ratios are indications that a company may not survive.

Question 64

Dun & Bradstreet publishes

A) credit ratings of companies.
B) data on average ratios and relationships.
C) data on industry norms.
D) all of these are correct.

Question 65

The sale of plant assets and the payment of dividends will reduce free cash flow.

Question 66

The debt to equity ratio indicates the extent to which a company is leveraged.

Question 67

The price/earnings (P/E)ratio is an indication of investor confidence in a company.

Question 68

The interest coverage ratio and the debt to equity ratio are short-term measures of liquidity.

Question 69

The market price of a stock represents investors' collective view at a point in time.

Question 70

Which of the following is the least useful in evaluating a relationship as either favorable or unfavorable?

A) Industry averages
B) Past performance of the company
C) Past and current performances of the company
D) Rule-of-thumb measures

Question 71

Both profit margin and asset turnover affect a company's return on assets.

Question 72

All of the following are key sources of financial news,except

A) Barron's.
B) Newsweek.
C) Fortune.
D) Forbes.

Question 73

A corporation's compensation committee,as required by the Sarbanes-Oxley Act of 2002,determines the pay of

A) the hourly wage earners.
B) the top executives.
C) the independent auditors.
D) the members of the board of directors.

Question 74

A general rule in choosing among alternative investments is the greater the risk taken,the

A) lower the potential expected.
B) lower the profits expected.
C) greater the return required.
D) greater the price of the investment.

Question 75

All of the following are standard forms of the SEC,except

A) Form 10-K.
B) Form 8-K.
C) Form 1040.
D) Form 10-Q.

Question 76

A company is referred to as a diversified company or a conglomerate if it operates in

A) one single major industry.
B) many unrelated industries.
C) many related industries.
D) many and varied locations throughout the world.

Question 77

The existence of diversified companies makes which of the following very difficult?

A) The preparation of interim financial statements
B) Use of more than one depreciation or inventory method
C) The compilation of segmented information
D) Comparison with industry norms

Question 78

Executive officers' compensation is typically comprised of all of the following except

A) incentive bonuses.
B) annual base salaries.
C) declared dividends.
D) stock option awards.

Question 79

Which of the following must be reported by diversified companies for each of their operating segments?

A) Assets,liabilities,and earnings per share
B) Segment profit or loss,certain revenue and expense items,and segment assets
C) Segment profit or loss,expenses,and unidentifiable assets
D) Segment profit or loss,expenses,and earnings per share

Question 80

Asset turnover is most closely associated with a company's liquidity position.