Deck 16: Financial Performance Measurement

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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 3

False

Question 4

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

Question 5

Past performance is rarely a good indicator of future performance.

Question 6

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 7

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

Question 8

Accounting methods may be a source of incomparability among companies.

Question 9

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

Question 10

Market strength is the ability to increase the wealth of stockholders.

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

Liquidity is the ability to earn a satisfactory net income.

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

One of the main parts of an annual report of a publicly held corporation is the five- to ten-year projection.

Question 23

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

Question 24

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

Question 25

Vertical analysis is the same as common-size analysis.

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

A change in the company's auditors must be reported to the SEC within a few days of the change.

Question 34

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

Question 35

Reports made to the SEC by public companies are often more comprehensive than those issued to the public.

Question 36

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

Question 37

Vertical analysis will result in common-size statements.

Question 38

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

Question 39

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

Question 40

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

Question 41

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

Question 42

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

Question 43

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

Question 44

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

Question 45

The receivable turnover is useful in assessing the profitability of receivables.

Question 46

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

Question 47

The receivables turnover measures the relative size of the accounts receivable and the effectiveness of credit policies.

Question 48

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

Question 49

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

Question 50

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

Question 51

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

Question 52

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

Question 53

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 54

Days' payable measures the relative size of accounts payable.

Question 55

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

Question 56

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

Question 57

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

Question 58

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

Question 59

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

Question 60

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

Question 61

Dividends yield is a market strength ratio.

Question 62

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

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

Question 63

Horizontal analysis of comparative financial statements includes the

A) development of common-size statements.
B) calculation of dollar amount changes and percentage changes from the previous to the current year.
C) calculation of the percentage of net sales for each item listed.
D) calculation of liquidity ratios.

Question 64

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

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

Question 65

Publicly held corporations must file annual reports with the SEC. All such reports are available

A) only to the SEC, the company's owners and management, and the company's auditors.
B) only to other SEC companies and the issuing company's owners and management.
C) only to the SEC, the company's management, and the company's auditors.
D) to the general public.

Question 66

Dun & Bradstreet publishes

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

Question 67

A balance sheet that displays only component percentages is called a

A) condensed balance sheet.
B) comparative balance sheet.
C) segmented balance sheet.
D) common-size balance sheet.

Question 68

One of the best places to look for early signals of change in a company's profitability is the

A) annual report sent to the SEC.
B) year-end financial statements.
C) interim financial statements.
D) annual report sent to stockholders.

Question 69

Financial performance measurement is useful for all of the following except assessment of

A) accounting methods.
B) return by investors.
C) risk by creditors.
D) risk by investors.

Question 70

Within a few days of certain major events, a report must be issued by publicly held corporations to

A) stockholders.
B) the SEC.
C) Dun & Bradstreet.
D) creditors.

Question 71

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

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

Question 72

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

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

Question 73

To find the most comprehensive information about a company's performance during the year, one would look to

A) interim financial statements.
B) the annual report sent to the SEC.
C) The Wall Street Journal.
D) the annual report sent to stockholders.

Question 74

Which of the following situations severely limits the use of industry norms as standards of comparison?

A) The fact that little information exists on industry norms
B) The existence of conglomerates
C) The presentation of segmented information
D) A downward turn in the economy

Question 75

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

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

Question 76

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

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

Question 77

Market strength refers most closely to the ability to

A) survive for many years.
B) pay bills when they fall due.
C) earn a satisfactory net income.
D) increase the wealth of stockholders.

Question 78

One reason that a common-size statement is a useful tool in financial performance evaluation is that it enables the user to

A) make better comparisons of two companies of different sizes in the same industry.
B) determine which companies in a single industry are of the same size.
C) judge the relative potential of two companies of similar size in different industries.
D) determine which companies in a single industry are of the same value.

Question 79

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

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

Question 80

An annual analysis called "Industry Norms and Key Business Ratios" is compiled and reported by

A) Forbes magazine.
B) Moody's Investor Services.
C) Dun & Bradstreet.
D) Mergent, Inc.