Deck 12: Financial Statement Analysis

Question 1

Return on assets is computed by adding the after-tax interest expense to net income,then dividing by the average total assets.

Answer 1

True

Question 2

Ratios that focus on cash are more useful than those that focus on income in the evaluation of a company's liquidity.

Answer 2

True

Question 3

Three measures of liquidity include working capital,the acid test ratio,and the current ratio.

Answer 3

True

Question 4

The return on equity ratio measures the profit earned by a company through the use of capital supplied by its bondholders.

Question 5

The analysis of common size financial statements may be included in a horizontal or vertical analysis.

Question 6

Comparing two companies in the same industry should cause no problem since both companies are required to use the same accounting principles.

Question 7

Time series analysis compares a company's financial data with industry averages.

Question 8

The acid test ratio is a stricter measure than the current ratio regarding a company's ability to pay its current obligations as they are due.

Question 9

Common size financial statements exclude the dollar amount as a relevant variable in the analysis,which makes comparison of one period with the next more meaningful.

Question 10

The length of the operating cycle is always considered to be a one year period,although that one year doesn't have to begin on January 1.

Question 11

An increase in a company's revenue and expense accounts will always cause an increase in net income for the period.

Question 12

The net profit margin percentage reflects the amount of income for each dollar of sales.

Question 13

An example of vertical analysis is that the cost of goods sold for 2015 is 129% of the amount from 2014.

Question 14

Along with its other financial statements,a public corporation must present its most recent two years of income statements within Item I of its Form 10-K.

Question 15

Management's Discussion and Analysis is a key part of the 10-K because it provides investors with information management believes necessary to understand the company and forecast future performance.

Question 16

Inventory is more liquid than accounts receivable because receivables must be collected and some customers may not be willing to pay,while inventory need only be sold in a retail store.

Question 17

The least liquid of all assets is cash.

Question 18

When using vertical analysis of the income statement,the base upon which all items are compared is net income.

Question 19

The stock repurchase payout ratio is calculated by adding the dividend payout ratio to the total payout ratio.

Question 20

The amount of working capital is more meaningful to users than the current ratio because working capital provides information on the composition of the current accounts.

Question 21

Liquidity refers to a company's ability to pay its current obligations when they come due.

Question 22

As a general rule,all users of financial statements seek answers to the same questions.

Question 23

Public companies file their quarterly reports on Form ____________________.

Question 24

A company that is considering selling goods or providing services to another company wants to know whether its customer will provide: competitive salary and benefits;experiences that will prepare employees to assume increased responsibility;and a secure job for the foreseeable future.

Question 25

Riverdale Drugs has an inventory turnover ratio of 15 times while RJ's Drugs has an inventory turnover of 14 times.RJ's is less efficient in managing its inventory.

Question 26

____________________ analysis compares a single corporation across time

Question 27

In ____________________ analysis,each financial statement line item is expressed as a percent of a base year,which is typically the earliest year shown.

Question 28

____________________ statements highlight differences by expressing each financial statement item in percentage terms.

Question 29

A company with a capital structure that shifts more toward debt financing will appear to be in a stronger position to pay interest and any principal amount that may be maturing by using its cash flows generated by operating activities.

Question 30

Trend analysis is another name for ____________________ analysis.

Question 31

____________________ analysis compares one corporation to another corporation and to industry averages.

Question 32

In ____________________ analysis,each financial statement line item is expressed as a percent of the largest amount on the statement,which is net sales for the income statement and total assets for balance sheet.

Question 33

The best source of information about a particular company is Standard & Poor's industry guide.

Question 34

____________________ refers to the likelihood that a company will be able to pay its current obligations as they come due.

Question 35

Form 8-K is the "current report^" companies must file with the SEC to announce major events that are important to investors and creditors.

Question 36

Many companies assist the users of the financial statements by providing information about the company's accounting policy choices in the first note to the financial statements.

Question 37

Investors who buy stock in a corporation expect to earn returns on their investment from dividends and an increase in the value of the stock (a capital gain).

Question 38

The three aspects of return on equity (ROE)recognized by DuPont analysis are the net profit margin percentage,the ____________________ ratio,and leverage.

Question 39

Public companies file their annual reports on Form ____________________.

Question 40

When trying to predict future profits,analysts often take a top-down approach which starts with gathering economic and industry data to supplement what they are able to find out about the specific corporations they follow.

Question 41

Rags to Riches Selected data from the financial statements are provided below:
$\begin{array}{ll}& \underline{ 2015 } & \underline{ 2014 } \\ \text { Accounts Receivable } &\$ 120,000 & \$ 76,000 \\ \text { Inventory } &24,000 & 32,000 \\ \text {Total Assets } &900,000 & 760,000 \\ \text { Net Sales } &760,000 & 540,000 \\ \text { Cost of Goods Sold } &320,000 & 420,000\end{array}$

-Refer to Rags to Riches.Which of the following would result from a horizontal analysis of the company's balance sheet?

A)Accounts receivable increased $22,000 or 57.9% during 2015.
B)Accounts receivable is five times larger than inventory in 2015.
C)Accounts receivable is 13.3% of total assets in 2015.
D)The accounts receivable turnover ratio is 7.76 in 2015.

Question 42

Various financial ratios,including payout ratios,are categorized as ____________________ ratios.

Question 43

Which of the following would report the market price of the company's stock?

A)balance sheet.
B)income statement.
C)statement of cash flows.
D)Item 5 in Form 10-K.

Question 44

A financial analyst is comparing two companies using a top-down approach.Which of the following would cause problems in the evaluation process?

A)One company's fiscal year-end is October 31,while the other company's fiscal year-end is December 31.
B)One company has been in business significantly longer than the other company.
C)Inflation has been low for several years.
D)The companies operate in different industries.

Question 45

The working capital of a company is equal to

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

Question 46

Various financial ratios,including return ratios,are categorized as ____________________ ratios.

Question 47

Each of the following is included in the MD&A section of a public company's Form 10-K except:

A)Material trends,events,or known uncertainties
B)Statements about what management expects to occur in the future
C)Management's views of the financial condition and performance of the company
D)Names and experience of the company's managers,directors,and officers.

Question 48

The auditor's opinions regarding effectiveness of a public company's internal controls and appropriateness of its financial statements are found within the Form 10-K on

A)Item 1.
B)Item 7.
C)Item 8.
D)Item 9.

Question 49

Annual reports are filed with the SEC on

A)Form 8-K.
B)Form 10-Q.
C)Form 10-K
D)the MD&A section.

Question 50

Horizontal analysis is analysis in which

A)financial statement lines are expressed as a percent of the base (earliest)year.
B)all items are presented as a percentage of one selected item on the financial statement.
C)a statistic is calculated for the relationship between two items on a single financial statement or for two items on different financial statements.
D)ratio increases and decreases are presented for the past two accounting periods.

Question 51

Measures of ____________________ evaluate how efficiently a company uses its assets,that is,the average length of time required for assets to be consumed or replaced.

Question 52

A banker is analyzing a company which operates in the automotive industry.Which of the following will likely be the banker's most important consideration in determining whether the company should receive a loan?

A)The automotive industry suffers from political pressures concerning environmental regulation of products.
B)Inflation has been consistently high for several years.
C)The company has state-of-the-art automated equipment which enhances the efficiency of its operating process.
D)The company has a large amount of interest payments related to other outstanding loans.

Question 53

Time series (or trend)analysis is analysis in which

A)dollar changes and percentage changes in a company's financial statement lines are compared over several years.
B)all items are presented as a percentage of one selected item on a financial statement.
C)a statistic is calculated for the relationship between two items on a single financial statement or for two items on different financial statements.
D)ratio increases and decreases are presented for the past two accounting periods.

Question 54

____________________ assets generally include cash,accounts receivable,and short-term investments.

Question 55

Which of the following statements is true regarding horizontal analysis?

A)It can only be used with balance sheet accounts.
B)It can only be used with income statement accounts.
C)It expresses each financial statement line item as a percent of the largest amount on the statement.
D)It expresses each financial statement line item as a percent of an earlier year amount.

Question 56

When a financial analyst determines the percentage change in operating income for the five-year period from 2011 to 2015,she is performing a

A)time series analysis.
B)vertical analysis.
C)profitability analysis.
D)cross-sectional analysis.

Question 57

When an investor is evaluating whether to purchase stock in a company,which of the following considerations is most important?

A)Will working capital be sufficient to support growth?
B)Will the key ratios be reported on the balance sheet?
C)Will cash flows from operations exceed net income in the coming years?
D)Will the company earn a satisfactory return on the amount invested by stockholders?

Question 58

Form 10-K for a public company is required to include the following financial statements for the most recent period of time including: Income Statements and
Statement of Cash Flows Balance Sheets

A)2 years 3 years
B)2 years 2 years
C)3 years 3 years
D)3 years 2 years

Question 59

In evaluating a company's financial statements,the least useful information would be derived from a comparison of the current period data with

A)economic and industry data.
B)another company in the same industry for the same period.
C)the same company's data from five years ago.
D)the same company's data from the prior year.

Question 60

A company's relative mix of debt and equity financing is referred to as its __________ structure.

Question 61

Which of the following is a measure of liquidity?

A)operating cash flows ratio
B)earnings per share
C)accounts receivable turnover ratio
D)return on common equity

Question 62

Liquidity analysis is required to

A)evaluate a company's profitability.
B)assess a company's ability to pay its current liabilities.
C)be reported in the financial statements for all publicly-traded companies.
D)provide information about a company's capital structure.

Question 63

Rainsoft Company Selected data from the financial statements are provided below:
$\begin{array}{llc}& \underline { 2015 }& \underline { 2014 }& \underline {2013 }\\ \text { Cash } &\$ 44,000 & \$ 28,000 & \$ 14,000 \\ \text { AccountsReceivable } &84,000 & 32,000 & 114,400 \\ \text { Inventory } &44,000 & 166,000 & 100,000 \\ \text {Prepaid Expenses } &\underline {46,000} & \underline {36,000} & \underline {41.600}\\ \text { Total Curent Assets } &\$ 218,000 & \$ 262,000 & \$ 270,000\\\\ \text { Total Current Liabilities } &\$ 130,000 & \$ 144,000 \\ \text { Net Credit Sales } &442,000 & 652,000 \\ \text { Cost of Goods Sold } &336,000 & 598,000 \\ \text { Net Cash Flows from Operating Activities } &32,000 & 58,000\end{array}$

-Refer to Rainsoft Company.What is the operating cash flow ratio for 2015?

A)4.0625
B)0.246
C)0.147
D)0.072

Question 64

Rags to Riches Selected data from the financial statements are provided below:
$\begin{array}{ll}& \underline{ 2015 } & \underline{ 2014 } \\ \text { Accounts Receivable } &\$ 120,000 & \$ 76,000 \\ \text { Inventory } &24,000 & 32,000 \\ \text {Total Assets } &900,000 & 760,000 \\ \text { Net Sales } &760,000 & 540,000 \\ \text { Cost of Goods Sold } &320,000 & 420,000\end{array}$

-Refer to Rags to Riches.Which of the following would result from a horizontal analysis of the company's income statement?

A)Cost of goods sold is 42.1% of net sales for 2015.
B)Gross profit is 57.9% of net sales for 2015.
C)Cost of goods sold decreased 23.8% from 2014 to 2015.
D)Inventory decreased $4,000 or 20% during 2014.

Question 65

The gross profit percentage decreased from 36.5% in 2014 to 24.8% in 2015.What is the trend in this change?

A)This increase represents an upward,or favorable,trend.
B)This increase represents a downward,or negative,trend.
C)The answer depends upon whether net sales increased or decreased during the period.
D)The trend cannot be determined unless the dollar amount of the change is also know.

Question 66

Rainsoft Company Selected data from the financial statements are provided below:
$\begin{array}{llc}& \underline { 2015 }& \underline { 2014 }& \underline {2013 }\\ \text { Cash } &\$ 44,000 & \$ 28,000 & \$ 14,000 \\ \text { AccountsReceivable } &84,000 & 32,000 & 114,400 \\ \text { Inventory } &44,000 & 166,000 & 100,000 \\ \text {Prepaid Expenses } &\underline {46,000} & \underline {36,000} & \underline {41.600}\\ \text { Total Curent Assets } &\$ 218,000 & \$ 262,000 & \$ 270,000\\\\ \text { Total Current Liabilities } &\$ 130,000 & \$ 144,000 \\ \text { Net Credit Sales } &442,000 & 652,000 \\ \text { Cost of Goods Sold } &336,000 & 598,000 \\ \text { Net Cash Flows from Operating Activities } &32,000 & 58,000\end{array}$

-Refer to Rainsoft Company.Assume that competitors in the industry have an average accounts receivable turnover ratio of 7.8 times in 2015.What is the company's accounts receivable turnover ratio for 2015?

A)5.26
B)7.62
C)7.80
D)8.91

Question 67

Rainsoft Company Selected data from the financial statements are provided below:
$\begin{array}{llc}& \underline { 2015 }& \underline { 2014 }& \underline {2013 }\\ \text { Cash } &\$ 44,000 & \$ 28,000 & \$ 14,000 \\ \text { AccountsReceivable } &84,000 & 32,000 & 114,400 \\ \text { Inventory } &44,000 & 166,000 & 100,000 \\ \text {Prepaid Expenses } &\underline {46,000} & \underline {36,000} & \underline {41.600}\\ \text { Total Curent Assets } &\$ 218,000 & \$ 262,000 & \$ 270,000\\\\ \text { Total Current Liabilities } &\$ 130,000 & \$ 144,000 \\ \text { Net Credit Sales } &442,000 & 652,000 \\ \text { Cost of Goods Sold } &336,000 & 598,000 \\ \text { Net Cash Flows from Operating Activities } &32,000 & 58,000\end{array}$

-Refer to Rainsoft Company.What is the current ratio for 2015?

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

Question 68

Rainsoft Company Selected data from the financial statements are provided below:
$\begin{array}{llc}& \underline { 2015 }& \underline { 2014 }& \underline {2013 }\\ \text { Cash } &\$ 44,000 & \$ 28,000 & \$ 14,000 \\ \text { AccountsReceivable } &84,000 & 32,000 & 114,400 \\ \text { Inventory } &44,000 & 166,000 & 100,000 \\ \text {Prepaid Expenses } &\underline {46,000} & \underline {36,000} & \underline {41.600}\\ \text { Total Curent Assets } &\$ 218,000 & \$ 262,000 & \$ 270,000\\\\ \text { Total Current Liabilities } &\$ 130,000 & \$ 144,000 \\ \text { Net Credit Sales } &442,000 & 652,000 \\ \text { Cost of Goods Sold } &336,000 & 598,000 \\ \text { Net Cash Flows from Operating Activities } &32,000 & 58,000\end{array}$

-Refer to Rainsoft Company.Assume that competitors in the industry have an average inventory turnover ratio of 20.8 times in 2015.Rainsoft's inventory turnover ratio for 2015 indicates that the company

A)has too little inventory on hand at the end of 2015.
B)is pricing its products too low.
C)is selling its inventory much more quickly than the industry average.
D)may have obsolete inventory or problems with sales.

Question 69

Which of the following is considered a measure of short-term liquidity?

A)gross profit percentage
B)quick ratio
C)dividend yield ratio
D)return on assets ratio

Question 70

Rags to Riches Selected data from the financial statements are provided below:
$\begin{array}{ll}& \underline{ 2015 } & \underline{ 2014 } \\ \text { Accounts Receivable } &\$ 120,000 & \$ 76,000 \\ \text { Inventory } &24,000 & 32,000 \\ \text {Total Assets } &900,000 & 760,000 \\ \text { Net Sales } &760,000 & 540,000 \\ \text { Cost of Goods Sold } &320,000 & 420,000\end{array}$

-Refer to Rags to Riches.Which of the following would result from a horizontal analysis of the company's income statement?

A)Net sales in 2015 increased to 140.74% of the 2014 amount.
B)Gross profit is 57.9% of net sales for 2015.
C)Accounts receivable is 13.3% of total assets in 2015.
D)The accounts receivable turnover ratio is 7.76 in 2015.

Question 71

Which of the following profitability ratios would be determined through a common size vertical analysis of the income statement?

A)gross profit percentage
B)return on assets
C)return on equity
D)earnings per share

Question 72

Which of the following ratios is least useful in evaluating a company's ability to pay its current obligations when they come due?

A)current ratio
B)quick ratio
C)cash ratio
D)return on assets ratio

Question 73

In a common size income statement to be used in vertical analysis,the 100% amount is

A)net income
B)operating income
C)gross profit
D)net sales

Question 74

Which of the following results is generally considered favorable?

A)A large decrease in the accounts receivable turnover ratio
B)An increase in the inventory turnover ratio
C)An increase in sales along with a larger decrease in the gross profit percentage.
D)A decrease in the operating cash flow ratio

Question 75

In a common size balance sheet to be used in vertical analysis,the 100% amount is

A)current assets
B)working capital
C)total assets
D)total stockholders' equity

Question 76

Which of the following statements is true regarding vertical analysis?

A)Cross-sectional analysis compares financial data for a single entity over time.
B)Common size financial statements are used to compare companies of different sizes.
C)Trend analysis compares a company's financial data to industry averages.
D)Time series analysis is effective for comparison of different companies over time.

Question 77

Rags to Riches Selected data from the financial statements are provided below:
$\begin{array}{ll}& \underline{ 2015 } & \underline{ 2014 } \\ \text { Accounts Receivable } &\$ 120,000 & \$ 76,000 \\ \text { Inventory } &24,000 & 32,000 \\ \text {Total Assets } &900,000 & 760,000 \\ \text { Net Sales } &760,000 & 540,000 \\ \text { Cost of Goods Sold } &320,000 & 420,000\end{array}$

-Refer to Rags to Riches.Which of the following would result from a vertical analysis of the company's income statement?

A)The accounts receivable turnover ratio is 7.76 in 2015.
B)Gross profit is 57.9% of net sales for 2015.
C)Cost of goods sold decreased $50,000 or 23.8% during 2015.
D)Net sales is 84.4% of total assets for 2015.

Question 78

Which of the following is an example of liquidity analysis?

A)Total liabilities are divided by total assets.
B)Net income is divided by average total assets.
C)Net income is divided by the average number of common shares outstanding.
D)Quick assets are divided by current liabilities.

Question 79

Rags to Riches Selected data from the financial statements are provided below:
$\begin{array}{ll}& \underline{ 2015 } & \underline{ 2014 } \\ \text { Accounts Receivable } &\$ 120,000 & \$ 76,000 \\ \text { Inventory } &24,000 & 32,000 \\ \text {Total Assets } &900,000 & 760,000 \\ \text { Net Sales } &760,000 & 540,000 \\ \text { Cost of Goods Sold } &320,000 & 420,000\end{array}$

-Refer to Rags to Riches.Which of the following would be found through ratio analysis of the company's financial statements?

A)The accounts receivable turnover ratio is 7.76 in 2015.
B)Cost of goods sold increased $50,000 or 23.8% in 2015.
C)Accounts receivable increased $22,000 during 2015.
D)Total assets decreased 18.4% during 2015.

Question 80

Rainsoft Company Selected data from the financial statements are provided below:
$\begin{array}{llc}& \underline { 2015 }& \underline { 2014 }& \underline {2013 }\\ \text { Cash } &\$ 44,000 & \$ 28,000 & \$ 14,000 \\ \text { AccountsReceivable } &84,000 & 32,000 & 114,400 \\ \text { Inventory } &44,000 & 166,000 & 100,000 \\ \text {Prepaid Expenses } &\underline {46,000} & \underline {36,000} & \underline {41.600}\\ \text { Total Curent Assets } &\$ 218,000 & \$ 262,000 & \$ 270,000\\\\ \text { Total Current Liabilities } &\$ 130,000 & \$ 144,000 \\ \text { Net Credit Sales } &442,000 & 652,000 \\ \text { Cost of Goods Sold } &336,000 & 598,000 \\ \text { Net Cash Flows from Operating Activities } &32,000 & 58,000\end{array}$

-Refer to Rainsoft Company.Which of the following statements is true regarding the company's liquidity?

A)Based on the current ratio and operating cash flow ratio,the company appears to be in a worse position to pay its current obligations at the end of 2015 compared to 2014.
B)The quick ratio decreased from 2014 to 2015.
C)The operating cash flow ratio increased from 2014 to 2015.
D)Based on the quick ratio and cash ratio,the company appears to be in a better position to pay its current obligations at the end of 2015 compared to 2014.