Deck 13: Financial Statement Analysis

Question 1

The following information is summarized from the balance sheets of Gear Mart Corporation and Function Junction,Inc.at December 31,2012:

Answer 1

Question 2

The following information was obtained from the 2012 and 2011 financial statements
Better Books and Tenacious Texts.Assume all sales are on credit for both companies.
(in millions)

Answer 2

Better Books Tenacious Texts

Question 3

Income statements for Maltese Corp.for the past two years are as follows:
(amounts in thousands of dollars)

Answer 3

2014 2013

Question 4

Use the current asset section of the balance sheets of the Breeze Company as of June 30,2012 and 2011 presented below to answer the questions that follow.

Question 5

The following information is available from the balance sheets at the end of 2012 and 2011 for Riverside Company:

Question 6

Use the following information that was obtained from the 2012 and 2011 financial statements of Lake Company,River Corporation,and Ocean Company to answer the questions that follow.

Question 7

Culinary Delights Company

Question 8

Culinary Delights Company

Question 9

The following information was obtained from the comparative financial statements included in Arco Inc.'s 2012 annual report.(All amounts are in millions of dollars. )
December 31,2012 December 31,2011

Question 10

Presented below are selected data from the financial statements of Hospital Supply Company for 2012,2011,and 2010.

Question 11

Use the current asset section of the balance sheets of the Breeze Company as of June 30,2012 and 2011 presented below to answer the questions that follow.

Question 12

Presented below are selected data from the financial statements of Medtech Company for 2012,2011,and 2010.

Question 13

Culinary Delights Company

Question 14

Use the following information that was obtained from the 2012 and 2011 financial statements of Lake Company,River Corporation,and Ocean Company to answer the questions that follow.

Question 15

Presented below are selected data from the financial statements of Ripple Company for 2012,2011,and 2010.

Question 16

Given below are three ratios calculated for Hall,Link,and Dollar Companies for 2012 and 2011.

Question 17

The following analysis is based on information obtained from 2012 financial statements of Lake Company,River Corporation,and Ocean Company.

Question 18

Given below are three ratios calculated for Lantana,Tera,and Bake Companies for 2012 and 2011.

Question 19

Given below is information for Xu Corporation and Yang Computers,Inc.at the end of 2012.

Question 20

The following information was summarized from the balance sheets of the Better Books and Tenacious Texts at December 31,2012:
(in millions)

Question 21

The Stockholders' Equity section of the balance sheet for Brompton Construction Company at the end of 2014 is as follows:

Question 22

The following information is available from the balance sheets at the end of 2012 and 2011 for Kitchen Equipment Company.

Question 23

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? Balance Sheet Income Statements and Statements of Cash Flows

A)3 Years 3 Years
B)2 Years 2 Years
C)2 Years 3 Years
D)3 Years 2 Years

Question 24

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 25

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 42.1% of net sales for 2012.
B)Gross profit is 42.1% of net sales for 2012.
C)Cost of goods sold decreased $50,000 or 23.8% during 2012.
D)Accounts receivable total 13.3% of total assets for 2012.

Question 26

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.

Question 27

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 2012.
B)Accounts receivable is five times larger than Merchandise inventory in 2012.
C)Accounts receivable is 13.3% of total assets for 2012.
D)Merchandise inventory is 2.7% of total assets for 2012.

Question 28

St.Petersburg Corporation
Use the information obtained from the comparative financial statements included in the St.Petersburg Corporation's 2012 annual report that is presented below to answer the questions that follow.All amounts are in thousands of dollars.

Question 29

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 30

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 31

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 32

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.

Question 33

The Stockholders' Equity section of the balance sheet for Calhoun Industries at the end of 2014 is as follows:

Question 34

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 35

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 36

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

A)Some companies don't 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 37

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.

Question 38

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 2012.
B)Accounts receivable is five times larger than Merchandise inventory in 2012.
C)Accounts receivable is 13.3% of total assets for 2012.
D)Merchandise inventory is 2.7% of total assets for 2012.

Question 39

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

A)Stockholders' equity reflects the amount the stockholders would receive upon liquidation.
B)Assets are recorded at current cost.
C)Stockholders' equity reflects the current market value of the stock
D)There are a variety of assumptions used in determining amounts reported on the balance sheet.

Question 40

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 2012.
B)Gross profit is 57.9% of net sales for 2012.
C)Cost of goods sold increased $50,000 or 23.8% during 2012.
D)Net sales increased $110,000 or 28.9% during 2012.

Question 41

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 42

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 43

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 44

Starship Inc.'s gross profit ratio increased from 36.5% in 2011 to 48.6% in 2012.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 45

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 46

Computech Industries Below is financial data for Computech Industries' current year.
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 47

Computech Industries Below is financial data for Computech Industries' current year.
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 48

What numerators are used in the computation of the following ratios? Inventory turnover ratio Accounts receivable turnover ratio

A)Cost of Goods Sold Cost of Goods Sold
B)Net Credit Sales Net Credit Sales
C)Net Credit Sales Cost of Goods Sold
D)Cost of Goods Sold Net Credit Sales

Question 49

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 50

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 51

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 52

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 2014 is

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

Question 53

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 54

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 2012.
B)Total assets increased $70,000 during 2012.
C)Cost of goods sold increased $50,000 or 23.8% during 2012.
D)Gross profit is 57.9% of net sales for 2012

Question 55

Computech Industries Below is financial data for Computech Industries' current year.
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 56

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 57

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 2014 is

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

Question 58

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 59

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 60

Computech Industries Below is financial data for Computech Industries' current year.
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 61

Sandy Shores,Inc.reported the following amounts in its financial statements: From 2013 to 2014,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 62

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 63

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 2013 to 2014.
B)The acid-test ratio decreased from 2013 to 2014.
C)The amount of working capital decreased from 2013 to 2014.
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 2014 compared to 2013.

Question 64

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 65

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 66

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 67

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 68

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 69

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 70

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 71

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 72

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 73

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 74

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 7.8 times.Pinecrest reported accounts receivable at December 31,2012 of $57,200.Pinecrest's accounts receivable turnover for 2014 is:

A)an indicators that the company needs to tighten its credit policies.
B)of no value to bankers and other creditors.
C)less efficient in 2014 than in 2013.
D)significantly below the standards required by the U.S.government.

Question 75

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 76

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 2014

A)indicates that the company has too little inventory on hand at the end of 2014.
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 company may have a large amount of obsolete inventory or problems in the sales department.

Question 77

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 78

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 79

Seashell Company is considered "very liquid" for the year ended December 31,2012.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 80

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 2014.
B)Net income must be less than $36,000 for 2014.
C)Cash flows from operating activities is twice as large as net income for 2014.
D)The amount of net income for 2014 cannot be determined based on the data provided.