Deck 12: Financial Statement Analysis

Question 1

To perform vertical analysis:

A) items on the balance sheet need to be restated to their fair market values.
B) items on the balance sheet need to be indexed for inflation.
C) common-size financial statements need to be prepared.
D) horizontal analysis needs to have already been done.

Answer 1

C

Question 2

Hansen Inc. has the following information available for 2011 and 2012: Which of the following statements is true regarding horizontal analysis with respect to Hansen?

A) It would show net income has decreased by 20 percent.
B) It would show net income has decreased by 16.7 percent.
C) There is not enough information available to perform horizontal analysis.
D) Horizontal analysis can not be performed using net income.

Answer 2

B

Question 3

The easiest part of ratio analysis is:

A) the interpretation of the ratio.
B) analyzing trends or changes in them.
C) using the ratio to make decisions.
D) the computation of the ratio.

Answer 3

D

Question 4

On a common-size balance sheet, current liabilities should be stated as a percentage of:

A) net income.
B) current liabilities.
C) total liabilities.
D) total liabilities and stockholders' equity.

Question 5

On a common-size balance sheet, current assets should be stated as a percentage of:

A) net income.
B) current assets.
C) cash.
D) total assets.

Question 6

On a common-size income statement, operating income should be stated as a percentage of:

A) net income.
B) sales revenue.
C) operating income.
D) total assets.

Question 7

On a common-size income statement, operating expenses should be stated as a percentage of:

A) sales revenue.
B) net income.
C) operating income.
D) total assets.

Question 8

Which of the following statements regarding financial statement analysis is true?

A) It will show how a company is guaranteed to perform in the future.
B) It should not be relied upon as an indicator of future performance.
C) It should be performed by only managers and creditors.
D) It provides supplemental information not provided directly by the financial statements.

Question 9

On a common-size income statement, net income should be stated as a percentage of:

A) net income.
B) sales revenue.
C) gross profit.
D) total assets.

Question 10

Comparing financial statements of different companies and financial statements of the same company across time after controlling for differences in size is called:

A) liquidity analysis.
B) vertical analysis.
C) price-earnings analysis.
D) horizontal analysis.

Question 11

Drucker Inc. has the following information available for 2011 and 2012: Performing a horizontal analysis on current assets shows that they have:

A) increased by 40 percent.
B) increased by 28.6 percent.
C) increased by 2.5 percent.
D) increased by 3.5 percent.

Question 12

Bingham Inc. is a retailer with annual sales of less that $10 million. At the end of 2012, ratio analysis is performed on Bingham's financial statements by various stakeholders. Bingham's 2012 ratios are not likely to be compared to:

A) Bingham's 2011 ratios.
B) Bingham's 2012 budgeted ratios.
C) other retailers with annual sales of less than $10 million.
D) a manufacturer with annual sales of less than $10 million.

Question 13

Michaud Ltd. has the following information available for 2011 and 2012: Which of the following statements is true regarding horizontal analysis with respect to Michaud?

A) It would show total assets has increased by 30 percent.
B) It would show total assets has increased by 53.8 percent.
C) There is not enough information available to perform horizontal analysis.
D) Horizontal analysis can not be performed using total assets.

Question 14

Which of the following statements is true regarding ratio analysis?

A) A ratio for a particular company is often compared to industry standards using various publications.
B) Ratio analysis should be kept as simple as possible, which is often accomplished by using just one ratio to measure a company's performance.
C) A ratio for a particular company is unique and, therefore, should not be compared to other companies' ratios.
D) Ratio analysis will not be affected by different accounting methods or assumptions.

Question 15

Financial statements prepared using generally accepted accounting principles:

A) use historical costs and are not adjusted for the effects of increasing prices.
B) use historical costs and are adjusted for the effects of increasing prices.
C) use market-based costs and are adjusted for the effects of increasing prices.
D) use market-based costs and are not adjusted for the effects of decreasing prices.

Question 16

Which of the following statements regarding horizontal analysis is false?

A) Horizontal analysis can include more than two years of financial data.
B) Horizontal analysis is facilitated by computing dollar and percentage changes in financial statement items.
C) Horizontal analysis analyzes ratio differences occurring between companies.
D) Horizontal analysis can include the statement of cash flows.

Question 17

Which of the following is not a limitation in performing financial statement analysis on a company that uses generally accepted accounting principles?

A) Variety of methods used by different companies.
B) Use of estimates by a company.
C) Use of assumptions by a company.
D) Use of technology by a company.

Question 18

Analyzing financial statement account balances over time for the same company is called:

A) vertical analysis.
B) horizontal analysis.
C) common-size analysis.
D) price analysis.

Question 19

Which of the following items is not typically used to prepare financial statements?

A) Historical costs
B) Inflation adjustments
C) Estimations
D) Assumptions

Question 20

Ratio analysis is least likely to indicate:

A) past performance.
B) future performance.
C) the effects of inflation.
D) trends in a company's performance.

Question 21

Bernstein Inc. Bernstein Inc. is a local retailer. The following selected information is available from their 2011 and 2012 financial statements:
Refer to the Bernstein Inc. information above. What was Bernstein's accounts receivable turnover ratio for 2012? (round to two decimal places)

A) 2.50
B) 5.00
C) 8.50
D) 17.00

Question 22

Bernstein Inc. Bernstein Inc. is a local retailer. The following selected information is available from their 2011 and 2012 financial statements:
Refer to the Bernstein Inc. information above. What was Bernstein's number of days sales in receivables for 2012? (round to two decimal places)

A) 21.47 days
B) 42.94 days
C) 73.00 days
D) 146.00 days

Question 23

Partin Manufacturing Partin Manufacturing has the following information available from its 12/31/12 and 12/31/11 financial statements:
Refer to the Partin Manufacturing information above. Partin's quick (or acid-test) ratio for the year 2012 is: (round to two decimal places)

A) 2.73.
B) 2.67.
C) 1.39.
D) .82.

Question 24

Working capital is a measure of:

A) solvency.
B) profitability.
C) liquidity.
D) marketability.

Question 25

Neptune Ltd. has the following information available for 2011 and 2012: Converting the 2012 column into a common-size statement would show current assets as being:

A) 60 percent higher than 2011 current assets.
B) 67 percent of 2012 total assets.
C) 71 percent of 2011 total assets.
D) 50 percent higher than 2012 long-term assets.

Question 26

Bernstein Inc. Bernstein Inc. is a local retailer. The following selected information is available from their 2011 and 2012 financial statements:
Refer to the Bernstein Inc. information above. What was Bernstein's inventory turnover ratio for 2012? (round to two decimal places)

A) 3.03
B) 1.52
C) 6.00
D) 3.00

Question 27

Which of the following ratios is the best measure of liquidity?

A) Return on assets ratio.
B) Ratio of cash flow from operations to capital expenditures.
C) Current ratio.
D) Earnings per share.

Question 28

Partin Manufacturing Partin Manufacturing has the following information available from its 12/31/12 and 12/31/11 financial statements:
Refer to the Partin Manufacturing information above. Partin's inventory turnover ratio for the year 2012 is: (round to two decimal places)

A) 1.00.
B) .50.
C) .56.
D) 2.00.

Question 29

Zabar Inc. has the following information available for 2011 and 2012: Converting the 2012 column into a common-size statement would show current liabilities as being:

A) 26.26 percent of 2012 total liabilities.
B) 33.33 percent lower than 2011 current liabilities.
C) 23.53 percent of total stockholders' equity.
D) 13.79 percent of total liabilities and stockholders' equity.

Question 30

Blaise Inc. has the following information available for 2011 and 2012: Blaise's working capital in 2012 is:

A) $(200,000).
B) $ 200,000.
C) $ 400,000.
D) $ 0.

Question 31

Partin Manufacturing Partin Manufacturing has the following information available from its 12/31/12 and 12/31/11 financial statements:
Refer to the Partin Manufacturing information above. Partin's current ratio for the year 2012 is: (round to two decimal places)

A) 2.73.
B) 2.67.
C) 1.39.
D) .82.

Question 32

Which of the following ratios is the best measure of liquidity?

A) Debt-to-equity ratio
B) Times-interest-earned ratio
C) Return on assets ratio
D) Quick ratio

Question 33

Partin Manufacturing Partin Manufacturing has the following information available from its 12/31/12 and 12/31/11 financial statements:
Refer to the Partin Manufacturing information above. Partin's accounts receivable turnover ratio for the year 2012 is: (round to two decimal places)

A) 3.13 times.
B) 5.00 times.
C) 10.00 times.
D) 13.33 times.

Question 34

McCabe Inc. has the following information available for 2011 and 2012: McCabe's working capital in 2012 is:

A) $124,000.
B) $248,000.
C) $234,000.
D) $367,000.

Question 35

Partin Manufacturing Partin Manufacturing has the following information available from its 12/31/12 and 12/31/11 financial statements:
Refer to the Partin Manufacturing information above. Partin's working capital for the year 2012 is:

A) $138,000.
B) $ 38,000.
C) $ 88,000.
D) $ 78,000.

Question 36

Which ratio measures the length of time between the purchase of inventory and the eventual collection of cash from sales?

A) Quick ratio
B) Cash-to-cash operating cycle ratio
C) Accounts receivable turnover ratio
D) Inventory turnover ratio

Question 37

Partin Manufacturing Partin Manufacturing has the following information available from its 12/31/12 and 12/31/11 financial statements:
Refer to the Partin Manufacturing information above. Partin's debt-to-equity ratio for the year 2012 is: (round to two decimal places)

A) .25.
B) .82.
C) .45.
D) .14.

Question 38

Hollandsworth Inc. has the following information available for 2011 and 2012: Converting the 2012 column into a common-size statement would show current assets as being:

A) 40 percent of 2012 total assets.
B) 20 percent lower than 2011 current assets.
C) 50 percent of 2011 total assets.
D) 25 percent lower than 2012 long-term assets.

Question 39

Liquidity measures a company's ability:

A) to meet its long-term financial obligations as they become due.
B) to meet its short-term financial obligations as they become due.
C) to make a profit in the short-run.
D) to make a profit in the long-run.

Question 40

Working capital is computed as:

A) Long-term assets - Long-term liabilities.
B) Current assets ¸ Current liabilities.
C) Current assets - Long-term assets.
D) Current assets - Current liabilities.

Question 41

Which of the following account balances would not be used in the calculation of the current ratio?

A) Inventory
B) Accounts payable
C) Sales revenue
D) Prepaid insurance

Question 42

Hardister Corp. Hardister Corp. has the following information available from its financial statements for 2012:
Refer to the Hardister Corp. information above. Hardister's times-interest-earned ratio is: (round to two decimal places)

A) 8.00.
B) 9.00.
C) 6.00.
D) 5.00.

Question 43

Which ratio would be best for measuring a company's ability to repay both principal and interest on outstanding loans from cash generated from operating activities?

A) Current ratio
B) Times-interest-earned ratio
C) Debt service coverage ratio
D) Debt-to-equity ratio

Question 44

Hardister Corp. Hardister Corp. has the following information available from its financial statements for 2012:
Refer to the Hardister Corp. information above. Hardister's debt-to-equity ratio is: (round to two decimal places)

A) .50.
B) .43.
C) .75.
D) .25.

Question 45

Hardister Corp. Hardister Corp. has the following information available from its financial statements for 2012:
Refer to the Hardister Corp. information above. Hardister's current ratio is: (round to two decimal places)

A) 3.33.
B) .67.
C) .50.
D) 2.00.

Question 46

Torrence Inc. has recently calculated the inventory turnover for the current year to be 30. In prior years, the same ratio was always lower. Which of the following statements would be the best interpretation for the reason for the ratio's change?

A) The company had less sales in the current year than in prior years.
B) The company purchased less inventory in the current year than in prior years.
C) The company took fewer days to sell its inventory in the current year than in prior years.
D) The company took more days to sell its inventory in the current year than in prior years.

Question 47

Bernstein Inc. Bernstein Inc. is a local retailer. The following selected information is available from their 2011 and 2012 financial statements:
Refer to the Bernstein Inc. information above. What was Bernstein's number of days inventory was held before sale in 2012? (round to two decimal places)

A) 121.67 days
B) 60.83 days
C) 120.46 days
D) 240.13 days

Question 48

As a company's accounts receivable turnover ratio increases from one year to the next, they will find that the number of days' sales in receivables:

A) decreases.
B) increases.
C) stays the same.
D) can not be determined.

Question 49

Hardister Corp. Hardister Corp. has the following information available from its financial statements for 2012:
Refer to the Hardister Corp. information above. Assuming Hardister has no preferred stock and the average number of common shares outstanding was 10,000, what would be earnings per share for 2012? (round to two decimal places)

A) $ 80.00
B) $ .02
C) $ 50.00
D) $300.00

Question 50

A quick ratio ____ is often a concern for creditors and managers.

A) of more than one
B) of less than one
C) equal to one
D) of more than two

Question 51

Solvency measures a company's ability:

A) to meet long-term obligations as they become due.
B) to meet short-term obligations as they become due.
C) to make a profit in the short-run.
D) to make a profit in the long-run.

Question 52

Which of the following statements would be the best interpretation of a company's low debt-to-equity ratio?

A) The company chooses to pay cash for most of its major purchases.
B) The company is not liquid.
C) The company prefers to pay stockholders high dividends out of their retained earnings.
D) The company prefers to raise funds by issuing capital stock than long-term borrowing.

Question 53

As a company's inventory turnover ratio decreases from one year to the next, they will find that the number of days inventory is held before sale:

A) decreases.
B) increases.
C) stays the same.
D) can not be determined.

Question 54

Which of the following ratios would be the best measure of solvency?

A) Return on assets ratio
B) Price earnings ratio
C) Current ratio
D) Times-interest-earned ratio

Question 55

Plumeria Inc. has recently calculated the accounts receivable turnover for the current year to be 15. In prior years, the same ratio was always higher. Which of the following statements would be the best interpretation for the reason for the ratio's change?

A) The company had less cash sales in the current year than in prior years.
B) The company had more sales in the current year than in prior years.
C) The company had fewer accounts receivables in the current year than in prior years.
D) The company took longer to collect on their accounts receivables in the current year than in prior years.

Question 56

Which of the following ratios would not be the best measure of solvency?

A) Return on assets ratio
B) Debt-to-equity ratio
C) Debt service coverage ratio
D) Times-interest-earned ratio

Question 57

Which of the following accounts should not be included in the calculation of the quick (or acid-test) ratio?

A) Accounts payable
B) Accounts receivable
C) Cash
D) Inventory

Question 58

Which of the following types of companies would you expect to have the highest inventory turnover ratio?

A) A law firm
B) A construction company
C) A fine jewelry retailer
D) A grocery store

Question 59

During 2012, Mark Walker, Inc. had cash flow from operations of $330,000, dividends paid totaling $15,000, and equipment purchases of $120,000. The ratio of cash flow from operations to capital expenditures is:

A) 2.63.
B) 0.36.
C) 2.75.
D) 2.88.

Question 60

ABC Inc. has determined that it needs to increase its current ratio in order to be in compliance with a creditor's loan agreement. All else being equal, which of the following ways would be best for increasing their current ratio?

A) Increasing long-term assets
B) Decreasing current assets
C) Decreasing current liabilities
D) Increasing long-term liabilities

Question 61

Grogan Inc. Grogan Inc. had the following information available from its 2011 and 2012 financial statements:
Refer to the Grogan Inc. information above. Grogan's return on assets (ROA) ratio for 2012 is: (round to two decimal places)

A) 44.27%.
B) 35.05%.
C) 15.04%.
D) 45.13%.

Question 62

Grogan Inc. Grogan Inc. had the following information available from its 2011 and 2012 financial statements:
Refer to the Grogan Inc. information above. Grogan's working capital for 2012 is:

A) $ 8,500.
B) $ 31,500.
C) $ 20,000.
D) $147,000.

Question 63

Grogan Inc. Grogan Inc. had the following information available from its 2011 and 2012 financial statements:
Refer to the Grogan Inc. information above. Grogan's return on common stockholders' equity (ROCSE) ratio for 2012 is: (round to two decimal places)

A) 43.12%.
B) 72.23%.
C) 46.78%.
D) 65.69%.

Question 64

Why do decision-makers analyze financial statements and how is ratio analysis useful in the process?

Question 65

Grogan Inc. Grogan Inc. had the following information available from its 2011 and 2012 financial statements:
Refer to the Grogan Inc. information above. Grogan's ratio of cash flow from operations to current liabilities for 2012 is: (round to two decimal places)

A) 5.45.
B) 0.18.
C) 0.29.
D) 6.52.

Question 66

Which of the following ratios would be the best measure of profitability?

A) Current ratio
B) Debt-to-equity ratio
C) Times-interest-earned ratio
D) Return on assets

Question 67

How is horizontal analysis performed and how is it used in financial statement analysis?

Question 68

Grogan Inc. Grogan Inc. had the following information available from its 2011 and 2012 financial statements:
Refer to the Grogan Inc. information above. Grogan's times-interest-earned ratio for 2012 is: (round to two decimal places)

A) 12.13.
B) 16.50.
C) 17.50.
D) 12.50.

Question 69

Which ratio gives an indication of how investors believe a company's stock will perform in the future compared to other companies?

A) Return on stockholders' equity
B) Earnings per share
C) Price earnings (P/E)
D) Return on assets

Question 70

Grogan Inc. Grogan Inc. had the following information available from its 2011 and 2012 financial statements:
Refer to the Grogan Inc. information above. Converting the 2012 column into a common-size statement would show current assets as being: (round to two decimal places)

A) 9.66 percent of long-term assets.
B) 8.81 percent of total assets.
C) 27.49 percent of net income.
D) 133.33 percent of 2011's current assets.

Question 71

Hardister Corp. Hardister Corp. has the following information available from its financial statements for 2012:
Refer to the Hardister Corp. information above. At the end of 2012, Hardister's common stock was listed on the stock exchange as having a market price of $65 per share and there are 10,000 shares outstanding. Hardister has no preferred stock. What would be Hardister's price earnings (P/E) ratio for 2012? (round to two decimal places)

A) 7.69 to 1
B) 12.31 to 1
C) 1.30 to 1
D) .77 to 1

Question 72

Discuss one limitation of financial statement analysis.

Question 73

Grogan Inc. Grogan Inc. had the following information available from its 2011 and 2012 financial statements:
Refer to the Grogan Inc. information above. Grogan had an average of 7,000 shares of common stock outstanding during 2012. At the end of the year, the market price per share was $100. The company's price earnings (P/E) ratio for 2012 is: (round to two decimal places)

A) 9.62 to 1.
B) 6.67 to 1.
C) 14.66 to 1.
D) 19.44 to 1.

Question 74

Which of the following ratios would not be the best measure of profitability?

A) Earnings per share
B) Debt-to-equity ratio
C) Return on common stockholders' equity
D) Return on assets

Question 75

Hardister Corp. Hardister Corp. has the following information available from its financial statements for 2012:
Refer to the Hardister Corp. information above. Assuming Hardister had total assets at the end of 2011 of $800,000 and an income tax rate of 37.5 percent, what would be return on assets for 2012? (round to the nearest whole percent)

A) 63%
B) 43%
C) 57%
D) 59%

Question 76

Grogan Inc. Grogan Inc. had the following information available from its 2011 and 2012 financial statements:
Refer to the Grogan Inc. information above. Grogan's debt-to-equity ratio for 2012 is: (round to two decimal places)

A) 2.17.
B) 0.46.
C) 0.85.
D) 0.31.

Question 77

Grogan Inc. Grogan Inc. had the following information available from its 2011 and 2012 financial statements:
Refer to the Grogan Inc. information above. Grogan had an average of 7,000 shares of common stock outstanding during 2012. The company's earnings per share for 2012 is: (round to two decimal places)

A) $ 6.82.
B) $15.00.
C) $10.39.
D) $ 5.14.

Question 78

Grogan Inc. Grogan Inc. had the following information available from its 2011 and 2012 financial statements:
Refer to the Grogan Inc. information above. Grogan's current ratio for 2012 is: (round to two decimal places)

A) 3.17.
B) 1.11.
C) .57.
D) 1.74.

Question 79

Grogan Inc. Grogan Inc. had the following information available from its 2011 and 2012 financial statements:
Refer to the Grogan Inc. information above. Performing a horizontal analysis on Grogan's total assets shows that they have:

A) increased by 93.46%.
B) increased by 46.26%.
C) increased by 86.07%.
D) increased by 31.50%

Question 80

Grogan Inc. Grogan Inc. had the following information available from its 2011 and 2012 financial statements:
Refer to the Grogan Inc. information above. Grogan's ratio cash flow from operations to capital expenditures for 2012 is: (round to two decimal places)

A) 170.00%.
B) 58.82%.
C) 250.00%
D) 88.24%.