Deck 11: Financial Statement Analysis

Question 1

If a firm's payment terms for sales made on account to its customers were 2/10, n30, the number of days' sales in accounts receivable would be expected to be:

A) less than 10.
B) between 10 and 25.
C) between 25 and 40.
D)over 40.

Answer 1

B

Question 2

Asset turnover calculations:

A) are made by dividing the average asset balance during the year by the sales for the year.
B) are made by dividing sales for the year by the asset balance at the end of the year.
C) communicate information about how promptly the entity pays its bills.
D)should be evaluated by observing the turnover trend over a period of time.

Answer 2

D

Question 3

Another term for the price/earnings ratio is:

A) cost ratio.
B) sales multiple.
C) earnings multiple.
D)profit ratio.

Answer 3

C

Question 4

The inventory turnover calculation:

A) is wrong unless cost of goods sold is used in the numerator.
B) is wrong unless sales is used in the numerator.
C) is an alternative way of expressing the number of days' sales in inventory.
D)requires knowledge of the inventory cost flow assumption being used.

Question 5

A leveraged buyout refers to:

A) one firm issues stock to take over another firm.
B) one firm trades its stock for the stock of another firm.
C) a firm goes heavily into debt in order to obtain the funds to purchase the shares of the public stockholders and thus take the firm private.
D)one firm pays cash for the shares of a takeover firm's shares.

Question 6

Management's use of resources can best be evaluated by focusing on measures of:

A) liquidity.
B) activity.
C) leverage.
D)book value.

Question 7

A higher P/E ratio means that:

A) the stock is more reasonably priced.
B) the stock is relatively expensive.
C) investors are wary of the stock.
D)earnings are expected to decrease.

Question 8

A management that wanted to increase the financial leverage of its firm would:

A) raise additional capital by selling common stock.
B) use excess cash to purchase preferred stock for the treasury.
C) raise additional capital by selling fixed interest rate long-term bonds.
D)try to increase its ROI by increasing asset turnover.

Question 9

The comparison of activity measures of different companies is complicated by the fact that:

A) different inventory cost flow assumptions may be used.
B) dollar amounts of assets may be significantly different.
C) only one of the companies may have preferred stock outstanding.
D)the number of shares of common stock issued may be significantly different.

Question 10

When a corporation has both common stock and preferred stock outstanding:

A) dividends on preferred stock are paid only if the company has current earnings.
B) dividends on preferred stock must be paid before dividends on common stock can be paid.
C) preferred stockholders receive the same dividend per share as common stockholders.
D)dividends on preferred stock are paid only if dividends are to be paid on the common stock.

Question 11

The price/earnings ratio:

A) is a measure of the relative expensiveness of a firm's common stock.
B) does not usually change by more than 1.0 during the year.
C) can be used to determine the cash dividend to be received during the year.
D)is calculated by dividing the earnings multiple by net income.

Question 12

If a firm's debt ratio was 25%, its debt/equity ratio would be:

A) 25%.
B) 50%.
C) 33.33%.
D)75%.

Question 13

Book value per share of common stock of a manufacturing company:

A) is not a very useful measure most of the time.
B) is calculated by dividing market value per share by earnings per share.
C) reflects the fair value of the company's stock.
D)is the same as the total balance sheet asset value per share of common stock.

Question 14

An entity's current ratio will be influenced by:

A) the inventory cost flow assumption used.
B) writing off an overdue account receivable against the allowance for uncollectible accounts.
C) the depreciation method used.
D)issuance of a stock dividend.

Question 15

An individual interested in making a judgment about the profitability of a company should:

A) review the trend of working capital for several years.
B) calculate the company's ROI for the most recent year.
C) review the trend of the company's ROI for several years.
D)compare the company's ROI for the most recent year with the industry average ROI for the most recent year.

Question 16

When a firm has financial leverage:

A) ROI will be greater than ROE.
B) ROI will usually be less than it would be without leverage.
C) risk is greater than if there wasn't any leverage.
D)the firm will always have a higher ROE than it would without leverage.

Question 17

A potential creditor's judgment about granting credit would be most influenced by the potential customer's:

A) current ratio at the end of the prior fiscal year.
B) most recent acid-test ratio.
C) trend of acid-test ratio over the past three years.
D)practice with respect to taking cash discounts offered by current suppliers.

Question 18

Which of the following is not a category of financial statement ratios?

A) Financial leverage.
B) Liquidity.
C) Profitability.
D)Prospectus.

Question 19

The dividend payout ratio describes:

A) the proportion of earnings paid as dividends.
B) the relationship of dividends per share to market price per share.
C) the percentage change in dividends this year compared to last year.
D)dividends as a percentage of the price/earnings ratio.

Question 20

If the P/E ratio of a company's common stock were 12, and its earnings were $2.50 per common share:

A) the market value of the common stock would be $20.83 per share.
B) the market value of the common stock would be $25.00 per share.
C) an increase in earnings of $0.20 per share, with no change in the multiple, would result in a market price increase of $2.40 per share.
D)an increase in earnings of $0.20 per share, with no change in the multiple, would result in a market price increase of $1.67 per share.

Question 21

For the fiscal year ended March 31, 2017, a company reported earnings per share of $1.95 and cash dividends per share of $0.30. During fiscal 2018, the company had a 3-for-2 stock split. In the annual report for the fiscal year ended March 31, 2018, earnings per share and cash dividends for fiscal 2017 would be reported, respectively, as:

A) $1.95 and $0.30
B) $2.91 and $0.45
C) $1.30 and $0.20
D)$0.65 and $0.10

Question 22

Which of the following is(are) an example of a measure of leverage?

A) Debt yield.
B) Debt payout ratio.
C) Preferred dividend coverage ratio.
D)Debt/equity ratio.

Question 23

A common size income statement:

A) uses the same dollar amount of revenues for each year.
B) expresses items as a percentage of revenues.
C) makes comparisons between years more difficult.
D)is useful in estimating the impact of inflation.

Question 24

Which of the following are examples of physical measures of activity that are sometimes disclosed in corporate annual reports?

A) Sales in units.
B) Number of employees.
C) Gross profit per square foot of selling space.
D)None of the above are examples of physical measures of activity that are sometimes reported in corporate annual reports.
E) A, B, and C above are all examples of physical measures of activity that are sometimes reported in corporate annual reports.

Question 25

The following information was available for the year ended December 31, 2016:
Required:
(a.) Calculate the inventory turnover for 2016.(b.) Calculate the number of days' sales in inventory for 2016, using year-end inventories.(c.) Calculate the accounts receivable turnover for 2016.(d.) Calculate the number of days' sales in accounts receivable for 2016, using year-end accounts receivable.

Question 26

Financial leverage:

A) arises because most borrowed funds have a fixed interest rate.
B) arises because most borrowed funds have a variable interest rate.
C) usually has no bearing on the risk associated with a company.
D)is a concept that does not apply to individuals.

Question 27

The following information was available for the year ended December 31, 2016:
Required:
(a.) Calculate the price/earnings ratio for 2016.(b.) Calculate the dividend payout ratio for 2016.(c.) Calculate the dividend yield for 2016.

Question 28

The following amounts were reported on the December 31, 2016, balance sheet:
Required:
(a.) Calculate working capital at December 31, 2016.(b.) Calculate the current ratio at December 31, 2016.(c.) Calculate the acid-test ratio at December 31, 2016.

Question 29

The following information was available for the year ended December 31, 2016:
Required:
(a.) Calculate the debt ratio at December 31, 2016.(b.) Calculate the debt/equity ratio at December 31, 2016.(c.) Calculate the times interest earned for the year ended December 31, 2016.