Question 1

By using common-size income statements,firms can determine how various expenses as a percentage of total sales changed from period to period.

Accepted Answer

Common-size income statements express all income statement items as a percentage of total sales, allowing firms to easily see how expenses have changed relative to total revenue from period to period.

Question 2

Common-size financial statements represent all figures on the financial statements
A)in inflation adjusted dollars from a base year.
B)as if all companies being compared had the same total revenue.
C)as if all companies being compared had the same total assets.
D)as a percentage of either sales or total assets.

Accepted Answer

Common-size financial statements represent all figures on the financial statements as a percentage of either sales or total assets. This allows for easier comparison between companies of different sizes and in different industries.

Question 3

Common-size income statements represent all figures on the income statement
A)as a percentage change from the previous year.
B)as percentages of the current year's sales.
C)as a percentage of some benchmark figure.
D)as a percentage of total assets.

Accepted Answer

Common-size income statements represent all figures on the income statement as percentages of the current year's sales. This allows for easy comparison between companies of different sizes and helps identify areas of the income statement that may require attention.

Question 4

What is the purpose of using common-size balance sheets and common-size income statements?

Accepted Answer

The answer of What is the purpose of using common-size...

Question 5

Which of the following parties would perform an internal financial analysis?
A)A financial analyst forecasting the next period's borrowing needs
B)A firm's competitors
C)A firm's creditors
D)Analysts for investment companies

Accepted Answer

An internal financial analysis is conducted by a company's own financial analyst to assess the company's financial performance and identify areas of strength and weakness to make informed decisions.

Question 6

Which of the following statements is true?
A)Current assets consist of cash,accounts receivable,inventory,and net plant,property and equipment.
B)The quick ratio is a more restrictive measure of a firm's liquidity than the current ratio.
C)For the average firm,inventory is considered to be more "liquid" than accounts receivable.
D)A successful firm's current liabilities should always be greater than its current assets.

Accepted Answer

The quick ratio only considers the most liquid assets (cash and accounts receivable) and excludes inventory, making it a more restrictive measure of a firm's liquidity than the current ratio. The other statements are false.

Question 7

The analysis of a firm's financial statements can be an important factor in the firm's ability to borrow money.

Accepted Answer

Lenders often look at a company's financial statements (such as the balance sheet, income statement, and cash flow statement) to assess its creditworthiness and ability to repay loans. A strong financial position indicated by solid financial statements can increase the likelihood of a company being approved for a loan and possibly receive more favorable terms.

Question 8

Which of the following parties would be interested in an analysis of the firm's financial statements?
A)Investors
B)Creditors
C)The firm's managers
D)all of the above

Accepted Answer

All of the mentioned parties (investors, creditors, and the firm's managers) have an interest in analyzing the firm's financial statements for different purposes. Investors use financial statements to evaluate the firm's performance, growth, and profitability to decide whether to invest or not. Creditors use financial statements to assess the firm's creditworthiness and ability to repay loans or debt. Managers use financial statements to track the company's financial health and make informed decisions about future investments and expenses.

Question 9

Which of the following parties would perform an external financial analysis?
A)A firm's compensation committee
B)A financial analyst forecasting the next period's borrowing needs
C)A firm's creditors
D)A CFO comparing the performance of the firm's various divisions

Accepted Answer

The answer of Which of the following parties would perform...

Question 10

On a common-size balance sheet,total assets are equal to 100%.

Accepted Answer

Common-size balance sheet expresses each item as a percentage of total assets, so by definition, total assets will always be equal to 100%.

Question 11

Individuals who do not work for a company rarely have enough information to perform a detailed financial analysis of the company.

Accepted Answer

The answer of Individuals who do not work for a...

Question 12

Common-size balance sheets represent all figures on the balance sheet
A)as a percentage change from the previous year.
B)percentages of the current year's sales.
C)as a percentage of some benchmark figure.
D)as a percentage of total assets.

Accepted Answer

Common-size balance sheets represent all figures on the balance sheet as a percentage of total assets. This allows for easier comparison of the relative size and composition of different asset and liability categories.

Question 13

The question "Did the ordinary shareholders receive an adequate return on their investment?" is answered through the use of
A)liquidity ratios.
B)profitability ratios.
C)coverage ratios.
D)leverage ratios.

Accepted Answer

The question is asking about the return on investment, which is a measure of profitability. Therefore, profitability ratios such as return on investment (ROI) or return on equity (ROE) would be the most appropriate to answer the question. Liquidity ratios measure a company's ability to meet short-term obligations, coverage ratios assess a company's ability to pay interest and debt, and leverage ratios look at the company's level of debt and how it affects the company's financial structure.

Question 14

The principal reason for preparing common-size statements is
A)to make meaningful comparisons between firms that are not the same size.
B)to make meaningful comparisons between different fiscal years.
C)to eliminate the effects of inflation.
D)to make meaningful comparisons between firms in different industries.

Accepted Answer

Common-size statements standardize financial information by expressing all items as percentages of a common base, such as sales or total assets. This allows for more meaningful comparisons between firms of different sizes, as well as comparisons between different fiscal years for the same firm. Common-size statements do not eliminate the effects of inflation or allow for meaningful comparisons between firms in different industries.

Question 15

If you were given the components of current assets and of current liabilities,what ratio(s)could you compute?
A)Acid test or quick ratio
B)Average collection period
C)Current ratio
D)Both A and C
E)All of the above

Accepted Answer

The acid test or quick ratio and current ratio can both be computed using the components of current assets and current liabilities. The average collection period requires additional information about sales and accounts receivable, so it cannot be computed with just the components of current assets and current liabilities. Therefore, the best choice is D.

Question 16

On a common-size income statement,EBIT is equal to 100%.

Accepted Answer

On a common size income statement, EBIT is shown as a percentage of revenue, but it is not necessarily equal to 100%. The percentage varies depending on the company's profitability and operating expenses.

Question 17

Which of the following transactions does NOT affect the quick ratio?
A)Land held for investment is sold for cash.
B)Equipment is purchased and is financed by a long-term debt issue.
C)Inventories are sold for cash.
D)Inventories are sold on a credit basis.

Accepted Answer

The answer of Which of the following transactions does NOT...

Question 18

The analysis of a firm's financial statements is usually of interest only to people who do not work for the company.

Accepted Answer

The analysis of a firm's financial statements is of interest to various stakeholders such as investors, creditors, suppliers, employees, and management within the company itself. It helps in evaluating the financial health of the company and making informed decisions.

Question 19

The debt ratio is a measure of a firm's
A)leverage.
B)profitability.
C)liquidity.
D)efficiency.

Accepted Answer

The debt ratio is a measure of a firm's leverage, which indicates the proportion of a company's assets that are financed by debt. A higher debt ratio indicates that a larger percentage of the company's assets are financed through borrowing, making the company more leveraged and potentially riskier. Profitability, liquidity, and efficiency are measured by other financial ratios, such as return on equity, current ratio, and asset turnover ratio, respectively.

Question 20

Given an accounts receivable turnover of 8 and annual credit sales of $362,000,the average collection period (360-day year)is
A)90 days.
B)45 days.
C)75 days.
D)60 days.

Accepted Answer

The answer of Given an accounts receivable turnover of 8...

Quiz 4: Financial Analysis - Sizing up Firm Performance

By using common-size income statements,firms can determine how various expenses as a percentage of total sales changed from period to period.

Common-size financial statements represent all figures on the financial statements

Common-size income statements represent all figures on the income statement

What is the purpose of using common-size balance sheets and common-size income statements?

Which of the following parties would perform an internal financial analysis?

Which of the following statements is true?

The analysis of a firm's financial statements can be an important factor in the firm's ability to borrow money.

Which of the following parties would be interested in an analysis of the firm's financial statements?

Which of the following parties would perform an external financial analysis?

On a common-size balance sheet,total assets are equal to 100%.

Individuals who do not work for a company rarely have enough information to perform a detailed financial analysis of the company.

Common-size balance sheets represent all figures on the balance sheet

The question "Did the ordinary shareholders receive an adequate return on their investment?" is answered through the use of

The principal reason for preparing common-size statements is

If you were given the components of current assets and of current liabilities,what ratio(s) could you compute?

On a common-size income statement,EBIT is equal to 100%.

Which of the following transactions does NOT affect the quick ratio?

The analysis of a firm's financial statements is usually of interest only to people who do not work for the company.

The debt ratio is a measure of a firm's

Given an accounts receivable turnover of 8 and annual credit sales of $362,000,the average collection period (360-day year) is