Deck 14: Financial Statement Analysis

Question 1

The yield rate on stock is measured by dividing dividends per share by market price per share.

Answer 1

True

Question 2

The gross profit rate usually is lowest on fast moving merchandise and highest on specialty and novelty products.

Answer 2

True

Question 3

The lower the current ratio, the more liquid the company appears.

Answer 3

False

Question 4

When an income statement does not show gross profit or operating income it is called a consolidated statement.

Question 5

The gross profit rate is gross profit expressed as a percentage of net sales.

Question 6

The quality of earnings tends to be higher for a company that uses straight-line depreciation and defers costs whenever possible than for a company which uses accelerated depreciation and defers costs only when necessary.

Question 7

The debt ratio is computed by dividing total liabilities by current assets.

Question 8

Comparative financial statements show side-by-side financial data for two or more companies.

Question 9

A company's liquidity refers to its ability to remain profitable.

Question 10

The quick ratio is especially useful in evaluating the liquidity of a company with fast moving inventories.

Question 11

If total current assets are $140,000 at the end of Year 1, increase by $50,000 by the end of Year 2, and increase by $50,000 in Year 3, the percentage increase over the preceding year is less in Year 3 than in Year 2.

Question 12

The trend in ratios is usually more useful than looking at a single year's ratio.

Question 13

The acid test ratio includes marketable securities but does not include accounts receivable.

Question 14

Current assets are those assets that can be converted into cash within a year and never longer.

Question 15

Deducting the cost of goods sold from net income gives us operating income.

Question 16

ROE - return on equity - is measured by dividing net income by average number of shares outstanding.

Question 17

Inventory is an example of a quick asset.

Question 18

Working capital is the excess of current assets over current liabilities.

Question 19

The owners of a corporation are not personally responsible for the debts of the business.

Question 20

Vertical analysis compares the results of financial information with a business in the same industry for a number of consecutive periods of time.

Question 21

A company should carry the amount of working capital necessary to conduct operations, not necessarily maximize its working capital.

Question 22

A company cannot be increasing its market share if its net sales are declining.

Question 23

In a classified balance sheet, assets are subdivided into current assets, plant and equipment and other assets, while liabilities are all classified as current.

Question 24

If the return on total assets ratio is substantially below the cost of borrowing, common stockholders will benefit from a high debt ratio.

Question 25

The current ratio may be less than, equal to, or greater than the quick ratio.

Question 26

In order for investors and creditors to decide whether to invest in a company or loan a company funds they may:

A) Analyze financial statements.
B) Focus on corporate governance.
C) Both analyze financial statements and focus on corporate governance.
D) Neither analyze financial statements nor focus on corporate governance.

Question 27

The return on equity ratio may be either higher or lower than the return on assets ratio.

Question 28

In a single-step income statement, all revenue items are listed, then all expense items are combined and deducted from total revenue.

Question 29

A comparative financial statement:

A) Places the balance sheet, the income statement, and the statement of cash flows side-by-side in order to compare the results.
B) Places two or more years of a financial statement side-by-side in order to compare results.
C) Places the financial statements of two or more companies side-by-side in order to compare results.
D) Places the dollar amounts next to the percentage amounts of a given year for the income statement.

Question 30

From a creditor's point of view, the lower the debt ratio; the safer the creditor's position.

Question 31

A company whose sales are growing at less than the rate of inflation may actually be selling less merchandise every year.

Question 32

A company whose future earnings are expected to rise substantially is likely to have a higher price-earnings ratio than a company whose future earnings are expected to decline.

Question 33

The measurement of the relative size of each item included in a total is called:

A) Money changes.
B) Trend percentages.
C) Component percentages.
D) Ratios.

Question 34

The inventory turnover rate indicates how quickly inventory sells.

Question 35

The more pessimistic investors' expectations regarding a company's future performance, the lower the price-earnings ratio is likely to be.

Question 36

One number expressed as a percentage of another is called:

A) Money changes.
B) Trend percentages.
C) Component percentages.
D) Ratios.

Question 37

The price-earnings ratio is calculated by dividing earnings per share by the current market price of a share of the company's stock.

Question 38

A single-step and multiple-step income statement are different in form and in the amount of net income reported.

Question 39

The changes in financial statement items from a base year to following years are called:

A) Money changes.
B) Trend percentages.
C) Component percentages.
D) Ratios.

Question 40

Net income stated as a percentage of sales is one means of evaluating a company's ability to control its expenses.

Question 41

The ratio which measures total liabilities as a percentage of total assets is called:

A) Current ratio.
B) Working capital.
C) Debt ratio.
D) Quick ratio.

Question 42

Which of the following is not a measure of short-term liquidity?

A) Quick ratio.
B) Working capital.
C) Current ratio.
D) Debt ratio.

Question 43

All of the following ratios are considered measures of profitability except:

A) Earnings per share.
B) Gross profit rate.
C) Price earnings ratio.
D) Return on assets.

Question 44

A high quality of earnings is indicated by:

A) Earnings derived largely from newly introduced products.
B) Declaration of both cash and stock dividends.
C) Use of the FIFO method of inventory during sustained inflation.
D) A history of increasing earnings and conservative accounting methods.

Question 45

The current ratio:

A) Is computed by dividing current assets by current liabilities.
B) Is computed by subtracting current liabilities from current assets.
C) Remains unchanged throughout the operating cycle.
D) Is a measure of short-term profitability.

Question 46

Which of the following is not a measure of long-term credit risk?

A) Quick ratio.
B) Debt ratio.
C) Interest coverage ratio.
D) Trend in net cash provided by operating activities.

Question 47

The price-earnings ratio is measured by dividing:

A) Book value by earnings per share.
B) Par value by earnings per share.
C) Market value by earnings per share.
D) Market value by total net income.

Question 48

How would a company's working capital be affected if a substantial amount of accounts payable were paid in cash?

A) It would be unaffected.
B) It would fall.
C) It would increase.
D) The change would depend on the relationship between the payables liquidated and current liabilities.

Question 49

The principle factors affecting the quality of working capital are:

A) The nature of the current assets.
B) The length of time to convert current assets into cash.
C) Both the nature of the current assets and the length of time to convert current assets into cash.
D) Neither the nature of the current assets nor the length of time to convert current assets into cash.

Question 50

The current ratio will be _______________ the quick ratio.

A) less than
B) greater than or equal to
C) the same as
D) always different than

Question 51

All of the following ratios are considered measures of liquidity except:

A) Quick ratio.
B) Debt ratio.
C) Current ratio.
D) Receivables turnover rate.

Question 52

In evaluating the quality of a company's earnings, which of the following factors is least important?

A) The accounting methods used by management.
B) The trend of the company's earnings over a period of years.
C) The dollar amount of earnings per share.
D) The stability and sources of the company's earnings.

Question 53

Quick assets include which of the following?

A) Cash, marketable securities, and receivables.
B) Cash, marketable securities, and inventories.
C) Cash, inventories, and receivables.
D) Market securities, receivables, and inventories.

Question 54

The measures most often used in evaluating solvency-the current ratio, quick ratio, and amount of working capital-are developed from amounts appearing in the:

A) Balance sheet.
B) Income statement.
C) Statement of retained earnings.
D) Statement of cash flows.

Question 55

The term, classified financial statements, refers:

A) To the financial statements of all companies working on government projects.
B) Only to the financial statements of defense contractors working on secret projects.
C) To financial statements prepared for use by management, but not for distribution outside of the organization.
D) To financial statements in which items with certain characteristics are placed together in a group in an effort to develop useful subtotals.

Question 56

Component percentages indicate the relative size of each item included in a total. Which of the following statements is true?

A) Income statement items are expressed as a percentage of net income, while balance sheet items are expressed as a percentage of total assets.
B) Income statement items are expressed as a percentage of net sales, while balance sheet items are expressed as a percentage of total assets.
C) Income statement items are expressed as a percentage of net income, while balance sheet items are expressed as a percentage of net worth.
D) Both income statement and balance sheet items are expressed as a percentage of net worth.

Question 57

The excess of current assets over current liabilities is called:

A) Current ratio.
B) Working capital.
C) Debt ratio.
D) Quick ratio.

Question 58

Which of the following is not a measure of profitability?

A) EPS.
B) ROI.
C) ROE.
D) NLR.

Question 59

Comparative financial statements compare the company's current statements with:

A) Those of prior periods.
B) Those of other companies in the same industry.
C) Those of the company's principal competitor.
D) The budgeted level of performance for the period.

Question 60

Which American industry would tend to have the greatest debt ratio?

A) Auto.
B) Retail clothing.
C) Manufacturing.
D) Banking.

Question 61

The debt ratio indicates the percentage of:

A) Total assets financed by long-term mortgages.
B) Revenue consumed by interest expense.
C) Total assets financed by creditors.
D) Total liabilities classified as current.

Question 62

In a multiple-step income statement, income taxes are not classified as operating expenses because:

A) Income taxes do not contribute to the production of revenue.
B) Income taxes stem from the manner in which assets are financed, not the manner in which they are used in business operations.
C) Not all forms of business organization are subject to income taxes.
D) The statement is incorrect; income taxes are classified as operating expenses.

Question 63

A rising gross profit rate most strongly suggests:

A) An increase in physical sales volume.
B) Strong consumer demand for the company's products.
C) Intense competition.
D) Increased short-term solvency.

Question 64

Assume that net sales are increasing faster than the rate of inflation, and that the company's gross profit rate is rising. Of the following, the most logical conclusion is that:

A) The company's cost of purchasing merchandise is rising rapidly.
B) Operating expenses are falling.
C) Demand for the company's products is very strong.
D) The company has achieved an increase in sales volume by reducing its sales prices.

Question 65

The quick ratio:

A) Is computed by dividing current assets by current liabilities.
B) Is always higher than the current ratio.
C) Cannot be higher than the current ratio.
D) May be higher or lower than the current ratio.

Question 66

Short-term creditors are most likely to use the quick ratio instead of the current ratio in evaluating the solvency of a company with large, slow-moving:

A) Plant and equipment.
B) Receivables.
C) Inventories.
D) Employees.

Question 67

When comparing the current ratio to the quick ratio:

A) The current ratio will always be greater.
B) The quick ratio will always be greater.
C) The quick ratio is sometimes greater and sometimes less than the current ratio.
D) They always will be the same.

Question 68

Operating income excludes each of the following, except:

A) Interest expense.
B) Income taxes.
C) Depreciation.
D) Prepaid expenses.

Question 69

On common size income statements, each component in the income statement is represented as a percentage of:

A) Net income.
B) Sales.
C) Total assets.
D) Profit.

Question 70

Generally speaking, which appears to be a desirable current ratio?

A) 20 to 1.
B) 1 to 20.
C) 2 to 1.
D) 1 to 2.

Question 71

Current assets are those assets that can be converted into cash within:

A) One year and never longer.
B) One year or the operating cycle, whichever is longer.
C) One year or the operating cycle, whichever is shorter.
D) Management's discretion.

Question 72

Traditionally, stock of financially sound companies with stable earnings usually have a price-earnings ratio of:

A) 90.
B) 12.
C) 4.
D) 3.

Question 73

The current ratio is calculated by:

A) Dividing current assets by total assets.
B) Dividing current assets by total liabilities.
C) Dividing current assets by stockholders' equity.
D) Dividing current assets by current liabilities.

Question 74

Which of the following is considered a quick asset?

A) Accounts receivable.
B) Inventory.
C) Automobiles.
D) Prepaid expenses.

Question 75

In a multiple-step income statement, interest expense usually is not classified as an operating expense because interest charges:

A) Do not contribute to the production of revenue.
B) Stem from the manner in which assets are financed, not the manner in which they are used in business operations.
C) Relate directly to the cost of goods sold.
D) The statement is incorrect. Interest usually is classified as an operating expense.

Question 76

All of the following captions or subtotals are typical of a multiple-step income statement, except for:

A) Net sales.
B) Gross profit.
C) Total costs and expenses.
D) Operating income.

Question 77

The gross profit rate represents:

A) Total sales revenue.
B) The percentage change in net sales from the prior period.
C) The percentage of sales revenue remaining after providing for the cost of the merchandise sold.
D) Net income stated as a percentage of total sales revenue.

Question 78

Which of the following transactions would cause a change in the amount of a company's working capital?

A) Collection of an account receivable.
B) Payment of an account payable.
C) Borrowing cash over a 60-day period.
D) Selling merchandise at a price above its cost.

Question 79

In calculating earnings per share, the denominator of the equation includes:

A) Only common stock outstanding.
B) Common stock plus preferred stock.
C) Common stock less preferred stock.
D) The total shares of authorized common stock.

Question 80

The debt ratio is used primarily as a measure of:

A) Short-term liquidity.
B) Creditors' long-term risk.
C) Profitability.
D) Return on Investment.