Question 1

Profitability is the ability to generate future revenues and meet long-term obligations.

Accepted Answer

Profitability refers to a company's ability to generate income relative to its revenue, operating costs, and other expenses over a certain period of time. It does not directly relate to the ability to generate future revenues or meet long-term obligations.

Question 2

Three of the most common tools of financial analysis include horizontal analysis,vertical analysis,and ratio analysis.

Accepted Answer

This is true, horizontal analysis compares financial data over a period of time, vertical analysis compares financial data as a percentage of a base amount, and ratio analysis uses mathematical formulas to analyze the relationship between different financial data.

Question 3

Standards for comparison of performance are necessary when making judgments about a company's performance.

Accepted Answer

Without standards for comparison, it would be difficult to assess whether a company's performance is good, bad or average. Standards provide a benchmark against which performance can be evaluated.

Question 4

Intercompany analysis is based on internal comparisons.

Accepted Answer

Intercompany analysis involves comparing financial data and performance metrics between different companies, not just within a single company.

Question 5

Financial statement analysis is the application of analytical tools to general-purpose financial statements and related data for making business decisions.

Accepted Answer

Financial statement analysis involves using different tools and techniques to evaluate financial statements and related data to facilitate informed business decisions.

Question 6

Financial statement analysis lessens the need for expert judgment.

Accepted Answer

While financial statement analysis provides quantifiable data, expert judgment is still necessary to interpret the data and make informed decisions. Expert judgment is needed to identify trends, anomalies, and potential issues that may not be immediately apparent from the financial statements alone.

Question 7

The four building blocks of financial statement analysis include (1)liquidity,(2)creditworthiness,(3)solvency,and (4)profitability.

Accepted Answer

The four building blocks of financial statement analysis are liquidity, solvency, profitability, and market prospects, not creditworthiness.

Question 8

Financial analysis refers to the communication of relevant financial information to decision makers.

Accepted Answer

Financial analysis refers to the process of evaluating businesses, projects, budgets, and other finance-related entities to determine their performance and suitability. Communication of relevant financial information is a part of financial reporting, not analysis.

Question 9

Liquidity and efficiency are considered to be building blocks of financial statement analysis.

Accepted Answer

Liquidity and efficiency are important factors to consider when analyzing a company's financial statements, as they provide insights into a company's ability to meet short-term obligations and operate efficiently. This information is critical for investors and creditors to make informed decisions about whether to invest or lend to the company.

Question 10

A trend percent is calculated by dividing the analysis period amount by the base period amount and multiplying the result by 100.

Accepted Answer

This is the correct formula for calculating a trend percent.

Question 11

The purpose of financial statement analysis for internal users is to provide information helpful in improving the company's efficiency or effectiveness in providing products or services.

Accepted Answer

Financial statement analysis for internal users is focused on using financial information to make decisions that will lead to improved performance and outcomes within the organization. This can include identifying areas for cost savings, evaluating the effectiveness of marketing or production strategies, and making informed decisions about investments in the business.

Question 12

Comparative analysis is used to reveal patterns in data covering successive periods.

Accepted Answer

The answer of Comparative analysis is used to reveal patterns...

Question 13

External users of accounting information are often directly involved in running a company.

Accepted Answer

External users of accounting information are not typically involved in running a company, but rather use the information for decision-making purposes such as investing, lending, or analyzing competition.

Question 14

Standards for comparison for interpreting financial statement analysis include: intracompany,credit standing,and industry.

Accepted Answer

The correct standards for comparison in financial statement analysis are intracompany, industry, and competitor (intercompany) comparisons, not credit standing.

Question 15

Guidelines or rules of thumb should be always be applied in financial analysis.

Accepted Answer

Guidelines or rules of thumb can be helpful in financial analysis, but they should not always be applied as they may not be suitable for every situation or context. Financial analysis often requires a tailored approach that considers the specific circumstances and goals of the analysis.

Question 16

Analysis measures taken from a selected competitor or group of competitors are often the best standards of comparisons.

Accepted Answer

Analysis measures taken from a selected competitor or group of competitors can provide valuable insight into industry trends, best practices, and areas for improvement. Comparing your own performance metrics to those of your competitors can help identify areas where you may be falling short or excelling, and can inform strategic decision-making. Therefore, using competitor analysis as a standard of comparison is often a wise approach.

Question 17

Evaluation of company performance includes (1)past and current performance,(2)current financial position,and (3)future performance and risk.

Accepted Answer

Evaluation of company performance typically involves assessing the company's past and current performance, analyzing its current financial position, and considering factors that may affect its future performance and risk.

Question 18

Comparative financial statements are reports where financial amounts are placed side by side in columns on a single statement for analysis purposes.

Accepted Answer

Comparative financial statements do involve placing financial amounts side by side in columns on a single statement for analysis purposes.

Question 19

General-purpose financial statements include the (1)income statement,(2)balance sheet,(3)statement of changes in equity,(4)statement of cash flows,and (5)notes related to the statements.

Accepted Answer

This is true. General-purpose financial statements typically include these five components as they aim to provide a comprehensive overview of a company's financial performance and position.

Question 20

A company's board of directors analyzes financial statements to assess future company prospects for investing and lending decisions.

Accepted Answer

The primary role of a company's board of directors is to provide strategic direction, governance, and oversight. It is the management's responsibility to analyze financial statements for operational decisions, while investors and lenders use them to assess the company's financial health for investing and lending decisions.

Quiz 9: Analyzing Financial Statements