978-0134125053 Chapter 12 Part 1

Unlock access to all the studying documents.

View Full Document

Financial Accounting, 4e (Kemp)

Chapter 12 Financial Statement Analysis

12.1 Understand the purpose and process of financial analysis

1) The economic environment of a business describes how a business is affected by competitors.

Question Type: Concept

2) The competitive environment of a business describes how a business competes for critical

resources.

Question Type: Concept

3) Financial analysis is used to predict the future of a business.

Question Type: Concept

4) Financial statement analysis indicates only that a problem may exist and offers clues as to

what the problem might be.

5) Financial analysis focuses on evaluating a company‘s past performance to predict its current

performance.

Question Type: Concept

6) Financial analysis is the process of using a company‘s financial information to evaluate

whether or not the company is creating value.

Question Type: Concept

7) Net income belongs to a company’s stockholders.

Question Type: Concept

8) The management discussion and analysis is typically located after the financial statements in a

company’s annual report.

Question Type: Concept

9) A business model describes what a business does, what it sells, and who it sells to.

Question Type: Concept

10) A business model deals with how a business makes customers want to buy their product.

Question Type: Concept

11) Comparing your company with a competing company in the same category of business is

called benchmarking.

Question Type: Application

12) Keeping prices low is an example of a business strategy.

Question Type: Application

13) The purpose of financial analysis is to see how revenue changes over time.

Question Type: Concept

14) Kroger would probably benchmark with other:

A) general merchandise retailers.

B) big box retailers.

C) grocery chains.

D) companies that sell food.

Question Type: Application

15) Evaluating whether a business is creating value is known as:

A) benchmarking.

B) financial analysis.

C) comparative analysis.

D) valuation.

Question Type: Concept

16) Which of the following is NOT one of the steps in financial analysis?

A) Understanding the environment in which a business operates

B) Analyzing a business’ operations

C) Preparing a business‘ financial statements

D) Understanding a business’ model and strategy

Question Type: Concept

17) Which of the following is NOT part of what a company’s business model describes?

A) What products the company sells

B) How to increase the customer base

C) Who the company sells to

D) What the company does

Question Type: Concept

18) A company’s business strategy describes:

A) what the business does.

B) how the business is affected by the overall economy.

C) who the business sells to.

D) how the business creates a competitive advantage.

Question Type: Concept

19) A business’s competitive environment describes:

A) how a business competes for critical resources.

B) how a business is affected by the overall economy.

C) how a business uses its business model to create a competitive advantage.

D) how a business makes its product.

Question Type: Concept

20) When an analyst compares a business with a similar business it is referred to as:

A) comparative analysis.

B) mentoring.

C) benchmarking.

D) idolizing.

Question Type: Concept

21) Which of the following is typically NOT one of the questions asked when analyzing a

business’ operations?

A) How is the business investing its money?

B) When was the business started?

C) Is the business a going concern?

D) Can the business pay its debt obligations?

Question Type: Concept

22) Management discussion and analysis is:

A) part of a business’s annual report.

B) prepared by the external auditors.

C) a summary of all the business’s press releases for the year.

D) both A and B.

Question Type: Concept

23) A business’s economic environment describes how a business:

A) competes for critical resources.

B) is affected by the overall economy.

C) creates a competitive advantage.

D) compares to similar companies in industry.

Question Type: Concept

24) Which of the following statements is TRUE regarding the results of financial statement

analysis?

A) They can be found in the management discussion and analysis section of the financial

statements.

B) They are most meaningful when compared to competitors in diverse industries.

C) They identify whether or not fraud has taken place.

D) They have limited value without a point of reference.

Question Type: Concept

12.2 Perform financial analysis using financial statements

1) Return on equity measures the relationship between net income and average total assets.

Question Type: Concept

2) Computing trend percentages over a period of years helps to indicate the direction in which

the business is going.

Question Type: Concept

3) The three ways to analyze financial statements are by using horizontal, vertical and ratio

analysis.

Question Type: Concept

4) Operating profit (EBIT) is first used to pay dividends to a company’s stockholders.

Question Type: Concept

5) In computing trend percentages, the most recent year amounts become the base and are always

set to 100%.

Question Type: Concept

6) The fixed asset turnover ratio measures a company’s ability to generate sales using all of its

assets.

Question Type: Concept

7) The return on assets measures the relationship between sales and average total assets.

8) Most companies want a low inventory turnover ratio.

Question Type: Concept

9) Determining the percentage changes in line items on financial statements for two consecutive

years is called horizontal analysis.

Question Type: Concept

10) Knowing the dollar amount of change from year–to-year in an account is less relevant than

knowing the percentage change.

Question Type: Concept

11) The most recent period in a horizontal analysis is called the base period.

Question Type: Concept

12) Horizontal analysis is only done on the Balance Sheet.

Question Type: Concept

13) The formula for determining the percentage change in an account from one year to the next

year is [(amount in later period – amount in earlier period)/ amount in earlier period] times 100.

Question Type: Concept

14) In a vertical analysis, an item is selected as the base amount and all other items are computed

as a percentage of the base amount.

Question Type: Concept

15) The base amounts for a vertical analysis are net income and total equity.

Question Type: Concept

16) Common-size statements are useful when comparing a company’s performance against that

of a company of a different size.

Question Type: Concept

17) Common-size statements use the same percentages that are computed during a vertical

analysis, but no dollar amounts are shown.

Question Type: Concept

18) How a business uses its money to acquire assets is called the financing decision.

Question Type: Concept

19) Return on equity shows how well the business is investing its money, and if it using its assets

efficiently.

Question Type: Concept

20) The goal of the investing decision is to obtain money at the lowest possible cost.

Question Type: Concept

21) The net working capital for a company with current assets of $69,000, quick assets of

$32,000 total assets of $130,000, current liabilities of $48,000 and net sales of $82,000 would be:

A) $101,000.

B) $53,000.

C) $13,000.

D) $21,000.

Question Type: Application

22) The net working capital for a company with current assets of $77,000, quick assets of

$46,000, total assets of $187,000 current liabilities of $65,000 and net sales of $91,000 would be:

A) $58,000.

B) $26,000.

C) $12,000.

D) $122,000.

Question Type: Application

23) The current ratio for a company with current assets of $79,000, quick assets of $43,000, total

assets of $197,000 current liabilities of $64,000 and net sales of $95,000 would be: (Round your

final answer to two decimal places.)

A) 0.67.

B) 3.08.

C) 1.23.

D) 0.59.

Question Type: Application

24) Winters, Inc. has a cash balance of $78,000; short-term investments of $22,000; net

receivables of $65,000; and inventory of $490,000. Current liabilities total $200,000. Winters’

current ratio is: (Round your final answer to two decimal places.)

A) 3.28 to 1.

B) 2.95 to 1.

C) 0.83 to 1.

D) 0.72 to 1.

Question Type: Application

25) Torres Company has $51,000 in cash; $8,000 in Accounts Receivable; $27,000 in short-term

investments and $90,000 in merchandise inventory. The company also has $55,000 in current

liabilities. The company’s current ratio is: (Round your final answer to two decimal places.)

A) 0.93.

B) 1.56.

C) 1.07.

D) 3.20.

Question Type: Application

26) The 2015 and 2016 balance sheets for Shadow Industries showed Cash of $7,600 and $9,100

respectively, Accounts Receivable of $16,000 and $18,000, respectively, Inventory of $11,000

and $8,000, respectively, and Accounts Payable of $5,300 and $7,300, respectively. Its 2016

Income Statement showed Net Sales of $103,000, Cost of Goods Sold of $65,000, and Net

Income of $30,000. The cash conversion cycle for 2016 was: (Assume all Sales are credit sales.

Round any intermediary calculations to two decimal places and your final answer to the nearest

day.)

A) 149 days.

B) 28 days.

C) 42 days.

D) 78 days.

Question Type: Application

27) The 2015 and 2016 balance sheets for Steele Electric showed Cash of $6500 and $8000

respectively, Accounts Receivable of $17,000 and $20,000, respectively, Inventory of $12,500

and $9500, respectively, and Accounts Payable of $4700 and $7700, respectively. Its 2016

Income Statement showed Net Sales of $120,000, Cost of Goods Sold of $59,000, and Net

Income of $33,000. The cash conversion cycle for 2016 was: (Assume all Sales are credit sales.

Round any intermediary calculations to two decimal places and your final answer to the nearest

day.)

A) 50 days.

B) 68 days.

C) 86 days.

D) 27 days.

Question Type: Application

28) After income from continuing operations, the next section on an Income Statement is:

A) earnings per share data.

B) discontinued operations.

C) continuing operations.

D) other income (expense).

Question Type: Concept

29) Everyday business activities are reported in the Income Statement‘s:

A) continuing and discontinued operations section.

B) discontinued operations section.

C) continuing operations section.

D) extraordinary items section.

Question Type: Concept

30) When a company sells off part of the business, this would be reported on the Income

Statement:

A) as a retrospective application.

B) in the discontinued operations section.

C) in the continuing operations section.

D) in the other income (expense) section.

Question Type: Concept

31) Predictions about a company’s future earnings can best be inferred from the Income

Statement’s:

A) earnings per share data.

B) discontinued operations section.

C) continuing operations section.

D) other income (expense) section.

Question Type: Concept

32) Other income (such as rental income) and other expenses (such as interest expense) are listed

on the Income Statement immediately after:

A) gross profit.

B) operating expenses.

C) operating income.

D) income tax expense.

Question Type: Concept

33) Gains and losses on plant, property, and equipment are reported on the Income Statement:

A) as a retrospective application.

B) in the discontinued operations section.

C) in the continuing operations section.

D) in the financing section.

Question Type: Concept

34) A(n) ________ is a distinguishable part of a business that is subject to a different set of risks

and returns than other parts of the business.

A) extraordinary event

B) business segment

C) product line

D) manufacturing line

Question Type: Concept

35) On the Income Statement, the results of discontinued operations are reported:

A) as part of other income (expense).

B) as part of operating income.

C) net of income tax or net of income tax savings.

D) before the operating income section.

Question Type: Concept