Financial and Managerial Accounting, 8e (Wild)
Chapter 13 Analysis of Financial Statements
1) Financial statement analysis applies analytical tools to financial statements and related data
for making business decisions.
2) External users of accounting information manage and operate the company.
3) The evaluation of company performance and financial condition focuses solely on past
performance.
4) The evaluation of company performance and financial condition includes evaluation of (1)
past and current performance, (2) current financial position, and (3) future performance and risk.
5) External users of accounting information make the strategic and operating decisions of a
company.
6) Internal users of accounting information manage and operate the company.
7) One purpose of financial statement analysis for internal users is to provide information to
improve efficiency and effectiveness.
8) Evaluation of company performance does not include analysis of (1) past and current
performance, (2) current financial position, and (3) future performance and risk.
9) A company’s board of directors analyzes financial statements to improve operating
performance and evaluate the performance of individual entry-level employees.
10) Auditors use financial statements to assess “fair presentation” of financial results.
11) Financial analysis does not include assessing future performance and risk because financial
statements are based on past performance.
12) Profitability is the ability to generate future revenues and meet long-term obligations.
13) Profitability is the ability to provide financial rewards sufficient to attract and retain
financing.
14) Liquidity and efficiency are the ability to meet short-term obligations and to efficiently
generate revenue.
15) Market prospects is the ability to meet short-term obligations.
16) Market prospects are the ability to generate positive market expectations.
17) Profitability is the ability to generate positive market expectations.
18) Financial reporting includes not only general purpose financial statements, but also
information from SEC filings, press releases, shareholders’ meetings, forecasts, management
letters, and auditor’s reports.
19) The building blocks of financial statement analysis include (1) liquidity, (2) salability, (3)
solvency, and (4) fair presentation.
20) The building blocks of financial statement analysis include (1) liquidity, (2) solvency, (3)
profitability, and (4) market prospects.
21) General-purpose financial statements include the (1) income statement, (2) balance sheet, (3)
statement of stockholders’ equity (or statement of retained earnings), (4) statement of cash flows,
and (5) notes to these statements.
22) An example of an intracompany comparison is comparing Apple’s profit margin to the
industry’s profit margin.
23) Standards for comparison when interpreting financial statements include competitor and
industry performance data.
24) Measures taken from a selected competitor or a group of competitors are often excellent
standards of comparison for analysis.
25) Intra-company analysis is based on comparisons with competitors.
26) Intra-company analysis compares a company’s current performance to its own prior
performance.
27) An example of a guideline (or rule of thumb) for comparison is the 2:1 level for the current
ratio and 1:1 level for the acid-test ratio.
28) Vertical analysis is the comparison of a company’s financial condition and performance
across time.
29) Horizontal analysis is the comparison of a company’s financial condition and performance
across time.
30) If a company is comparing its financial condition or performance to a base amount, it is
using vertical analysis.
31) Horizontal analysis is the comparison of a company’s financial condition and performance to
a base amount.
32) If a company is comparing this year’s financial performance to last year’s financial
performance, it is using horizontal analysis.
33) When a negative amount is in the base period and a positive amount is in the analysis period
(or vice versa), a meaningful percent change cannot be calculated.
34) When no value is in the base period, no percent change is computable.
35) When an item has a value in the base period and zero in the analysis period, the decrease is
100 percent.
36) When an item has a value in the base period and zero in the analysis period, the decrease is 0
percent.
37) Three of the most common tools of financial analysis include horizontal analysis, vertical
analysis, and ratio analysis.
38) The key factors section of a financial statement analysis report includes both quantitative and
qualitative indicators of company performance.
39) The executive summary of a financial statement analysis report includes the evidential
matter, assumptions, and inferences for the report.
40) A good financial statement analysis report often includes the following sections: executive
summary, analysis overview, evidential matter, assumptions, key factors, and inferences.
41) Earnings per share is calculated using income before interest and income taxes.
42) Trend analysis is computing percents that show patterns in data across periods.
43) Comparative financial statements are reports that show financial amounts in side by side
columns on a single statement for analysis purposes.
44) Vertical analysis is used to reveal patterns in data covering two or more successive periods.
45) Horizontal analysis is used to reveal patterns in data covering two or more successive
periods.
46) Trend analysis is a form of horizontal analysis that can reveal patterns in data across
successive periods.
47) Trend analysis of financial statement items can include comparisons of relations between
items on different financial statements.
48) Horizontal analysis is used to reveal patterns in data covering successive periods.
49) A trend percent is calculated by dividing the analysis period amount by the base period
amount and multiplying the result by 100.
50) The percent change of a comparative financial statement item is computed by subtracting the
estimated period amount from the base period amount, dividing the result by the base period
amount and multiplying that result by 100.
51) The percent change of a comparative financial statement item is computed by subtracting the
base period amount from the analysis period amount, dividing the result by the base period
amount and multiplying that result by 100.
52) Vertical analysis is a tool to evaluate individual financial statement items or groups of items
in terms of a specific base amount.
53) Horizontal analysis is used to understand the relative importance of each financial statement
item.
54) The base amount for a common-size balance sheet is usually total assets.
55) An advantage of common-size statements is that they show patterns in data across periods.
56) Graphical analysis of the balance sheet can be useful in assessing sources of financing.
57) A corporation reported cash of $14,000, total assets of $178,300, and net income of $50,000.
Its common-size percent for cash equals 7.85%.
58) A ratio expresses a relation between two amounts and can be expressed as a percent, rate, or
proportion.
59) To be useful, a ratio must refer to economically important relationships, such as a sale price
compared to its cost.
60) Liquidity refers to the availability of resources to meet short-term cash requirements.
61) Working capital is computed as current liabilities minus current assets.
62) The current ratio is calculated as total assets divided by current assets.
63) Total asset turnover reflects a company’s ability to use its assets to generate sales and is an
important indication of operating efficiency.
64) Capital structure measures a company’s ability to earn net income from sales.
65) Debt financing is considered riskier than equity financing because of its required payments
of interest and principal.
66) The greater the times interest earned ratio, the greater the risk a company will not be able to
pay interest expense.
67) Efficiency refers to how productive a company is in using its assets, and is usually measured
relative to how much revenue is generated from a certain level of assets.
68) The higher the accounts receivable turnover, the less quickly accounts receivable are
collected.
69) A company with a high inventory turnover requires a smaller investment in inventory than
one producing the same sales with a lower turnover.
70) A company with a low inventory turnover requires a smaller investment in inventory than
one producing the same sales with a higher turnover.
71) A company that has days’ sales uncollected of 30 days and days’ sales in inventory of 18 days
implies that inventory will be converted to cash in about 12 days.
72) The return on total assets can be calculated as profit margin times total asset turnover.
73) The return on common stockholder’s equity measures a company’s success in earning net
income for its owners.
74) Low expectations of future performance result in a low price-earnings (PE) ratio.
75) The return on total assets ratio is a profitability measure.
76) A company reports basic earnings per share of $3.50, cash dividends per share of $0.75, and
a market price per share of $64.75. The company’s dividend yield equals 21.4%.
77) The purposes of financial statement analysis include all of the following except:
A) Providing information to improve efficiency and effectiveness.
B) Providing information for managing and operating the company.
C) Helping external users assess performance.
D) Helping the board of directors monitor management’s performance.
E) Assuring that the company will not be the subject of an IRS audit.
78) Evaluation of company performance can include comparison and/or assessment of all but
which of the following:
A) Past performance.
B) Current performance.
C) Current financial position.
D) Future performance and risk.
E) External user needs and demands.
79) External users of financial information:
A) Are those individuals involved in managing and operating the company.
B) Include internal auditors and managers.
C) Are not directly involved in operating the company.
D) Make strategic decisions for a company.
E) Make operating decisions for a company.