Chapter 13 Analyzing and Interpreting Financial Statements Answer
Key
True / False Questions
1.
Financial statement analysis is the application of analytical tools to general-purpose
financial statements and related data for making business decisions.
2.
Financial statement analysis lessens the need for expert judgment.
3.
Financial statement analysis may be used for personal financial investment decisions.
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.
One purpose of financial statement analysis for internal users is to provide strategic
information to improve company efficiency and effectiveness in providing products and
services.
7.
Evaluation of company performance does
not
include analysis of (1) past and current
performance, (2) current financial position, and (3) future performance and risk.
8.
A company’s board of directors analyzes financial statements to assess future company
prospects for making operating decisions.
9.
Financial analysis only refers to the communication of relevant financial information to
decision makers.
10.
Profitability is the ability to generate future revenues and meet long-term obligations.
11.
Liquidity and efficiency are the ability to meet short-term obligations and to efficiently
generate revenue.
12.
Market prospects are the ability to provide financial rewards sufficient to attract and
retain financing.
13.
Profitability is the ability to generate positive market expectations.
14.
Financial reporting includes not only general purpose financial statements, but also
information from SEC filings, press releases, shareholders’ meetings, forecasts,
management letters, auditor’s reports, and Webcasts.
15.
The building blocks of financial statement analysis include (1) liquidity, (2) salability, (3)
solvency, and (4) profitability.
16.
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.
17.
Standards for comparison are not generally necessary when making judgments about a
company’s performance.
18.
Standards for comparison when interpreting financial statement analysis include
competitor and industry performance data.
19.
Measures taken from a selected competitor or a group of competitors are often excellent
standards of comparison for analysis.
20.
Intra-company analysis is based on comparisons with competitors.
21.
General standards of comparisons, developed from experience, include the 2:1 level for
the current ratio and 1:1 level for the acid-test ratio.
22.
Vertical analysis is the comparison of a company’s financial condition and performance
across time.
23.
If a company is comparing its financial condition or performance to a base amount, it is
using vertical analysis.
24.
Horizontal analysis is the comparison of a company’s financial condition and performance
to a base amount.
25.
If a company is comparing this year’s financial performance to last year’s financial
performance, it is using horizontal analysis.
26.
Three of the most common tools of financial analysis include horizontal analysis, vertical
analysis, and ratio analysis.
27.
A financial statement analysis report helps to reduce uncertainty in business decisions
through a rigorous and sound evaluation.
28.
A good financial report does not link interpretations and conclusions of analysis with the
underlying information.
29.
A good financial statement analysis report often includes the following sections: executive
summary, analysis overview, evidential matter, assumptions, key factors, and inferences.
30.
Earnings per share are calculated only on income from continuing operations.
31.
Analysis of a single financial number is often of limited value.
32.
Comparative financial statements are reports that show financial amounts in side by side
columns on a single statement for analysis purposes.
33.
Vertical analysis is used to reveal patterns in data covering two or more successive
periods.
34.
Trend analysis is a form of horizontal analysis that can reveal patterns in data across
successive periods.
35.
Trend analysis of financial statement items can include comparisons of relations between
items on different financial statements.
36.
Horizontal analysis is used to reveal patterns in data covering successive periods.
37.
A trend percent, or index number, is calculated by dividing the analysis period amount by
the base period amount and multiplying the result by 100.
38.
The percent change of a comparative financial statement item is computed by subtracting
the analysis period amount from the base period amount, dividing the result by the base
period amount and multiplying that result by 100.
39.
Vertical analysis is a tool to evaluate individual financial statement items or groups of
items in terms of a specific base amount.
40.
Horizontal analysis is used to reveal changes in the relative importance of each financial
statement item.
41.
The base amount for a common-size balance sheet is usually total assets.
42.
An advantage of common-size statements is that they reflect the dollar magnitude (size)
of the different companies under analysis.
43.
Graphical analysis of the balance sheet can be useful in assessing sources of financing.
44.
A corporation reported cash of $14,000 and total assets of $178,300. Its common-size
percent for cash equals 7.85%.
45.
A ratio expresses a mathematical relation between two quantities and can be expressed
as a percent, rate, or proportion.
46.
Ratios must refer to economically important relationships, such as a sale price compared
to its cost.
47.
Liquidity refers to the availability of resources to meet short-term cash requirements.
48.
Working capital is computed as current liabilities minus current assets.
49.
The current ratio is calculated as current liabilities divided by current assets.
50.
Total asset turnover reflects a company’s ability to use its assets to generate sales and is
an important indication of operating efficiency.
51.
Capital structure refers to a company’s long–run financial viability and its ability to cover
long-term obligations.
52.
The use of debt is sometimes described as financial leverage because debt can have the
effect of increasing the return on equity.
53.
The greater the times interest earned ratio, the greater the risk a company is exposed to.