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Chapter 14 Financial Statement Analysis Answer Key
True / False Questions
1.
Vertical analysis compares the results of financial information with a business in the same
industry for a number of consecutive periods of time.
2.
Comparative financial statements show side-by-side financial data for two or more
companies.
3.
The quality of earnings tends to be higher for a company that uses accounting principles
and methods that lead to a conservative measurement of earnings.
4.
Working capital is the excess of current assets over current liabilities.
5.
In a classified balance sheet, assets are subdivided into current assets, plant and
equipment and other assets, while liabilities are all classified as current.
6.
The quick ratio is especially useful in evaluating the liquidity of a company with fast moving
inventories.
7.
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.
8.
A company's liquidity refers to its ability to remain profitable.
9.
Inventory is an example of a quick asset.
10.
Current assets are those assets that are expected to be converted into cash within a
relatively short period of time.
11.
The debt ratio is computed by dividing total liabilities by current assets.
12.
The lower the current ratio, the more liquid the company appears.
13.
The owners of a corporation are not personally responsible for the debts of the business.
14.
From a creditor's point of view, the lower the debt ratio; the safer the creditor's position.
15.
The current ratio may be less than, equal to, or greater than the quick ratio.
16.
A company should carry the amount of working capital necessary to conduct operations,
not necessarily maximize its working capital.
17.
Deducting the cost of goods sold from net income gives us operating income.
18.
The gross profit rate is gross profit expressed as a percentage of net sales.
19.
The gross profit rate usually is lowest on fast moving merchandise and highest on specialty
and novelty products.
20.
When an income statement does not show gross profit or operating income it is called a
consolidated statement.
21.
A single-step and a multiple-step income statement are different in form and in the amount
of net income reported.
22.
A company whose sales are growing at less than the rate of inflation may actually be
selling less merchandise every year.
23.
A company cannot be increasing its market share if its net sales are declining.
24.
Net income stated as a percentage of sales is one means of evaluating a company's ability
to control its expenses.
25.
If the return on total assets ratio is substantially below the cost of borrowing, common
stockholders will benefit from a high debt ratio.
26.
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.
27.
The price-earnings ratio is calculated by dividing earnings per share by the current market
price of a share of the company's stock.
28.
The return on equity ratio may be either higher or lower than the return on assets ratio.
29.
In a single-step income statement, all revenue items are listed, then all expense items are
combined and deducted from total revenue.
30.
The more pessimistic investors' expectations regarding a company's future performance,
the lower the price-earnings ratio is likely to be.
31.
ROE - return on equity - is measured by dividing net income by average number of shares
outstanding.
32.
The trend in ratios is usually more useful than looking at a single year's ratio.
33.
The acid test ratio includes marketable securities but does not include accounts
receivable.
34.
The inventory turnover rate indicates how quickly inventory sells.
35.
The yield rate on stock is measured by dividing dividends per share by market price per
share.
Multiple Choice Questions
36.
A comparative financial statement:
37.
The changes in financial statement items from a base year to following years are called:
38.
The measurement of the relative size of each item included in a total is called:
39.
One number expressed as a percentage of another is called:
40.
Comparative financial statements compare the company's current statements with:
41.
On common size income statements, each component in the income statement is
represented as a percentage of:
42.
During the years 2013 through 2015, Powers, Inc., reported the following amounts of net
income (dollars in thousands):
Relative to the prior year, the percentage change in net income:
43.
A high quality of earnings is indicated by:
44.
In evaluating the quality of a company's earnings, which of the following factors is
least
important?
45.
The term, classified financial statements, refers:
46.
The operating cycle of a company:
47.
The excess of current assets over current liabilities is called:
48.
Quick assets include which of the following?
49.
The ratio which measures total liabilities as a percentage of total assets is called:
50.
The principle factor/s affecting the quality of working capital is/are:
51.
All of the following are measures of liquidity
except
:
