Accounting Chapter 17 Financial statement analysis applies analytical tools

Chapter 17 Analysis of Financial Statements

MULTIPLE CHOICE QUESTIONS

1)

Financial statement analysis applies analytical tools to financial statements and related data for

making business decisions.

A)

True

B)

False

2)

External users of accounting information manage and operate the company.

A)

True

B)

False

3)

The evaluation of company performance and financial condition focuses solely on past

performance.

A)

True

B)

False

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.

A)

True

B)

False

5)

External users of accounting information make the strategic and operating decisions of a company.

A)

True

B)

False

6)

Internal users of accounting information make the strategic and operating decisions of a company.

A)

True

B)

False

7)

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.

A)

True

B)

False

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.

A)

True

B)

False

9)

A company’s board of directors analyzes financial statements to assess future company prospects

for making operating decisions.

A)

True

B)

False

10)

Suppliers use financial statement information in establishing credit terms.

A)

True

B)

False

11)

Financial analysis only refers to the communication of relevant financial information to decision

makers.

A)

True

B)

False

12)

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

A)

True

B)

False

13)

Profitability is the ability to provide financial rewards sufficient to attract and retain financing.

A)

True

B)

False

14)

Liquidity and efficiency are the ability to meet short-term obligations and to efficiently generate

revenue.

A)

True

B)

False

15)

Market prospects are the ability to provide financial rewards sufficient to attract and retain

financing.

A)

True

B)

False

16)

Market prospects are the ability to generate positive market expectations.

A)

True

B)

False

17)

Profitability is the ability to generate positive market expectations.

A)

True

B)

False

18)

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.

A)

True

B)

False

19)

The building blocks of financial statement analysis include (1) liquidity, (2) salability, (3) solvency,

and (4) profitability.

A)

True

B)

False

20)

The building blocks of financial statement analysis include (1) liquidity, (2) solvency, (3)

profitability, and (4) market prospects.

A)

True

B)

False

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.

A)

True

B)

False

22)

Standards for comparison are not generally necessary when making judgments about a company’s

performance.

A)

True

B)

False

23)

Standards for comparison when interpreting financial statement analysis include competitor and

industry performance data.

A)

True

B)

False

24)

Measures taken from a selected competitor or a group of competitors are often excellent standards

of comparison for analysis.

A)

True

B)

False

25)

Intra-company analysis is based on comparisons with competitors.

A)

True

B)

False

26)

Intra-company analysis compares a company’s current performance to its own prior performance.

A)

True

B)

False

27)

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.

A)

True

B)

False

28)

Vertical analysis is the comparison of a company’s financial condition and performance across

time.

A)

True

B)

False

29)

Horizontal analysis is the comparison of a company’s financial condition and performance across

time.

A)

True

B)

False

30)

If a company is comparing its financial condition or performance to a base amount, it is using

vertical analysis.

A)

True

B)

False

31)

Horizontal analysis is the comparison of a company’s financial condition and performance to a base

amount.

A)

True

B)

False

32)

If a company is comparing this year’s financial performance to last year’s financial performance, it

is using horizontal analysis.

A)

True

B)

False

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.

A)

True

B)

False

34)

When no value is in the base period, no percent change is computable.

A)

True

B)

False

35)

When an item has a value in the base period and zero in the analysis period, the decrease is 100

percent.

A)

True

B)

False

36)

When an item has a value in the base period and zero in the analysis period, the decrease is 0

percent.

A)

True

B)

False

37)

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

and ratio analysis.

A)

True

B)

False

38)

A financial statement analysis report helps to reduce uncertainty in business decisions through a

rigorous and sound evaluation.

A)

True

B)

False

39)

A good financial report does not link interpretations and conclusions of analysis with the

underlying information.

A)

True

B)

False

40)

A good financial statement analysis report often includes the following sections: executive

summary, analysis overview, evidential matter, assumptions, key factors, and inferences.

A)

True

B)

False

41)

Earnings per share are calculated only on income from continuing operations.

A)

True

B)

False

42)

Analysis of a single financial number is often of limited value.

A)

True

B)

False

43)

Comparative financial statements are reports that show financial amounts in side by side columns

on a single statement for analysis purposes.

A)

True

B)

False

44)

Vertical analysis is used to reveal patterns in data covering two or more successive periods.

A)

True

B)

False

45)

Horizontal analysis is used to reveal patterns in data covering two or more successive periods.

A)

True

B)

False

46)

Trend analysis is a form of horizontal analysis that can reveal patterns in data across successive

periods.

A)

True

B)

False

47)

Trend analysis of financial statement items can include comparisons of relations between items on

different financial statements.

A)

True

B)

False

48)

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

A)

True

B)

False

49)

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.

A)

True

B)

False

50)

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.

A)

True

B)

False

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.

A)

True

B)

False

52)

Vertical analysis is a tool to evaluate individual financial statement items or groups of items in

terms of a specific base amount.

A)

True

B)

False

53)

Horizontal analysis is used to reveal changes in the relative importance of each financial statement

item.

A)

True

B)

False

54)

The base amount for a common-size balance sheet is usually total assets.

A)

True

B)

False

55)

An advantage of common-size statements is that they reflect the dollar magnitude (size) of the

different companies under analysis.

A)

True

B)

False

56)

Graphical analysis of the balance sheet can be useful in assessing sources of financing.

A)

True

B)

False

57)

A corporation reported cash of $14,000 and total assets of $178,300. Its common-size percent for

cash equals 7.85%.

A)

True

B)

False

58)

A ratio expresses a mathematical relation between two quantities and can be expressed as a

percent, rate, or proportion.

A)

True

B)

False

59)

Ratios must refer to economically important relationships, such as a sale price compared to its cost.

A)

True

B)

False

60)

Liquidity refers to the availability of resources to meet short-term cash requirements.

A)

True

B)

False