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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
