Chapter 14 – Financial Statement Analysis
1. Comparative financial statements are designed to compare the financial statements of two or more corporations.
a.
True
b.
False
2. In horizontal analysis, the current year is the base year.
a.
True
b.
False
3. On a common-sized income statement, all items are stated as a percent of total assets or equities at year-end.
a.
True
b.
False
4. The analysis of increases and decreases in the amount and percentage of comparative financial statement items is
referred to as horizontal analysis.
a.
True
b.
False
Chapter 14 – Financial Statement Analysis
5. A 15% change in sales will result in a 15% change in net income.
a.
True
b.
False
6. A financial statement showing each item on the statement as a percentage of one key item on the statement is called a
common-sized financial statement.
a.
True
b.
False
7. The relationship of each asset item as a percent of total assets is an example of vertical analysis.
a.
True
b.
False
8. Vertical analysis refers to comparing the financial statements of a single company over several years.
a.
True
b.
False
Chapter 14 – Financial Statement Analysis
9. In a common-sized income statement, each item is expressed as a percentage of net income.
a.
True
b.
False
10. In the vertical analysis of a balance sheet, the base for current liabilities is total liabilities.
a.
True
b.
False
11. Using vertical analysis of the income statement, a company’s net income as a percentage of sales is 15%; therefore, the
cost of goods sold as a percentage of sales must be 85%.
a.
True
b.
False
12. In the vertical analysis of an income statement, each item is generally stated as a percentage of total assets.
a.
True
b.
False
Chapter 14 – Financial Statement Analysis
13. Factors that reflect the ability of a business to pay its debts and earn a reasonable amount of income are referred to as
solvency, profitability, and liquidity.
a.
True
b.
False
14. The excess of current assets over current liabilities is referred to as working capital.
a.
True
b.
False
15. Dollar amounts of working capital are difficult to assess when comparing companies of different sizes or in comparing
such amounts with industry figures.
a.
True
b.
False
16. Using measures to assess a business’s ability to pay its current liabilities is called current position analysis.
a.
True
b.
False
Chapter 14 – Financial Statement Analysis
17. Current position analysis is used by short-term creditors to assess how quickly they will be repaid.
a.
True
b.
False
18. An advantage of the current ratio is that it considers the makeup of the current assets.
a.
True
b.
False
19. If two companies have the same current ratio, their ability to pay short-term debt is the same.
a.
True
b.
False
20. The ratio of the sum of cash, receivables, and marketable securities to current liabilities is referred to as the current
ratio.
a.
True
b.
False
Chapter 14 – Financial Statement Analysis
21. A balance sheet shows cash, $75,000; marketable securities, $115,000; receivables, $150,000; and inventories,
$222,500. Current liabilities are $225,000. The current ratio is 2.5.
a.
True
b.
False
22. If a firm has a current ratio of 2, the subsequent collection of a 60-day note receivable on account will cause the ratio
to decrease.
a.
True
b.
False
23. If a firm has a quick ratio of 1, the subsequent payment of an account payable will cause the ratio to increase.
a.
True
b.
False
24. Solvency analysis focuses on the ability of a business to pay its current and noncurrent liabilities.
a.
True
b.
False
Chapter 14 – Financial Statement Analysis
25. If the accounts receivable turnover for the current year has decreased when compared with the ratio for the preceding
year, there has been an acceleration in the collection of receivables.
a.
True
b.
False
26. An increase in the accounts receivable turnover may be due to a change in how credit is granted and/or in collection
practices.
a.
True
b.
False
27. The number of days’ sales in receivables is one means of expressing the relationship between average daily sales and
accounts receivable.
a.
True
b.
False
Chapter 14 – Financial Statement Analysis
28. A firm selling food should have higher inventory turnover rate than a firm selling office furniture.
a.
True
b.
False
29. The number of days’ sales in inventory is one means of expressing the relationship between the cost of goods sold and
inventory.
a.
True
b.
False
30. Assuming that the quantities of inventory on hand during the current year were sufficient to meet all demands for
sales, a decrease in the inventory turnover for the current year when compared with the turnover for the preceding year
indicates an improvement in inventory management.
a.
True
b.
False
31. The ratio of fixed assets to long-term liabilities provides a measure of a firm’s ability to pay dividends.
a.
True
b.
False
Chapter 14 – Financial Statement Analysis
32. A decrease in the ratio of liabilities to stockholders’ equity indicates an improvement in the margin of safety for
creditors.
a.
True
b.
False
33. In computing the asset turnover ratio, long-term investments are excluded from average total assets.
a.
True
b.
False
34. The return on total assets measures the profitability of total assets, without considering how the assets are financed.
a.
True
b.
False
35. In computing the return on total assets, interest expense is subtracted from net income before dividing by average total
assets.
a.
True
b.
False
Chapter 14 – Financial Statement Analysis
36. The denominator of the return on total assets ratio is the average total assets.
a.
True
b.
False
37. When the return on total assets is greater than the return on common stockholders’ equity, the management of the
company has effectively used leverage.
a.
True
b.
False
38. When computing the return on common stockholders’ equity, preferred stock dividends are subtracted from net
income.
a.
True
b.
False
39. If a company has issued only one class of stock, the earnings per share are determined by dividing net income plus
interest expense by the number of shares outstanding.
a.
True
b.
False
Chapter 14 – Financial Statement Analysis
40. The ratio of the market price per share of common stock on a specific date to the annual earnings per share is referred
to as the price-earnings ratio.
a.
True
b.
False
41. The dividend yield is equal to the dividends per share divided by the par value per share of common stock.
a.
True
b.
False
42. Comparing dividends per share to earnings per share indicates the extent to which the corporation is retaining its
earnings for use in operations.
a.
True
b.
False
43. When you are interpreting financial ratios, it is useful to compare a company’s ratios to the same ratios from a prior
period or to the ratios of another company in the same industry.
a.
True
b.
False
Chapter 14 – Financial Statement Analysis
44. Ratios and various other analytical measures are not a substitute for sound judgment, nor do they provide definitive
guides for action.
a.
True
b.
False
45. Analyzing a company’s performance should take into account conditions peculiar to the industry and the general
economic conditions.
a.
True
b.
False
46. A company can compare its financial data to the data of other companies and industry averages to evaluate its
position.
a.
True
b.
False
Chapter 14 – Financial Statement Analysis
47. The effects of differences in accounting methods are of little importance when analyzing comparable data from
competing businesses.
a.
True
b.
False
48. The report on internal control required by the Sarbanes-Oxley Act of 2002 may be prepared by either management or
the company’s auditors.
a.
True
b.
False
49. The auditor’s report is where the auditor certifies that the financial statements are correct and accurate.
a.
True
b.
False
50. In a company’s annual report, the section called Management Discussion and Analysis provides critical information
for interpreting the financial statements and assessing the future of the company.
a.
True
b.
False
Chapter 14 – Financial Statement Analysis
51. A clean audit opinion is not the same as an unmodified opinion.
a.
True
b.
False
52. If Epsilon Company’s price-earnings ratio on common stock is greater than Iota Company’s, then Iota Company would
be expected to have the best potential for future common stock price appreciation.
a.
True
b.
False
53. Unusual items affecting the current period’s income statement consist of changes in accounting principles and
discontinued operations.
a.
True
b.
False
Chapter 14 – Financial Statement Analysis
54. When a corporation discontinues a segment of its operations at a loss, the loss should be reported as a separate item
after income from continuing operations on the income statement.
a.
True
b.
False
55. An unusual item is often related to current operations and occurs infrequently.
a.
True
b.
False
56. Reporting unusual items separately on the income statement allows investors to isolate the effects of these items on
income and cash flows.
a.
True
b.
False
57. Unusual items affecting the prior period’s income statement consist of changes in or errors in applying accounting
principles.
a.
True
b.
False
Chapter 14 – Financial Statement Analysis
58. Earnings per share amounts are only required to be presented for income from continuing operations and net income
on the face of the statement.
a.
True
b.
False
59. The percentage analysis of increases and decreases in individual items in comparative financial statements is called
a.
b.
c.
d.
60. Which of the following is the most useful in analyzing companies of different sizes?
a.
comparative statements
b.
common-sized financial statements
c.
price-level accounting
d.
audit report
Chapter 14 – Financial Statement Analysis
61. The percent of fixed assets to total assets is an example of
a.
b.
c.
d.
62. What type of analysis is indicated by the following?
Increase (Decrease)
Current Year
Preceding Year
Amount
Percent
Current assets
$ 430,000
$ 500,000
$(70,000)
(14%)
Fixed assets
1,740,000
1,500,000
240,000
16%
a.
vertical analysis
b.
horizontal analysis
c.
liquidity analysis
d.
common-size analysis
63. An analysis in which all the components of an income statement are expressed as a percentage of sales is a
a.
vertical analysis
b.
horizontal analysis
c.
liquidity analysis
d.
solvency analysis
Chapter 14 – Financial Statement Analysis
64. A balance sheet that displays only component percentages is a
a.
trend balance sheet
b.
comparative balance sheet
c.
condensed balance sheet
d.
common-sized balance sheet
65. One reason that a common-sized statement is a useful tool in financial analysis is that it enables the user to
a.
judge the relative potential of two companies of similar size in different industries
b.
determine which companies in a single industry are of the same value
c.
determine which companies in a single industry are of the same size
d.
make a better comparison of two companies of different sizes in the same industry
66. Assume the following sales data for a company:
Current year
$325,000
Preceding year
250,000
What is the percentage increase in sales from the preceding year to the current year?
a.
70%
b.
76.9%
c.
30%
d.
50%
[$75,000 / $250,000] × 100 = 30%
Chapter 14 – Financial Statement Analysis
67. On a common-sized balance sheet, 100% is
a.
total property, plant, and equipment
b.
total current assets
c.
total liabilities
d.
total assets
68. In a common-sized income statement, 100% is the
a.
net cost of goods sold
b.
net income
c.
gross profit
d.
sales
69. Horizontal analysis is a technique for evaluating financial statement data
a.
for one period of time
b.
over a period of time
c.
on a certain date
d.
as it may appear in the future
70. Horizontal analysis of comparative financial statements includes
a.
development of common-sized statements
b.
calculation of liquidity ratios
c.
calculation of dollar amount changes and percentage changes from the previous to the current year
d.
evaluation of each component in a financial statement to a total within the statement
Chapter 14 – Financial Statement Analysis
71. In horizontal analysis, each item is expressed as a percentage of the
a.
base year figure
b.
retained earnings figure
c.
total assets figure
d.
net income figure
72. Assume the following sales data for a company:
Current year
$1,025,000
Preceding year
820,000
What is the percentage increase in sales from the preceding year to the current year?
a.
100%
b.
25%
c.
125%
d.
75%