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CHAPTER 15(14): FINANCIAL STATEMENT ANALYSIS
1.
Comparable 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
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
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
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 and profitability.
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
17.
Current position analysis measures a company's ability to pay its current liabilities.
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
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 receipt 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
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 an improvement in the collection of receivables or
to
a change in the granting of credit 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
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
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 ratio of sales to assets, long-term investments are excluded from average total assets.
a.
True
b.
False
34.
The rate earned on total assets measures the profitability of total assets, without considering how the assets are
financed.
a.
True
b.
False
35.
In computing the rate earned on total assets, interest expense is subtracted from net income before dividing
by
average total assets.
a.
True
b.
False
36.
The denominator of the rate of return on total assets ratio is the average total assets.
a.
True
b.
False
37.
When the rate of return on total assets ratio is greater than the rate of return on common stockholders' equity ratio,
the management of the company has effectively used leverage.
a.
True
b.
False
38.
When computing the rate earned on total 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
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 rate 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 some form of standard.
a.
True
b.
False
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.
Interpreting financial analysis should be considered in light of conditions peculiar to the industry and the
general
economic conditions.
a.
True
b.
False
46.
A company can use comparisons of its financial data to the data of other companies and industry averages to
evaluate its position.
a.
True
b.
False
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 in
interpreting the financial statements and assessing the future of the company.
a.
True
b.
False
51.
A clean audit opinion is the same as a qualified audit opinion.
a.
True
b.
False
52.
Unusual items affecting the current period’s income statement consist of changes in accounting principles and
discontinued operations.
a.
True
b.
False
53.
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
54.
An extraordinary item must be either unusual in nature or infrequent in occurrence.
a.
True
b.
False
55.
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
56.
When a corporation discontinues a segment of its operations at a loss, the loss should be reported as a
separate
item before income from continuing operations on the income statement.
a.
True
b.
False
57.
Unusual items affecting the prior period’s income statement consist of errors and changes in accounting principles.
a.
True
b.
False
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.
vertical analysis
b.
solvency analysis
c.
profitability analysis
d.
horizontal analysis
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
61.
The percent of fixed assets to total assets is an example of
a.
vertical analysis
b.
solvency analysis
c.
profitability analysis
d.
horizontal analysis
