Chapter 15—Financial Statement Analysis Key
1. Comparable financial statements are designed to compare the financial statements of two or more
corporations.
2. In horizontal analysis, the current year is the base year.
3. On a common-sized income statement, all items are stated as a percent of total assets or equities at year-end.
4. The percentage analysis of increases and decreases in corresponding items in comparative financial
statements is referred to as horizontal analysis.
5. A 15% change in sales will result in a 15% change in net income.
6. A financial statement showing each item on the statement as a percentage of one key item on the statement is
called common-sized financial statements.
7. The relationship of each asset item as a percent of total assets is an example of vertical analysis.
8. Vertical analysis refers to comparing the financial statements of a single company for several years.
9. In a common-sized income statement, each item is expressed as a percentage of net income.
10. In the vertical analysis of a balance sheet, the base for current liabilities is total liabilities.
11. Using vertical analysis of the income statement, a company’s net income as a percentage of net sales is 15%;
therefore, the cost of goods sold as a percentage of sales must be 85%.
12. In the vertical analysis of an income statement, each item is generally stated as a percentage of total assets.
13. Factors which reflect the ability of a business to pay its debts and earn a reasonable amount of income are
referred to as solvency and profitability.
14. The excess of current assets over current liabilities is referred to as working capital.
15. Dollar amounts of working capital are difficult to assess when comparing companies of different sizes or in
comparing such amounts with industry figures.
16. Using measures to assess a business’s ability to pay its current liabilities is called current position analysis.
17. Current position analysis indicates a company’s ability to liquidate current liabilities.
18. An advantage of the current ratio is that it considers the makeup of the current assets.
19. If two companies have the same current ratio, their ability to pay short-term debt is the same.
20. The ratio of the sum of cash, receivables, and marketable securities to current liabilities is referred to as the
current ratio.
21. A balance sheet shows cash, $75,000; marketable securities, $115,000; receivables, $150,000 and $222,500
of inventories. Current liabilities are $225,000. The current ratio is 2.5 to 1.
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.
23. If a firm has a quick ratio of 1, the subsequent payment of an account payable will cause the ratio to
increase.
24. Solvency analysis focuses on the ability of a business to pay its current and noncurrent liabilities.
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.
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.
27. The number of days’ sales in receivables is one means of expressing the relationship between average daily
sales and accounts receivable.
28. A firm selling food should have higher inventory turnover rate than a firm selling office furniture.
29. The number of days’ sales in inventory is one means of expressing the relationship between the cost of
goods sold and inventory.
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.
31. The ratio of fixed assets to long-term liabilities provides a measure of a firm’s ability to pay dividends.
32. A decrease in the ratio of liabilities to stockholders’ equity indicates an improvement in the margin of safety
for creditors.
33. In computing the ratio of net sales to assets, long-term investments are excluded from average total assets.
34. The rate earned on total assets measures the profitability of total assets, without considering how the assets
are financed.
35. In computing the rate earned on total assets, interest expense is subtracted from net income before dividing
by average total assets.
36. The denominator of the rate of return on total assets ratio is the average total assets.
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.
38. When computing the rate earned on total common stockholders’ equity, preferred stock dividends are
subtracted from net income.
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.
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.
41. The dividend yield rate is equal to the dividends per share divided by the par value per share of common
stock.
42. Comparing dividends per share to earnings per share indicates the extent to which the corporation is
retaining its earnings for use in operations.
43. When you are interpreting financial ratios, it is useful to compare a company’s ratios to some form of
standard.
44. Ratios and various other analytical measures are not a substitute for sound judgment, nor do they provide
definitive guides for action.
45. Interpreting financial analysis should be considered in light of conditions peculiar to the industry and the
general economic conditions.
46. A company can use comparisons of its financial data to the data of other companies and industry values to
evaluate its position.
47. The effects of differences in accounting methods are of little importance when analyzing comparable data
from competing businesses.
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.
49. The auditor’s report is where the auditor certifies that the financial statements are correct and accurate.
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.
51. A clean audit opinion is the same as a qualified audit opinion.
52. Unusual items affecting the current period’s income statement consist of changes in accounting principles
and discontinued operations.
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.
54. An extraordinary item must be either unusual in nature or infrequent in occurrence.
55. Reporting unusual items separately on the income statement allows investors to isolate the effects of these
items on income and cash flows.
56. Those unusual items reported as deductions from income from continuing operations should be listed net of
the related income tax.
57. 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.
58. An extraordinary loss of $300,000 that results in income tax savings of $90,000 should be reported as an
extraordinary loss (net of tax) of $210,000 on the income statement.
59. Unusual items affecting the prior period’s income statement consist of errors and change in accounting
principles.
60. Earnings per share amounts are only required to be presented for income from continuing operations and net
income on the face of the statement.
61. The relationship of $325,000 to $125,000, expressed as a ratio, is
62. The percentage analysis of increases and decreases in individual items in comparative financial statements is
called
63. Which of the following below generally is the most useful in analyzing companies of different sizes
64. The percent of fixed assets to total assets is an example of
65. What type of analysis is indicated by the following?
Increase (Decrease*)
2011
2010
Amount
Percent
Current assets
$ 430,000
$ 500,000
$70,000*
14%*
Fixed assets
1,740,000
1,500,000
240,000
16%
66. An analysis in which all the components of an income statement are expressed as a percentage of net sales is
called
67. A balance sheet that displays only component percentages is called
68. One reason that a common-size statement is a useful tool in financial analysis is that it enables the user to
69. Under which of the following cases may a percentage change be computed?
70. Assume the following sales data for a company:
2015
375,000
2014
300,000
What is the percentage increase in sales from 2014 to 2015?
71. In a common size balance sheet, the 100% figure is:
72. In a common size income statement, the 100% figure is:
73. Horizontal analysis is a technique for evaluating financial statement data
74. Horizontal analysis of comparative financial statements includes the
75. In horizontal analysis, each item is expressed as a percentage of the
76. Assume the following sales data for a company:
2015
$1,287,000
2014
780,000
What is the percentage increase in sales from 2014 to 2015?
77. In performing a vertical analysis, the base for cost of goods sold is
78. The ability of a business to pay its debts as they come due and to earn a reasonable amount of income is
referred to as
79.
Accounts payable
$ 40,000
Accounts receivable
65,000
Accrued liabilities
7,000
Cash
30,000
Intangible assets
40,000
Inventory
72,000
Long-term investments
110,000
Long-term liabilities
75,000
Marketable securities
36,000
Notes payable (short-term)
30,000
Property, plant, and equipment
625,000
Prepaid expenses
2,000
Based on the above data, what is the amount of quick assets?
80.
Accounts payable
$ 40,000
Accounts receivable
65,000
Accrued liabilities
7,000
Cash
30,000
Intangible assets
40,000
Inventory
72,000
Long-term investments
110,000
Long-term liabilities
75,000
Marketable securities
36,000
Notes payable (short-term)
30,000
Property, plant, and equipment
625,000
Prepaid expenses
2,000
Based on the above data, what is the amount of working capital?
81.
Accounts payable
$ 40,000
Accounts receivable
65,000
Accrued liabilities
7,000
Cash
30,000
Intangible assets
40,000
Inventory
72,000
Long-term investments
110,000
Long-term liabilities
75,000
Marketable securities
36,000
Notes payable (short-term)
30,000
Property, plant, and equipment
625,000
Prepaid expenses
2,000
Based on the above data, what is the quick ratio, rounded to one decimal point?
82. A company with working capital of $720,000 and a current ratio of 2.2 pays a $125,000 short-term liability.
The amount of working capital immediately after payment is
83. Which of the following measures a company’s ability to pay its current liabilities?
84. Which of the following is not included in the computation of the quick ratio?
85. The numerator used to calculate accounts receivable turnover is
86. Based on the following data for the current year, what is the accounts receivable turnover?
Net sales on account during year
$700,000
Cost of merchandise sold during year
270,000
Accounts receivable, beginning of year
45,000
Accounts receivable, end of year
35,000
Inventory, beginning of year
90,000
Inventory, end of year
110,000
87. An acceleration in the collection of receivables will tend to cause the accounts receivable turnover to
88. Based on the following data for the current year, what is the number of days’ sales in accounts receivable?
Net sales on account during year
$584,000
Cost of merchandise sold during year
300,000
Accounts receivable, beginning of year
45,000
Accounts receivable, end of year
35,000
Inventory, beginning of year
90,000
Inventory, end of year
110,000
89. Based on the following data for the current year, what is the inventory turnover?
Net sales on account during year
$700,000
Cost of merchandise sold during year
270,000
Accounts receivable, beginning of year
45,000
Accounts receivable, end of year
35,000
Inventory, beginning of year
90,000
Inventory, end of year
110,000
90. Based on the following data for the current year, what is the number of days’ sales in inventory?
Net sales on account during year
$1,204,500
Cost of merchandise sold during year
657,000
Accounts receivable, beginning of year
75,000
Accounts receivable, end of year
85,000
Inventory, beginning of year
85,600
Inventory, end of year
98,600
91. Which of the following ratios provides a solvency measure that shows the margin of safety of bondholders
and also gives an indication of the potential ability of the business to borrow additional funds on a long-term
basis?
92. The number of times interest expense is earned is computed as
93. Balance sheet and income statement data indicate the following:
Bonds payable, 10% (issued 1988 due 2012)
$1,000,000
Preferred 5% stock, $100 par (no change during year)
300,000
Common stock, $50 par (no change during year)
2,000,000
Income before income tax for year
350,000
Income tax for year
80,000
Common dividends paid
50,000
Preferred dividends paid
15,000
Based on the data presented above, what is the number of times bond interest charges were earned (round to one decimal point)?
94. The current ratio is
95. A company with $70,000 in current assets and $50,000 in current liabilities pays a $1,000 current
liability. As a result of this transaction, the current ratio and working capital will
96. Hsu Company reported the following on its income statement:
Income before income taxes
$420,000
Income tax expense
120,000
Net income
$300,000
An analysis of the income statement revealed that interest expense was $80,000. Hsu Company’s times interest earned was
97. The following information pertains to Brock Company. Assume that all balance sheet amounts represent
both average and ending balance figures. Assume that all sales were on credit.
Assets
Cash and
short-term
investments
$ 40,000
Accounts
receivable
(net)
30,000
Inventory
25,000
Property, plant
and equipment
215,000
Total Assets
$310,000
Liabilities and Stockholders’ Equity
Current
liabilities
$ 60,000
Long-term
liabilities
95,000
Stockholder
s’ equity-
common
155,000
Total Liabilities and stockholders’ equity
$310,000
Income Statement
Sales
$ 90,000
Cost of
goods sold
45,000
Gross
margin
45,000
Operating
expenses
20,000
Net income
$ 25,000
Number of shares of common stock
6,000
Market price of common stock
$20
What is the current ratio for this company?
98.
Accounts payable
$ 30,000
Accounts receivable
35,000
Accrued liabilities
7,000
Cash
25,000
Intangible assets
40,000
Inventory
72,000
Long-term investments
100,000
Long-term liabilities
75,000
Marketable securities
36,000
Notes payable (short-term)
20,000
Property, plant, and equipment
400,000
Prepaid expenses
2,000
Based on the above data, what is the amount of quick assets?
99.
Accounts payable
$ 30,000
Accounts receivable
35,000
Accrued liabilities
7,000
Cash
25,000
Intangible assets
40,000
Inventory
72,000
Long-term investments
100,000
Long-term liabilities
75,000
Marketable securities
36,000
Notes payable (short-term)
20,000
Property, plant, and equipment
400,000
Prepaid expenses
2,000
Based on the above data, what is the amount of working capital?
100.
Accounts payable
$ 30,000
Accounts receivable
35,000
Accrued liabilities
7,000
Cash
25,000
Intangible assets
40,000
Inventory
72,000
Long-term investments
100,000
Long-term liabilities
75,000
Marketable securities
36,000
Notes payable (short-term)
20,000
Property, plant, and equipment
400,000
Prepaid expenses
2,000
Based on the above data, what is the quick ratio, rounded to one decimal point?
101. The tendency of the rate earned on stockholders’ equity to vary disproportionately from the rate earned on
total assets is sometimes referred to as
102. The balance sheets at the end of each of the first two years of operations indicate the following:
2012
2011
Total current assets
$600,000
$560,000
Total investments
60,000
40,000
Total property, plant, and equipment
900,000
700,000
Total current liabilities
125,000
65,000
Total long-term liabilities
350,000
250,000
Preferred 9% stock, $100 par
100,000
100,000
Common stock, $10 par
600,000
600,000
Paid-in capital in excess of par-common stock
75,000
75,000
Retained earnings
310,000
210,000
If net income is $115,000 and interest expense is $30,000 for 2012 what is the rate earned on total assets for 2012 (round percent to one decimal
point)?
103. The balance sheets at the end of each of the first two years of operations indicate the following:
2012
2011
Total current assets
$600,000
$560,000
Total investments
60,000
40,000
Total property, plant, and equipment
900,000
700,000
Total current liabilities
125,000
65,000
Total long-term liabilities
350,000
250,000
Preferred 9% stock, $100 par
100,000
100,000
Common stock, $10 par
600,000
600,000
Paid-in capital in excess of par-common stock
75,000
75,000
Retained earnings
310,000
210,000
If net income is $115,000 and interest expense is $30,000 for 2012, what is the rate earned on stockholders’ equity for 2012 (round percent to one
decimal point)?
104. The balance sheets at the end of each of the first two years of operations indicate the following:
2012
2011
Total current assets
$600,000
$560,000
Total investments
60,000
40,000
Total property, plant, and equipment
900,000
700,000
Total current liabilities
125,000
65,000
Total long-term liabilities
350,000
250,000
Preferred 9% stock, $100 par
100,000
100,000
Common stock, $10 par
600,000
600,000
Paid-in capital in excess of par-common stock
75,000
75,000
Retained earnings
310,000
210,000
If net income is $115,000 and interest expense is $30,000 for 2012, what are the earnings per share on common stock for 2012, (round to two
decimal places)?