Chapter 19 – Financial Statement Analysis
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Chapter 19
Financial Statement Analysis
Multiple Choice Questions
1. A firm has a higher quick (or acid test) ratio than the industry average, which implies.
A. the firm has a higher P/E ratio than other firms in the industry.
B. the firm is more likely to avoid insolvency in short run than other firms in the industry.
Difficulty: Easy
2. A firm has a lower quick (or acid test) ratio than the industry average, which implies.
Difficulty: Easy
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3. An example of a liquidity ratio is _______.
Difficulty: Easy
4. __________ a snapshot of the financial condition of the firm at a particular time.
Difficulty: Easy
5. __________ of the cash flow generated by the firm’s operations, investments and financial
activities.
Difficulty: Easy
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6. A firm has a higher asset turnover ratio than the industry average, which implies
Difficulty: Easy
7. A firm has a lower asset turnover ratio than the industry average, which implies
Difficulty: Easy
8. If you wish to compute economic earnings and are trying to decide how to account for
inventory, _______.
Difficulty: Easy
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11. Over a period of thirty-odd years in managing investment funds, Benjamin Graham used
the approach of investing in the stocks of companies where the stocks were trading at less
than their working capital value. The average return from using this strategy was
approximately ______.
Difficulty: Moderate
12. A study by Speidell and Bavishi (1992) found that when accounting statements of foreign
firms were restated on a common accounting basis,
Difficulty: Moderate
Chapter 19 – Financial Statement Analysis
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The financial statements of Black Barn Company are given below.
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40. Which of the following ratios gives information on the amount of profits reinvested in the
firm over the years:
Difficulty: Moderate
41. Ferris Corp. wants to increase its current ratio from the present level of 1.5 when it closes
the books next week. The action of __________ will have the desired effect.
Difficulty: Moderate
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45. __________ is a false statement.
A. During periods of inflation, LIFO makes the balance sheet less representative of the actual
inventory values than if FIFO were used
B. During periods of inflation, FIFO makes the balance sheet less representative of actual
Difficulty: Moderate
46. The level of real income of a firm can be distorted by the reporting of depreciation and
interest expense. During periods of high inflation, the level of reported depreciation tends to
__________ income, and the level of interest expense reported tends to __________ income.
A. understate, overstate
B. understate, understate
Difficulty: Moderate
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47. Which of the following would best explain a situation where the ratio of (net income/total
equity) of a firm is higher than the industry average, while the ratio of (net income/total
assets) is lower than the industry average?
Difficulty: Moderate
48. If a firm’s ratio of (total liabilities/total assets) is higher than the industry average while
the total capitalization of the firm’s stockholders’ equity) is lower than the industry average,
the most likely assumption is that the firm ________.
Difficulty: Moderate
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49. What best explains why a firm’s ratio of (long-term debt/total capital) is lower than the
industry average, while the ratio of (income before interest and taxes/debt interest charges) is
lower than the industry average.
Difficulty: Moderate
50. __________ best explains a ratio of (sales/average net fixed assets) that exceeds the
industry average.
Difficulty: Moderate