Chapter 19 – Financial Statement Analysis
19–33
80. Proceeds from a company’s sale of stock to the public are included in ________.
Difficulty: Easy
81. Which of the financial statements recognizes only transactions in which cash changes
hands?
Difficulty: Easy
19–34
82. Suppose that Chicken Express, Inc. has a ROA of 7% and pays a 6% coupon on its debt.
Chicken Express has a capital structure that is 70% equity and 30% debt. Relative to a firm
that is 100% equity-financed, Chicken Express’s Net Profit will be ________ and its ROE will
be ________.
Difficulty: Difficult
83. The P/E ratio that is based on a firm’s financial statements and reported in the newspaper
stock listings is different from the P/E ratio derived from the dividend discount model (DDM)
because
Difficulty: Moderate
19–35
84. The dollar value of a firm’s return in excess of its opportunity costs is called its
Difficulty: Moderate
Difficulty: Easy
19–36
86. Which of the following are issues when dealing with the financial statements of
international firms?
I) Many countries allow firms to set aside larger contingency reserves than the amounts
allowed for U.S. firms.
II) Many firms outside the U.S. use accelerated depreciation methods for reporting purposes,
whereas most U.S. firms use straight-line depreciation for reporting purposes.
III) Intangibles such as goodwill may be amortized over different periods or may be expensed
rather than capitalized.
IV) There is no way to reconcile the financial statements of non-U.S. firms to GAAP.
Difficulty: Moderate
87. To create a common size income statement ____________ all items on the income
statement by ____________.
Difficulty: Moderate
19–37
88. To create a common size balance sheet ____________ all items on the balance sheet by
____________.
Difficulty: Moderate
89. Common size financial statements make it easier to compare firms ____________.
Difficulty: Easy
90. Common size income statements make it easier to compare firms ____________.
Difficulty: Easy
19–38
91. Common size balance sheets make it easier to compare firms ____________.
Difficulty: Easy
92. If a firm has “goodwill” recorded on its balance sheet it must have ____________.
Difficulty: Easy
Chapter 19 – Financial Statement Analysis
19–39
Short Answer Questions
93. Publicly traded firms must prepare audited financial statements according to generally
accepted accounting principles (GAAP). How do comparability problems arise?
Difficulty: Easy
19–40
94. In an increasingly globalized investment environment, comparability problems become
even greater. Discuss some of the problems for the investor who wishes to have an
internationally diversified portfolio.
Firms in other countries are not required to prepare financial statement according to U.S.
generally accepted accounting principles. Accounting practices in other countries vary from
those of the U.S. In some countries, accounting standards may be very lax or virtually
Difficulty: Easy
Chapter 19 – Financial Statement Analysis
19–43
Answers are shown in the table below.
Difficulty: Difficult