Chapter 12—Financial Statement Analysis
MULTIPLE CHOICE
1. Which of the following statements regarding financial statement analysis is true?
a.
It will show how a company is guaranteed to perform in the future.
b.
It should not be relied upon as an indicator of future performance.
c.
It should be performed by only managers and creditors.
d.
It provides supplemental information not provided directly by the financial statements.
2. Ratio analysis is least likely to indicate:
a.
past performance.
b.
future performance.
c.
the effects of inflation.
d.
trends in a company’s performance.
3. The easiest part of ratio analysis is:
a.
the interpretation of the ratio.
b.
analyzing trends or changes in them.
c.
using the ratio to make decisions.
d.
the computation of the ratio.
4. Which of the following is not a limitation in performing financial statement analysis on a company
that uses generally accepted accounting principles?
a.
Variety of methods used by different companies.
b.
Use of estimates by a company.
c.
Use of assumptions by a company.
d.
Use of technology by a company.
5. Which of the following statements is true regarding ratio analysis?
a.
A ratio for a particular company is often compared to industry standards using various
publications.
b.
Ratio analysis should be kept as simple as possible, which is often accomplished by using
just one ratio to measure a company’s performance.
c.
A ratio for a particular company is unique and, therefore, should not be compared to other
companies’ ratios.
d.
Ratio analysis will not be affected by different accounting methods or assumptions.
6. Bingham Inc. is a retailer with annual sales of less that $10 million. At the end of 2012, ratio analysis
is performed on Bingham’s financial statements by various stakeholders. Bingham’s 2012 ratios are not
likely to be compared to:
a.
Bingham’s 2011 ratios.
b.
Bingham’s 2012 budgeted ratios.
c.
other retailers with annual sales of less than $10 million.
d.
a manufacturer with annual sales of less than $10 million.
7. Which of the following items is not typically used to prepare financial statements?
a.
Historical costs
b.
Inflation adjustments
c.
Estimations
d.
Assumptions
8. Financial statements prepared using generally accepted accounting principles:
a.
use historical costs and are not adjusted for the effects of increasing prices.
b.
use historical costs and are adjusted for the effects of increasing prices.
c.
use market-based costs and are adjusted for the effects of increasing prices.
d.
use market-based costs and are not adjusted for the effects of decreasing prices.
9. Analyzing financial statement account balances over time for the same company is called:
a.
vertical analysis.
b.
horizontal analysis.
c.
common-size analysis.
d.
price analysis.
10. Which of the following statements regarding horizontal analysis is false?
a.
Horizontal analysis can include more than two years of financial data.
b.
Horizontal analysis is facilitated by computing dollar and percentage changes in financial
statement items.
c.
Horizontal analysis analyzes ratio differences occurring between companies.
d.
Horizontal analysis can include the statement of cash flows.
11. Drucker Inc. has the following information available for 2011 and 2012:
2011
2012
Current assets
$500,000
$700,000
Performing a horizontal analysis on current assets shows that they have:
a.
increased by 40 percent.
b.
increased by 28.6 percent.
c.
increased by 2.5 percent.
d.
increased by 3.5 percent.
12. Hansen Inc. has the following information available for 2011 and 2012:
2011
2012
Net income
$600,000
$500,000
Which of the following statements is true regarding horizontal analysis with respect to Hansen?
a.
It would show net income has decreased by 20 percent.
b.
It would show net income has decreased by 16.7 percent.
c.
There is not enough information available to perform horizontal analysis.
d.
Horizontal analysis can not be performed using net income.
13. Michaud Ltd. has the following information available for 2011 and 2012:
2011
2012
Total Assets
$2,600,000
$4,000,000
Which of the following statements is true regarding horizontal analysis with respect to Michaud?
a.
It would show total assets has increased by 30 percent.
b.
It would show total assets has increased by 53.8 percent.
c.
There is not enough information available to perform horizontal analysis.
d.
Horizontal analysis can not be performed using total assets.
14. Comparing financial statements of different companies and financial statements of the same company
across time after controlling for differences in size is called:
a.
liquidity analysis.
b.
vertical analysis.
c.
price-earnings analysis.
d.
horizontal analysis.
15. To perform vertical analysis:
a.
items on the balance sheet need to be restated to their fair market values.
b.
items on the balance sheet need to be indexed for inflation.
c.
common-size financial statements need to be prepared.
d.
horizontal analysis needs to have already been done.
16. On a common-size balance sheet, current assets should be stated as a percentage of:
a.
net income.
b.
current assets.
c.
cash.
d.
total assets.
17. On a common-size balance sheet, current liabilities should be stated as a percentage of:
a.
net income.
b.
current liabilities.
c.
total liabilities.
d.
total liabilities and stockholders’ equity.
18. On a common-size income statement, net income should be stated as a percentage of:
a.
net income.
b.
sales revenue.
c.
gross profit.
d.
total assets.
19. On a common-size income statement, operating income should be stated as a percentage of:
a.
net income.
b.
sales revenue.
c.
operating income.
d.
total assets.
20. On a common-size income statement, operating expenses should be stated as a percentage of:
a.
sales revenue.
b.
net income.
c.
operating income.
d.
total assets.
21. Neptune Ltd. has the following information available for 2011 and 2012:
2011
2012
Current assets
$120,000
$
240,000
Long-term assets
60,000
120,000
Total assets
$180,000
$360,000
Converting the 2012 column into a common-size statement would show current assets as being:
a.
60 percent higher than 2011 current assets.
b.
67 percent of 2012 total assets.
c.
71 percent of 2011 total assets.
d.
50 percent higher than 2012 long-term assets.
22. Hollandsworth Inc. has the following information available for 2011 and 2012:
2011
2012
Current assets
$500,000
$400,000
Long-term assets
300,000
600,000
Total assets
$800,000
$1,000,000
Converting the 2012 column into a common-size statement would show current assets as being:
a.
40 percent of 2012 total assets.
b.
20 percent lower than 2011 current assets.
c.
50 percent of 2011 total assets.
d.
25 percent lower than 2012 long-term assets.
23. Zabar Inc. has the following information available for 2011 and 2012:
2011
2012
Current liabilities
$ 130,000
$ 100,000
Long-term liabilities
150,000
200,000
Total liabilities
$280,000
$300,000
Capital stock
$ 75,000
$ 75,000
Retained earnings
140,000
350,000
Total stockholders’ equity
$215,000
$425,000
Total liabilities and stockholders’ equity
$495,000
$725,000
Converting the 2012 column into a common-size statement would show current liabilities as being:
a.
26.26 percent of 2012 total liabilities.
b.
33.33 percent lower than 2011 current liabilities.
c.
23.53 percent of total stockholders’ equity.
d.
13.79 percent of total liabilities and stockholders’ equity.
24. Working capital is a measure of:
a.
solvency.
b.
profitability.
c.
liquidity.
d.
marketability.
25. Working capital is computed as:
a.
Long-term assets − Long-term liabilities.
b.
Current assets Current liabilities.
c.
Current assets − Long-term assets.
d.
Current assets − Current liabilities.
26. McCabe Inc. has the following information available for 2011 and 2012:
2011
2012
Current assets
$467,000
$615,000
Current liabilities
233,000
367,000
McCabe’s working capital in 2012 is:
a.
$124,000.
b.
$248,000.
c.
$234,000.
d.
$367,000.
27. Blaise Inc. has the following information available for 2011 and 2012:
2011
2012
Current assets
$400,000
$400,000
Current liabilities
200,000
600,000
Blaise’s working capital in 2012 is:
a.
$(200,000).
b.
$ 200,000.
c.
$ 400,000.
d.
$ 0.
28. Liquidity measures a company’s ability:
a.
to meet its long-term financial obligations as they become due.
b.
to meet its short-term financial obligations as they become due.
c.
to make a profit in the short-run.
d.
to make a profit in the long-run.
29. Which of the following ratios is the best measure of liquidity?
a.
Debt-to-equity ratio
b.
Times-interest-earned ratio
c.
Return on assets ratio
d.
Quick ratio
30. Which of the following ratios is the best measure of liquidity?
a.
Return on assets ratio.
b.
Ratio of cash flow from operations to capital expenditures.
c.
Current ratio.
d.
Earnings per share.
31. Which ratio measures the length of time between the purchase of inventory and the eventual collection
of cash from sales?
a.
Quick ratio
b.
Cash-to-cash operating cycle ratio
c.
Accounts receivable turnover ratio
d.
Inventory turnover ratio
Partin Manufacturing
Partin Manufacturing has the following information available from its 12/31/12 and 12/31/11 financial
statements:
12/31/12
12/31/12
$ 12,000
Accounts payable
$ 10,000
6,000
Salaries payable
3,000
40,000
Taxes payable
9,000
2,000
Total current liabilities
$ 22,000
$ 60,000
Notes payable
50,000
80,000
Total long-term liabilities
$ 50,000
20,000
Total liabilities
$ 72,000
$100,000
Capital stock
60,000
Retained earnings
28,000
Total stockholders’ equity
$ 88,000
Total liabilities and
$160,000
stockholders’ equity
$160,000
Other information:
Net income in 2012
$25,000
Inventory (12/31/11)
50,000
Credit sales in 2012
80,000
Cost of goods sold in 2012
45,000
Accounts receivable (12/31/11)
10,000
32. Refer to the Partin Manufacturing information above. Partin’s working capital for the year 2012 is:
a.
$138,000.
b.
$ 38,000.
c.
$ 88,000.
d.
$ 78,000.
33. Refer to the Partin Manufacturing information above. Partin’s current ratio for the year 2012 is:
(round to two decimal places)
a.
2.73.
b.
2.67.
c.
1.39.
d.
.82.
34. Refer to the Partin Manufacturing information above. Partin’s quick (or acid-test) ratio for the year
2012 is: (round to two decimal places)
a.
2.73.
b.
2.67.
c.
1.39.
d.
.82.
35. Refer to the Partin Manufacturing information above. Partin’s accounts receivable turnover ratio for
the year 2012 is: (round to two decimal places)
a.
3.13 times.
b.
5.00 times.
c.
10.00 times.
d.
13.33 times.
36. Refer to the Partin Manufacturing information above. Partin’s inventory turnover ratio for the year
2012 is: (round to two decimal places)
a.
1.00.
b.
.50.
c.
.56.
d.
2.00.
37. Refer to the Partin Manufacturing information above. Partin’s debt-to-equity ratio for the year 2012
is: (round to two decimal places)
a.
.25.
b.
.82.
c.
.45.
d.
.14.
Bernstein Inc.
Bernstein Inc. is a local retailer. The following selected information is available from their 2011 and
2012 financial statements:
Accounts receivable at 12/31/11
$
160,000
Accounts receivable at 12/31/12
240,000
Inventory at 12/31/11
300,000
Inventory at 12/31/12
360,000
Net credit sales for 2012
3,400,000
Cost of goods sold for 2012
1,980,000
Net income for 2012
1,000,000
38. Refer to the Bernstein Inc. information above. What was Bernstein’s accounts receivable turnover
ratio for 2012? (round to two decimal places)
a.
2.50
b.
5.00
c.
8.50
d.
17.00
39. Refer to the Bernstein Inc. information above. What was Bernstein’s number of days sales in
receivables for 2012? (round to two decimal places)
a.
21.47 days
b.
42.94 days
c.
73.00 days
d.
146.00 days
40. Refer to the Bernstein Inc. information above. What was Bernstein’s inventory turnover ratio for
2012? (round to two decimal places)
a.
3.03
b.
1.52
c.
6.00
d.
3.00
41. Refer to the Bernstein Inc. information above. What was Bernstein’s number of days inventory was
held before sale in 2012? (round to two decimal places)
a.
121.67 days
b.
60.83 days
c.
120.46 days
d.
240.13 days
42. Which of the following accounts should not be included in the calculation of the quick (or acid-test)
ratio?
a.
Accounts payable
b.
Accounts receivable
c.
Cash
d.
Inventory
43. Which of the following account balances would not be used in the calculation of the current ratio?
a.
Inventory
b.
Accounts payable
c.
Sales revenue
d.
Prepaid insurance
44. Plumeria Inc. has recently calculated the accounts receivable turnover for the current year to be 15. In
prior years, the same ratio was always higher. Which of the following statements would be the best
interpretation for the reason for the ratio’s change?
a.
The company had less cash sales in the current year than in prior years.
b.
The company had more sales in the current year than in prior years.
c.
The company had fewer accounts receivables in the current year than in prior years.
d.
The company took longer to collect on their accounts receivables in the current year than
in prior years.
45. Torrence Inc. has recently calculated the inventory turnover for the current year to be 30. In prior
years, the same ratio was always lower. Which of the following statements would be the best
interpretation for the reason for the ratio’s change?
a.
The company had less sales in the current year than in prior years.
b.
The company purchased less inventory in the current year than in prior years.
c.
The company took fewer days to sell its inventory in the current year than in prior years.
d.
The company took more days to sell its inventory in the current year than in prior years.
46. As a company’s accounts receivable turnover ratio increases from one year to the next, they will find
that the number of days’ sales in receivables:
a.
decreases.
b.
increases.
c.
stays the same.
d.
can not be determined.
47. As a company’s inventory turnover ratio decreases from one year to the next, they will find that the
number of days inventory is held before sale:
a.
decreases.
b.
increases.
c.
stays the same.
d.
can not be determined.
48. A quick ratio ____ is often a concern for creditors and managers.
a.
of more than one
b.
of less than one
c.
equal to one
d.
of more than two
49. ABC Inc. has determined that it needs to increase its current ratio in order to be in compliance with a
creditor’s loan agreement. All else being equal, which of the following ways would be best for
increasing their current ratio?
a.
Increasing long-term assets
b.
Decreasing current assets
c.
Decreasing current liabilities
d.
Increasing long-term liabilities
50. Which of the following types of companies would you expect to have the highest inventory turnover
ratio?
a.
A law firm
b.
A construction company
c.
A fine jewelry retailer
d.
A grocery store
51. Solvency measures a company’s ability:
a.
to meet long-term obligations as they become due.
b.
to meet short-term obligations as they become due.
c.
to make a profit in the short-run.
d.
to make a profit in the long-run.
52. Which of the following ratios would be the best measure of solvency?
a.
Return on assets ratio
b.
Price earnings ratio
c.
Current ratio
d.
Times-interest-earned ratio
53. Which of the following ratios would not be the best measure of solvency?
a.
Return on assets ratio
b.
Debt-to-equity ratio
c.
Debt service coverage ratio
d.
Times-interest-earned ratio
54. Which of the following statements would be the best interpretation of a company’s low debt–to-equity
ratio?
a.
The company chooses to pay cash for most of its major purchases.
b.
The company is not liquid.
c.
The company prefers to pay stockholders high dividends out of their retained earnings.
d.
The company prefers to raise funds by issuing capital stock than long-term borrowing.
55. Which ratio would be best for measuring a company’s ability to repay both principal and interest on
outstanding loans from cash generated from operating activities?
a.
Current ratio
b.
Times-interest-earned ratio
c.
Debt service coverage ratio
d.
Debt-to-equity ratio
56. During 2012, Mark Walker, Inc. had cash flow from operations of $330,000, dividends paid totaling
$15,000, and equipment purchases of $120,000. The ratio of cash flow from operations to capital
expenditures is:
a.
2.63.
b.
0.36.
c.
2.75.
d.
2.88.
Hardister Corp.
Hardister Corp. has the following information available from its financial statements for 2012:
Balance sheet information:
Income statement information:
Assets
Current assets
$
400,000
Sales (all on account)
$3,000,000
Long-term assets
600,000
Cost of goods sold
1,500,000
Total assets
$1,000,000
Salary expense
200,000
Miscellaneous expenses
400,000
Liabilities
Interest expense
100,000
Current liabilities
$
200,000
Income before taxes
$
800,000
Long-term liabilities
100,000
Income tax expense
300,000
Total liabilities
$
300,000
Net income
$
500,000
Stockholders’ Equity
Capital stock
$
300,000
Retained earnings
400,000
Total Stockholders’ Equity
$
700,000
57. Refer to the Hardister Corp. information above. Hardister’s current ratio is: (round to two decimal
places)
a.
3.33.
b.
.67.
c.
.50.
d.
2.00.
58. Refer to the Hardister Corp. information above. Hardister’s debt-to-equity ratio is: (round to two
decimal places)
a.
.50.
b.
.43.
c.
.75.
d.
.25.
59. Refer to the Hardister Corp. information above. Hardister’s times-interest-earned ratio is: (round to
two decimal places)
a.
8.00.
b.
9.00.
c.
6.00.
d.
5.00.
60. Refer to the Hardister Corp. information above. Assuming Hardister has no preferred stock and the
average number of common shares outstanding was 10,000, what would be earnings per share for
2012? (round to two decimal places)
a.
$ 80.00
b.
$ .02
c.
$ 50.00
d.
$300.00
61. Refer to the Hardister Corp. information above. Assuming Hardister had total assets at the end of 2011
of $800,000 and an income tax rate of 37.5 percent, what would be return on assets for 2012? (round
to the nearest whole percent)
a.
63%
b.
43%
c.
57%
d.
59%
62. Refer to the Hardister Corp. information above. At the end of 2012, Hardister’s common stock was
listed on the stock exchange as having a market price of $65 per share and there are 10,000 shares
outstanding. Hardister has no preferred stock. What would be Hardister’s price earnings (P/E) ratio
for 2012? (round to two decimal places)
a.
7.69 to 1
b.
12.31 to 1
c.
1.30 to 1
d.
.77 to 1
63. Which of the following ratios would be the best measure of profitability?
a.
Current ratio
b.
Debt-to-equity ratio
c.
Times-interest-earned ratio
d.
Return on assets
64. Which of the following ratios would not be the best measure of profitability?
a.
Earnings per share
b.
Debt-to-equity ratio
c.
Return on common stockholders’ equity
d.
Return on assets
Grogan Inc.
Grogan Inc. had the following information available from its 2011 and 2012 financial statements:
Balance sheet information:
2011
2012
Current assets
$ 15,000
$ 20,000
Long-term assets
107,000
207,000
Total assets
$122,000
$227,000
Current liabilities
$ 16,000
$ 11,500
Long-term liabilities
40,000
60,000
Total liabilities
$ 56,000
$ 71,500
Common stock
$ 30,000
$71,750
Retained earnings
36,000
83,750
Total stockholders’ equity
$ 66,000
$155,500
Income statement information:
Income before interest and taxes
$ 50,000
$105,000
Interest expense
4,000
6,000
Tax expense
10,000
26,250
Net income
$ 36,000
$72,750
Other information:
Dividends paid to stockholders
$ 0
$25,000
Average income tax rate
20%
25%
Net cash flows from operations
$25,000
$75,000
Cash paid for acquisitions
$10,000
$85,000
65. Refer to the Grogan Inc. information above. Performing a horizontal analysis on Grogan’s total assets
shows that they have:
a.
increased by 93.46%.
b.
increased by 46.26%.
c.
increased by 86.07%.
d.
increased by 31.50%
66. Refer to the Grogan Inc. information above. Converting the 2012 column into a common-size
statement would show current assets as being: (round to two decimal places)
a.
9.66 percent of long-term assets.
b.
8.81 percent of total assets.
c.
27.49 percent of net income.
d.
133.33 percent of 2011’s current assets.
67. Refer to the Grogan Inc. information above. Grogan’s working capital for 2012 is:
a.
$ 8,500.
b.
$ 31,500.
c.
$ 20,000.
d.
$147,000.
68. Refer to the Grogan Inc. information above. Grogan’s current ratio for 2012 is: (round to two decimal
places)
a.
3.17.
b.
1.11.
c.
.57.
d.
1.74.
69. Refer to the Grogan Inc. information above. Grogan’s ratio of cash flow from operations to current
liabilities for 2012 is: (round to two decimal places)
a.
5.45.
b.
0.18.
c.
0.29.
d.
6.52.
70. Refer to the Grogan Inc. information above. Grogan’s debt-to-equity ratio for 2012 is: (round to two
decimal places)
a.
2.17.
b.
0.46.
c.
0.85.
d.
0.31.
71. Refer to the Grogan Inc. information above. Grogan’s times-interest-earned ratio for 2012 is: (round
to two decimal places)
a.
12.13.
b.
16.50.
c.
17.50.
d.
12.50.
72. Refer to the Grogan Inc. information above. Grogan’s ratio cash flow from operations to capital
expenditures for 2012 is: (round to two decimal places)
a.
170.00%.
b.
58.82%.
c.
250.00%
d.
88.24%.
73. Refer to the Grogan Inc. information above. Grogan’s return on assets (ROA) ratio for 2012 is:
(round to two decimal places)
a.
44.27%.
b.
35.05%.