Chap 014 testbank financial statement analysis

8/10/2019 Chap 014 testbank financial statement analysis

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Chapter 14 Financial Statement Analysis

Chapter 14

Financial Statement Analysis

True / False Questions

1. Vertical analysis compares the results of financial information with a business in the sameindustry for a number of consecutive periods of time.True False

2. The uic! ratio is especially useful in evaluatin" the liuidity of a company with fastmovin" inventories.True False

#. $eductin" the cost of "oods sold from net income "ives us operatin" income.True False

4. The "ross profit rate is "ross profit e%pressed as a percenta"e of net sales.True False

&. The "ross profit rate usually is lowest on fast movin" merchandise and hi"hest on specialtyand novelty productsTrue False

'. (hen an income statement does not show "ross profit or operatin" income it is called aconsolidated statement.True False

). *+, - return on euity - is measured by dividin" net income by avera"e number of sharesoutstandin".True False

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. The yield rate on stoc! is measured by dividin" dividends per share by mar!et price pershare.True False

/. The trend in ratios is usually more useful than loo!in" at a sin"le year0s ratio.True False

1. The acid test ratio includes mar!etable securities but does not include accountsreceivable.True False

11. Comparative financial statements show side-by-side financial data for two or morecompanies.True False

12. The uality of earnin"s tends to be hi"her for a company that uses strai"ht-linedepreciation and defers costs whenever possible than for a company which uses accelerateddepreciation and defers costs only when necessary.

True False

1#. f total current assets are 314 at the end of 5ear 1 increase by 3& by the end of5ear 2 and increase by 3& in 5ear # the percenta"e increase over the precedin" year isless in 5ear # than in 5ear 2.True False

14. (or!in" capital is the e%cess of current assets over current liabilities.True False

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1&. A company0s liuidity refers to its ability to remain profitable.True False

1'. nventory is an e%ample of a uic! asset.True False

1). Current assets are those assets that can be converted into cash within a year and neverlon"er.True False

1. The debt ratio is computed by dividin" total liabilities by current assets.True False

1/. The lower the current ratio the more liuid the company appears.True False

2. The owners of a corporation are not personally responsible for the debts of the business.True False

21. A sin"le-step and multiple-step income statement are different in form and in the amountof net income reported.True False

22. A company whose sales are "rowin" at less than the rate of inflation may actually besellin" less merchandise every year.True False

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2#. A company cannot be increasin" its mar!et share if its net sales are declinin".True False

24. 6et income stated as a percenta"e of sales is one means of evaluatin" a company0s abilityto control its e%penses.True False

2&. A company whose future earnin"s are e%pected to rise substantially is li!ely to have ahi"her price7earnin"s ratio than a company whose future earnin"s are e%pected to decline.True False

2'. From a creditor0s point of view the lower the debt ratio8 the safer the creditors0 position.True False

2). The price7earnin"s ratio is calculated by dividin" earnin"s per share by the current mar!etprice of a share of the company0s stoc!.True False

2. f the return on total assets ratio is substantially below the cost of borrowin" commonstoc!holders will benefit from a hi"h debt ratio.True False

2/. The return on euity ratio may be either hi"her or lower than the return on assets ratio.True False

#. The current ratio may be less than eual to or "reater than the uic! ratio.True False

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#1. The inventory turnover rate indicates how uic!ly inventory sells.True False

#2. n a sin"le-step income statement all revenue items are listed then all e%pense items arecombined and deducted from total revenue.True False

##. n a classified balance sheet assets are subdivided into current assets plant and euipmentand other assets while liabilities are all classified as current.True False

#4. The more pessimistic investors0 e%pectations re"ardin" a company0s future performancethe lower the price7earnin"s ratio is li!ely to be.True False

#&. A company should carry the amount of wor!in" capital necessary to conduct operationsnot necessarily ma%imi9e its wor!in" capital.True False

Multiple Choice Questions

#'. n order for investors and creditors to decide whether to invest in a company or loan acompany funds they mayA. Analy9e financial statements.:. Focus on corporate "overnance.C. :oth of the above.

$. 6either of the above.

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#). A comparative financial statementA. ;laces the balance sheet the income statement and the statement of cash flows side by sidein order to compare the results.:. ;laces two or more years of a financial statement side by side in order to compare results.

C. ;laces the financial statements of two or more companies side by side in order to compareresults.$. ;laces the dollar amounts ne%t to the percenta"e amounts of a "iven year for the incomestatement.

#. The chan"es in financial statement items from a base year to followin" years are calleduic! ratio

44. The price7earnin"s ratio is measured by dividin"A. :oo! value by earnin"s per share.:. ;ar value by earnin"s per share.C. =ar!et value by earnin"s per share.$. =ar!et value by total net income.

4&. The principle factors affectin" the uality of wor!in" capital areuic! ratio.:. (or!in" capital.C. Current ratio.$. $ebt ratio.

&1. The current ratio will be BBBBBBBBBBBBBBB the uic! ratio.A. ess than.:. @reater than or eual to.

C. The same as.$. Always different than.

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&2. (hich of the followin" is not a measure of lon"-term credit ris!?A. >uic! ratio.:. $ebt ratio.C. nterest covera"e ratio.

$. Trend in net cash provided by operatin" activities.

. A hi"h uality of earnin"s is indicated byuic! assets include which of the followin"?A.Cash mar!etable securities and receivables.:.Cash mar!etable securities and inventories.C.Cash inventories and receivables.

$.=ar!et securities receivables and inventories.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

earning !"#ective: &

4#. The ratio which measures total liabilities as a percenta"e of total assets is calleduality Service. G$ollaramounts are in millions.H

Compute for the yearuic! ratio.+ $ebt ratio.c Current ratio., Cash flow from operatin" activities.

- n each of the last five years the net sales of ;la9a Co. have increased at about half therate of inflation but net income has increased at appro%imately twice the rate ofinflation. $urin" this period the companyQs total assets liabilities and euity haveremained almost unchan"ed8 dividends are appro%imately eual to net income. Theserelationships su""est Gindicate all correct answersH

Chap 014 testbank financial statement analysis

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