True False

Study4smart

Quality review Materials

ch17Student:

1. Financial statement analysis is the application of analytical tools to general-purpose financial statements and related data for making business decisions.

True False

2. Financial statement analysis lessens the need for expert judgment. True False

3. Financial statement analysis may be used for personal investment decisions. True False

4. The evaluation of company performance and financial condition includes evaluation of (1) past and current performance, (2) current financial position, and (3) future performance and risk. True False

5. External users of accounting information make the strategic and operating decisions of a company. True False

6. One purpose of financial statement analysis for internal users is to provide information helpful in improving the company's efficiency and effectiveness in providing products and services. True False

7. Evaluation of company performance does not include analysis of (1) past and current performance, (2) current financial position, and (3) future performance and risk.

True False

8. A company's board of directors analyzes financial statements to assess future company prospects for making operating decisions.

True False

9. Financial analysis only refers to the communication of relevant financial information to decision makers.

True False

10. Profitability is the ability to generate future revenues and meet long-term obligations. True False

11. Liquidity and efficiency are considered to be building blocks of financial statement analysis. True False

12. Market prospects are the ability to provide financial rewards sufficient to attract and retain financing. True False

13. Profitability is the ability to generate positive market expectations. True False

14. Financial reporting includes not only general purpose financial statements, but also information from SEC filings, press releases, shareholders' meetings, forecasts, management letters, auditor's reports, and Webcasts.

True False

15. The building blocks of financial statement analysis include (1) liquidity, (2) salability, (3) solvency, and (4) profitability.

16. General-purpose financial statements include the (1) income statement, (2) balance sheet, (3) statement of stockholders' equity (or statement of retained earnings), (4) statement of cash flows, and (5) notes to these statements.

True False

17. Standards for comparison are necessary when making judgments about a company's performance. True False

18. Standards for comparison when interpreting financial statement analysis include competitor and industry performance data.

True False

19. Measures taken from a selected competitor or a group of competitors are often excellent standards of comparison for analysis.

True False

20. Intracompany analysis is based on comparisons with competitors. True False

21. General standards of comparisons include the 2:1 level for the current ratio and 1:1 level for the acid-test ratio.

True False

22. Vertical analysis is the comparison of a company's financial condition and performance across time. True False

23. Horizontal analysis is the comparison of a company's financial condition and performance to a base amount.

True False

24. Three of the most common tools of financial analysis include horizontal analysis, vertical analysis, and ratio analysis.

True False

25. A financial statement analysis report helps to reduce uncertainty in business decisions through a rigorous and sound evaluation.

True False

26. A good financial report does not link interpretations and conclusions of analysis with the underlying information. True False

27. A good financial statement analysis report often includes the following sections: executive summary, analysis overview, evidential matter, assumptions, key factors, and inferences.

True False

28. Earnings per share are calculated only on income from continuing operations. True False

29. Analysis of a single financial number is often of limited value. True False

30. Comparative financial statements are reports that show financial amounts placed side by side in columns on a single statement for analysis purposes.

True False

31. Vertical analysis is used to reveal patterns in data covering successive periods. True False

32. Trend analysis is a form of horizontal analysis that can reveal patterns in data across successive periods.

True False

33. Trend analysis of financial statement items can include comparisons of relations between items on different financial statements.

True False

34. Comparative horizontal analysis is used to reveal patterns in data covering successive periods. True False

35. A trend percent, or index number, is calculated by dividing the analysis period amount by the base period amount and multiplying the result by 100.

True False

36. The percent change is computed by subtracting the analysis period amount from the base period amount, dividing the result by the base period amount and multiplying that result by 100.

True False

37. Vertical analysis is a tool to evaluate individual financial statement items or groups of items in terms of a specific base amount.

True False

38. Horizontal analysis is used to reveal changes in the relative importance of each financial statement item.

True False

39. The base amount for a common-size balance sheet is usually total assets. True False

40. An advantage of common-size statements is that they reflect the dollar magnitude (size) of the different companies under analysis.

True False

41. Graphical analysis of the balance sheet can be useful in assessing sources of financing. True False

42. A corporation reported cash of $14,000 and total assets of $178,300. Its common-size percent for cash equals 7.85%.

True False

43. A ratio expresses a mathematical relation between two quantities and can be expressed as a percent, rate, or proportion.

True False

44. Ratios, like other analysis tools, are only historically oriented. True False

45. Liquidity refers to the availability of resources to meet short-term cash requirements. True False

46. Working capital is computed as current liabilities minus current assets. True False

47. The current ratio is calculated as current liabilities divided by current assets. True False

48. Total asset turnover reflects a company's ability to use its assets to generate sales and is an important indication of operating efficiency.

True False

49. Capital structure refers to a company's long-run financial viability and its ability to cover long-term obligations.

True False

50. The use of debt is sometimes described as financial leverage because debt can have the effect of increasing the return on equity.

True False

51. The greater the times interest earned ratio, the greater the risk a company is exposed to. True False

52. Efficiency refers to how productive a company is in using its assets, and is usually measured relative to how much revenue is generated from a certain level of assets.

True False

53. The higher the accounts receivable turnover, the less quickly accounts receivable are collected. True False

54. A company with a high inventory turnover requires a smaller investment in inventory than one producing the same sales with a lower turnover.

True False

55. A rough guideline states that for a company with no discounts offered, days' sales uncollected should not exceed 1 1/3 times the days in its credit period.

True False

56. A company that has days' sales uncollected of 30 days and days' sales in inventory of 18 days implies that inventory will be converted to cash in about 12 days.

True False

57. The return on total assets can be calculated as profit margin times total asset turnover. True False

58. The return on common stockholder's equity measures a company's success in reaching the goal of earning net income for its owners.

True False

59. A high level of expected risk suggests a low price-earnings ratio. True False

60. The return on total assets ratio is a profitability measure. True False

61. A company reports basic earnings per share of $3.50, cash dividends per share of $0.75, and a market price per share of $64.75. The company's dividend yield equals 21.4%.

True False

True False