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Financial Statement Analysis
Financial Statement Analysis
small. Which type of numbers would be most meaningful for statement analysis?
THEORIES: A. Absolute numbers would be most meaningful for both the large and small firm.
6. Management is a user of financial analysis. Which of the following comments does not B. Absolute numbers would be most meaningful in the large firm; relative numbers would be
represent a fair statement as to the management perspective? most meaningful in the small firm.
A. Management is always interested in maximum profitability. C. Relative numbers would be most meaningful for the large firm; absolute numbers would
B. Management is interested in the view of investors. be most meaningful for the small firm.
C. Management is interested in the financial structure of the entity. D. Relative numbers would be most meaningful for both the large and small firm, especially
D. Management is interested in the asset structure of the entity. for interfirm comparisons.
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Financial Statement Analysis
A. Financial statement analysis is an art; it requires judgment decisions on the part of the
Industry Analysis analyst.
3. Suppose you are comparing two firms in the steel industry. One firm is large and the other is B. Financial analysis can be used to detect apparent liquidity problems.
small. Which type of numbers would be most meaningful for statement analysis? C. There are as many ratios for financial analysis as there are pairs of figures.
A. Absolute numbers would be most meaningful for both the large and small firm. D. Some industry ratio formulas vary from source to source.
B. Absolute numbers would be most meaningful in the large firm; relative numbers would be
most meaningful in the small firm. 77. The use of alternative accounting methods:
C. Relative numbers would be most meaningful for the large firm; absolute numbers would A. is not a problem in ratio analysis because the footnotes disclose the method used.
be most meaningful for the small firm. B. may be a problem in ratio analysis even if disclosed.
D. Relative numbers would be most meaningful for both the large and small firm, especially C. is not a problem in ratio analysis since eventually all methods will lead to the same end.
for interfirm comparisons. D. is only a problem in ratio analysis with respect to inventory.
5. Which of the following does not represent a problem with financial analysis? Limitations
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Financial Statement Analysis
1. A limitation in calculating ratios in financial statement analysis is that compared with industry averages and with results of competitors.
A. it requires a calculator. D. A company comparison should not be made with industry averages if the company does
B. no one other than the management would be interested in them. not clearly fit into any one industry.
C. some account balances may reflect atypical data at year end.
D. they seldom identify problem areas in a company. Common-sized financial statementsperspective?
A. Management is always interested in maximum profitability.
2. Which of the following is not a limitation of financial statement analysis? B. Management is interested in the view of investors.
A. The cost basis. C. The diversification of firms. C. Management is interested in the financial structure of the entity.
B. The use of estimates. D. The availability of information. D. Management is interested in the asset structure of the entity.
5. Which of the following does not represent a problem with financial analysis? Limitations
A. Financial statement analysis is an art; it requires judgment decisions on the part of the 1. A limitation in calculating ratios in financial statement analysis is that
analyst. A. it requires a calculator.
B. Financial analysis can be used to detect apparent liquidity problems. B. no one other than the management would be interested in them.
C. There are as many ratios for financial analysis as there are pairs of figures. C. some account balances may reflect atypical data at year end.
D. Some industry ratio formulas vary from source to source. D. they seldom identify problem areas in a company.
77. The use of alternative accounting methods: 2. Which of the following is not a limitation of financial statement analysis?
A. is not a problem in ratio analysis because the footnotes disclose the method used. A. The cost basis. C. The diversification of firms.
B. may be a problem in ratio analysis even if disclosed. B. The use of estimates. D. The availability of information.
C. is not a problem in ratio analysis since eventually all methods will lead to the same end.
D. is only a problem in ratio analysis with respect to inventory. 5. Which of the following does not represent a problem with financial analysis?
A. Financial statement analysis is an art; it requires judgment decisions on the part of the
Industry Analysis analyst.
3. Suppose you are comparing two firms in the steel industry. One firm is large and the other is B. Financial analysis can be used to detect apparent liquidity problems.
small. Which type of numbers would be most meaningful for statement analysis? C. There are as many ratios for financial analysis as there are pairs of figures.
A. Absolute numbers would be most meaningful for both the large and small firm. D. Some industry ratio formulas vary from source to source.
B. Absolute numbers would be most meaningful in the large firm; relative numbers would be
most meaningful in the small firm. 77. The use of alternative accounting methods:
C. Relative numbers would be most meaningful for the large firm; absolute numbers would A. is not a problem in ratio analysis because the footnotes disclose the method used.
be most meaningful for the small firm. B. may be a problem in ratio analysis even if disclosed.
D. Relative numbers would be most meaningful for both the large and small firm, especially C. is not a problem in ratio analysis since eventually all methods will lead to the same end.
for interfirm comparisons. D. is only a problem in ratio analysis with respect to inventory.
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Financial Statement Analysis
B. Absolute numbers would be most meaningful in the large firm; relative numbers would be
most meaningful in the small firm. 77. The use of alternative accounting methods:
C. Relative numbers would be most meaningful for the large firm; absolute numbers would A. is not a problem in ratio analysis because the footnotes disclose the method used.
be most meaningful for the small firm. B. may be a problem in ratio analysis even if disclosed.
D. Relative numbers would be most meaningful for both the large and small firm, especially C. is not a problem in ratio analysis since eventually all methods will lead to the same end.
for interfirm comparisons. D. is only a problem in ratio analysis with respect to inventory.
5. Which of the following does not represent a problem with financial analysis? Limitations
A. Financial statement analysis is an art; it requires judgment decisions on the part of the 1. A limitation in calculating ratios in financial statement analysis is that
analyst. A. it requires a calculator.
B. Financial analysis can be used to detect apparent liquidity problems. B. no one other than the management would be interested in them.
C. There are as many ratios for financial analysis as there are pairs of figures. C. some account balances may reflect atypical data at year end.
D. Some industry ratio formulas vary from source to source. D. they seldom identify problem areas in a company.
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Financial Statement Analysis
5. Which of the following does not represent a problem with financial analysis? Limitations
A. Financial statement analysis is an art; it requires judgment decisions on the part of the 1. A limitation in calculating ratios in financial statement analysis is that
analyst. A. it requires a calculator.
B. Financial analysis can be used to detect apparent liquidity problems. B. no one other than the management would be interested in them.
C. There are as many ratios for financial analysis as there are pairs of figures. C. some account balances may reflect atypical data at year end.
D. Some industry ratio formulas vary from source to source. D. they seldom identify problem areas in a company.
77. The use of alternative accounting methods: 2. Which of the following is not a limitation of financial statement analysis?
A. is not a problem in ratio analysis because the footnotes disclose the method used. A. The cost basis. C. The diversification of firms.
B. may be a problem in ratio analysis even if disclosed. B. The use of estimates. D. The availability of information.
C. is not a problem in ratio analysis since eventually all methods will lead to the same end.
D. is only a problem in ratio analysis with respect to inventory. 5. Which of the following does not represent a problem with financial analysis?
A. Financial statement analysis is an art; it requires judgment decisions on the part of the
Industry Analysis analyst.
3. Suppose you are comparing two firms in the steel industry. One firm is large and the other is B. Financial analysis can be used to detect apparent liquidity problems.
small. Which type of numbers would be most meaningful for statement analysis? C. There are as many ratios for financial analysis as there are pairs of figures.
A. Absolute numbers would be most meaningful for both the large and small firm. D. Some industry ratio formulas vary from source to source.
B. Absolute numbers would be most meaningful in the large firm; relative numbers would be
most meaningful in the small firm. 77. The use of alternative accounting methods:
C. Relative numbers would be most meaningful for the large firm; absolute numbers would A. is not a problem in ratio analysis because the footnotes disclose the method used.
be most meaningful for the small firm. B. may be a problem in ratio analysis even if disclosed.
D. Relative numbers would be most meaningful for both the large and small firm, especially C. is not a problem in ratio analysis since eventually all methods will lead to the same end.
for interfirm comparisons. D. is only a problem in ratio analysis with respect to inventory.
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Financial Statement Analysis
for interfirm comparisons. D. is only a problem in ratio analysis with respect to inventory.
5. Which of the following does not represent a problem with financial analysis? Limitations
A. Financial statement analysis is an art; it requires judgment decisions on the part of the 1. A limitation in calculating ratios in financial statement analysis is that
analyst. A. it requires a calculator.
B. Financial analysis can be used to detect apparent liquidity problems. B. no one other than the management would be interested in them.
C. There are as many ratios for financial analysis as there are pairs of figures. C. some account balances may reflect atypical data at year end.
D. Some industry ratio formulas vary from source to source. D. they seldom identify problem areas in a company.
77. The use of alternative accounting methods: 2. Which of the following is not a limitation of financial statement analysis?
A. is not a problem in ratio analysis because the footnotes disclose the method used. A. The cost basis. C. The diversification of firms.
B. may be a problem in ratio analysis even if disclosed. B. The use of estimates. D. The availability of information.
C. is not a problem in ratio analysis since eventually all methods will lead to the same end.
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Financial Statement Analysis
5. Which of the following does not represent a problem with financial analysis? Limitations
A. Financial statement analysis is an art; it requires judgment decisions on the part of the 1. A limitation in calculating ratios in financial statement analysis is that
analyst. A. it requires a calculator.
B. Financial analysis can be used to detect apparent liquidity problems. B. no one other than the management would be interested in them.
C. There are as many ratios for financial analysis as there are pairs of figures. C. some account balances may reflect atypical data at year end.
D. Some industry ratio formulas vary from source to source. D. they seldom identify problem areas in a company.
77. The use of alternative accounting methods: 2. Which of the following is not a limitation of financial statement analysis?
A. is not a problem in ratio analysis because the footnotes disclose the method used. A. The cost basis. C. The diversification of firms.
B. may be a problem in ratio analysis even if disclosed. B. The use of estimates. D. The availability of information.
C. is not a problem in ratio analysis since eventually all methods will lead to the same end.
D. is only a problem in ratio analysis with respect to inventory. 5. Which of the following does not represent a problem with financial analysis?
A. Financial statement analysis is an art; it requires judgment decisions on the part of the
Industry Analysis analyst.
3. Suppose you are comparing two firms in the steel industry. One firm is large and the other is management would be interested in them.
small. Which type of numbers would be most meaningful for statement analysis? C. some account balances may reflect atypical data at year end.
A. Absolute numbers would be most meaningful for both the large and small firm. D. they seldom identify problem areas in a company.
B. Absolute numbers would be most meaningful in the large firm; relative numbers would be
most meaningful in the small firm. 2. Which of the following is not a limitation of financial statement analysis?
C. Relative numbers would be most meaningful for the large firm; absolute numbers would A. The cost basis. C. The diversification of firms.
be most meaningful for the small firm. B. The use of estimates. D. The availability of information.
D. Relative numbers would be most meaningful for both the large and small firm, especially
for interfirm comparisons. 5. Which of the following does not represent a problem with financial analysis?
A. Financial statement analysis is an art; it requires judgment decisions on the part of the
4. Which of these statements is false? analyst.
A. Many companies will not clearly fit into any one industry. management would be interested in them.
B. A financial service uses its best judgment as to which industry the firm best fits. C. some account balances may reflect atypical data at year end.
C. The analysis of an entity's financial statements can be more meaningful if the results are D. they seldom identify problem areas in a company.
compared with industry averages and with results of competitors.
D. A company comparison should not be made with industry averages if the company does 2. Which of the following is not a limitation of financial statement analysis?
not clearly fit into any one industry. A. The cost basis. C. The diversification of firms.
B. The use of estimates. D. The availability of information.
Common-sized financial statementsperspective?
A. Management is always interested in maximum profitability. 5. Which of the following does not represent a problem with financial analysis?
B. Management is interested in the view of investors. A. Financial statement analysis is an art; it requires judgment decisions on the part of the
C. Management is interested in the financial structure of the entity. analyst.
D. Management is interested in the asset structure of the entity. management would be interested in them.
C. some account balances may reflect atypical data at year end.
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Financial Statement Analysis
D. they seldom identify problem areas in a company. A. The cost basis. C. The diversification of firms.
B. The use of estimates. D. The availability of information.
2. Which of the following is not a limitation of financial statement analysis?
A. The cost basis. C. The diversification of firms. 5. Which of the following does not represent a problem with financial analysis?
B. The use of estimates. D. The availability of information. A. Financial statement analysis is an art; it requires judgment decisions on the part of the
analyst.
5. Which of the following does not represent a problem with financial analysis? management would be interested in them.
A. Financial statement analysis is an art; it requires judgment decisions on the part of the C. some account balances may reflect atypical data at year end.
analyst. D. they seldom identify problem areas in a company.
management would be interested in them.
C. some account balances may reflect atypical data at year end. 2. Which of the following is not a limitation of financial statement analysis?
D. they seldom identify problem areas in a company. A. The cost basis. C. The diversification of firms.
B. The use of estimates. D. The availability of information.
2. Which of the following is not a limitation of financial statement analysis?
A. The cost basis. C. The diversification of firms. 5. Which of the following does not represent a problem with financial analysis?
B. The use of estimates. D. The availability of information. A. Financial statement analysis is an art; it requires judgment decisions on the part of the
analyst.
5. Which of the following does not represent a problem with financial analysis? management would be interested in them.
A. Financial statement analysis is an art; it requires judgment decisions on the part of the C. some account balances may reflect atypical data at year end.
analyst. D. they seldom identify problem areas in a company.
B. Financial analysis can be used to detect apparent liquidity problems.
C. There are as many ratios for financial analysis as there are pairs of figures. 2. Which of the following is not a limitation of financial statement analysis?
D. Some industry ratio formulas vary from source to source. A. The cost basis. C. The diversification of firms.
B. The use of estimates. D. The availability of information.
77. The use of alternative accounting methods:
A. is not a problem in ratio analysis because the footnotes disclose the method used. 5. Which of the following does not represent a problem with financial analysis?
B. may be a problem in ratio analysis even if disclosed. A. Financial statement analysis is an art; it requires judgment decisions on the part of the
C. is not a problem in ratio analysis since eventually all methods will lead to the same end. analyst.
D. is only a problem in ratio analysis with respect to inventory. B. Financial analysis can be used to detect apparent liquidity problems.
C. There are as many ratios for financial analysis as there are pairs of figures.
Industry Analysis D. Some industry ratio formulas vary from source to source.
3. Suppose you are comparing two firms in the steel industry. One firm is large and the other is
small. Which type of numbers would be most meaningful for statement analysis? 77. The use of alternative accounting methods:
A. Absolute numbers would be most meaningful for both the large and sm A. is not a problem in ratio analysis because the footnotes disclose the method used.
C. some account balances may reflect atypical data at year end. B. may be a problem in ratio analysis even if disclosed.
D. they seldom identify problem areas in a company. C. is not a problem in ratio analysis since eventually all methods will lead to the same end.
D. is only a problem in ratio analysis with respect to inventory.
2. Which of the following is not a limitation of financial statement analysis?
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Financial Statement Analysis
Industry Analysis D. Some industry ratio formulas vary from source to source.
3. Suppose you are comparing two firms in the steel industry. One firm is large and the other is
small. Which type of numbers would be most meaningful for statement analysis? 77. The use of alternative accounting methods:
A. Absolute numbers would be most meaningful for both the large and sm A. is not a problem in ratio analysis because the footnotes disclose the method used.
C. some account balances may reflect atypical data at year end. B. may be a problem in ratio analysis even if disclosed.
D. they seldom identify problem areas in a company. C. is not a problem in ratio analysis since eventually all methods will lead to the same end.
D. is only a problem in ratio analysis with respect to inventory.
2. Which of the following is not a limitation of financial statement analysis?
A. The cost basis. C. The diversification of firms. Industry Analysis
B. The use of estimates. D. The availability of information. 3. Suppose you are comparing two firms in the steel industry. One firm is large and the other is
small. Which type of numbers would be most meaningful for statement analysis?
5. Which of the following does not represent a problem with financial analysis? A. Absolute numbers would be most meaningful for both the large and sm
A. Financial statement analysis is an art; it requires judgment decisions on the part of the C. some account balances may reflect atypical data at year end.
analyst. D. they seldom identify problem areas in a company.
management would be interested in them.
C. some account balances may reflect atypical data at year end. 2. Which of the following is not a limitation of financial statement analysis?
D. they seldom identify problem areas in a company. A. The cost basis. C. The diversification of firms.
B. The use of estimates. D. The availability of information.
2. Which of the following is not a limitation of financial statement analysis?
A. The cost basis. C. The diversification of firms. 5. Which of the following does not represent a problem with financial analysis?
B. The use of estimates. D. The availability of information. A. Financial statement analysis is an art; it requires judgment decisions on the part of the
analyst.
5. Which of the following does not represent a problem with financial analysis? management would be interested in them.
A. Financial statement analysis is an art; it requires judgment decisions on the part of the C. some account balances may reflect atypical data at year end.
analyst. D. they seldom identify problem areas in a company.
management would be interested in them.
C. some account balances may reflect atypical data at year end. 2. Which of the following is not a limitation of financial statement analysis?
D. they seldom identify problem areas in a company. A. The cost basis. C. The diversification of firms.
B. The use of estimates. D. The availability of information.
2. Which of the following is not a limitation of financial statement analysis?
A. The cost basis. C. The diversification of firms. 5. Which of the following does not represent a problem with financial analysis?
B. The use of estimates. D. The availability of information. A. Financial statement analysis is an art; it requires judgment decisions on the part of the
analyst.
5. Which of the following does not represent a problem with financial analysis? management would be interested in them.
A. Financial statement analysis is an art; it requires judgment decisions on the part of the C. some account balances may reflect atypical data at year end.
analyst. D. they seldom identify problem areas in a company.
B. Financial analysis can be used to detect apparent liquidity problems.
C. There are as many ratios for financial analysis as there are pairs of figures. 2. Which of the following is not a limitation of financial statement analysis?
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Financial Statement Analysis
A. The cost basis. C. The diversification of firms. B. common-sized financial statements D. profitability index
B. The use of estimates. D. The availability of information.
12. Statements in which all items are expressed only in relative terms (percentages of a base) are
5. Which of the following does not represent a problem with financial analysis? termed:
A. Financial statement analysis is an art; it requires judgment decisions on the part of the A. Vertical statements C. Funds Statements
analyst. B. Horizontal Statements D. Common-Size Statements
B. Financial analysis can be used to detect apparent liquidity problems.
C. There are as many ratios for financial analysis as there are pairs of figures. 10. The percent of property, plant and equipment to total assets is an example of:
D. Some industry ratio formulas vary from source to source. A. vertical analysis C. profitability analysis
B. solvency analysis D. horizontal analysis
77. The use of alternative accounting methods:
A. is not a problem in ratio analysis because the footnotes disclose the method used. 15. Vertical analysis is a technique that expresses each item in a financial statement
B. may be a problem in ratio analysis even if disclosed. A. in pesos and centavos.
C. is not a problem in ratio analysis since eventually all methods will lead to the same end. B. as a percent of the item in the previous year.
D. is only a problem in ratio analysis with respect to inventory. C. as a percent of a base amount.
D. starting with the highest value down to the lowest value.
Industry Analysis
3. Suppose you are comparing two firms in the steel industry. One firm is large and the other is 17. In performing a vertical analysis, the base for prepaid expenses is
small. Which type of numbers would be most meaningful for statement analysis? A. total current assets. C. total liabilities.
A. Absolute numbers would be most meaningful for both the large and sm all firm. B. total assets. D. prepaid expenses in a previous year.
B. Absolute numbers would be most meaningful in the large firm; relative numbers would be
most meaningful in the small firm. Horizontal analysis
C. Relative numbers would be most meaningful for the large firm; absolute numbers would 8. The percentage analysis of increases and decreases in individual items in comparative
be most meaningful for the small firm. financial statements is called:
D. Relative numbers would be most meaningful for both the large and small firm, especially A. vertical analysis C. profitability analysis
for interfirm comparisons. B. solvency analysis D. horizontal analysis
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Financial Statement Analysis
69. Which suppliers of funds bear the greatest risk and should therefore earn the greatest return? 36. The two categories of ratios that should be utilized to asses a firm’s true liquidity are the
A. common stockholders C. preferred shareholders A. current and quick ratios C. liquidity and profitability ratios
B. general creditors such as banks D. bondholders B. liquidity and debt ratios D. liquidity and activity ratios
Measures of Risk 47. Which of the following is the most of interest to a firm’s suppliers?
54. The following groups of ratios primarily measure risk: A. profitability C. asset utilization
A. liquidity, activity, and common equity C. liquidity, activity, and debt B. debt D. liquidity
B. liquidity, activity, and profitability D. activity, debt, and profitability
Measures of liquidity
Financial ratios 21. The ratios that are used to determine a company’s short-term debt paying ability are
7. Ratios are used as tools in financial analysis A. asset turnover, times interest earned, current ratio, and receivables turnover.
A. instead of horizontal and vertical analyses. B. times interest earned, inventory turnover, current ratio, and receivables turnover.
B. because they can provide information that may not be apparent from inspection of the C. times interest earned, acid-test ratio, current ratio, and inventory turnover.
individual components of a particular ratio. D. current ratio, acid-test ratio, receivables turnover, and inventory turnover.
C. because even single ratios by themselves are quite meaningful.
D. because they are prescribed by GAAP. 20. Which of the following is a measure of the liquidity position of a corporation?
A. earnings per share
18. In the near term, the important ratios that provide the information critical to the short-run B. inventory turnover
operation of the firm are: C. current ratio
A. liquidity, activity, and profitability C. liquidity, activity, and equity D. number of times interest charges earned
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Financial Statement Analysis
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Financial Statement Analysis
A. that is should not exceed 30 days. C. use of borrowed money to increase the return to owners.
B. it can be any length as long as the customer continues to buy merchandise. D. earnings per share.
C. that it should not greatly exceed the discount period.
D. that it should not greatly exceed the credit term period. 90. The tendency of the rate earned on stockholders' equity to vary disproportionately from the
rate earned on total assets is sometimes referred to as:
Asset utilization ratios A. leverage C. yield
Performance measures B. solvency D. quick assets
65. All of the following are asset utilization ratios except:
A. average collection period C. receivables turnover 55. Using financial leverage is a good financial strategy from the viewpoint of stockholders of
B. inventory turnover D. return on assets companies having:
A. a high debt ratio C. a steadily declining current ratio
Asset turnover B. steady or rising profits D. cyclical highs and lows
63. Asset turnover measures
A. how often a company replaces its assets. 46. The ratio that indicates a company’s degree of financial leverage is the
B. how efficiently a company uses its assets to generate sales. A. cash debt coverage ratio. C. free cash flow ratio.
C. the portion of the assets that have been financed by creditors. B. debt to total assets. D. times-interest earned ratio.
D. the overall rate of return on assets.
73. Interest expense creates magnification of earnings through financial leverage because:
66. Total asset turnover measures the ability of a firm to: A. while earnings available to pay interest rise, earnings to residual owners rise faster
A. generate profits on sales B. interest accompanies debt financing
B. generate sales through the use of assets C. interest costs are cheaper than the required rate of return to equity owners
C. cover long-term debt S. the use of interest causes higher earnings
D. buy new assets
Measures of solvency
76. A measure of how efficiently a company uses its assets to generate sales is the 34. The set of ratios that is most useful in evaluating solvency is
A. asset turnover ratio. C. profit margin ratio. A. debt ratio, current ratio, and times interest earned
B. cash return on sales ratio. D. return on assets ratio. B. debt ratio, times interest earned, and return on assets
C. debt ratio, times interest earned, and quick ratio
Solvency ratios D. debt ratio, times interest earned, and cash flow to debt
Interested parties
50. Long-term creditors are usually most interested in evaluating 49. Which of the following ratios is most relevant to evaluating solvency?
A. liquidity. C. profitability. A. Return on assets C. Days’ purchases in accounts payable
B. marketability. D. solvency. B. Debt ratio D. Dividend yield
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Financial Statement Analysis
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Financial Statement Analysis
31. An acceleration in the collection of receivables will tend to cause the accounts receivable Profitability analysis
turnover to: 84. Denver Dynamics has net income of P2,000,000. Oakland Enterprises has net income of
A. decrease C. either increase or decrease P2,500,000. Which of the following best compares the profitability of Denver and Oakland?
B. remain the same D. increase A. Oakland Enterprises is 25% more profitable than Denver Dynamics.
B. Oakland Enterprises is more profitable than Denver Dynamics, but the comparison can't
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Financial Statement Analysis
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Financial Statement Analysis
D. Not enough information to determine if any of the answers are correct. Bonds payable, due in 10 years 500,000
Cash 100,000
Times interest earned Interest payable, due in three months 25,000
85. Which of the following will not cause times interest earned to drop? Assume no other changes Inventory 440,000
than those listed. Land 800,000
A. A rise in preferred stock dividends. Notes payable, due in six months 250,000
B. A drop in sales with no change in interest expense. What will happen to the ratios below if Ratio Company uses cash to pay 50 percent
C. An increase in interest rates. of its accounts payable?
D. An increase in bonds payable with no change in operating income. A. B. C. D.
Current ratio Increase Decrease Increase Decrease
DuPont Analysis Acid-test ratio Increase Decrease Decrease Increase
71. Which of the following could cause return on assets to decline when net profit margin is
increasing? Question Nos. 4 through 6 are based on the data taken from the balance sheet of Nomad
A. sale of investments at year-end C. purchase of a new building at year-end Company at the end of the current year:
B. increased turnover of operating assets D. a stock split Accounts payable P145,000
Accounts receivable 110,000
80. A firm with a lower net profit margin can improve its return on total assets by Accrued liabilities 4,000
A. increasing its debt ratio C. increasing its total asset turnover Cash 80,000
B. decreasing its fixed assets turnover D. decreasing its total asset turnover Income tax payable 10,000
Inventory 140,000
Marketable securities 250,000
PROBLEMS: Notes payable, short-term 85,000
Horizontal analysis Prepaid expenses 15,000
i
. Kline Corporation had net income of P2 million in 2006. Using the 2006 financial elements as
the base data, net income decreased by 70 percent in 2007 and increased by 175 percent in iv
. The amount of working capital for the company is:
2008. The respective net income reported by Kline Corporation for 2007 and 2008 are: A. P351,000 C. P211,000
A. P 600,000 and P5,500,000 C. P1,400,000 and P3,500,000 B. P361,000 D. P336,000
B. P5,500,000 and P 600,000 D. P1,400,000 and P5,500,000
v
ii
. The company’s current ratio as of the balance sheet date is:
. Assume that Axle Inc. reported a net loss of P50,000 in 2006 and net income of P250,000 in A. 2.67:1 C. 2.02:1
2007. The increase in net income of P300,000: B. 2.44:1 D. 1.95:1
A. can be stated as 0% C. cannot be stated as a percentage
B. can be stated as 100% increase D. can be stated as 200% increase vi
. The company’s acid-test ratio as of the balance sheet date is:
A. 1.80:1 C. 2.02:1
Liquidity ratios B. 2.40:1 D. 1.76:1
iii
. The following financial data have been taken from the records of Ratio Company:
Accounts receivable P200,000 Activity ratios
Accounts payable 80,000 Receivables turnover
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Financial Statement Analysis
vii
. Pine Hardware Store had net credit sales of P6,500,000 and cost of goods sold of xii
. Selected information from the accounting records of Petals Company is as follows:
P5,000,000 for the year. The Accounts Receivable balances at the beginning and end of the Net sales for 2007 P900,000
year were P600,000 and P700,000, respectively. The receivables turnover was Cost of goods sold for 2007 600,000
A. 7.7 times. C. 9.3 times. Inventory at December 31, 2006 180,000
B. 10.8 times. D. 10.0 times. Inventory at December 31, 2007 156,000
Petals’ inventory turnover for 2007 is
viii
. Milward Corporation’s books disclosed the following information for the year ended December A. 5.77 times C. 3.67 times
31, 2007: B. 3.85 times D. 3.57 times
Net credit sales P1,500,000
Net cash sales 240,000 xiii
. The Moss Company presents the following data for 2007.
Accounts receivable at beginning of year 200,000 Net Sales, 2007 P3,007,124
Accounts receivable at end of year 400,000 Net Sales, 2006 P 930,247
Milward’s accounts receivable turnover is Cost of Goods Sold, 2007 P2,000,326
A. 3.75 times C. 5.00 times Cost of Goods Sold, 2007 P1,000,120
B. 4.35 times D. 5.80 times Inventory, beginning of 2007 P 341,169
Inventory, end of 2007 P 376,526
Days receivable The merchandise inventory turnover for 2007 is:
ix
. Batik Clothing Store had a balance in the Accounts Receivable account of P390,000 at the A. 5.6 C. 7.5
beginning of the year and a balance of P410,000 at the end of the year. The net credit sales B. 15.6 D. 7.7
during the year amounted to P4,000,000. Using 360-day year, what is the average collection
period of the receivables? xiv
. Based on the following data for the current year, what is the inventory turnover?
A. 30 days C. 73 days Net sales on account during year P 500,000
B. 65 days D. 36 days Cost of merchandise sold during year 330,000
Accounts receivable, beginning of year 45,000
Cash collection Accounts receivable, end of year 35,000
x
. Deity Company had sales of P30,000, increase in accounts payable of P5,000, decrease in Inventory, beginning of year 90,000
accounts receivable of P1,000, increase in inventories of P4,000, and depreciation expense of Inventory, end of year 110,000
P4,000. What was the cash collected from customers? A. 3.3 C. 3.7
A. P31,000 C. P34,000 B. 8.3 D. 3.0
B. P35,000 D. P25,000
Days inventory
Inventory turnover xv
. Selected information from the accounting records of Eternity Manufacturing Company follows:
xi
. During 2007, Tarlac Company purchased P960,000 of inventory. The cost of goods sold for Net sales P3,600,000
2007 was P900,000, and the ending inventory at December 31, 2007 was P180,000. What Cost of goods sold 2,400,000
was the inventory turnover for 2007? Inventories at January 1 672,000
A. 6.4 C. 5.3 Inventories at December 31 576,000
B. 6.0 D. 5.0 What is the number of days’ sales in average inventories for the year?
A. 102.2 C. 87.6
584
Financial Statement Analysis
585
Financial Statement Analysis
Preferred stock, 8%, par P100, nonconvertible, P250,000 P250,000 Orchard’s common stock, which is listed on a major stock exchange, was quoted at P4 per
noncumulative share on December 31. Orchard’s net income for the year ended December 31 was P50,000.
Common stock 600,000 800,000 The yearly preferred dividend was declared. No capital stock transactions occurred. What
Retained earnings 150,000 370,000 was the price earnings ratio on Orchard’s common stock at December 31?
Dividends paid on preferred stock for the year 20,000 20,000 A. 6 to 1 C. 10 to 1
Net income for the year 120,000 240,000 B. 8 to 1 D. 16 to 1
Ivano’s return on common stockholders’ equity, rounded to the nearest percentage point, for
xxvii
2007 is . On December 31, 2006 and 2007, Renegade Corporation had 100,000 shares of common
A. 17% C. 21% stock and 50,000 shares of noncumulative and nonconvertible preferred stock issued and
B. 19% D. 23% outstanding.
Additional information:
Dividend yield Stockholders’ equity at 12/31/07 P4,500,000
xxiv
. The following information is available for Duncan Co.: Net income year ended 12/31/07 1,200,000
2006 Dividends on preferred stock year ended 12/31/07 300,000
Dividends per share of common stock P 1.40 Market price per share of common stock at 12/31/07 144
Market price per share of common stock 17.50 The price-earnings ratio on common stock at December 31, 2007, was
Which of the following statements is correct? A. 10 to 1 C. 14 to 1
A. The dividend yield is 8.0%, which is of interest to investors seeking an increase in market B. 12 to 1 D. 16 to 1
price of their stocks.
B. The dividend yield is 8.0%, which is of special interest to investors seeking current returns Payout ratio
xxviii
on their investments. . Selected financial data of Alexander Corporation for the year ended December 31, 2007, is
C. The dividend yield is 12.5%, which is of interest to bondholders. presented below:
D. The dividend yield is 8.0 times the market price, which is important in solvency analysis. Operating income P900,000
Interest expense (100,000)
Market Test Ratios Income before income taxes 800,000
Market/Book value ratio Income tax (320,000)
Price per share Net income 480,000
xxv
. What is the market price of a share of stock for a firm with 100,000 shares outstanding, a book Preferred stock dividend (200,000)
value of equity of P3,000,000, and a market/book ratio of 3.5? Net income available to common stockholders 280,000
A. P8.57 C. P85.70 Common stock dividends were P120,000. The payout ratio is:
B. P30.00 D. P105.00 A. 42.9 percent C. 25.0 percent
B. 66.7 percent D. 71.4 percent
P/E ratio
xxvi
. Orchard Company’s capital stock at December 31 consisted of the following: P/E ratio & Payout ratio
Common stock, P2 par value; 100,000 shares authorized, issued, and Use the following information for question Nos. 33 and 34:
outstanding. Terry Corporation had net income of P200,000 and paid dividends to common stockholders of
10% noncumulative, nonconvertible preferred stock, P100 par value; 1,000 shares P40,000 in 2007. The weighted-average number of shares outstanding in 2007 was 50,000
authorized, issued, and outstanding. shares. Terry Corporation’s common stock is selling for P60 per share in the local stock
586
Financial Statement Analysis
587
Financial Statement Analysis
588
Financial Statement Analysis
589
i
. Answer: A
2007: P2,000,000 (1 – 0.7) = P600,000
2008: P2,000,000 (1 + 1.75) = P5,500,000
Note: For 2007 & 2008, 2006 was used as a base year.
ii
. Answer: C
iii
. Answer: C
Current Assets:
Cash P100,000
Accounts receivable 200,000
Total liquid assets 300,000
Inventory 440,000
Total current assets P740,000
Current Liabilities:
Accounts payable P 80,000
Notes payable, due in 6 months 250,000
Interest payable 25,000
Total current liabilities P355,000
Before any payment, the current ratio is above 1:1 and acid test ratio is below 1:1. Therefore, the current ratio shall
rise but acid test ratio shall go down. If any of these two ratios is below 1:1, the equal change in current assets and
current liabilities brings direct effect on the ratio, that is, equal increase in current assets and current liabilities causes
the ratio to rise.
iv
. Answer: A
Working capital equals the difference between the total current assets and total current liabilities.
Current Assets:
Cash P 80,000
Marketable securities 250,000
Accounts receivable 110,000
Total liquid assets 440,000
Inventory 140,000
Prepaid expense 15,000
Total Current Assets P595,000
Current Liabilities:
Accounts payable P145,000
Income tax payable 10,000
Notes payable, short-term 85,000
Accrued liabilities 4,000 244,000
Alternative Computation:
Average daily cost of goods sold: = (P2,400,000 ÷ 365) P6,575.34
Turnover in Days: P624,000 ÷ P6,575.34 94.9 days
xvi
. Answer: A
Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2 P 950,000
Average inventory; (P1.1M + P1.2M) ÷ 2 P1,150,000