Analyzing Financial Statements

The purpose of financial statement analysis is to help users make better business decisions, therefore the only parties interested in financial statement analysis are external to the company.

True / False
False
Liquidity and efficiency, solvency, profitability, and market are called the building blocks of analysis.

True / False
True
Financial reporting is not narrow in scope but broadly refers to useful information for decision makers.

True / False
True
Financial statement analysis requires no standards or very loose standards for comparisons.

True / False
False
Should a business have no interest income in one year, and have $1,000 of interest income the following year, the percentage of change in the interest income between the two years is 100%.

True / False
False
Generally, trend percentages are not adjusted for the effects of inflation or deflation.

True / False
True
Common-size comparative statements show items appearing on them in percentage form and in dollar form.

True / False
True
If net sales increase by 10%, from $200,000 to $220,000, and the cost of goods sold increases 10%, from $110,000 to $121,000, the gross profit from sales will increase by 10%.

True / False
True
A ratio expresses a mathematical relation between two quantities.

True / False
True
Liquidity and efficiency are used synonymously in ratio analysis.

True / False
False
The excess of current assets over current liabilities is known as working capital.

True / False
True
A high current ratio suggests a strong liquidity position, however the makeup of the type of business, the composition of the current assets, and the turnover rate of assets need to be considered before passing judgment on the current ratio.

True / False
True
When a company records a credit sale, the acid-test ratio will increase.

True / False
True
A firm can have a positive current ratio and a negative acid-test ratio.

True / False
True
The accounts receivable turnover for 2001 was 3.56 times. In 2002 it was 3.87 times. This type of change would generally be considered a positive change.

True / False
True
The write off of an account receivable through an allowance for doubtful accounts will increase the current ratio.

True / False
False
An increase in the accounts receivable turnover is always a favorable trend.

True / False
False
An increase in the merchandise inventory turnover is always a favourable trend.

True / False
False
Merchandise inventory turnover is calculated by dividing the cost of goods sold by the average of merchandise inventory balances.

True / False
True
Day's Sales Uncollected = (Accounts Receivable / Net Sales) x 365.

True / False
True
Day's Sales in Inventory = Ending Inventory / Cost of Goods Sold.

True / False
False
The debt ratio is calculated by dividing total liabilities by total shareholders' equity.

True / False
False
When a company records a credit sale, the debt ratio will decrease.

True / False
True
The times fixed interest charges earned provides a measurement for evaluating the operating efficiency and profitability of a business.

True / False
False
The profit margin indicates the amount of net income each dollar of sales generates.

True / False
True
If a company has a return on total assets of 18.0%, and net income of $36,000, its average total assets are $180,000.

True / False
False
The market price per share of stock decreased 4.0%, or $1.00. The earnings per share decreased 10%, or $.15. The price earnings ratio will have increased.

True / False
True
The relationship between the market price of a share of stock and the current earnings of the stock is known as the dividend yield.

True / False
False
The dividend yield is determined by dividing the annual dividends declared per share by the market price per share.

True / False
True
An investor need only use the dividend yield as a measure to evaluate the profitability of alternative share investments.

True / False
False
Comparative financial statements in which each amount is expressed as a percent of a base amount are called _______________ statements.
COMMON-SIZE
A financial statement with data for two or more successive accounting periods placed in columns side by side is referred to as a _______________ statement.
COMPARATIVE
How productive a company is in using its assets is referred to as _______________.
EFFICIENCY
The _______________ ratio is calculated by dividing shareholders' equity by total assets.

EQUITY
The process of communicating information that is relevant to investors, creditors, and others in making investment, credit, and similar decisions is called _______________ reporting.

FINANCIAL
The application of analytical tools, such as determining liquidity, profitability, and solvency ratio, to general-purpose financial statements and related data for making business decisions is called financial statement _______________.

ANALYSIS
The availability of resources to meet short-term cash requirements is referred to as _______________.

LIQUIDITY
A company's ability to generate an adequate return on invested capital is referred to as _______________.

PROFITABILITY
_______________ refers to a company's long-run financial viability and its ability to cover long-term obligations.

SOLVENCY
_______________ analysis is a tool to evaluate each financial statement item or group of items in terms of a specific base amount.

VERTICAL
Current assets minus current liabilities = _______________.

WORKING CAPITAL
Comparative financial statements in which each amount is expressed as a percent of a base amount. In the balance sheet, the amount of total assets is usually selected as the base amount and is expressed as 100%. In the income statement, net sales is usually selected as the base amount.
Common-size statements
A financial statement with data for two or more successive accounting periods placed in columns side by side, sometimes with changes shown in dollar amounts and percents.
Comparative statement
Refers to how productive a company is in using its assets; usually measured relative to how much revenue is generated for a certain level of assets.
Efficiency
The portion of total assets provided by shareholders' equity, computed as shareholders' equity divided by total assets.
Equity ratio
The process of communicating information that is relevant to investors, creditors, and others in making investment, credit, and similar decisions.
Financial reporting
The application of analytical tools to general-purpose financial statements and related data for making business decisions.
Financial statement analysis
Statements published periodically for use by a wide variety of interested parties; include the income statement, balance sheet, statement of changes in shareholders' equity (or statement of retained earnings), statement of cash flows, and notes related to the statements.
General-purpose financial statements
Refers to the availability of resources to meet short-term cash requirements.
Liquidity
Refers to a company's ability to generate an adequate return on invested capital.
Profitability
Refers to a company's long-run financial viability and its ability to cover long-term obligations.
Solvency
A tool to evaluate each financial statement item or group of items in terms of a specific base amount; the base amount is commonly defined as 100% and is usually revenue on the income statement and total assets on the balance sheet.
Vertical analysis
Current assets minus current liabilities.
Working capital
Capital structure
A company's source of financing: shares and/or debt.
Common-size financial statement:
A statement in which each amount is expressed as a percent of a base amount. In the balance sheet, the amount of total assets is usually selected a s the base amount and is expressed as 100%. In the income statement, revenue is usually selected as the base amount.

Horizontal analysis:

A tool to evaluate changes in financial statement data across time.