FINANCIAL STATEMENT ANALYSIS

Question 1

In financial statements analysis, expressing all financial statement items as a percentage of base year amounts is called

a. trend analysis.
b. variance analysis.
c. horizontal common-size analysis.
d. vertical common-size analysis.

Answer 1

C

Question 2

In financial statements analysis, expressing figures for a single year as a percentage of a base amount on the financial statement (for example, total assets in a balance sheet or sales in an income statement) is called

a. trend analysis.
b. variance analysis.
c. horizontal common-size analysis.
d. vertical common-size analysis.

Answer 2

D

Question 3

Which of the following statements is correct?

a. Liquidity refers to the firm’s ability to pay all its obligations and to continue operations.
b. Solvency refers to a firm’s ability to survive in the long-term by paying its short-term obligations.
c. Trading on the equity refers to a firm’s sale of its own stocks in the stock exchange.
d. Ratio analysis addresses such issues as the firm’s liquidity, use of leverage, management of assets, cost control, growth, and valuation.

Answer 3

D

Question 4

Solvency is a firm’s ability to survive in the long-term by paying its long-term obligations. Its key ingredients are capital structure and earning power. Capital structure consists of

a. the capital stocks of the firm.
b. the firm’s total assets.
c. the firm’s sources of financing, whether long-term or short-term, of its assets.
d. the stockholders’ equity accounts.

Answer 4

C

Question 5

Financial leverage or trading on equity is advantageous when

a. all of the corporation’s authorized capital stocks have already been issued
b. a firm has an available credit line with its depository bank.
c. earnings from borrowed funds exceed borrowing costs.
d. a firm is in financial distress

Answer 5

C

Question 6

Through financial statements analysis, interested parties - such as managers, investors, and creditors - can identify the company’s financial strengths and weaknesses and know about the following, except

a. profitability of the business firm.
b. the firm’s ability to meet its obligations.
c. safety of the investment in the business.
d. composition of management running the firm.

Answer 6

D

Question 7

Financial statements analysis is not without problems and limitations. Among such limitations is as follows, except:

a. A ratio that is acceptable to one company may not be acceptable to another when some other factors are considered.
b. There may be some differences in the accounting methods and estimates used by companies so that comparison of their ratios may not be advisable.
c. Financial statements are based on current market value of the firm’s assets, therefore they do not reflect historical costs.
d. The timing of transactions and use of averages in applying the various techniques in financial statements analysis affect the results to be obtained.

Answer 7

C

Question 8

Which of the following is not)
a limitation of ratio analysis affecting
comparability among firms?

a. Provision of useful information regarding the efficiency of operations and the stability of financial conditions
b. Different sources of information
c. Different accounting periods
d. Different accounting policies

Answer 8

A

Question 9

In assessing the financial health of a firm, financial analysts use different techniques. One technique is the vertical, common-size analysis, an example of which is

a. total current assets is 20% of the total assets as of a certain date.
b. total current assets as of a certain date is 20% greater compared with the previous year.
c. the finished goods inventory turnover is twelve times during the year.
d. cash provided by operations is P100,000.

Answer 9

A

Question 10

Price level changes affect financial statements analysis. In measuring price level changes, some indices are used. An example of such indices is the Gross Domestic product (GDP) price index or GDP. deflator, which

a. measures price level by a monthly pricing of a specified set of goods and services purchased by a typical urban consumer.
b. includes the prices of all goods and services produced in the country.
c. measures the price of specified commodities at the time of their first commercial sale.
d. is the amount charged by one organizational unit for the transfer of goods or services to another organizational unit within the same firm.

Answer 10

B

Question 11

Which of the following statements is not correct? A limitation of
ratio analysis affecting comparability from one interim period to the next within a firm is that

a. in a seasonal business, inventory and receivables may vary widely with year-end balances not reflecting the averages for the period.
b. management has less incentive to window dress financial statements to improve results.
c. comparability is impaired if different firms use different accounting policies: for industry com panim)
d. misleading conclusions may result if improper comparisons are selected.

Answer 11

C

Question 12

The variance that arises solely because the actual units sold differs from the budgeted units to be sold is called

a. sales volume variance.
b. sales price variance.
c. master budget increment.
d. sales mix variance.

Answer 12

A

Question 13

For a multi-product company, the sales volume can be divided into the

a. sales mix variance and production volume variance.
b. sales mix variance and sales quantity variance.
c. sales price variance and sales volume variance.
d. sales volume variance and sales quantity variance.

Answer 13

B

Question 14

The statement of cash flows

a. reports the revenues earned and expenses incurred by the firm during the period.
b. shows the company’s total assets, broken down into current and non-current assets.
c. shows the company’s capital structure for a period of time.
d. reports the net change in cash resulting from operating, investing, and financing activities of the firm during the period.

Answer 14

D

Question 15

In cash flow analysis, the cash flows from operating activities

a. are the cash effects of transactions that create revenues and expenses.
b. generally relate to changes in non-current assets.
c. generally relate to changes in long-term liabilities and stockholders’ equity accounts.
d. are irrelevant.

Answer 15

A

Question 16

In computing a ratio, when a balance sheet amount is related to an income statement amount,

a. the income statement amount should be converted to an average for the year.
b. the balance sheet amount should be converted to an average for the year.
c. both amounts should be converted to an average for the year.
d. the amounts may be used as is to develop a meaningful ratio.

Answer 16

B

Question 17

Which of the following statements is incorrect?

a. The ratio of sales to working capital is a measure of liquidity and activity.
b. The number of days’ sales in receivables is a measure of liquidity, as well as of activity.
c. A high sales-to-working capital ratio would indicate that the firm is not susceptible to liquidity problems.
d. The earnings per share is a profitability ratio.

Answer 17

C

Question 18

Last year, a business had no long-term investments; this year, long-
term investments amount to P500,000. In a horizontal analysis, the change in long-term investments should be expressed as

a. an absolute value of P500,000 and an increase of 100%.
b. an absolute value of P500,000 and an increase of 1,000 percent.
c. an absolute value of P500,000 and no value for a percentage change.
d. no change in any terms because there was no investment in the previous year

Answer 18

C

Question 19

Earnings per share amounts to P
10 and the price earnings ratio is
5. If the dividend yield is 8%,

a. the market price of the stock must be P40.
b. the market price of the stock cannot be determined.
c. the amount of dividend cannot be determined.
d. the dividend is P4 per share.

Answer 19

C

Question 20

Which of the following statements about the Statement of Cash
Flows is incorrect?

a. It provides information about the operating, investing, and: financing activities during the period.
b. It is one of the basic financial statements.
c. It provides information about cash receipts and cash payments of a firm during a period.
d. It reconciles the ending cash account balance per books to the balance per the bank statement.

Answer 20

D

Question 21

Typically, which of the following would be cosidered to be the most indicative of a firm’s short term debt paying ability?

a. Working capitla
b. Acid test
c. Current ratio
d. cash ratio

Answer 21

C

Question 22

Which of the following ratios does not represent some form of comparison between accounts in current assets anda accounts in current liabilities?

a. working capital
b. acid-test ratio
c. current ratio
d. merchandise inventory turnover

Answer 22

D

Question 23

Which of the following ratios would generally be used to measure a firm’s overall liquidity position?

a. working capital
b. acid-test ratio
c. current ratio
d. cash ratio

Answer 23

C

Question 24

Which of the following would best indiciate that the firm is carrying excess inventory?

a. a decline in sales
b. a decline in the current ratio
c. a decline in the day’s sales in inventory
d. stable current ratio with decling quick ratios

Answer 24

D

Question 25

Total asset turnover measures the ability of a firm to : a. generate profits on sales b. buy new assets c. generate sales through the use of assets d. move inventory

Answer 25

C

Question 26

Return on assets cannot fall under which of the following circumstances? Net Profit Margin I Total Asset Turnover a. decline, rise b. rise, decline c. rise, rise d. decline, decline

Answer 26

C

Question 27

The price/earnings ratio a. measure the past earning ability of the firm b. is a gauge of future earning power as seen by investors c. relates price to dividends d. relates price to total net income

Answer 27

B

Question 28

Which of the following ratios usually reflects investors opinions of the future prospects for the firm? a. dividend yeiled b. price/earnings ratio c. book value per share d. earnings per share

Answer 28

B

Question 29

Which of the following is not a measure of asset utilization? a. inventory turnover b. average accounts receivable collection period c. fixed assets turnover d. debt to total assets

Answer 29

D

Question 30

What financial analysis technique would imply benchmarks with other firms? a. horizontal analysis b. cross-sectional analysis c. vertical analysis d. ratio analysis

Answer 30

B

Question 31

In comparing the current ratios of two companies, why is it invalid to assume that the ocmpany with the higher current raito is the better company? a. The current ratio includes assets other than cash b. a high current ratio may indicate inadequate inventory on hand c. a high current ratio may indicate inefficient use of various assets and liabilities d. the two companies may define working capital in different terms

Answer 31

C