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Financial Statement Analysis T/F
Financial Statement Analysis (Qassim University)
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Christianne Lauria
Acc645HW8-Financial Statement Analysis
Part I. True or False, Multiple Choice
1. Under both GAAP and IFRS, items that are considered to be both unusual in nature and infrequent in occurrence are
reported as “extraordinary items” in a separate line item at the bottom of the income statement, net of tax.
a. True
b. False
2. Under IFRS, there is no classification for extraordinary items. In other words, extraordinary item treatment is prohibited
under IFRS.
a. True
b. False
3. In recent years, the types of items that can receive extraordinary item treatment under GAAP has been reduced to the
point where the classification is rarely used.
a. True
b. False
4. The accounting for changes in accounting principles and changes in accounting estimates are the same for both GAAP
and IFRS.
a. True
b. False
5. Calculating financial ratios is a financial reporting requirement under IFRS.
a. True
b. False
6. Measures of a company's liquidity are concerned with the frequency and amounts of dividend payments.
a. True
b. False
7. Comparisons of company data with industry averages can provide some insight into the company's relative position in
the industry.
a. True
b. False
8. Vertical and horizontal analyses are concerned with the format used to prepare financial statements.
a. True
b. False
9. Horizontal analysis is a technique for evaluating a financial statement item in the current year with other items in the
current year.
a. True
b. False
10. Another name for trend analysis is horizontal analysis.
True
b. False
11. A ratio can be expressed as a percentage, a rate, or a proportion.
True
b. False
12. A solvency ratio measures the income or operating success of an enterprise for a given period of time.
True
b. False
13. The current ratio is a measure of all the ratios calculated for the current year.
True
b. False
14. Profitability ratios are frequently used as a basis for evaluating management's operating effectiveness.
True
b. False
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15. Which one of the following is primarily interested in the liquidity of a company?
a.
Government agencies
b.
Shareholders
c.
Long-term creditors
d.
Short-term creditors
16. Earnings per share is calculated
only for ordinary shares.
a.
b.
only for preference shares.
c.
for ordinary and preference shares.
d.
only for treasury shares.
17. In analyzing the financial statements of a company, a single item on the financial statements
a.
should be reported in bold-face type.
b.
is more meaningful if compared to other financial information.
c.
is significant only if it is large.
d.
should be accompanied by a footnote.
18. Short-term creditors are usually most interested in evaluating
a.
solvency.
b.
liquidity.
c.
marketability.
d.
profitability.
19. Long-term creditors are usually most interested in evaluating
a.
liquidity and solvency.
b.
solvency and marketability.
c.
liquidity and profitability.
d.
profitability and solvency.
20. Shareholders are most interested in evaluating
a.
liquidity and solvency.
b.
profitability and solvency.
c.
liquidity and profitability.
d.
marketability and solvency.
21. A shareholder is interested in the ability of a firm to
a.
pay consistent dividends.
b.
appreciate in share price.
c.
survive over a long period.
d.
all of these.
22. Comparisons of financial data made within a company are called
a.
intracompany comparisons.
b.
interior comparisons.
c.
intercompany comparisons.
d.
intramural comparisons.
23. Which one of the following is not a tool in financial statement analysis?
a.
Horizontal analysis
b.
Circular analysis
c.
Vertical analysis
d.
Ratio analysis
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24. A technique for evaluating financial statements that expresses the relationship among selected items of financial
statement data is
a.
common size analysis.
b.
horizontal analysis.
c.
ratio analysis.
d.
vertical analysis.
25. In common size analysis,
a.
a base amount is required.
b.
a base amount is optional.
c.
the same base is used across all financial statements analyzed.
d.
the results of the horizontal analysis are necessary inputs for performing the analysis.
26. If equal amounts are added to the numerator and the denominator of the current ratio, the ratio will always
a.
increase.
b.
decrease.
c.
stay the same.
d.
equal zero.
27. Which of the following is not a profitability ratio?
a.
Payout ratio
b.
Profit margin
c.
Times interest earned
d.
Return on ordinary shareholders' equity
28. If a company has an acid-test ratio of 1.2:1, what respective effects will the borrowing of cash by short-term debt and
collection of accounts receivable have on the ratio?
Short-term Borrowing Collection of Receivable
a.
Increase
No effect
b.
Increase
Increase
c.
Decrease
No effect
d.
Decrease
Decrease
29. A general rule to use in assessing the average collection period is that
a.
it should not exceed 30 days.
b.
it can be any length as long as the customer continues to buy merchandise.
c.
it should not greatly exceed the discount period.
d.
it should not greatly exceed the credit term period.
30. Inventory turnover is calculated by dividing
a.
cost of goods sold by the ending inventory.
b.
cost of goods sold by the beginning inventory.
c.
cost of goods sold by the average inventory.
d.
average inventory by cost of goods sold.
31. A successful grocery store would probably have
a.
a low inventory turnover.
b.
a high inventory turnover.
c.
zero profit margin.
d.
low volume.
32. An aircraft company would most likely have
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a.
b.
c.
d.
a high inventory turnover.
low profit margin.
high volume.
a low inventory turnover.
Part II. Problems.
P1. Net sales are $6,000,000, beginning total assets are $2,800,000, and the asset turnover is 2.0 times. What is the ending
total asset balance?
Asset turnover = net sales / average assets = 2
= 6,000,000 / ((2,800,000 + x )/2) = 2
= (2,800,000 + x ) / 2 = 3,000,000
= x = 3,200,000
Ending total asset balance is $3,200,000
P2. Assume the following sales data for a company:
2013 €1,200,000
2012 960,000
2011 840,000
2010 600,000
If 2010 is the base year, what is the percentage increase in sales from 2010 to 2012?
= (2012 – 2010) / 2010
= (960,000 – 600,000) / 600,000
=360,000 / 600,000 = 60%
P3. The following information is available for Charles Company:
2010
2011
Accounts receivable
$ 360,000
$ 400,000
Inventory
280,000
320,000
Net credit sales
2,470,000
1,400,000
Cost of goods sold
1,860,000
1,060,000
Net income
300,000
170,000
The receivables turnover ratio for 2011 is
= net credit sales / avg net receivables
= 2,470,000 / ((360,000 + 400,000) / 2)
= 2,470,000 / 380,000
= 6.5
P4. The following information pertains to Cheng Company. Assume that all statement of financial position amounts
represent both average and ending balance figures. Assume that all sales were on credit. All amounts are in thousands
except per share items.
Assets
Property, plant and equipment
Inventory
¥ 215,000
25,000
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Accounts receivable (net)
Cash and short-term investments
Total Assets
30,000
40,000
¥310,000
Equity and Liabilities
Shareholders’ equity—ordinary
Non-current liabilities
Current liabilities
Total Equity and Liabilities
¥ 175,000
75,000
60,000
¥310,000
Income Statement
Sales
Cost of goods sold
Gross margin
Operating expenses
Net income
Number of ordinary shares
Market price of ordinary shares
Dividends per share
¥ 90,000
45,000
45,000
25,000
¥ 20,000
5,000
$22
1.00
a. What is the profit margin for Cheng?
= net income / net sales
= 20,000 / 90,000
= 22%
b. What is the ROI for Cheng assuming the total assets as their investment amount?
= profit margin * asset turnover
= (net income / net sales) * (net sales / average assets)
= .2222 * (90,000 / 310,000)
= .2222 * .2903
= .0645 or 6.45%
c. What is the return on ordinary shareholders’ equity for Cheng?
= income / ordinary shareholders’ equity
= 20,000 / 110,000
= .18 or 18%
d. What is the price-earnings ratio for Cheng?
= market price per share / earnings per share
= 22 / 1
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