Chapter 23 Financial Statement Analysis
A high ratio of stockholders' equity to total liabilities indicates a greater risk for creditors
False
Comparison of amounts and percentages for only two years is adequate to indicate long-term trends
False
During vertical analysis, each item on the balance sheet is expressed as a percentage of total liabilities
False
In horizontal analysis, the base year is the most recent year
False
In vertical analysis, it is customary to express each item on the balance sheet as a percentage of total liabilities.
False
The current ratio is a measure of profitability
False
The fair market value of a share of common stock is determined by dividing the stockholders' equity by the number of shares of common stock outstanding.
False
During vertical analysis, each item in the income statement is expressed as a percentage of
Net Sales
Which of the following is true of horizontal analysis
The amounts of increase or decrease can be added or subtracted in the column from top to bottom and will give correct subtotals at each point.
Vertical analysis percentages can be added and subtracted from top to bottom
True
When horizontal analysis is performed, no percentage change is computed for a given item if there is no balance for that item in the base year.
True
Return on Common Stockholders' Equity
a measure of how well the corporation is making a profit for its shareholders; the ratio of net income available for common stockholders to common stockholders' equity
Acid-Test Ratio
a measure of immediate liquidity; the ratio of quick assets to current liabilities
Current Ratio
a measure of the ability of a business to pay its current debts using current assets; the ratio of current assets to current liabilities
Asset Turnover
a measure of the effective use of assets in making sales; the ratio of net sales to total assets
Accounts Receivable Turnover
a measure of the speed with which sales on accounts are collected; the ratio of net credit sales to average receivables
Industry Averages
financial ratios and percentages reflecting averages for similar companies
Comparative Statements
financial statements presented side by side for two or more years
Common-Size Statements
financial statements with items expressed as percentages of a base amount
If the comparative balance sheet shows the amount and percentage of decrease in merchandise inventory from 2012 to 2013, the firm used
horizontal analysis
Return on Assets
measure how productively the resources (assets) of the firm are used
Return on Common Equity
measures the return available to common stockholders relative to the book value of their investment in the firm
In a vertical analysis of data, the cost of goods sold most likely would be expressed as a percentage of
net sales
Vertical analysis of income statement data most often involves a comparison of each income statement item with
net sales
Low inventory turnover compared with the industry average might reflect
obsolete goods, poor purchasing procedures, and excess merchandise
Leveraged Buyout
purchasing a business by acquiring the stock and obligating the business to pay the debt incurred
What is a ratio that measures financial strength?
ratio of stockholders' equity to total liabilities
Liquidity
the ability of a business to pay its debts when due
A horizontal analysis of balance sheet data involves a comparison of a balance sheet amount on a given date with
the amount for the same balance sheet item on a previous date.
Which of the following is true of horizontal analysis?
the amounts of increase or decrease can be added or subtracted in the column from top to bottom and will give correct subtotals at each point.
Average Collection Period
the ratio of 365 days to the accounts receivable turnover; also called the number od days' sales in receivables
Price-Earnings Ratio
the ratio of the current market value of common stock to earnings per share of that stock
If the ratio of total stockholders' equity to total assets was greater in 2013 than in 2012, then
the ratio of total liabilities to total assets was smaller in 2013 than in 2012.
If the ratio of total stockholders' equity to total assets was greater than in 2012 than in 2012, then
the ratio of total liabilities to total assets was smaller in 2013 than in 2012.
Total Equities
the sum of a corporation's liabilities and stockholders' equity
In vertical analysis of the balance sheet, each item is expressed as a percentage of
total assets or of total liabilities and stockholders' equity
A decrease in cost of goods sold from 46.5% to 45.0% from 2012 to 2013 indicates a favorable long-term trend.
False
Operating Cash Flow
Cash flow from operations/current liabilities
Working Capital
The measure of the ability of a company to meet its current obligations; the excess of current assets over current liabilities
During vertical analysis, each item on the balance sheet is expressed as a percentage of
Total assets
Most trade associations provide common-size statements based on data gather from member companies
True
The ability of a company to pay its debts when due is known as liquidity.
True
The price-earnings ratio compares the present market value of a corporation's common stock with the earnings per share of that stock
True
The rate of return on total assets measures how effectively management has used the assets of the company
True
Quick Assets
cash, receivables, and marketable securities
Current Ratio
compares a firm's current assets to its current liabilities
Trend Analysis
comparing selected ratios and percentages over a period of time
Horizontal Analysis
computing the percentage change for individual items in the financial statements from year to year
Vertical Analysis
computing the relationship between each item on a financial statement to some base amount on the statement
Ratio Analysis
computing the relationship between various items in the financial statements
