Chapter 5 Fin Stmt ANalysis

In a common size cash flow statement, all items are expressed as a percentage of a. Sales b. Total Equity c. Net Income d. Total Assetd e. Cash Holdings

A. Sales

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 analyst. 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. d. Some industry ratio formulas vary from source to source. e. Adequate detailed disclosure of how the industry ratios are computed is often lacking.

B. Financial analysis can be used to detect apparent liquidity problems

In financial statement analysis ratios are: a. the only type of analysis where industry data are available b. absolute numbers converted to a common base c. fractions usually expressed in percent or times d. the only indication of the financial position of the firm e. None of the above

C. Fractions usually expressed in percent or times

Trend statements are better than common size statements at indicating which of the following? a. monetary changes b. stability c. Growth and decline d. Profitability e. Liquidity

C. Growth and decline

A retailing firm has which type of inventory a. Raw Materials b. Work in Progress c. Merchandise d. Raw materials and merchandise e. Raw materials, work in process and merchandise

C. Merchandise

Manero Company included the following information in its annual report: 2019 2018 2017 Sales$178,400 $162,500 $155,500 Cost of goods sold 115,000 102,500 100,000 Operating expenses 50,000 50,000 45,000 Operating income13,400 10,000 10,500 In a trend income statement for 2017, where 2017 is the base year, sales are expressed as: a. 87.2 % b. 100% c. 114.7 % d. 104.5 % e. 102 %

D. 1O4.5%

Which of the following can offer a type of comparison in financial statement analysis? a. past ratios and figures b. industry averages c. statistics of competitors d. all of the answers are correct e. none

D. All of the answers are correct

Statements in which all items are expressed only in relative terms (percentage of a base) are termed a. vertical statements b. horizontal statements c. funds statements d. common-size statements e. none of the above

D. Common size statements

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? a. Absolute numbers would be most meaningful for both the large and small firm. b. Absolute numbers would be most meaningful in the large firm; relative numbers would be most meaningful in the small firm. c. Relative numbers would be most meaningful for the large firm; absolute numbers would be most meaningful for the small firm. d. Relative numbers would be most meaningful for both the large and small firm, especially for interfirm comparisons. e. It is not meaningful to compare a large firm with a small firm.

D. Relative numbers would be most meaningful for both the large and small firm especially for interfirm comparisons

Liquidity ratios can be used a. to measure the degree of protection of long term suppliers of funds b. to measure borrowing capacity c. to measure the earning ability of a firm d. to measure the firms ability to meet its current e. to measure the worth of the firm

D. To measure the firm's ability to meet its current obligations

Which of the following would not be a user of financial statements? a. Management B. Bankers c. Employee Unions d. Investment Analyst e. All of the above

E. All of the above

A manufacturing firm will most likely have the heaviest investment in which type of assets a. Cash b. Inventory c. Accounts Receivable d. Investments e. Plant Property and Equipment

E. PPE

A given ratio is always computed the same way, no matter what the source

False

In vertical common-size analysis, the dollar figure for an account is expressed in terms of that same account figure for a selected base year

False

Liquidity ratios measure the degree of protection of long-term suppliers of funds

False

Which of these statements is false? a. A ratio can be computed from any pair of numbers. b. Given the large quantity of variables included in financial statements, a very long list of meaningful ratios can be derived. c. Comparing ratios computed from income statement and balance sheet numbers can create difficulties due to the timing of the financial statements. d. Financial ratios are usually expressed in percent or times. e. In vertical analysis, a figure from the year's statement is compared with a base selected from the prior statement.

In vertical analysis, a figure from this years statement is compared with a based selected from the prior statement

A service firm will usually have a low amount of inventory, consisting primarily of supplies

True

Based on the terms of the credit and the purpose, the objectives of financial statement analysis by creditors will vary

True

Common-size analysis involves expressing comparisons in percentages

True

Different accounting methods can cause some ratios to differ substantially

True

Financial statement analysis is a judgmental process

True

In order to determine the meaning of a ratio, some kind of comparison, such as an industry average or trend analysis is helpful

True

The ideal way to compare income statement figures, such as sales, to balance sheet figures, such as receivables, is to use a measure of the average for the balance sheet figures.

True

Typically, the largest expense to expense to a manufacturing firm is cost of goods sold

True

When performing year-to-year change analysis a meaningful percent change cannot be computed when one number is positive and the other number is negative

True