FSA Exam 2
Which of these statements is false?
A company comparison should not be made with industry averages if the company does not clearly fit into any one industry.
ich of the following types of businesses would normally have the shortest operating cycle?
A grocery store
hich of the following circumstances will cause sales to fixed assets to be abnormally high?
A labor-intensive industry
Which of the following types of business would normally have the longest operating cycle?
A seller of resort property
Which of the following can offer a type of comparison in financial statement analysis
All of the answers are correct.
Which of the following can offer a type of comparison in financial statement analysis?
All of the answers are correct.
Which of the following does not bear on the quality of receivables?
All of the answers bear on the quality of receivables
Which of the following ratios would generally be used to evaluate a firm's overall liquidity position?
Current ratio
A given ratio is always computed the same way, no matter what the source.
False
A shortening of the credit terms is an indication that there will be more risk in the collection of future receivables.
False
Absolute figures usually have more meaning than ratio comparisons.
False
Days' sales in receivables may be abnormally high if a material amount of sales are on a cash basis.
False
Dissimilar year ends will have no impact on the results of ratios.
False
If the company closes the year when the activities are at a peak, the number of days' sales in inventory would tend to be overstated and the liquidity would be overstated
False
In order to compute gross profit margin, the income statement must be in single-step format.
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
Management should usually strive to keep the cash ratio high
False
Sales to fixed assets will have the least meaning if assets are relatively new
False
The LIFO inventory costing method usually results in working capital being overstated.
False
The descriptive information in annual reports is not useful in statement analysis; only the financial statements themselves are of value.
False
The direct write-off method frequently results in the bad debt expense being recognized in the year subsequent to the sale, and thus results in a proper matching of expense with revenue.
False
The principal asset of a merchandising firm will usually be accounts receivable.
False
To get a better indication of a firm's ability to cover interest payments in the long run, the noncash charges for depreciation, depletion, and amortization can be added back to the times interest earned ratio.
False
Working capital is considered to be more indicative of the short-term, debt-paying ability than is the current ratio.
False
n terms of liquidity, it is to management's advantage to show investments under investments instead of marketable securities.
False
Which of the following does not represent a problem with financial analysis?
Financial analysis can be used to detect apparent liquidity problems.
Denver Dynamics has net income of $2,000,000. Oakland Enterprises has net income of $2,500,000. Which of the following best compares the profitability of Denver and Oakland?
Further information is needed for a reasonable comparison.
Which of the following is a false statement as it relates to analysis?
If merchandise with a 20% markup is sold on credit, it would take ten successful sales of the same amount to make up for one sale not collected.
Which of the following statements is incorrect?
In most sectors, NAICS provides for compatibility at the industry (six-digit) level.
Which of these statements is false?
In vertical analysis, a figure from this year's statement is compared with a base selected from the prior statement
In computing debt to tangible net worth, which of the following is not subtracted in the denominator?
Investments
Which of the following would not be classified as a current asset
Investments
Which of the following would not be a reasonable conclusion when comparing LIFO-FIFO under an inflationary condition?
LIFO would probably be used for inventory that has a high turnover rate because there would be an immaterial difference in the results between LIFO ad FIFO.
Which of the following is not a source of industry statistics?
Mergent Dividend Record
Jones Company has long-term debt of $1,000,000, while Smith Company, Jones' competitor, has long-term debt of $200,000. Which of the following statements best represents an analysis of the long-term debt position of these two firms?
Not enough information to determine if any of the answers are correct.
Which of the following current assets will not generate cash in the future?
Prepayments
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?
Relative numbers would be most meaningful for both the large and small firm, especially for interfirm comparisons.
Which of the following ratios will usually have the lowest percent?
Return on total assets
Which of the following is a government document that provides industry statistics?
The Department of Commerce Financial Report
Which of the following statements best compares long-term borrowing capacity ratios?
The debt to tangible net worth ratio is more conservative than the debt/equity ratio.
Which of the following statements is not true relating to a defined contribution pension plan?
This type of plan presents substantial problems in estimating the pension liability.
Absolute figures and ratios are close to being meaningless unless compared to another figure.
True
Based on the terms of the credit and the purpose, the objectives of financial statement analysis by creditors will vary.
True
Because the cost of specific inventory items is not usually practical to determine, it is necessary for management to select a cost flow assumption
True
Because the cost of specific inventory items is not usually practical to determine, it is necessary for management to select a cost flow assumption.
True
Different accounting methods can cause some ratios to differ substantially.
True
Equity earnings are excluded from earnings for the times interest earned coverage.
True
Even an entity on a very profitable course will find itself bankrupt if it fails to meets its obligations to short-term creditors.
True
High fixed costs in a period of low activity can cause a low net profit margin.
True
In general, the profitability of a firm is not considered to be important in determining the short-term, debt-paying ability of the firm.
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
Significant weight is seldom given to the cash ratio unless the firm is in financial trouble.
True
The SEC requires interim financial data on Form 10-Q
True
The ability of an entity to maintain its short-term, debt-paying ability is important to all users of financial statements.
True
The company with the natural business year tends to overstate its accounts receivable turnover, thus overstating its liquidity.
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
The use of the allowance for doubtful accounts results in the bad debt expense being charged to the period of sale.
True
The valuation problem from waiting to collect a receivable is ignored in the valuation of receivables and notes that are classified as current assets.
True
To qualify as a marketable security, the investment must be readily marketable and it must be the intent of management to convert the investment to cash within the current operating cycle or a year, whichever is longer.
True
Typically, the largest expense to a manufacturing firm is cost of goods sold.
True
Under the allowance method, the charge off of a specific account receivable does not influence the income statement nor the net receivable on the balance sheet at the time of the charge off.
True
Using the direct write-off method, the bad debt expense is recorded when a specific customer's account is determined to be noncollectible.
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
Working capital of a business is the excess of current assets over current liabilities.
True
Which of the following statements is not correct?
Usually, the highest times interest coverage in the most recent five-year period is used as the primary indication of the interest coverage.
The debt ratio indicates:
a comparison of liabilities with total assets.
If a firm has pledged its receivables and its inventory, then the best indicator of its short-term liquidity may be indicated by:
cash ratio
Gross profit margin is an important ratio of merchandising firms because:
cost of goods sold is usually the largest expense.
Prepayments should be reported in the:
current assets section of the balance sheet.
Operating income is:
gross profit less operating expenses.
A fixed charge coverage:
is an income statement indication of debt carrying ability.
Return on investment measures:
return to all long-term suppliers of funds.
Net profit margin measures return on:
sales.
