FSA - Problems

Liquidity ratios are computed using information from the ____________. •Statement of changes in financial position •Income statement •Balance sheet •Cash flow statement

Balance sheet

When compared to a debt ratio, a debt to equity ratio would ____________. •Be higher than the debt ratio •Have no relationship at all to debt ratio •Be equal to the debt ratio •Be lower than the debt ratio

Be higher than the debt ratio

Which of the following is an example of vertical analysis? •Commission expense in 2020 is 5% of sales. •Utilities expense in 2020 is 10% greater than in 2019. •A comparison in financial ratio between two or more firms in the different industries •A comparison in financial ratio between two or more firms in the same industry

Commission expense in 2020 is 5% of sales.

Through financial statement analysis, interested parties, such as managers, investors, and creditors, can identify the company's financial strengths and weaknesses and know about the following, EXCEPT •The firm's ability to meet its obligations •Safety of the investment in the business •Composition of management running the firm •Profitability of the business firm

Composition of management running the firm

If the ratio of total liabilities to equity increases, a ratio that would also most likely INCREASE is ____________. •Times interest earned •Debt ratio •Return on assets •Current ratio

Debt ratio

A company's current ratio and acid-test ratios are both greater than 1.0 to 1. If obsolete inventory is written off, this would ____________. •Increase the acid-test ratio •Increase net working capital •Decrease the current ratio •Decrease both the acid-test ratio and the current ratio

Decrease the current ratio

Which of the following statements is FALSE? •Different accounting procedures may affect ratio comparisons between individual companies and industry averages. •Financial statement analysis involves little judgment on the part of analysts when industry comparisons are available. •Valid comparative financial statement analysis depends on the availability of data for appropriately defined industries. •The statement of cash flows summarizes a firm's operating, investing and financing activities for a specific period and explains the change in cash from one period to the next.

Financial statement analysis involves little judgment on the part of analysts when industry comparisons are available.

Financial statement analysis is not without problems and limitations. Among such limitations are as follows, EXCEPT •Financial statements are based on current market value of the firm's assets; therefore they do not reflect historical costs. •A ratio that is acceptable to one company may not be acceptable to another when some other factors are considered. •The timing of transactions and use of averages in applying the various techniques in financial statements analysis affect the results to be obtained. •There may be some differences in the accounting methods and estimates used by companies so that comparison of their ratios may not be advisable.

Financial statements are based on current market value of the firm's assets; therefore they do not reflect historical costs.

A company that generates a great deal of "free cash" each year is generally considered to be what? •One that raises most of its cash from stock sales that do not require the payment of interest •Using its cash unwisely •Financially strong because it generates more than enough cash to satisfy reinvestment opportunities •Financially weak because it does not have enough investment opportunities available to put all its cash to work

Financially strong because it generates more than enough cash to satisfy reinvestment opportunities

In financial statement analysis, expressing all financial statement items as a percentage of base period amounts is called ____________. •Vertical analysis •Horizontal analysis •Ratio analysis •Variance analysis

Horizontal analysis

Which of the following ratios are measures of the company's profitability? I. Current ratio IV. Return on assets II. Return on sales V. Inventory turnover III. Debt-to-equity ratio VI. Receivable turnover •I, II & IV •II, III & IV •V & VI •II & IV

II & IV

A company has just converted a long-term note receivable into a short-term note receivable. This transaction will ____________. •Increase the current ratio and have no effect on times interest earned ratio •Increase working capital and decrease the acid-test ratio •Decrease the current ratio •Increase the company's times interest earned ratio

Increase the current ratio and have no effect on times interest earned ratio

All of the following statements about management's discussion and analysis that accompany financial statements are true, EXCEPT •It is restricted to a discussion and analysis of the historical data presented in the financial statements. •The external stakeholders use it to understand the overall health of the organization. •It helps investors and creditors interpret the financial statements. •It is useful because top management is in the best position to know how well the company is performing.

It is restricted to a discussion and analysis of the historical data presented in the financial statements.

Which of the following BEST describes a low accounts payable turnover? •It provides a shorter number of days for the business to pay its obligation on account purchases. •It provides a longer number of days for the business to pay its obligation on account purchases. •It provides a longer number of days for the business to pay its obligation due to insufficient cash available. •It provides a shorter number of days for the business to pay its obligation due to sufficient cash available.

It provides a longer number of days for the business to pay its obligation on account purchases.

Which of the following does NOT belong to the list? •Long-form report •Financial ratios •Peso and percentage changes on financial statements •Common-size financial statements

Long-form report

Which of the following is an appropriate computation for return on investment? •Net sales divided by equity •Net income divided by net sales •Net sales divided by average total assets •Net income divided by average total assets

Net income divided by average total assets

A high accounts receivable turnover would most likely indicate that •Accounts receivable balances have been overstated. •Credit policies have been relaxed. •Policies for extending credit to customers are too tight. •The company is unsuccessful in its efforts to collect cash from customers.

Policies for extending credit to customers are too tight.

Creditors and investors use financial statement analysis to ____________. •Choose the members of the board •Help determine how to solve a company's financial problems •Predict the amount of expected returns, as well as the risks associated with those returns •Help determine the cause of a company's financial problems

Predict the amount of expected returns, as well as the risks associated with those returns

Which of the following would be most helpful in comparison of the different-sized companies? •Comparison of their working capital balances •Y Horizontal analysis •To look at the amount of income earned by each company •Preparation of common-size financial statements

Preparation of common-size financial statements

Which type of ratio measures the earning power of a firm? •Liquidity •Market valuation •Solvency •Profitability

Profitability

LODI Co. presently has a current ratio of 0.8 to 1. The company has been informed by its bank that it must improve its current ratio to qualify for a line of credit. Which of the following would improve the current ratio? •Purchase additional marketable securities in cash. •Use cash to pay off some current liabilities. •Purchase additional inventory on credit. •Acquire a parcel of land in exchange for ordinary shares.

Purchase additional inventory on credit.

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

Ratio analysis addresses such issues as the firm's liquidity, use of leverage, management of assets, cost control, growth and valuation.

Return on investment (ROI) is a term often used to express income earned on capital invested in a business unit. A company's ROI would INCREASE if ____________. •Sales increased by the same peso amount as expense and total assets increased •Sales decreased by the same peso amount that expenses increased •Sales remained the same and expenses were reduced by the same peso amount that total assets increased •Sales and expenses increased by the same percentage that total assets increased

Sales remained the same and expenses were reduced by the same peso amount that total assets increased

From the viewpoint of short-term creditors, which of the following relationships would be the LEAST meaningful? •The amount of working capital •The accounts receivable turnover •Quick assets as a percentage of current liabilities •Short-term notes payable as a percentage of accounts payable

Short-term notes payable as a percentage of accounts payable

In computing a ratio, when a balance sheet amount is related to an income statement, ____________. •The amounts may be used as is to develop a meaningful ratio. •The balance sheet amount should be converted to an average of the year. •Both amounts should be converted to an average of the year. •The income statement amount should be converted to an average of the year.

The balance sheet amount should be converted to an average of the year.