Exam 10: Financial Statement Analysis

An implication of the efficient markets hypothesis (EMH) is that managers will choose accounting policies in order to influence reported net profit.

The analysis technique that shows each item on the financial statements as a percentage of one item on that statement is known as:

Which of the following would be an appropriate interpretation of a current ratio of 1.76?

What are some of the factors that are directly relevant to an analysis of business performance?

Solvency and profitability are important aspects of financial statement analysis, as an entity can be in the position of not being able to repay debt, which could result in liquidation, even though the entity is making profits.

Consistency implies that the measurement and display of transactions and events need to be carried out in a consistent manner throughout an entity, and over time for that entity, but does not imply there is consistency between entities.

The accounts receivable and inventory turnover ratios are important in evaluating the short-term efficiency of an entity.

A price earnings ratio shows:

Of all the user groups identified for financial statement analysis, it is the equity investor who is most interested in information on management efficiency.

Financial analysis is only useful if it is measured relative to something else, such as past periods and similar entities in the same industry.

Use the following information to answer questions 28 and 29. Kestal Ltd reported sales of $500 000 for the year ending 31 December. The net profit before interest and tax was $120 000, and the net profit after tax was $90 000. The average of total assets was $1 000 000. The average shareholders' equity was $700 000. -What is the asset turnover for the year ending 31 December?

When evaluating the return on a shareholder's investment, it is necessary to consider the return relative to:

General purpose reporting by corporations contributes to the efficiency of the share market and, ultimately, the allocation of scarce resources.

Although the financial statements are important sources of information for financial analysis, it is true to say that they lose some relevance in assessing the entity's current position, due to the historical nature of the information involved.

Comparability, as a qualitative characteristic of useful information, calls for consistency in the application of accounting policy choice.

A clear distinction between return on assets and return on equity is that return on assets:

A secured lender is exposed to a higher level of financial risk than an unsecured lender.

The conclusion that a company was able to generate 79.5c of net profit for every dollar of sales reflects which of the following?

The financial structure of an entity can be assessed using the:

An entity has debt finance that exceeds its equity finance by 20%. Under the traditional 'best-practice' approach used by Australian banks and financial institutions, it would be considered that the debt finance is too high.