Exam 8: Financial Statement Analysis

Cash flows from investing activities would involve the purchase or sale of plant and equipment.

Ratio analysis, which compares a company to an industry, is complicated because:

The after-tax profit margin represents operating income divided by sales.

The Financial Accounting Standards Board (FASB) 85 requires that the Statement of Cash Flows be divided into three sections: cash flows from operations, investments, and financing.

___________ ratios measure the impact of external market forces on the internal performance of a firm.

If a firm has a return on assets of 10% and a 40% debt-to-total-assets ratio, what will the return on equity be?

For a firm with old, heavy fixed assets, replacement cost accounting will normally decrease the return-on-equity ratio.

Financial ratios are meaningless unless they are compared to a company standard or historical or industry data.

Corporate diversification eases the task of the financial analyst.

Debt-utilization ratios provide an indication of the way the firm is financed between debt (lenders) and equity (owners), and therefore helps the analyst determine the amount of financial risk present in the firm.

Extraordinary gains and losses are usually included in ratio analysis, since they reflect on the annual operating performance of a firm.

A primary use of the source and use of funds statement is to determine how current assets and longer-term assets are financed.

A firm with an average return on assets, but a high return on equity, was probably able to achieve this by keeping debt down to a very low level.

In an inflationary economy, many firms use the ________ method of inventory valuation to reduce distortion of profits.

Price Printing Co. had sales of $10 million, operating income of $3 million, after-tax income of $1 million, assets of $8 million, stockholders' equity of $5 million, and a total debt of $3 million. What is Price Printing Company's asset turnover?

Harding Corp. has to cover a $65,000 sinking fund payment. The firm is in the 35% tax bracket, and the treasurer wants to know how much before-tax income is required for the firm to cover its sinking fund.

Cash flows from financing activities would include the repurchase of debt and equity.

The Beaver and Altman bankruptcy studies indicated that ratios of failing firms signal failure as much as five years ahead of bankruptcy.

The major device for measuring the profitability of a firm over a defined period of time is the

Listing all balance sheet items at historical cost helps to reduce the distortion in profits caused by inflation.