Exam 13: Financial Statement Analysis

Indicate whether each of the following statements about financial statement analysis is true or false. _____ a)Comparing percentages derived from financial statement analysis has the drawback of varying materiality levels. _____ b)The materiality of accounting information refers to whether it is viewed as favorable (good news)or unfavorable (bad news). _____ c)Companies are exempt from accounting for immaterial items in compliance with generally accepted accounting principles. _____ d)To judge the materiality of an absolute financial statement amount,one must consider the size of the company reporting it. _____ e)Meaningful comparisons between two companies generally should be made using percentage analysis or ratio analysis,not absolute amounts.

Indicate whether each of the following statements about financial statement analysis is true or false. _____ a)The value of a corporation's price-earnings ratio indicates how optimistic investors are about a company's growth potential. _____ b)The dividend yield ratio indicates the percentage of a company's net income that it paid out in dividends. _____ c)Comparing financial statement ratios of companies in different industries may provide misleading results. _____ d)Changes in general economic conditions (such as rate of inflation)can cause the values for a company's financial statement ratios to change from one year to the next. _____ e)Conservatism produces a positive bias in a company's financial statements and thus in the ratios calculated from the financial statements.

On January 1,2015,Gatewood paid $4,600 on accounts payable.Which of the following statements is incorrect?

The Davis Company reported net income of $60,000 on sales of $300,000.The company has total assets of $500,000 and total liabilities of $100,000.What is the company's return on equity ratio?

The following balance sheet information is provided for Weaver Company: Assuming 2015 cost of goods sold is $140,000,what is the company's inventory turnover?

A banker may perform a financial ratio analysis to assess a firm's ability to repay debt in a timely manner.

Indicate whether each of the following statements about financial statement analysis is true or false. _____ a)Net margin measures a company's immediate debt-paying ability. _____ b)Accounts receivable turnover is a direct measure of a company's uncollectible accounts expense. _____ c)Accounts receivable turnover is calculated by using the following formula: net credit sales/average accounts receivable. _____ d)Net credit sales is sales on account less sales returns and discounts. _____ e)The amount of average receivables can be calculated using the amount of receivables shown on balance sheets for the current year and previous year.

Indicate whether each of the following statements about financial statement analysis is true or false. _____ a)Both dividends and earnings performance are indicators of the value of a company's stock. _____ b)The most widely quoted measure of a company's earnings performance is earnings per share. _____ c)Earnings per share is calculated for a company's preferred stock. _____ d)Investors need to understand that the value of a company's earnings per share is affected by its choices of accounting principles and assumptions. _____ e)The book value per share measures the market value of a corporation's stock.

The study of an individual item or account over several accounting periods,such as months,quarters or years is known as:

Indicate whether each of the following statements about financial statement analysis is true or false. _____ a)The asset turnover ratio is calculated by dividing net income by average total assets. _____ b)The asset turnover ratio is likely to be high in an industry in which operations require only a minimal investment in assets. _____ c)Return on equity measures the wealth generated by the amount of assets invested in a business. _____ d)A higher value for the return on investment ratio would generally indicate more effective company management. _____ e)The use of financial leverage often causes a business's return on equity to be higher than its return on investment.

Assume that you are considering purchasing some of a company's long-term bonds as an investment.Which of the company's financial statement ratios would you probably be most interested in?

In terms of solvency,the smaller the number of times interest is earned,the better.

Romero Company has cash of $40,000,accounts receivable of $60,000,inventory of $32,000,and equipment of $100,000.Assuming current liabilities of $48,000,this company's working capital is:

The most frequently quoted measure of earnings performance is the stockholders' equity ratio.

Singleton Company is seeking a short-term loan from its local bank.The banker needs assurance that the company will be able to repay the loan.Describe three financial ratios the banker should consider including in the loan approval process.What information does each of your selected ratios provide?

Discuss the limitations that affect financial statement analysis.

Which ratio compares the earnings per share of a company to the market price for a share of the company's stock?

Working capital is defined as:

A vertical analysis uses percentages to compare each of the parts of an individual statement to the whole.For example,on an income statement each item would be shown as a percentage of net sales.

Financial statement analysis typically involves some form of comparison such as changes in the same item over a number of years.