Financ
MODULE 10 small. Which type of numbers would be most meaningful for statem
A. Absolute numbers would be most meaningful for both the large
FINANCIAL STATEMENT ANALYSIS B. Absolute numbers would be most meaningful in the large firm;
most meaningful in the small firm.
THEORIES: C. Relative numbers would be most meaningful for the large firm
6. Management is a user of financial analysis. Which of the following comments does not be most meaningful for the small firm.
represent a fair statement as to the management perspective? D. Relative numbers would be most meaningful for both the larg
A. Management is always interested in maximum profitability. for interfirm comparisons.
B. Management is interested in the view of investors.
C. Management is interested in the financial structure of the entity. 4. Which of these statements is false?
D. Management is interested in the asset structure of the entity. A. Many companies will not clearly fit into any one industry.
B. A financial service uses its best judgment as to which industry
Limitations C. The analysis of an entity's financial statements can be more m
1. A limitation in calculating ratios in financial statement analysis is that compared with industry averages and with results of competito
A. it requires a calculator. D. A company comparison should not be made with industry ave
B. no one other than the management would be interested in them. not clearly fit into any one industry.
C. some account balances may reflect atypical data at year end.
D. they seldom identify problem areas in a company. Common-sized financial statements
9. Which of the following generally is the most useful in analyzing com
2. Which of the following is not a limitation of financial statement analysis? A. comparative statements C. price-level acco
A. The cost basis. C. The diversification of firms. B. common-sized financial statements D. profitability inde
B. The use of estimates. D. The availability of information.
12. Statements in which all items are expressed only in relative terms (
5. Which of the following does not represent a problem with financial analysis? termed:
A. Financial statement analysis is an art; it requires judgment decisions on the part of the A. Vertical statements C. Funds Stateme
analyst. B. Horizontal Statements D. Common-Size
B. Financial analysis can be used to detect apparent liquidity problems.
C. There are as many ratios for financial analysis as there are pairs of figures. 10. The percent of property, plant and equipment to total assets is an e
D. Some industry ratio formulas vary from source to source. A. vertical analysis C. profitability ana
B. solvency analysis D. horizontal analy
77. The use of alternative accounting methods:
A. is not a problem in ratio analysis because the footnotes disclose the method used. 15. Vertical analysis is a technique that expresses each item in a financ
B. may be a problem in ratio analysis even if disclosed. A. in pesos and centavos.
C. is not a problem in ratio analysis since eventually all methods will lead to the same end. B. as a percent of the item in the previous year.
D. is only a problem in ratio analysis with respect to inventory. C. as a percent of a base amount.
D. starting with the highest value down to the lowest value.
Industry Analysis
3. Suppose you are comparing two firms in the steel industry. One firm is large and the other is 17. In performing a vertical analysis, the base for prepaid expenses is
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A. total current assets. C. total liabilities. 69. Which suppliers of funds bear the greatest risk and should therefore
B. total assets. D. prepaid expenses in a previous year. A. common stockholders C. preferred share
B. general creditors such as banks D. bondholders
Horizontal analysis
8. The percentage analysis of increases and decreases in individual items in comparative Measures of Risk
financial statements is called: 54. The following groups of ratios primarily measure risk:
A. vertical analysis C. profitability analysis A. liquidity, activity, and common equity C. liquidity, activity
B. solvency analysis D. horizontal analysis B. liquidity, activity, and profitability D. activity, debt, a
11. Horizontal analysis is also known as Financial ratios
A. linear analysis. C. trend analysis. 7. Ratios are used as tools in financial analysis
B. vertical analysis. D. common size analysis. A. instead of horizontal and vertical analyses.
B. because they can provide information that may not be appa
13. In which of the following cases may a percentage change be computed? individual components of a particular ratio.
A. The trend of the amounts is decreasing but all amounts are positive. C. because even single ratios by themselves are quite meaningfu
B. There is no amount in the base year. D. because they are prescribed by GAAP.
C. There is a negative amount in the base year and a negative amount in the subsequent
year. 18. In the near term, the important ratios that provide the informati
D. There is a negative amount in the base year and a positive amount in the subsequent operation of the firm are:
year. A. liquidity, activity, and profitability C. liquidity, activit
B. liquidity, activity, and debt D. activity, debt, a
14. Horizontal analysis is a technique for evaluating a series of financial statement data over a
period of time 75. The ability of a business to pay its debts as they come due and to
A. that has been arranged from the highest number to the lowest number. of income is referred to as:
B. that has been arranged from the lowest number to the highest number. A. solvency and leverage C. solvency and li
C. to determine which items are in error. B. solvency and profitability D. solvency and e
D. to determine the amount and/or percentage increase or decrease that has taken place.
Liquidity ratios
Trend analysis Interested parties
16. Trend analysis allows a firm to compare its performance to: 19. The primary concern of short-term creditors when assessing th
A. other firms in the industry C. other industries entity’s
B. other time periods within the firm D. none of the above A. short-term liquidity C. market price of
B. profitability D. leverage
Risk and return
29. The present and prospective stockholders are primarily concerned with a firm’ 35. Short-term creditors are usually most interested in assessing
A. profitability C. leverage A. solvency. C. marketability.
B. liquidity D. risk and return B. liquidity. D. profitability.
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36. The two categories of ratios that should be utilized to asses a firm’s true liquidity are the A. accounts receivable turnover. C. acid test ratio.
A. current and quick ratios C. liquidity and profitability ratios B. asset turnover. D. current ratio.
B. liquidity and debt ratios D. liquidity and activity ratios
Current ratio
47. Which of the following is the most of interest to a firm’s suppliers? 24. Typically, which of the following would be considered to be the mos
A. profitability C. asset utilization term debt paying ability?
B. debt D. liquidity A. working capital C. acid test ratio
B. current ratio D. days’ sales in r
Measures of liquidity
21. The ratios that are used to determine a company’s short-term debt paying ability are 22. The current ratio is
A. asset turnover, times interest earned, current ratio, and receivables turnover. A. calculated by dividing current liabilities by current assets.
B. times interest earned, inventory turnover, current ratio, and receivables turnover. B. used to evaluate a company’s liquidity and short-term debt pay
C. times interest earned, acid-test ratio, current ratio, and inventory turnover. C. used to evaluate a company’s solvency and long-term debt pay
D. current ratio, acid-test ratio, receivables turnover, and inventory turnover. D. calculated by subtracting current liabilities from current assets.
20. Which of the following is a measure of the liquidity position of a corporation? 30. Which of the following ratios is rated to be a primary measure of
A. earnings per share highest significance rating of the liquidity ratios a bank analyst?
B. inventory turnover A. Debt/Equity
C. current ratio B. Current ratio
D. number of times interest charges earned C. Degree of Financial Leverage
D. Accounts Receivable Turnover in Days
37. Which one of the following ratios would not likely be used by a short-term creditor in
evaluating whether to sell on credit to a company? 41. A weakness of the current ratio is
A. Current ratio C. Asset turnover A. the difficulty of the calculation.
B. Acid-test ratio D. Receivables turnover B. that it does not take into account the composition of the curre
C. that it is rarely used by sophisticated analysts.
51. Which of the following ratios would be least helpful in appraising the liquidity of current D. that it can be expressed as a percentage, as a rate, or as a p
assets?
A. Accounts Receivable turnover C. Current Ratio Acid-test or quick ratio
B. Days’ sales in inventory D. Days’ sales in accounts receivable 42. A measure of a company’s immediate short-term liquidity is the
A. current ratio.
53. Which ratio is most helpful in appraising the liquidity of current assets? B. current cash debt coverage ratio.
A. current ratio C. acid-test ratio C. cash debt coverage ratio.
B. debt ratio D. accounts receivable turnover D. acid-test ratio.
Not a measure of liquidity 23. The acid-test or quick ratio
79. Which one of the following ratios would not likely be used by a short-term creditor in evaluating A. is used to quickly determine a company’s solvency and long-te
whether to sell on credit to a company? B. relates cash, short-term investments, and net receivables to cu
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MODULE 10 small. Which type of numbers would be most meaningful for statem
A. Absolute numbers would be most meaningful for both the large
FINANCIAL STATEMENT ANALYSIS B. Absolute numbers would be most meaningful in the large firm;
most meaningful in the small firm.
THEORIES: C. Relative numbers would be most meaningful for the large firm
6. Management is a user of financial analysis. Which of the following comments does not be most meaningful for the small firm.
represent a fair statement as to the management perspective? D. Relative numbers would be most meaningful for both the larg
A. Management is always interested in maximum profitability. for interfirm comparisons.
B. Management is interested in the view of investors.
C. Management is interested in the financial structure of the entity. 4. Which of these statements is false?
D. Management is interested in the asset structure of the entity. A. Many companies will not clearly fit into any one industry.
B. A financial service uses its best judgment as to which industry
Limitations C. The analysis of an entity's financial statements can be more m
1. A limitation in calculating ratios in financial statement analysis is that compared with industry averages and with results of competito
A. it requires a calculator. D. A company comparison should not be made with industry ave
B. no one other than the management would be interested in them. not clearly fit into any one industry.
C. some account balances may reflect atypical data at year end.
D. they seldom identify problem areas in a company. Common-sized financial statements
9. Which of the following generally is the most useful in analyzing com
2. Which of the following is not a limitation of financial statement analysis? A. comparative statements C. price-level acco
A. The cost basis. C. The diversification of firms. B. common-sized financial statements D. profitability inde
B. The use of estimates. D. The availability of information.
12. Statements in which all items are expressed only in relative terms (
5. Which of the following does not represent a problem with financial analysis? termed:
A. Financial statement analysis is an art; it requires judgment decisions on the part of the A. Vertical statements C. Funds Stateme
analyst. B. Horizontal Statements D. Common-Size
B. Financial analysis can be used to detect apparent liquidity problems.
C. There are as many ratios for financial analysis as there are pairs of figures. 10. The percent of property, plant and equipment to total assets is an e
D. Some industry ratio formulas vary from source to source. A. vertical analysis C. profitability ana
B. solvency analysis D. horizontal analy
77. The use of alternative accounting methods:
A. is not a problem in ratio analysis because the footnotes disclose the method used. 15. Vertical analysis is a technique that expresses each item in a financ
B. may be a problem in ratio analysis even if disclosed. A. in pesos and centavos.
C. is not a problem in ratio analysis since eventually all methods will lead to the same end. B. as a percent of the item in the previous year.
D. is only a problem in ratio analysis with respect to inventory. C. as a percent of a base amount.
D. starting with the highest value down to the lowest value.
Industry Analysis
3. Suppose you are comparing two firms in the steel industry. One firm is large and the other is 17. In performing a vertical analysis, the base for prepaid expenses is
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A. total current assets. C. total liabilities. 69. Which suppliers of funds bear the greatest risk and should therefore
B. total assets. D. prepaid expenses in a previous year. A. common stockholders C. preferred share
B. general creditors such as banks D. bondholders
Horizontal analysis
8. The percentage analysis of increases and decreases in individual items in comparative Measures of Risk
financial statements is called: 54. The following groups of ratios primarily measure risk:
A. vertical analysis C. profitability analysis A. liquidity, activity, and common equity C. liquidity, activity
B. solvency analysis D. horizontal analysis B. liquidity, activity, and profitability D. activity, debt, a
11. Horizontal analysis is also known as Financial ratios
A. linear analysis. C. trend analysis. 7. Ratios are used as tools in financial analysis
B. vertical analysis. D. common size analysis. A. instead of horizontal and vertical analyses.
B. because they can provide information that may not be appa
13. In which of the following cases may a percentage change be computed? individual components of a particular ratio.
A. The trend of the amounts is decreasing but all amounts are positive. C. because even single ratios by themselves are quite meaningfu
B. There is no amount in the base year. D. because they are prescribed by GAAP.
C. There is a negative amount in the base year and a negative amount in the subsequent
year. 18. In the near term, the important ratios that provide the informati
D. There is a negative amount in the base year and a positive amount in the subsequent operation of the firm are:
year. A. liquidity, activity, and profitability C. liquidity, activit
B. liquidity, activity, and debt D. activity, debt, a
14. Horizontal analysis is a technique for evaluating a series of financial statement data over a
period of time 75. The ability of a business to pay its debts as they come due and to
A. that has been arranged from the highest number to the lowest number. of income is referred to as:
B. that has been arranged from the lowest number to the highest number. A. solvency and leverage C. solvency and li
C. to determine which items are in error. B. solvency and profitability D. solvency and e
D. to determine the amount and/or percentage increase or decrease that has taken place.
Liquidity ratios
Trend analysis Interested parties
16. Trend analysis allows a firm to compare its performance to: 19. The primary concern of short-term creditors when assessing th
A. other firms in the industry C. other industries entity’s
B. other time periods within the firm D. none of the above A. short-term liquidity C. market price of
B. profitability D. leverage
Risk and return
29. The present and prospective stockholders are primarily concerned with a firm’ 35. Short-term creditors are usually most interested in assessing
A. profitability C. leverage A. solvency. C. marketability.
B. liquidity D. risk and return B. liquidity. D. profitability.
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36. The two categories of ratios that should be utilized to asses a firm’s true liquidity are the A. accounts receivable turnover. C. acid test ratio.
A. current and quick ratios C. liquidity and profitability ratios B. asset turnover. D. current ratio.
B. liquidity and debt ratios D. liquidity and activity ratios
Current ratio
47. Which of the following is the most of interest to a firm’s suppliers? 24. Typically, which of the following would be considered to be the mos
A. profitability C. asset utilization term debt paying ability?
B. debt D. liquidity A. working capital C. acid test ratio
B. current ratio D. days’ sales in r
Measures of liquidity
21. The ratios that are used to determine a company’s short-term debt paying ability are 22. The current ratio is
A. asset turnover, times interest earned, current ratio, and receivables turnover. A. calculated by dividing current liabilities by current assets.
B. times interest earned, inventory turnover, current ratio, and receivables turnover. B. used to evaluate a company’s liquidity and short-term debt pay
C. times interest earned, acid-test ratio, current ratio, and inventory turnover. C. used to evaluate a company’s solvency and long-term debt pay
D. current ratio, acid-test ratio, receivables turnover, and inventory turnover. D. calculated by subtracting current liabilities from current assets.
20. Which of the following is a measure of the liquidity position of a corporation? 30. Which of the following ratios is rated to be a primary measure of
A. earnings per share highest significance rating of the liquidity ratios a bank analyst?
B. inventory turnover A. Debt/Equity
C. current ratio B. Current ratio
D. number of times interest charges earned C. Degree of Financial Leverage
D. Accounts Receivable Turnover in Days
37. Which one of the following ratios would not likely be used by a short-term creditor in
evaluating whether to sell on credit to a company? 41. A weakness of the current ratio is
A. Current ratio C. Asset turnover A. the difficulty of the calculation.
B. Acid-test ratio D. Receivables turnover B. that it does not take into account the composition of the curre
C. that it is rarely used by sophisticated analysts.
51. Which of the following ratios would be least helpful in appraising the liquidity of current D. that it can be expressed as a percentage, as a rate, or as a p
assets?
A. Accounts Receivable turnover C. Current Ratio Acid-test or quick ratio
B. Days’ sales in inventory D. Days’ sales in accounts receivable 42. A measure of a company’s immediate short-term liquidity is the
A. current ratio.
53. Which ratio is most helpful in appraising the liquidity of current assets? B. current cash debt coverage ratio.
A. current ratio C. acid-test ratio C. cash debt coverage ratio.
B. debt ratio D. accounts receivable turnover D. acid-test ratio.
Not a measure of liquidity 23. The acid-test or quick ratio
79. Which one of the following ratios would not likely be used by a short-term creditor in evaluating A. is used to quickly determine a company’s solvency and long-te
whether to sell on credit to a company? B. relates cash, short-term investments, and net receivables to cu
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