Financial Statement Analysis

Question 1

What item is probably the least useful when analyzing financial statements?

Management discussion and analysis

The notes to the financial statements

The statement of cash flows

Public relations materials

Question 2

What types of information CANNOT be found in the financial statements?

Details about officer and employee retirement, pension, and stock option plans

Pending legal proceedings

Reputation of the firm, morale of employees and prestige in the community

Disclosures about segments of an enterprise

Question 3

Using __ during a period of inflation would result in net income being overstated relative to the LIFO method.

LIFO

FIFO

gross sales

net sales

Question 4

__ is (are) short-term obligations that arise from credit extended by suppliers for the purchase of goods and services.

Accounts receivable

Accounts payable

Equity

Cash

Question 5

Which of the following statements about a common-size balance sheet is true?

Each item on a common-size balance sheet is expressed as a percentage of sales.

The common-size balance sheet reveals the composition of expenses relative to revenues.

The common-size balance sheet reveals the capital and debt structure of the firm.

Each item on a common-size balance sheet is expressed as a percentage of net income.

Question 6

Which of the items below would be analyzed separate from operating profit?

Salaries, interest expense, and equity losses

Equity earnings, discontinued operations, and interest income

Research and development, dividend income, and interest expense

Advertising, cost of goods sold, and selling and administrative expenses

Question 7

Per FASB rules, firms may use the _ method or the _ method to calculate and present cash flow from operating activities.

direct; indirect

before tax; after tax

operational; financial

accounting; financial

Question 8

Reading the “Commitments and Contingencies” note to financial statements is important when assessing the quality of the:

balance sheet.

income summary.

statement of owner’s equity.

double contingency statement.

Question 9

The following categories of ratios are used in financial statement analysis: iquidity, Operating efficiency (also referred to as Activity), Leverage, Profitability, and Market measures. Classify the following ratios according to these categories.

Earnings per share – operating efficiency; fixed asset turnover – liquidity

Earnings per share – leverage; fixed asset turnover – profitability

Earnings per share – market measures; fixed asset turnover – operating efficiency

Earnings per share – market measures; fixed asset turnover – profitability

Question 10

The average collection period of accounts receivable is the:

average number of days required to convert receivables into write offs/bad debts.

average number of days required to convert receivables into cash.

total number of days required to convert receivables into write offs/bad debts.

total number of days required to convert receivables into cash.

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