1. 1. Time-series analysis helps identify financial trends over time for a single company. 
  2. 2. An analyst desiring to determine the degree to which a company's earnings have fluctuated historically in relation to changes in economic growth would employ cross-sectional analysis. 
  3. 3. Cross-sectional analysis helps identify similarities and differences across companies over time. 
  4. 4. A benchmark comparison is an analytic tool similar in approach to time-series analysis. 
  5. 5. Analysts use financial statement information to assess the economic activities of a company and its condition. 
  6. 6. Managers' ability to freely choose among several alternative reporting methods makes it more difficult for a financial analyst to evaluate the activities and condition of a company. 
  7. 7. GAAP filters data needed for a complete and faithful picture in the financial reports. 
  8. 8. Companies are not required to disclose business transactions that involve potential conflicts of interest if the transactions are with affiliated companies. 
  9. 9. Because GAAP specifies what must be contained in financial reports, management is precluded from disclosing financial and nonfinancial operating details that GAAP does not require—thus promoting comparability among companies' financial reports. 
  10. 10. Analysts need to understand what accounting data do and do not reveal about a company's economic activities and condition. 
  11. 11. The first step to informed financial statement analysis is a careful examination of the auditor's opinion. 
  12. 12. Common size income statements recast each statement item as a percent of total assets. 
  13. 13. Common size income statements show you how much of each sales dollar hits the bottom line as profit. 
  14. 14. Trend income statements recast each statement item as a percent of sales. 
  15. 15. Operating and administrative efficiencies that result in lower expenses per dollar of sales possibly explain a trend where income grows faster than sales. 
  16. 16. Trend statements often provide a clearer indication of growth and decline than do common size statements. 
  17. 17. Informed financial statement analysis begins with knowledge of the company and its industry. 
  18. 18. Asset turnover is defined as sales divided by total assets. 
  19. 19. Return on assets is defined as EBI divided by total yearend assets. 
  20. 20. EBI refers to the company's earnings before interest. 
  21. 21. Analysts typically eliminate after-tax interest expense from EBI when calculating ROA. 
  22. 22. When calculating ROA, analysts always use average assets as reported, and when calculating average assets prefer to have more than just beginning and end of year asset measures. 
  23. 23. Before computing ROA, analysts isolate a company's sustainable operating profits by removing nonoperating or nonrecurring items from reported income. 
  24. 24. A company can increase its return on assets by either increasing the profit margin or decreasing the intensity of asset utilization. 
  25. 25. The current asset turnover ratio helps the analyst spot efficiency gains from improved accounts receivable and inventory management. 
  26. 26. The long-term asset turnover ratio captures information about property, plant, and equipment utilization. 
  27. 27. The only way a company can increase its operating profits per asset dollar is to expand the amount of sales generated from each asset dollar. 
  28. 28. Competition in an industry continually works to drive up the rate of return on assets towards the competitive ceiling. 
  29. 29. Companies that consistently earn rates of return above the industry's competitive floor are said to have a competitive advantage. 
  30. 30. According to most observers, there are numerous strategies for achieving superior performance in any business. 
  31. 31. Companies that are able to get people to pay premium prices for their products have successfully enacted a differentiation strategy. 
  32. 32. Most companies try to develop customer loyalty while controlling costs. 
  33. 33. The financial structure leverage ratio measures the degree to which the company uses long-term debt to finance assets. 
  34. 34. Return on assets will generally equal return on common equity except when the company has no long-term debt. 
  35. 35. Financial leverage is beneficial when the company earns more than the incremental after-tax cost of debt. 
  36. 36. ROCE measures a company's performance in using capital provided by common shareholders to generate earnings. 
  37. 37. Both common and preferred stock dividends are subtracted in arriving at net income available to common stockholders. 
  38. 38. Financial structure leverage is calculated by dividing average assets by average common shareholders' equity. 
  39. 39. The statement of cash flow is an important source of information when analyzing a company's credit risk. 
  40. 40. Credit risk refers to the risk of payment default by the borrower, and the resulting loss to the lender of interest and loan principal payments. 
  41. 41. The likelihood that a lender will receive promised interest and principal payments is solely determined by the borrower's ability to repay. 
  42. 42. Solvency refers to the long-term ability to generate sufficient cash to satisfy plant capacity needs, fuel growth, and repay debt when due. 
  43. 43. The quick ratio measures the most immediate liquidity of a company. 
  44. 44. The quick ratio does not include inventory in the denominator because few businesses can instantaneously convert their inventories into cash. 
  45. 45. Activity ratios describe the profitability of a company. 
  46. 46. The Z score model combines five financial ratios in a precise way to estimate a company's default risk. 
  47. 47. The current asset turnover ratio helps the analyst identify efficiency gains from improved accounts receivable and inventory management. 
  48. 48. The accounts receivable turnover ratio can be used by the analyst to spot changing customer payment patterns. 
  49. 49. Using total sales instead of credit sales in the accounts receivable turnover calculation can produce misleading results and is a problem primarily for companies that have a material amount of cash sales. 
  50. 50. Days payable outstanding helps analysts understand the company's pattern of cash receipts from customers. 
  51. 51. Disparate operating and cash conversion cycles can spell a dangerous mismatch between cash outflows and inflows. 
  52. 52. The more a company relies on long-term borrowing to finance its business activities, the lower its debt ratio and long-term solvency risk. 
  53. 53. There is more than one commonly used debt ratio. 
  54. 54. The interest coverage ratio reflects the cushion between operating profit inflows and required interest payments. 
  55. 55. Lenders typically petition to have a borrower judged insolvent by a court when the borrower is in default. 
  56. 56. A low-credit-risk company generates operating cash flows substantially in excess of what are required to sustain its business activities. 
  57. 57. Lenders have several courses of action available when a borrower is in default. 
  58. 58. Although a company's earnings are important, an analysis of its cash flows is central to all credit evaluations and lending decisions. 
  59. 59. All companies should be expected to produce positive operating cash flows every year. 
  60. 60. Negative operating cash flows are often attributable to increasing receivables and inventories. 
  61. 61. Companies that spend more cash on operating activities than they generate must find ways to finance these operating cash shortfalls. 
  62. 62. Established growth companies require substantial investments in property, plant, and equipment at a stage when operating cash flows are typically negative. 
  63. 63. Mature companies' capital expenditures are limited to the amount needed to sustain current levels of operation. 
  64. 64. An unexplained increase in fixed asset sales may indicate that management needs to raise cash quickly. 
  65. 65. The disadvantage of debt financing is that interest on debt is tax deductible. 
  66. 66. Differences in the business strategies companies adopt give rise to economic differences that are reflected as differences in asset utilization only. 
  67. 67. Credit risk analysis uses financial ratios that focus on an assessment of liquidity and solvency. 
  68. 68. Analysts must always be vigilant about the possibility that accounting distortions are present and complicate the interpretation of financial ratios, percentage relations, and trend indices. 
  69. 69. All of the following are used as financial analysis tools except 
    A. managements' discussion and analysis.
  70. 70. A type of analysis that helps identify similarities and differences across companies or business units at a single moment in time is 
    D. cross-sectional analysis.
  71. 71. Common-size financial statements recast each statement item as 
    C. a percentage of some "base number" on the financial statement in question.
  72. 72. An analytical tool that measures a company's performance against a predetermined standard is a/an 
    A. benchmark comparison analysis.
  73. 73. The financial statement reporting "filter" is 
    D. management's discretion to choose alternative accounting procedures within GAAP
  74. 74. Which one of the following helps the analyst remove the effects of an information filter? 
    C. Footnote disclosures.
  75. 75. Trend statements help the user 
    C. spot changes over time in each financial statement line item.
  76. 76. (Manero) In a common size income statement for 2008, the operating expenses are expressed as 
    • A. 28.0%
    • Operating expenses $50,000  Sales $178,500 = 28.0%
  77. 77. (Manero) In a common size income statement for 2006, the cost of goods sold is expressed as 
    • B. 64.3%
    • Cost of goods sold $100,000  Sales $155,500 = 64.3%
  78. 78. (Manero) In a common size income statement for 2008, the cost of goods sold is expressed as 
    • A. 64.5%
    • Cost of goods sold $115,000  Sales $178,400 = 64.5%
  79. 79. (Manero) In a trend income statement for 2006, where 2006 is the base year, sales are expressed as 
    • C. 100.0%
    • (2006) $155,500  (2006) $155,500 = 100%
  80. 80. (Manero) In a trend income statement for 2008, where 2006 is the base year, sales are expressed as 
    • C. 114.7%
    • (2008) $178,400  (2006) $155,500 = 114.7%
  81. 81. In a common size balance sheet, all items are expressed as a percentage of 
    A. total assets.
  82. 82. In a trend balance sheet, each balance sheet item is expressed as a percentage of 
    B. the base year item.
  83. 83. (Hansel) In a common size balance sheet for 2007, plant and equipment (net) is expressed as 
    • A. 83.0%
    • Plant and equipment $410,000  Total assets $494,000 = 83.0%
  84. 84. In a common size balance sheet for 2006, total liabilities and equity are expressed as 
    • C. 100.0%
    • Total liabilities & equity $570,000  Total assets $570,000 = 100%
  85. 85. In a trend balance sheet for 2008, long-term liabilities are expressed as 
    • C. 105.3%
    • L.T. liabilities 2008 $395,000  L.T. liabilities 2006 $375,000 = 105.3%
  86. 86. In a trend balance sheet for 2007, stockholders' equity is expressed as 
    • C. 104.6%
    • S.E. 2007 $149,000  S.E. 2006 $142,500 = 104.6%
  87. 87. Trend statements are better than common size statements at indicating which of the following? 
    D. Growth and decline.
  88. 88. In a common size cash flow statement, all items are expressed as a percentage of 
    A. sales.
  89. 89. Earnings Before Interest (EBI) adjusts net income for which one of the following groups of items? 
    D. Nonrecurring items, after-tax interest, and distortions related to accounting quality concerns.
  90. 90. Return on Assets (ROA) measures a firm's 
    B. profitable use of its assets.
  91. 91. Return on Assets (ROA) can be broken down into these two components: operating profit margin and 
    B. asset turnover.
  92. 92. Which one of the following successful strategies will increase the Return on Assets (ROA)? 
    B. Increase the operating profit margin.
  93. 93. The ratio that captures information about property, plant, and equipment utilization is 
    B. long-term asset turnover.
  94. 94. Companies that consistently earn rates of return above the competitive floor in the industry are considered to possess a 
    C. competitive advantage.
  95. 95. Strategies to gain a competitive advantage include product differentiation and 
    A. low-cost leadership.
  96. 96. (Phoenix) The return on assets ratio for 2008 is 
    • C. 17.7%
    • (Net income + after-tax interest expense)  average total assets = ($127,500 + $10,000  (1 - .30))  (($825,000 + $695,000)  2)
  97. 97. (Phoenix) The operating profit margin for 2008 is 
    • B. 8.2%
    • (Net income + after-tax interest expense)  sales = ($127,500 + $10,000  (1 - .30))  $1,640,000 = 8.2%
  98. 98. (Phoenix) The total assets turnover ratio for 2008 is 
    • C. 2.2 times.
    • Sales  Average total assets = $1,640,000  (($825,000 + $695,000)  2) = 2.2 times.
  99. 99. (Phoenix) The current ratio for 2008 is 
    • C. 2.7 to 1
    • Current assets  Current liabilities = $670,000  $252,500 = 2.7 to 1.
  100. 100. (Phoenix) The quick ratio for 2008 is (Assume that total current assets include cash, marketable securities, accounts receivable and inventory). 
    • B. 1.4 to 1
    • Quick assets  Current liabilities = ($670,000 - $312,500)  $252,500 = 1.4 to 1.
  101. 101. (Phoenix) The accounts receivable turnover for 2008 is (Assume all sales are on account.) 
    • C. 6.6 times.
    • Sales  Average accounts receivable = $1,640,000  (($267,500 + 230,000)  2) = 6.6 times.
  102. 102. (Phoenix) The days receivable outstanding for 2008 is 
    • B. 55 days.
    • 365 days  A/R turnover = 365  6.6 = 55 days
  103. 103. (Phoenix)  If there is no preferred stock, the return on common equity for 2008 is 
    • B. 27.9%
    • Net income  Average common equity = $127,500  (($495,000 + $420,000)  2) = 27.9%.
  104. 104. (Phoenix) If there is no preferred stock, the common earnings leverage for 2008 is 
    • B. 94.8%
    • Net income  (Net income + after-tax interest expense) = $127,500  ($127,500 + $10,000  (1 - .30)) = 94.8%.
  105. 105. (Phoenix)  If there is no preferred stock, the financial structure leverage for 2008 is 
    • C. 1.66 times.
    • Average total assets  Average common equity = (($825,000 + $695,000)  2)  (($495,000 + $420,000)  2) = 1.66.
  106. 106. (Phoenix) The inventory turnover for 2008 is 
    • C. 3.45 times.
    • Cost of goods sold  Average inventory = $982,500  (($312,500 + $257,500)  2) = 3.45 times.
  107. 107. (Phoenix) The days inventory held for 2008 is 
    • B. 106 days.
    • 365 days  Inventory turnover = 365  3.45 = 106 days.
  108. 108. (Phoenix) The long-term debt to assets for 2008 is 
    • A. 9.4%
    • Long-term debt  Total assets = $77,500  $825,000 = 9.4%.
  109. 109. (Phoenix) If the intangible assets in 2008 are $50,000, the long-term debt to tangible assets for 2008 is 
    • A. 10.0%
    • Long-term debt  (Total assets - Intangible assets) = $77,500  ($825,000 - $50,000) = 10.0%.
  110. 110. (Phoenix) The interest coverage for 2008 is 
    • D. 21.5 times.
    • (Net income + interest expense + income taxes)  Interest expense = ($127,500 + $10,000 + $77,500)  $10,000 = 21.5 times.
  111. 111. (Phoenix) The operating cash flows to total liabilities for 2008 is 
    • C. 23.4%
    • Operating cash flows  (average current liabilities + long-term liabilities) = $71,000  (($252,500 + $200,000)  2 + $77,500) = 23.4%.
  112. 112. Financial ratios used to determine credit risk include an assessment of 
    C. solvency and liquidity.
  113. 113. Post Corporation purchases from suppliers on net 30 day terms, has an Accounts Receivable Turnover of 8 times, and an Inventory Turnover of 12 times. Cash inflows and outflows are 
    • D. negatively mismatched by 45 days.
    • Days = Purchases - A/R - Inventory = 30 - 45 - 30 = - 45 days
  114. 114. The percentage of assets financed by long-term debt is best described by the 
    C. long-term debt to asset ratio.
  115. 115. When operating earnings and cash flows from operations are dissimilar, which of the following ratios is a better measure of long-term solvency? 
    D. Operating cash flow to total liabilities
  116. 116. Which of the following financial ratios is not a component of the Z score model? 
    C. Common stock/total assets.
  117. 117. Changes in a company's capital expenditures or fixed asset sales over time must 
    A. be carefully analyzed.
  118. 118. Financial ratio, percentage, and trend comparisons can be distorted by all of the following except 
    D. accounting for similar economic fundamentals in similar fashion.
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