Ch 13 Rev Flashcards
The purpose of financial statement analysis for (internal/external) ….
users is to provide information to improve efficiency and effectiveness.
internal
Identify which of the following specific areas are considered the building blocks of financial statement analysis.
Solvency
Liquidity and efficiency
Profitability
Market prospects
Most users rely on ….
financial statements, which include the (1) income statement, (2) balance sheet, (3) statement of stockholders’ equity, (4) statement of cash flows, and (5) notes to these statements.
general purpose
______ reporting refers to the communication of financial information useful for making investment, credit, and other business decisions.
Financial
Management’s Discussion and Analysis includes all of the following sections: (Check all that apply.)
discussion of risks
critical accounting policies and estimates
overview
financial condition
(Internal/External) ….
users of accounting information rely on financial statement analysis to make more informed decisions when pursuing their goals.
External
All of the following are standards used in financial statement analysis for comparisons:
competitor
intracompany
industry
Which of the following areas are not considered to be one of the building blocks of financial statement analysis?
Ratio analysis
A comparison of a company’s financial condition and performance to a base amount, such as total assets, is called (horizontal/vertical) …
analysis.
vertical
Most users rely on general-purpose financial statements, which include which of the following?
Statement of stockholders’ equity
Income statement
Notes to financial statements
Statement of cash flows
Balance sheet
… financial statements show financial amounts in side-by-side columns on a single statement.
Comparative
Stella, Inc. needs to communicate financial information to external users that is useful for making investment, credit, and other business decisions. This is called (financial/managerial) …
reporting.
financial
Small dollar changes can yield large percent changes consistent with their importance.
False
Management’s ….
and ….
begins with an overview, followed by critical accounting policies, and a discussion of operating results and financial condition. It is an excellent starting point in understanding a company’s business activities.
Discussion; analysis
The formula for dollar change for financial statement analysis is computed by taking the analysis period amount minus the ….
period amount.
base
$ change = analysis period - base period
When interpreting measures from financial statement analysis, we need …
(or benchmarks) for comparisons.
standards
An analysis of a comparative balance sheet focuses on Blank______ and percent changes.
large dollar
A comparison of a company’s financial condition and performance across time is called Blank______ analysis.
horizontal
______ analysis is a form of horizontal analysis that can reveal patterns in data across periods by comparing period amounts by base period amounts.
Trend
Comparative financial statements show financial information in Blank______ columns.
side-by-side
Vertical analysis is also called
…..-…. analysis.
Common- size
Vertical analysis is also called
…..-…. analysis.
Common- size
Analysts typically use computation of dollar changes and percent changes because:
sometimes dollar changes are small, but percents are large
To prepare common-size financial statements, each line item needs to be calculated to a common-size percent. The formula for common-size percent is (Blank______) x 100.
analysis amount/base amount
To compute the percent change, divide the (analysis period amount - base period amount) by the Blank______ and multiply the result by 100.
base period amount
______ balance sheets express each item as a percent of a base amount. The base amount is assigned a value of 100%.
Common-size
______ balance sheets consist of balance sheet amounts from two or more balance sheet dates, arranged side by side.
Comparative
Trend percent is computed by taking the (analysis period amount Blank______) x 100.
divided by the base period
The base amount used in a common-size income statement is Blank______.
revenue
Vertical analysis is a tool to evaluate individual financial statement items or a group of items. When analyzing income statement accounts, the base is usually (revenue/expenses/net income) ….
and for balance sheet accounts, the base is usually total (assets/liabilities/equity) …
revenues ; assests
…..-……
financial statements express each item as a percent of a base amount. The base amount is assigned a value of 100%.
Common-size
Data visualizations reveal: (Check all that apply.)
insights not easily seen by looking at numbers
trends not easily seen by looking at numbers
The base amount used in common-size balance sheets is total Blank______.
assets
A(n) (chart/ratio/statement) …
is used to uncover conditions and trends difficult to see by looking at individual amounts. It can be expressed as a percent, rate, or proportion.
ratio
…. income statements include amounts for two or more periods, placed side by side.
Comparative
_____ refers to the availability of resources to pay short-term cash requirements. Analysis is aimed at a company’s funding requirements.
Liquidity
_____ income statements express each item as a percent of a base amount. The base amount is assigned a value of 100%.
Common-size
Working capital can be computed by taking current …. minus current …..
assets - liabilities
Visualizations are used to identify: (Check all that apply.)
sources of financing
investing activities
The Blank______ ratio, or current assets divided by current liabilities, is used to evaluate a company’s ability to pay its short-term obligations.
current
A(n) Blank______ is used to uncover conditions and trends which are difficult to see by looking at individual amounts. It can be expressed as a percent, rate, or proportion.
ratio
Vito Co. had current assets of $9,000 and current liabilities of $6,000 at the end of the year. Net income during the year was $21,000. The current ratio for the period is:
1.5
9,000÷6,000
An investor in Able Inc. would like to understand Able’s availability of resources to pay its short-term cash requirements. This type of analysis is known as a(n) (efficiency/liquidity) …
measure.
liquidity
The acid-test ratio takes the sum of cash, short-term investments, andBlank______and divides the total by current liabilities. It helps determine immediate short-term debt-paying ability.
current receivables
Accounts receivable are
(increased/decreased) …. by credit sales and are ….
(increased/decreased) by customer payments.
Increase; decrease
The amount of current assets minus current liabilities is called ….
Working capital
A potential investor in Denzel Co. would like to measure how frequently Denzel converts its account receivables into cash. The investor takes Denzel’s net sales divided by average accounts receivable to determine this information, known as the accounts ….
turnover ratio.
receivable
The ….
ratio, or current assets divided by current liabilities, is used to evaluate a company’s ability to pay its short-term obligations.
Current
Net sales for a company are $250,000. Average accounts receivable are $10,000. The accounts receivable turnover for this company is …
25
250,000÷10,000
Brown Co. had current assets of $15,000, total assets of $30,000 and current liabilities of $9,000 at the end of the year. The current ratio for the period is:
1.67
15,000÷9,000
The measure of how long a company holds inventory before selling it is called the …….
inventory turnover
The Blank______ ratio takes the sum of cash, short-term investments, and current receivables and divides the total by current liabilities. It helps determine immediate short-term debt-paying ability.
acid-test
The formula to compute days’ sales uncollected is:
accounts receivable divided by net sales times 365
Which of the following statements is (are) true about accounts receivables? (Check all that apply.)
Accounts receivable are increased when credit sales are made.
Accounts receivable reflects the amount owed by customers.
The ratio that measures how frequently a company converts its account receivables into cash by taking net sales divided by average accounts receivable is known as:
accounts receivable turnover
__ is a measure of how frequently a company collects accounts receivables. It is computed by dividing the current balance of receivables by the annual credit (or net) sales and then multiplying by 365.
Days’ sales uncollected
he following financial information is available for Siu Co.
20x1
20x0
Net Sales
160,000
155,000
Accounts Receivable
38,000
32,000
Compute accounts receivable turnover for 20x1. Round your answer to one decimal place.
4.6
Reason: 160,000/ ((38,000+32,000)/2) = 4.57 rounds to 4.6
Days’ sales uncollected is computed by taking accounts receivable, net divided by net ….
multiplied by 365.
sales
The length of time that a company holds inventory prior to selling it is called the…
inventory turnover
A company has Total Assets of $135,000 including $29,000 in Accounts Receivable, and Net Sales of $380,000. Days’ sales uncollected is Blank______ days.
27.9
Reason: (29,000/380,000)x365=27.9
The following annual account balances are taken from ABC Co at year end.
Current year
Previous year
Accounts Receivable
$5,500
$4,000
Net Sales
$58,000
$55,000
Days sales uncollected
? days
? days
Calculate ABC Co.’s days sales uncollected for the current year.
34.6 days
Reason: ($5,500/58,000) x 365 = 34.6 days.
Days’ sale in inventory is a useful measure in evaluating inventory (efficiency/liquidity) …
. It is computed by taking ending inventory divided by cost of goods sold multiplied by 365.
liquidity
Days’ sales in inventory is computed by taking Blank______ divided by cost of goods sold multiplied by 365.
ending inventory
Days’ sales uncollected is a measure of how ….
a company collects accounts receivables computed by dividing the current balance of receivables by the annual credit (or net) sales and then multiplying by 365.
frequently
Whisper Co. had Beginning Inventory of $20,000 and Ending Inventory of $26,000. Cost of goods sold for the period was $130,000. Days’ sales in inventory is ….
days.
73 days
(26,000÷130,000)×365
Days’ sales uncollected is computed by taking Blank______, net divided by net sales multiplied by 365.
accounts receivable
_____ measures a company’s ability to use its assets to generate sales and is an important indication of operating efficiency. It is computed by taking net sales divided by average total assets.
Total asset turnover
A company has Total Assets of $34,000 including $3,000 in Accounts Receivable, and Net Sales of $40,000. Days’ sales uncollected is Blank______ days
27.4
Reason: ($3,000/$40,000) x 365 = 27.4
Total asset turnover is computed by taking Blank______
net sales divided by average total assets.
______ is a useful measure in evaluating inventory liquidity. It is computed by taking ending inventory divided by cost of goods sold multiplied by 365.
Days’ sales in inventory
Days’ sales in inventory is computed by taking ending inventory divided by Blank______ multiplied by 365.
cost of goods sold
Total asset turnover is computed by dividing net sales by …
total assets.
average
Marsh Co. had beginning inventory of $10,000 and ending inventory of $13,000. Cost of goods sold for the period was $65,000. Days’ sales in inventory is Blank______ days.
73
(13,000÷65,000)×365
Blossom Co. had Net Sales of $3,600 in 2017 and $4,200 in 2018. It had Total Assets of $1,400 in 2017 and $1,600 in 2018. Total asset turnover would be computed in 2018 by taking Blank______.
4,200/1,500.
(1,400+1,600)÷2 = 1500
…… turnover measures a company’s ability to use its assets to generate sales and is an important indication of operating efficiency. It is computed by taking net sales divided by average total assets.
Total asset
_____ refers to a company’s makeup of equity and debt financing.
Capital structure
The Blank______ ratio is a measure of solvency that takes total liabilities divided by total equity.
debt-to-equity
Days’ sale in inventory is a useful measure in evaluating inventory (efficiency/liquidity) …
. It is computed by taking ending inventory divided by cost of goods sold multiplied by 365.
liquidity
The debt-to-equity ratio takes total liabilities divided by total …
equity
Franco Co. reported net sales of $10,000 in year 2 and $8,000 in year 1. Franco reported total assets of $18,000 in year 2 and $22,000 in year 1. Total asset turnover for year 2 would equal ….
(answer should be a decimal number). Hint: compute average total assets first.
0.5
10,000÷((22,000+18,000)
÷2) = 0.5
At the end of the year, assets for Jordan company are $120,000 and liabilities are $40,000. The debt-to-equity ratio is:
0.5
40,000÷(120,000
−40,000)
Squire Co. had Net Sales of $3,000 in 2017 and $3,600 in 2018. It had Total Assets of $1,000 in 2017 and $1,400 in 2018. Total asset turnover would be ….
times in 2018.
3
3,600÷((1,000+1,400)÷2)
Which of the following formulas is used to compute the times interest earned?
Income before interest expense and income tax/interest expense
______ refers to a company’s ability to meet long-term obligations and generate future revenues.
Solvency
The amount of income before deductions for interest expense and income taxes is the amount available to pay interest. The……..
ratio takes this income divided by interest expense to determine the risk for creditors.
times interest earned
The debt-to-equity ratio is a measure of solvency that takes total …
divided by total equity.
liabilities
The times interest earned ratio is computed by taking income before interest expense and income taxes divided by:
interest expense
The debt-to-equity ratio is computed by taking:
total liabilities divided by total equity
A company reports net income before interest expense and income taxes of $18,000. Interest Expense for the period is $500 and Taxes are $4,000. Times interest earned is:
36
Reason: 18,000/500=36
At the end of the first year, assets for a company are $60,000 and liabilities are $40,000. The debt-to-equity ratio is …
2
40,000÷(60,000−40,000)
The formula to compute the times interest earned is income before interest expense and income taxes divided by:
interest expense
_____ refers to a company’s ability to generate an adequate return.
Profitability
The amount of income before deductions for interest expense and income tax expense is the amount available to pay interest. The Blank______ ratio takes income before interest expense and income tax expense divided by interest expense to determine the risk for creditors.
times interest earned
Explain how to compute gross profit by completing the following sentence. Gross profit is calculated by taking the net ….
(sales/costs) of a product and ….
(adding/subtracting) the cost of the goods sold.
Sales; subtract
The times interest earned ratio is computed by taking income before interest expense and income taxes divided by …
expense.
interest
_____ reflects a company’s ability to earn net income from sales. It is measured by expressing net income as a percent of net sales.
Profit margin
A company reports net income before interest expense and income taxes of $16,000. Interest Expense for the period is $200 and Interest Income for the period is $400. Times interest earned is:
80
Reason: $16,000/200=80
Profit margin is computed by taking:
net income divided by net sales
____ is computed by taking net income divided by average total assets for the period.
Return on total assets
…. refers to a company’s ability to generate an adequate return.
Profitability
A company reported Net Income for 2018 of $1,500 and for 2017 of $1,000. It reported Total Assets at the end of 2018 of $13,000 and at the end of 2017 of $11,000. Compute return on total assets for 2018.
12.5%
(1,500÷((13,000+11,000)
÷2))×100
Determine which of the definitions below describes gross profit.
The difference between net sales and the cost of the goods sold
… margin measures a company’s ability to earn net income from sales. It is measured by expressing net income as a percent of net sales.
Profit
Return on total assets is computed by taking:
net income divided by average total assets
Profit margin is computed by taking net income divided by net …
Sales
Return on equity measures the amount of Blank______ earned for its owners. It is computed by taking net income divided by average total equity.
income
Return on total assets reflects solvency. It is computed by taking net income divided by current assets for the period.
False
The price-…
ratio reveals market expectations.
earnings
A company reported Net Income for 2018 of $12,000 and for 2017 of $14,000. It reported Total Assets at the end of 2018 of $120,000 and at the end of 2017 of $100,000. Compute return on total assets for 2018.
10.9%
(12,000÷((120,000
+100,000)÷2))×100
The Blank______ ratio measures a company’s market expectations for future growth.
price-earnings
A company’s market price is $40.00 per common share, book value is $10.00 per share, and the earnings is $3.00 per share. Compute price-earnings ratio.
13.3
Reason: $40 / 3 = $13.3
Return on total assets is computed by taking net income divided by:
average total assets
The price-earnings ratio is computed by taking:
market price per common share divided by earnings per share
_____ measures the amount of net income earned for its owners. It is computed by taking net income divided by average total equity.
Return on equity
One way to help identify whether a stock is an income stock or a growth stock is to analyze its Blank______, by taking annual cash dividends per share divided by market value per share.
dividend yield
A ratio that divides market value (price) per share by earnings per share is called:
price-earnings ratio.
The ….
ratio is computed by taking market price per common share divided by earnings per share.
price-earnings
…. is used to compare the dividend-paying performance of different companies. It is computed by taking annual cash dividends per share divided by market price per share.
Dividend Yield
A company’s market price is $60.00 per common share, book value is $10.00 per share, and the earnings is $5.00 per share. Compute price-earnings ratio
12.0
Reason: $60 / 5 = $12.0
A company has 10,000 shares of $10 par-value common stock issued and outstanding. Earnings per share were $8, annual cash dividends per share were $0.50, and market price per share is $30. Compute the dividend yield.
1.7%
(0.50÷30)×100
The price-earnings ratio is computed by taking market price per common share divided by:
earnings per share
The dividend yield is computed by taking annual cash dividends per share divided by the:
market price per share
Growth stocks pay large amounts of cash dividends.
False
Reason: Growth stocks pay little or no cash dividends.
A financial statement ….
report consists of an executive summary, analysis overview, evidential matter, assumptions, key factors, and inferences.
analysis
Identify and match the major parts of the complete income statement.
1. Continuing operations:
2. Discontinued segments:
3. Earnings per share:
- Continuing operations: revenues, expenses, and income from ongoing operations.
- Discontinued segments: reports income from selling/closing segment and income loss from operating discontinued segment.
- Earnings per share: reports info for each of the three subcategories of income.
_____ is used to compare the dividend-paying performance of different companies. It is computed by taking annual cash dividends per share divided by market price per share.
Dividend yield
Gains and losses that are either unusual and/or infrequent are reported as …
part of continuing operations after normal revenues and expenses
A company has 20,000 shares of $5 par-value common stock issued and outstanding. Earnings per share were $4, annual cash dividends per share were $0.90, and market price per share is $90. Dividend yield is ….
%.
1%
(0.90÷90)×100
A discontinued segment is reported:
separately in the discontinued segments section of the income statement
The dividend yield is computed by taking:
annual cash dividends per share divided by market price per share
The Blank______ application refers to applying a different accounting principle to prior periods as if that principle had always been used.
retrospective
Identify which of the following sections are part of the six sections that make up an analysis report.
Executive summary
Key factors
Assumptions
The complete income statement is separated into the following sections:
continuing operations
discontinued segments
earnings per share
Gains and losses that are either unusual and/or infrequent are reported as part of continuing operations after normal revenues and expenses. Items considered unusual and/or infrequent include:
Condemning of property
Hurricane
A business (section/segment/class) …
is a part of a company’s operations that is separated by its products or services or by geographic location.
segment
Changes in accounting principle are reported…
retrospectively
