Module 2 - Analysis and Use of Financial Statements Flashcards
Sales of Automobiles by an automobile dealer would be classified under which cash flow activity?
Operating Cashflow Activity
ABC Corp. extends credit terms of 45 days to its customers. Its credit collection would be considered
poor if its actual average collection period was
More than 45days
A liquidity ratio measures the
short-term ability of the enterprise to pay its maturing obligations and to meet unexpected
needs for cash
A successful grocery store would probably have
A high inventory turnover
Apple Company had ₱250,000 of total current assets and ₱90,000 of total current liabilities before
borrowing ₱50,000 from BDO with a maturity of nine (9) months. On the date the loan from BDO is
made official, what effect did the borrowing transaction have on the amount of Apple Company’s
working capital?
No effect
Use December 31 yearend balances of Balance Sheet, Income Statement, and Statement of Cash
Flows when calculating all the ratios (i.e. do not use averages for Balance Sheet items). Use 365 days
in a year. Round off final answers to two decimal places.
The average number of days to sell inventory in 2018 improved compared to 2016.
True
Use December 31 yearend balances of Balance Sheet, Income Statement, and Statement of Cash
Flows when calculating all the ratios (i.e. do not use averages for Balance Sheet items). Use 365 days
in a year. Round off final answers to two decimal places.
The average number of days to collect receivables in 2018 deteriorated compared to 2016.
False
Use December 31 yearend balances of Balance Sheet, Income Statement, and Statement of Cash
Flows when calculating all the ratios (i.e. do not use averages for Balance Sheet items). Use 365 days
in a year. Round off final answers to two decimal places.
The average number of days to pay accounts payable 2018 is higher than in 2016.
False
Use December 31 yearend balances of Balance Sheet, Income Statement, and Statement of Cash
Flows when calculating all the ratios (i.e. do not use averages for Balance Sheet items). Use 365 days
in a year. Round off final answers to two decimal places.
The cash conversion cycle in 2018 improved compared to 2016
True
Use December 31 yearend balances of Balance Sheet, Income Statement, and Statement of Cash
Flows when calculating all the ratios (i.e. do not use averages for Balance Sheet items). Use 365 days
in a year. Round off final answers to two decimal places.
WLCON’s liquidity as measured by the current ratio improved in 2018 compared to 2017.
False
Use December 31 yearend balances of Balance Sheet, Income Statement, and Statement of Cash
Flows when calculating all the ratios (i.e. do not use averages for Balance Sheet items). Use 365 days
in a year. Round off final answers to two decimal places.
WLCON’s interest-bearing debt increased gradually from 2016 to 2018, thus indicating higher risk
for investors.
False
Use December 31 yearend balances of Balance Sheet, Income Statement, and Statement of Cash
Flows when calculating all the ratios (i.e. do not use averages for Balance Sheet items). Use 365 days
in a year. Round off final answers to two decimal places.
Based on the P/E ratio, WLCON shares were relatively cheaper at yearend 2018 compared to
yearend 2017:
Stock price at yearend 2018 : ₱12.60
Stock price at yearend 2017 : ₱8.28
False
Use December 31 yearend balances of Balance Sheet, Income Statement, and Statement of Cash
Flows when calculating all the ratios (i.e. do not use averages for Balance Sheet items). Use 365 days
in a year. Round off final answers to two decimal places.
The operating profit margin (using EBIT) improved in 2018 compared to 2017.
True
Use December 31 yearend balances of Balance Sheet, Income Statement, and Statement of Cash
Flows when calculating all the ratios (i.e. do not use averages for Balance Sheet items). Use 365 days
in a year. Round off final answers to two decimal places.
The net profit margin deteriorated in 2018 compared to 2016.
False
The return on equity (ROE) improved in 2018 compared to 2017.
True
Apple Company had ₱250,000 of current assets and ₱90,000 of current liabilities before borrowing
₱50,000 from the bank with a 3-month note payable. What effect did the borrowing transaction
have on the amount of Apple Company’s current ratio?
The ratio decreased
What does an increasing collection period for accounts receivable suggest about a firm’s credit
policy (i.e. the policy of who to grant credit to and in what manner to grant credit)?
The credit policy may be too lenient
Which of the following statements is true regarding profitability ratios?
A return on assets of 15% indicates that for every peso invested in assets, the company is
generating 15 centavos in net income.
Sam is examining the solvency of ABC Manufacturing Corporation and has collected the following data. What is the most appropriate conclusion based on the data provided?
The company is becoming increasingly less solvent, as evidenced by the increase in its debt-toequity ratio from 0.35 to 0.50 from 2018 to 2020
Sam is examining the solvency of ABC Manufacturing Corporation and has collected the following data. What would be a reasonable explanation of these financial results?
The decline in the company’s equity indicates that the company may be incurring losses on its operations, paying dividends greater than income, and / or repurchasing shares
Megan observes a decrease in a company’s inventory turnover. Which of the following would explain this trend?
The company installed a new inventory management system but experienced some operational difficulties resulting in duplicate orders being placed with suppliers.
A decomposition of ROE for XYZ Company is as follows. Which of the following choices best describes reasonable conclusions an analyst might make based on this ROE decomposition?
A higher average tax rate in 2020 offset the improvement in efficiency during 2020, thus leaving ROE unchanged.
In general, a creditor would consider a decrease in which of the following ratios to be positive news?
Debt to total assets
Assuming no changes in other variables, which of the following would decrease ROA?
An increase in assets.
What does the P/E ratio measure?
The “multiple” that the stock market places on a company’s EPS.
The primary weakness of the current ratio is
it includes some items, such as inventory, that may not be readily liquid.
The primary weakness of the current ratio is
it includes some items, such as inventory, that may not be readily liquid.
The fixed asset turnover ratio is influenced by
all of the above choices are correct
A firm’s return on equity is a function of its net profit margin, ______ and equity multiplier (i.e. “financial leverage”).
total asset turnover
What is a lender’s primary objective in performing an analysis of financial statements?
To decide whether or not the borrower has the ability to repay interest and principal on borrowed funds.
What is a limitation common to both the current and the quick ratios?
Accounts receivable may not be truly liquid.
