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Exam 13: Financial Statement Analysis Available Online in the Connect Library

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Question 61

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What is a primary drawback with examining and comparing absolute amounts from two businesses' financial statements?

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The primary drawback is that absolute am...

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Question 62

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Select the incorrect statement regarding net margin.

A) Net margin refers to the average amount of each sales dollar remaining after all expenses are subtracted.
B) Net margin may be calculated in several ways.
C) The smaller the net margin the better.
D) The amount of net margin is affected by a company's choices of accounting principles.

E) A) and B)
F) B) and C)

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Question 63

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You are considering an investment in Google Company stock and wish to assess the company's position in the stock market. All of the following ratios can be used except:

On December 31, 2011, Omaha Company's total current assets were $360,000 and its total current liabilities were $200,000. On January 1, 2012, Omaha issued a long-term note to a bank for $10,000 cash. Required: (a) Compute Omaha's working capital before and after issuing the note payable. (b) Compute Omaha's current ratio before and after issuing the note payable.

Maryland Company's balance sheet and income statement are provided below: The company paid cash dividends of $2.00 per share during 2012. On December 31, 2012, the stock was listed on the stock exchange at a price of $75.25 per share. Required: Compute the following ratios for 2012: (a) Accounts receivable turnover (b) Average days to collect receivables (c) Inventory turnover (d) Average days to sell inventory (e) Debt to assets ratio (f) Debt to equity ratio (g) Net margin (h) Asset turnover (i) Return on investment (j) Dividend yield

Which of the following statements is generally incorrect?

The debt to equity ratio can be used to asses a firm's solvency.

Which ratio measures how effectively a company is using assets to generate revenue?

Many companies have to monitor some of their financial statement ratios, such as the current ratio, due to debt covenants. Selected transactions are provided below for a company that uses a perpetual inventory system; sells its merchandise at a selling price that exceeds cost; and had a current ratio of 1.85 before the event occurred. Required: In the above table, indicate whether each transaction would increase (+), decrease (-), or not affect (0) the company's working capital and the current ratio.

Vertical analysis involves comparing amounts in the financial statements for a single period, but an analyst may usefully compare vertical analysis results for two or more periods.

An analysis procedure that uses percentages to compare each of the parts of an individual statement to a key dollar amount from the financial statements is:

Indicate whether each of the following statements about financial statement analysis is true or false. _____ a) Both dividends and earnings performance are indicators of the value of a company's stock. _____ b) The most widely quoted measure of a company's earnings performance is return on equity. _____ c) Earnings per share is calculated for a company's preferred stock. _____ d) Investors need to understand that the value of a company's earnings per share is affected by its choices of accounting principles and assumptions. _____ e) The book value per share measures the market value of a corporation's stock.

As of December 31, 2012, Grove Corporation had a current ratio of 1.29, quick ratio of 1.05, and working capital of $18,000. The company uses a perpetual inventory system and sells merchandise for more than it cost. On January 1, 2012, Grove purchased merchandise on account for $4,000. Which of the following statements is true?

The Mount Vernon Company reported gross sales of $850,000, sales returns and allowances of $5,000 and sales discounts of $5,000. The company has total average assets of $500,000, of which $250,000 is property, plant, and equipment. What is the company's asset turnover ratio?

On December 31, 2011, Alcon Company's total current assets were $300,000 and its total current liabilities were $180,000. On January 1, 2012, Alcon paid $10,000 on accounts payable. Required: (a) Compute Alcon's working capital before and after paying the account payable. (b) Compute Alcon's current ratio before and after paying the account payable.

You are considering an investment in General Motors stock and wish to assess the firm's long-term debt-paying ability and its use of debt financing. All of the following ratios can be used to assess solvency except:

Indicate whether each of the following statements about financial statement analysis is true or false. _____ a) A common size income statement is prepared by converting each component to a percentage of net income. _____ b) Common size financial statements are a form of vertical analysis, but the common size statements for two or more years may usefully be compared. _____ c) Vertical analysis of a balance sheet involves converting each component to a percentage of stockholders' equity. _____ d) Small percentage changes resulting from vertical analysis may still represent large dollar amounts; therefore, changes in both absolute dollar amounts and percentages should be examined. _____ e) Vertical analysis of a company's balance sheet is useful in assessing its liquidity.

The drawback of studying absolute amounts reported in financial statements is the problem of differing materiality levels.

Salem Company is seeking a short-term loan from its local bank. The banker needs assurance that the company will be able to repay the loan. Describe three financial ratios the banker should consider including in the loan approval process. What information does each of your selected ratios provide?

Which type of approach should be used when evaluating corporate results using horizontal analysis?