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Exam 17: Financial Statement Analysis

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Question 81

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The three categories used to measure a company are ratios, which analyze a company's liquidity, profitability and permanency.

A) True
B) False

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Question 82

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The current ratio is

A) calculated by dividing current liabilities by current assets.
B) used to evaluate a company's liquidity and short-term debt-paying ability.
C) used to evaluate a company's solvency and long-term debt-paying ability.
D) calculated by subtracting current liabilities from current assets.

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

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Question 83

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A general rule to use in assessing the collection period is that

The balance sheet for Finley Corporation at the end of the current year indicates the following: Profit before income taxes was $960,000 and income taxes expense for the current year amounted to $288,000. Cash dividends paid on common shares were $300,000, and the common shares were selling for $45 per share at the end of the year. There were no ownership changes during the year. Instructions Determine each of the following: a. number of times that bond interest was covered. b. earnings per share. c. price-earnings ratio. d. payout ratio on common shares.

In a vertical analysis of a merchandising company, all items on the income statement are expressed as a percentage of net sales.

The income statements for the first three years of operations of Carol's Music Ltd. are provided below: Instructions a. Is Carol's gross profit improving over the three years or not? Use horizontal analysis, with 2013 as the base year, to support your answer. b. Provide one explanation for the decline in income from operations other than changes in gross profit. Support your answer using vertical analysis. c. Although profit is decreasing, Carol has not been concerned because her cash flows have increased from year to year. Using the information available in the income statements, explain why this is so.

The interest coverage ratio gives an indication of a company's ability to make its interest payments as they come due.

Horizontal analysis is also known as common size analysis.

If a company has sales of $110,000 in 2012 and $154,000 in 2013, the percentage increase in sales from 2012 to 2013 is 40%.

The collection period for accounts receivable is calculated by dividing 365 days by the receivables turnover.

Under which of the following cases may a percentage change be calculated?

The higher the percentage of total debt to total assets the greater the risk

Use the following information for questions . Selected financial ratios for Front Room Decorating Incorporated are as follows: $\begin{array}{llll}&2013&2012&2011\\\text { Current ratio } & 2.50: 1 & 2.0: 1 & 1.75: 1 \\\text { Accounts receivable turnover } & 7 \text { times } & 12 \text { times } & 18 \text { times } \\\text { Inventory turnover } & 9 \text { times } & 9.1 \text { times } & 8.9 \text { times }\end{array}$ 98 Based upon an analysis of the above information, which of the following statements most accurately describes Front Room's financial results for 2013? a. The company is selling more inventory. b. The company is taking longer to collect its accounts receivable. c. The company's current ratio deteriorated. d. The company's liquidity improved. -When assessing the above ratios on an overall basis, most analysts would conclude that the company's liquidity

In performing a vertical analysis for a merchandising company, the base for sales on the income statement is

Horizontal analysis is a technique for evaluating financial statement data