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

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Question 31

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Earnings before interest and taxes divided by interest expense is the formula for which of these analytical measures?

A) Debt to assets ratio
B) Earnings per share
C) Return on investment
D) Number of times interest is earned

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Question 32

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Indicate whether each of the following statements about financial statement analysis is true or false. _____ a) Ratio analysis may involve studying relationships between an item reported on the balance sheet and another reported on the income statement. _____ b) Comparing sales in 2012 with sales for 2011 is a form of vertical analysis. _____ c) Comparing net income in 2012 with sales for 2012 is a form of horizontal analysis. _____ d) Liquidity ratios measure a company's ability to generate profits in the short term. _____ e) Working capital is calculated by using the following formula: quick assets - current liabilities.

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a) True b) False c) False d) False e) Fa...

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Question 33

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Ratios can be used for different purposes. For example, a variety of ratios have been developed to assess a firm's liquidity. Similarly, ratios have been developed to assess solvency, profitability, and stock market strength. A sample of commonly used ratios for these purposes is provided in the table below. Required: In the middle column of the table, provide the formula to compute the specified ratio. In the final column, indicate the purpose (Liquidity, Solvency, Profitability, and Stock market strength) for which the ratio is most commonly used. The first item is completed as an example.

Financial ratios can be used to assess which of the following aspects of a firm's performance?

In terms of solvency, the smaller the number of times interest is earned, the better.

Indicate whether each of the following statements about financial statement analysis is true or false. _____ a) Having too little inventory can hurt a company's profitability because of lost sales. _____ b) Having too much inventory can hurt a company's profitability because of excess costs. _____ c) Generally, a lower inventory turnover indicates that merchandise is being handled more efficiently. _____ d) Average days to sell inventory is the number of times, on average, that inventory is replaced during the year. _____ e) Values for the inventory turnover ratio vary widely among different industries.

If the company purchased a $60,000 piece of equipment by paying $30,000 and having the rest financed with a short-term note from the bank, then immediately after this transaction what is the expected impact on the current ratio?

Lilly's Corporation has working capital of $840,000, and Harmon Corporation has working capital of $620,000. Which of the following statements is incorrect?

The study of an individual financial statement item over several accounting periods is called:

Profitability ratios attempt to assess the company's ability to generate earnings.

Starlight Corporation has current assets of $200,000, total current liabilities of $750,000 net credit sales of $650,000, beginning accounts receivable of $65,000 and ending accounts receivable of $69,000. What is Starlight's accounts receivable turnover?

A company has an obligation to provide highly detailed information on its financial statements.

Select the incorrect statement regarding the return on equity (ROE) measure.

Selected financial information for Maris Company for 2012 follows: Required: How many times did Maris' merchandise inventory turnover during 2012?

The following information applies to Manuel Company: Additional information: Net credit sales = $220,000; beginning accounts receivable = $10,000. Required: Compute Manuel's (a) Quick ratio (b) Current ratio (c) Working capital (d) Accounts receivable turnover (e) Average days to collect receivables

Which of the following statements is correct?

Explain the difference between horizontal analysis and vertical analysis of a company's financial statements.

Common methods of financial statement analysis include all of the following except:

Barrett Company declared and paid a cash dividend totaling $500,000 on its common stock. As a result of this transaction, the company's debt to assets ratio will:

Which of the following statements about financial statements is incorrect?