FINANCIAL STATEMENT ANALYSIS

1. Which of the following does not represent a problem with financial analysis?

a. Financial statement analysis is an art; it requires judgment decisions on the part of

the analyst.
b. Financial analysis can be used to detect apparent liquidity problems.
c. There are as many ratios for financial analysis as there are pairs of figures.
d. Some industry ratio formulas vary from source to source

2. The ratios that are used to determine a companys short-term debt paying ability are:

a. asset turnover, times interest earned, current ratio, and receivables turnover.
b. times interest earned, inventory turnover, current ratio, and receivables turnover.
c. times interest earned, acid-test ratio, current ratio, and inventory turnover.
d. current ratio, acid-test ratio, receivables turnover, and inventory turnover.

3. Which of the following ratios provides a solvency measure that shows the margin of
safety of noteholders or bondholders and also gives an indication of the potential ability
of the business to borrow additional funds on a long-term basis?

a. ratio of fixed assets to long-term liabilities

b. ratio of net sales to assets
c. number of days' sales in receivables
d. rate earned on stockholders' equity

4. Recently the RCD Company has been having problems. As a result, its financial situation
has deteriorated. RCD approached the BDO Unibank for a badly needed loan, but the
loan officer insisted that the current ratio (now 0.5) be improved to at least 0.8 before
the bank would even consider granting the credit. Which of the following actions would
do the most to improve the ratio in the short run?

a. Using some cash to pay off some current liabilities.

b. Collecting some of the current accounts receivable.
c. Paying off some long-term debt.
d. Purchasing additional inventory on credit (accounts payable).

5. Consider the following statements..

Statement I: Ratios are used as tools in financial analysis instead of vertical analysis
Statement II: Ratios are used due that even single ratios are quite meaningful
Statement III: Ratios are used because they can provide information that may not be
apparent from inspection of the individual components of a particular ratio.
A. Statement A is True
B. Statement A, B is True
C. Statement C is True
D. Sleepino

6. In the near term, the important ratios that provide the information critical to the
short-run operation of the firm are:
A. liquidity, activity, and debt
B. liquidity, activity, and equity
C. liquidity, activity, and profitability
D. activity, debt, and profitability

7. If a firm has substantial capital or financing leases disclosed in the notes but not
capitalized in the financial statements, then the
a. times interest earned ratio will be overstated, based upon the financial statements
b. debt ratio will be understated
c. working capital will be understated
d. fixed charge ratio will be overstated, based upon the financial statements

8. Supposedly a company has an acid-test ratio of 1.2:1, what respective effects will the
borrowing of cash by short-term debt and collection of accounts receivable have on
the ratio?
A. B. C. D.
Short-term Increase Increase Decrease Decrease
borrowing
Collection No Increase No Decrease
of receivable effect effect

9. When High 5 Corporation. compares its ratios to industry averages, it has a higher
current ratio, an average quick ratio, and a low inventory turnover. What might you
assume about Tri-C?

A.Its cash balance is too low.

B.Its current liabilities are too low.
C.Its average inventory is too high.
D.Its cost of goods sold is too low.

10. Consider the following statements..

I. The short term creditor is more interested in cash flows and in working capital
management that he is in how much accounting net income is reported.
II. If the return on total assets is higher than the after-tax cost of long-term debt,
then leverage is positive, and the common stockholders will benefit.
III. The results of financial statements analysis are of value only when viewed in
 comparison with the results of other periods or other firms.
IV. The inventory turnover is computed by dividing sales by average inventory.

A. Statement 1, 2 and 3 is True, Statement 4 is False

B. Statement 2,4 is True, Statement 1 is False
C. Statements 2, 3, 4 is True and Statement 1 are False
D. Statements 1, 3,4 is True and Statement 2 is False

11. In a set of comparative financial statements, you observed a gradual decline in the
net of gross ratio, i.e., between net sales and gross sales. This indicates that:
A. There is a stiffening in the grant of discounts to the customers.
B. The discount period is being lengthened.
C. There is adherence to the collection policies of the company
D. Sales volume is decreasing.

12. Masigasig Corp. has current assets of P180,000 and current liabilities of P360,000.
Which of the following transactions would improve Masigasigs current ratio?
A. Refinancing a P60,000 long-term mortgage with a short-term note.
B. Collecting P20,000 of short-term accounts receivable.
C. Purchasing P100,000 of merchandise inventory with a short-term accounts
payable.
D. Paying P40,000 of short-term accounts payable.

13. If a firm has substantial capital or financing leases disclosed in the notes but not
capitalized in the financial statements, then the
A. times interest earned ratio will be overstated, based upon the financial
statements
B. debt ratio will be understated
C. working capital will be understated
D. fixed charge ratio will be overstated, based upon the financial statements

14. In comparing the current ratios of two companies, why is it invalid to assume that the
company with the higher current ratio is the better company?
A. The current ratio includes assets other than cash.
B. A high current ratio may indicate inadequate inventory on hand.
C. A high current ratio may indicate inefficient use of various assets and liabilities
D. The two companies may define working capital in different terms.

15. When a balance sheet amount is related to an income statement amount in computing
a ratio,
A. The income statement amount should be converted to an average for the year.
B. Comparisons with industry ratios are not meaningful.
 C. The balance sheet amount should be converted to an average for the year.
D. The ratio loses its historical perspective because a beginning-of-the-year amount
is combined with an end-of-the-year amount.

16. A useful tool in financial statement analysis is the common-size financial statement.
What does this tool enable the financial analyst to do?
A. Evaluate financial statements of companies within a given industry of
approximately the same value.
B. Determine which companies in the same industry are at approximately the
same stage of development.
C. Compare the mix of assets, liabilities, capital, revenue, and expenses within a
company over time or between companies within a given industry without respect to
relative size.
D. Ascertain the relative potential of companies of similar size in different
industries.

17. Which of these ratios are measures of a companys profitability?

1. Earnings per share 5. Return on assets
2. Current ratio 6. Inventory turnover
3. Return on sales 7. Receivables turnover
4. Debt-equity ratio 8. Price-earnings ratio

A. All eight ratios.

B. 1, 3, 5, 6, 7, and 8 only
C. 1, 3, 5, and 8 only
D. 1, 3, and 5 only

18. Assume that a company's debt ratio is currently 50%. It plans to purchase fixed assets
either by using borrowed funds for the purchase or by entering into an operating lease.
The company's debt ratio as measured by the balance sheet will
a.Increase whether the assets are purchased or leased.
b. Increase if the assets are purchased, and remain unchanged if the assets
are leased.
c. Increase if the assets are purchased, and decrease if the assets are leased.
d. Remain
unchanged whether the assets are purchased or leased.

19. Consider the following statements: Which of the following are correct?

A. Statement 1: Ratio analysis are used to provide information that may not be apparent
from inspection of the individual components of a particular ratio.
B. Statement 2: Ratio analysis is used to evaluate various aspects of a companys operating
 and financial performance such as its efficiency, liquidity, profitability and solvency
C. Statement 3: Ratio analysis is not based on line items in financial statements like
the balance sheet, income statement and cash flow statement; the ratios of one item
or a combination of items - to another item or combination are then calculated.

A. All Statements are Correct

B. None of the Statements are Correct
C. Only Statement 1 and 2 are Correct
D. None of the Statements are Correct

20. The percentage analysis of increases and decreases in individual items in comparative
financial statements is called:
A. vertical analysis C. profitability analysis
B. solvency analysis D. horizontal analysis

21. The current ratio is

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

22. If the ratio of total liabilities to equity increases, a ratio that must also increase is
A. Times interest earned.
B. Total liabilities to total asset
C. Return on equity.
D. The current ratio.

23. Contribution margin profit after interests and preferred dividends =

A. Degree of operation leverage
B. Degree of financial leverage
C. Degree of total leverage
D. No meaningful amount

24. It is a term used to describe the magnification of risk and return introduced through the use
of fixed cost financing such as preferred stock and long-term debt.
(a) Financial leverage
(b) Operating leverage
(c) Fixed-payment coverage
(d) The acid-test

25. A useful tool in financial statement analysis is the common-size financial statement.
What does this tool enable the financial analyst to do?
a. Evaluate financial statements of companies within a given industry of approximately the
same value.
b.Determine which companies in the same industry are at approximately the same stage of

development.

c. Compare the mix of assets, liabilities, capital, revenue, and expenses within a
company over time or between companies within a given industry without respect to
relative size.
d. Ascertain the relative potential of companies of similar size in different industries.