Chapter 2

Financial Statements and Analysis

n Learning Goals
1. Review the contents of the stockholders’ report and the procedures for consolidating international
financial statements.

2. Understand who uses financial ratios, and how.

3. Use ratios to analyze a firm’s liquidity and activity.

4. Discuss the relationship between debt and financial leverage and the ratios used to analyze a firm’s
debt.

5. Use ratios to analyze a firm’s profitability and market value.

6. Use a summary of financial ratios and the DuPont System of analysis to perform a complete ratio
analysis.

n True/False
1. The Financial Accounting Standards Board (FASB) is the federal regulatory body that governs the
sale and listing of securities.
Answer: FALSE
Level of Difficulty: 1
Learning Goal: 1
Topic: Accounting Standards and Regulation

2. GAAP is the accounting profession’s rule-setting body.

Answer: FALSE
Level of Difficulty: 1
Learning Goal: 1
Topic: Accounting Standards and Regulation

3. Generally-accepted accounting principles are authorized by the Financial Accounting Standards

Board (FASB).
Answer: TRUE
Level of Difficulty: 1
Learning Goal: 1
Topic: Accounting Standards and Regulation
4. Publicly-owned corporations are those which are financed by the proceeds from the treasury
securities.
Answer: FALSE
Level of Difficulty: 1
Learning Goal: 1
Topic: Accounting Standards and Regulation

5. Publicly-owned corporations are required by the Securities and Exchange Commission (SEC) and
individual state securities commissions to provide their stockholders with an annual stockholders’
report.
Answer: TRUE
Level of Difficulty: 1
Learning Goal: 1
Topic: Accounting Standards and Regulation

6. The president’s letter, as the first component of the stockholders’ report, is the primary
communication from management to the firm’s employees.
Answer: FALSE
Level of Difficulty: 1
Learning Goal: 1
Topic: Stockholders’ Report

7. Common stock dividends paid to stockholders are equal to the earnings available for common
stockholders divided by the number of shares of common stock outstanding.
Answer: FALSE
Level of Difficulty: 1
Learning Goal: 1
Topic: Dividends

8. The income statement is a financial summary of the firm’s operating results during a specified
period while the balance sheet is a summary statement of the firm’s financial position at a given
point in time.
Answer: TRUE
Level of Difficulty: 1
Learning Goal: 1
Topic: Income Statement

9. The par value of common stock is an arbitrarily assigned per share value used primarily for
accounting purposes.
 Answer: TRUE
Level of Difficulty: 1
Learning Goal: 1
Topic: Balance Sheet

10. Paid-in capital in excess of par represents the firm’s book value received from the original sale of
common stock.
Answer: FALSE
Level of Difficulty: 1
Learning Goal: 1
Topic: Balance Sheet