Financial Statement Analysis/Ratio Analysis (True/False) 1. Financial statements that reflect financial data for two or more periods are often referred to as comparative statements T 2. Development of data that measure changes occurring from one accounting period to another is a form of horizontal analysis T 3. One form of horizontal analysis is the development of an index- number trend series T 4. When preparing an index-number trend series, the first year presented must always be the base (i.e. 100%) F 5. Index numbers can only be computed when amounts are positive T 6. Common size financial statements are a widely used vertical analysis technique T 7. A common-size income statement usually shows each revenue or expense item as a percentage of net sales T 8. Comparability between enterprises is more difficult to obtain than comparability within a single enterprise T 9. Computation of ratios for an accounting period is a form of horizontal analysis T 10. Generally, the first concern of a financial analyst is a firm’s liquidity T 11. The working capital ratio is regarded as fundamental measurement of a company’s liquidity T 12. Normally, an analyst would believe that a manufacturing company with a current ratio of 3 to 1 was in serious liquidity trouble F 13. The acid test ratio is regarded primarily as a measure of a company’s long term liquidity situation F 14. Usually quick ratio of 1.5 o 1 would be considered satisfactory T 15. The accounts receivable turnover is both a measure of liquidity and a measure of activity T 16. Average receivables may also be expressed in terms of the number of days’ sales in receivables T 17. The receivable position and the approximate collection time may be evaluated by computing the accounts receivable turnover T 18. The inventory turnover is computed by dividing cost of goods sold by average inventory T 19. A natural business year relates to a fiscal year ending when operations are at their lowest point T 20. Normally a relatively low inventory turnover is desirable F 21. The ratio of the net sales to total assets is often called the profitability ratio F 22. The ratio called profit margin on sales is a measure of the profit percentage per dollar of sales T 23. Return on investment (ROI) is a measure of overall asset productivity T 24. The price earnings ratio is a measure of the relative attractiveness of common stock as an investment T 25. The use of borrowed funds is known as trading on the equity T 26. The internal users of financial statement are managers, employees and creditors F 27. Some external users of financial statement comprises Inland Revenue, existing shareholders and potential investors F 28. Horizontal analysis is a technique to compare company’s financial condition over a period of time T 29. Vertical analysis is a technique to evaluate each item in a financial statement as a percent of a base amount or item T 30. The four classification of ratio analysis are liquidity ratio, fixed asset ratio, profitability ratio and efficiency ratios F 31. Liquidity ratio measure the ability of a business to meet long term obligations F 32. Solvency ratios measure the business’ very short-term ability to meet all financial obligations F 33. Total asset turnover measures the amount of sales generated by each dollar of asset T 34. Debt to asset ratio measures the extent to which borrowed funds have been used to finance the acquisition of assets T 35. Price earning ratio shows how much an investor is willing to pay for each dollar of earnings given the actual market price T
Posted on: Sun, 25 Aug 2013 06:46:16 +0000