Financial Statement Analysis

True or False (Gemini answered)

False

One limitation of vertical analysis is that it cannot be used to compare two companies that are significantly different in size.

False

The sale of used equipment at book value for cash will increase earnings per share.

False

An increase in the number of shares of common stock outstanding will decrease a company's price-earnings ratio if the market price per share remains unchanged.

True

If a company's acid-test ratio increases

False

Short-term borrowing is not a source of working capital.

True

Attention directing is one of the many basic objectives of financial statement analysis.

False

Since financial statements are summary of historical data

True

The ratio that shows the margin by which the firm's operating cash flows cover its financial requirements is the cash flow coverage ratio.

True

Companies with relatively high rates of return on equity generally sell at higher multiples of book value than those with low returns.

True

If the firm's liquidity

False

A high current asset ratio is always an indication of strong liquidity position.

False

In trend analysis

False

Common-size statements are statements of companies of similar size and operations.

True

An extremely high current ratio may be an indication that receivables and inventories are excessive.

False

Trend percentages in financial statements would be an example of vertical analysis.

True

A common-size statement is one that shows the separate items appearing on it in percentage form

False

If earnings remain unchanged and the price/earnings ratio goes up

False

Investors seeking capital gains would like the dividend pay-out ratio to be high.

False

Dividing the market price of share of stock by the dividends per share gives the price/earnings ratio.

True

Book value per share is not a good predictor of either earnings potential or debt paying ability.

True

In computing the dividend yield ratio

True

If the return on total assets is greater than the after-tax cost of long-term debt

False

The inventory turnover is computed by dividing sales by average inventory.

False

Companies that experience high earning on some occasions and suffer losses on other occasions should rely heavily on the use of financial leverage.

True

If a company's return on total assets is substantially higher than its cost of borrowing

True

Comparisons within a company are often useful to detect changes in financial relationships and significant trends.

True

Comparisons with other companies provide insight into a company's competitive position.

True

Comparisons with industry averages provide information about a company's relative position within the industry.

False

Horizontal analysis is a technique for evaluating financial statement data that expresses each item in a financial statement as a percent of a base amount.

True

Comparisons of company data with industry averages provide information about a company's relative position within the industry.

True

Horizontal

False

Horizontal analysis is a technique for evaluating a financial statement item in the current year with other items in the current year.

False

If a company has sales of P110 in 2008 and P154 in 2007

True

In horizontal analysis

False

A primary purpose of vertical analysis is to observe trends over a three-year period.

False

Vertical analysis is a technique for evaluating a series of financial statement data over a period to determine the increase (decrease) that has taken place.

False

Using vertical analysis of the income statement

False

Liquidity ratios measure the ability of the enterprise to survive over a long period of time.

False

A solvency ratio measures the income or operating success of an enterprise for a given period.

True

Receivable turnover is useful in assessing the profitability of receivables.

True

The inventory turnover ratio measures the number of times on average the inventory was sold during the period.

True

Inventory turnover is a measure of liquidity that focuses on efficient use of inventory.

True

Profitability ratios are frequently used as a basis for evaluating management's operating effectiveness.

False

The return on assets ratio will be greater than the rate of return on common stockholders' equity if the company has been successful in trading on the equity at a gain.

False

From a creditor's point of view