Financial Statement Analysis

Management is a user of financial analysis. Which of the following comments does not represent a fair statement as to the management perspective?

• Management is always interested in maximum profitability.

• Management is interested in the view of investors.

• Management is interested in the financial structure of the entity.

• Management is interested in the asset structure of the entity.

Which of the following generally is the most useful in analyzing companies of different sizes?

• comparative statements

• common-sized financial statements

• price-level accounting

• profitability index

The percent of property, plant and equipment to total assets is an example of:

• vertical analysis

• solvency analysis

• profitability analysis

• horizontal analysis

In performing a vertical analysis, the base for prepaid expenses is

• total current assets.

• total assets.

• total liabilities.

• prepaid expenses in a previous year.

The percentage analysis of increases and decreases in individual items in comparative financial statements is called:

• vertical analysis

• solvency analysis

• profitability analysis

• horizontal analysis

Horizontal analysis is also known as

• linear analysis.

• vertical analysis.

• trend analysis.

• common size analysis.

Which suppliers of funds bear the greatest risk and should therefore earn the greatest return?

• common stockholders

• general creditors such as banks

• preferred shareholders

• bondholders

Ratios are used as tools in financial analysis

• instead of horizontal and vertical analyses.

• because they can provide information that may not be apparent from inspection of the individual components of a particular ratio.

• because even single ratios by themselves are quite meaningful.

• because they are prescribed by GAAP.

In the near term, the important ratios that provide the information critical to the short-run operation of the firm are:

• liquidity, activity, and profitability

• liquidity, activity, and debt

• liquidity, activity, and equity

• activity, debt, and profitability

The primary concern of short-term creditors when assessing the strength of a firm is the entity’s

• short-term liquidity

• profitability

• market price of stock

• leverage