FINANCIAL ANALYSIS-SKOUSEN

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. Ascertain the relative potential of companies of similar size in different industries.

d. 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.

When using common-size statements

a. data may be selected for the same business as of different dates, or for two or more

businesses as of the same date.

b. relationships should be stated in terms of ratios.

c. dollar changes are reported over a period of at least three years.

d. All of the above are correct.

Which of the following statements best describes the use of financial statement analysis?

a. Financial statement analysis techniques are merely guides to interpretation of financial

data.

b. Financial statement analysis can eliminate the risk in investment decisions.

c. Measurements for a specific company should be compared only with data from past

periods.

d. All of the above are correct.

Rauh Corporation had a current ratio of 2.0 at the end of 2004. Current assets and current liabilities increased

by equal amounts during 2005. The effects on net working capital and on the current ratio, respectively, were

a. no effect; increase.

b. no effect; decrease.

c. increase; increase.

d. decrease; decrease.

Which of the following ratios measures short-term solvency?

a. Current ratio

b. Creditors' equity to total assets

c. Return on investment

d. Total asset turnover

If a firm changes its inventory method from FIFO to LIFO just prior to a period of rising prices, the effect in

the next period will be

Current Ratio Inventory Turnover

a. No effect Increase

b. No effect Decrease

c. Increase Decrease

d. Decrease Increase

Which of the following transactions would increase a firm's current ratio?

a. Purchase of inventory on account

b. Payment of accounts payable

c. Collection of accounts receivable

d. Purchase of temporary investments for cash

How are trade receivables used in the calculation of each of the following?

Current Ratio Inventory Turnover

a. Not used Numerator

b. Numerator Numerator

c. Numerator Not used

d. Denominator Numerator

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. A high current ratio may indicate inadequate inventory on hand.

b. A high current ratio may indicate inefficient use of various assets and liabilities.

c. The two companies may define working capital in different terms.

d. The two companies may be different sizes.

Millward Corporation's books disclosed the following information for the year ended December 31, 2005:

Net credit sales ...................................... $1,500,000

Net cash sales ........................................ 240,000

Accounts receivable at beginning of year .............. 200,000

Accounts receivable at end of year .................... 400,000

Millward's accounts receivable turnover is

a. 3.75 times.

b. 4.35 times.

c. 5.00 times.

d. 5.80 times.