Financial Analysis_Chapter 1+2

Which of the following is likely to be the most informative source if you were interested in a company's business plan or strategy?

• A. Auditor's letter
• B. Management discussion and analysis
• C. Proxy statement
• D. Footnotes

Which of the following would not be considered a source of financing?

• A. Notes receivable
• B. Common stockholders' equity
• C. Retained earnings
• D. Debentures

If a company receives an unqualified audit opinion it means the auditors:

• A. did not complete a full audit and therefore do not feel qualified to give an opinion on financial statements.
• B. are providing assurance that the company will remain financially viable for at least the next year.
• C. are providing assurance that the company's financial statements fairly present company's financial performance and position.
• D. are providing assurance that the company's financial statements are free from misstatement, fraudulent accounting and fairly indicate future performance.

The Management Discussion and Analysis Section of the annual report:

• A. is required by the SEC.
• B. is optional but normally included in the annual report.
• C. is required by the SEC only if the company has suffered from unfavorable trends or there are significant uncertainty concerning liquidity of the company.
• D. is required by the SEC only if they have a qualified audit opinion.

Which of the following is not a common tool used in financial statement analysis?

• A. Random walk analysis
• B. Ratio analysis
• C. Common size statement analysis
• D. Trend series analysis

A common size income statement would typically be prepared by dividing:

• A. all items on income statement in Year t by their corresponding value in Year t-1.
• B. all items on income statement in Year t by their corresponding balance sheet accounts in Year t.
• C. all items on income statement in Year t by net income in Year t-1.
• D. all items on income statement in Year t by sales in Year t.

When conducting comparative analysis by reviewing consecutive balance sheets,

• A. all items on the balance sheet in Year t must be divided by their corresponding value in Year t-1 and subtract 1.
• B. all items on the balance sheet in Year t-1 must be subtracted from their corresponding value in Year t.
• C. all items on the balance sheet in Year t must be divided by net income in Year t-1.
• D. Both A and B are correct.

While determining the most profitable company from the given number of companies, which of the following would be the best indicator of relative profitability?

• A. Highest net income
• B. Highest retained earnings
• C. Highest return on equity
• D. Highest operating margin

Which of the following statements concerning financial ratios is incorrect?

• A. Accounting principles and methods used by a company will not affect financial ratios.
• B. The informational value of a ratio in isolation is limited.
• C. A ratio is one number expressed as a percentage or fraction of another number.
• D. Calculation of financial ratios is not sufficient for a complete financial analysis of a company.

Which of the following ratios is not generally considered to be helpful in assessing short-term liquidity?

• A. Acid test ratio
• B. Current ratio
• C. Days to collect receivables
• D. Days goodwill held