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Chapter 14 Financial Statement Analysis
Chapter 14
Financial Statement Analysis
True / False Questions
1. Vertical
Vertical analysis compares the results of financial information with a business in the same
industry for a number of consecutive periods ofo f time.
True False
2. The uic! ratio is especially useful in evaluatin" the liuidity of a company with fast
movin" inventories.
True False
#. $eductin" the cost of "oods sold from net income "ives us operatin" income.
True False
4. The "ross profit rate is "ross profit e%pressed as a percenta"e of net sales.
True False
&. The "ross profit rate usually is lowest on fast movin" merchandise and hi"hest on specialty
and novelty products
True False
'. (hen an income statement does not show "ross profit or operatin" income it is called a
consolidated statement.
True False
). *+, - return on euity - is measured by dividin" net income by avera"e number of shares
outstandin".
True False
14-1
. The yield rate on stoc! is measured by dividin" dividends per share by mar!et price per
share.
True False
/. The trend in ratios is usually more useful than loo!in" at a sin"le year0s ratio.
True False
1. The acid test ratio includes mar!etable securities but does not include accounts
receivable.
True False
11. Comparative financial statements show side-by-side financial data for two or more
companies.
True False
12. The uality of earnin"s tends to be hi"her for a company

compan y that uses strai"ht-line
depreciation and defers costs whenever possible than for a company which uses accelerated
depreciation and defers costs only when necessary.
True False
1#. f total current assets are 314 at the end of 5ear

5ear 1 increase by 3&
3&  by the end of
5ear
5ear 2 and increase by 3& in 5ear
5ear # the percenta"e increase over the precedin" year is
less in 5ear # than in 5ear 2.
True False
14. (or!in"
(or!in" capital is the e%cess of current assets over current liabilities.
True False
14-2
1&. A company0s liuidity refers to its ability to remain profitable.

True False
1'. nventory is an e%ample of a uic! asset.

True False
1). Current assets are those assets that can be converted into cash within a year and never
lon"er.
True False
1. The debt ratio is computed by dividin" total liabilities by current assets.
True False
1/. The lower the current ratio the more liuid the company appears.
True False
2. The owners of a corporation are not personally responsible for the debts of the business.
True False
21. A sin"le-step and multiple-step income statement are different in form and in the amount
of net income reported.
True False
22. A company whose sales are "rowin" at less than the rate of inflation may actually be
sellin" less merchandise every year.
True False
14-#
2#. A company cannot be increasin" its mar!et share if its net sales are declinin".
True False
24. 6et income stated as a percenta"e of sales is one means of evaluatin" a company0s ability
to control its e%penses.
True False
2&. A company whose future earnin"s are e%pected to rise substantially is li!ely to have a
hi"her price7earnin"s ratio than a company whose future earnin"s are e%pected to decline.
True False
2'. From a creditor0s point of view the lower the debt ratio8 the safer the c reditors0 position.
True False
2). The price7earnin"s ratio is calculated by dividin" earnin"s per share by the current mar!et
price of a share of the company0s stoc!.
True False
2. f the return on total assets ratio is substantially below the co st of borrowin" common
stoc!holders will benefit from a hi"h debt ratio.
True False
2/. The return on euity ratio may be either hi"her or lower than the return on assets ratio.
True False
#. The current ratio may be less than eual to or "reater than the uic! ratio.
True False
14-4
#1. The inventory turnover rate indicates how uic!ly inventory sells.
True False
#2. n a sin"le-step income statement all revenue items are listed then all e%pense items are
combined and deducted from total revenue.
True False
##. n a classified balance sheet assets are subdivided into current assets plant and euipment
and other assets while liabilities are all classified as current.
True False
#4. The more pessimistic investors0 e%pectations re"ardin" a company0s future p erformance
the lower the price7earnin"s ratio is li!ely to be.
True False
#&. A company should carry the amount of wor!in" capital necessary to conduct operations
not necessarily ma%imi9e its wor!in" capital.
True False
Multiple Choice Questions
#'. n order for investors and creditors to decide whether to invest in a company or loan a
company funds they may
A. Analy9e financial statements.
:. Focus on corporate "overnance.
C. :oth of the above.
$. 6either of the above.
14-&
#). A comparative financial statement

A. ;laces the balance sheet the income statement and the statement of cash flows side by side
in order to compare the results.
:. ;laces two or more years of a financial statement side by side in order to compare results.
C. ;laces the financial statements of two or more companies side by side in order to compare
results.
$. ;laces the dollar amounts ne%t to the percenta"e amounts of a "iven year for the income
statement.
#. The chan"es in financial statement items from a base year to followin" years are called<
A. =oney chan"es
:. Trend percenta"es
C. Component percenta"es
$. *atios
#/. The measurement of the relative si9e of each item included in a total is called<
A. =oney chan"es
$. *atios
4. +ne number e%pressed as a percenta"e of another is called<

A. =oney chan"es
$. *atios
41. The e%cess of current assets over current liabilities is called<

A. Current ratio
:. (or!in" capital
C. $ebt ratio
$. >uic! ratio
14-'
42. >uic! assets include which of the followin"?

A. Cash mar!etable securities and receivables.
:. Cash mar!etable securities and inventories.
C. Cash inventories and receivables.
$. =ar!et securities receivables and inventories.
4#. The ratio which measures total liabilities as a percenta"e of total assets is called<
A. Current ratio
:. (or!in" capital
C. $ebt ratio
$. >uic! ratio
44. The price7earnin"s ratio is measured by dividin"

A. :oo! value by earnin"s per share.
:. ;ar value by earnin"s per share.
C. =ar!et value by earnin"s per share.
$. =ar!et value by total net income.
4&. The principle factors affectin" the uality of wor!in" cap ital are<
A. The nature of the current assets.
:. The len"th of time to convert current assets into cash.
C. :oth A and :.
$. 6either A nor :.
4'. All of the followin" ratios are considered measures of profitability e%cept<
A. ,arnin"s per share
:. @ross profit rate
C. ;rice earnin"s ratio
$. *eturn on assets
14-)
4). All of the followin" ratios are considered measures of liuidity e%cept<
A. >uic! ratio
:. $ebt ratio
C. Current ratio
$. *eceivables turnover rate
4. The term classified financial statements refers<

A. To the financial statements of all companies wor!in" on "overnment proects.
:. +nly to the financial statements of defense contractors wor!in" on secret proects.
C. To financial statements prepared for use by mana"ement but not for distribution outside of
the or"ani9ation.
$. To financial statements in which items with certain characteristics are placed to"ether in a
"roup in an effort to develop useful subtotals.
4/. Comparative financial statements compare the company0s current statements with<
A. Those of prior periods.
:. Those of other companies in the same industry.
C. Those of the company0s principal competitor.
$. The bud"eted level of performance for the period.
&. (hich of the followin" is not a measure of short-term liuidity?

A. >uic! ratio.
:. (or!in" capital.
C. Current ratio.
$. $ebt ratio.
&1. The current ratio will be BBBBBBBBBBBBBBB the uic! ratio.

A. ess than.
:. @reater than or eual to.
C. The same as.
$. Always different than.
14-
&2. (hich of the followin" is not a measure of lon"-term credit ris!?

A. >uic! ratio.
:. $ebt ratio.
C. nterest covera"e ratio.
$. Trend in net cash provided by operatin" activities.
&#. A hi"h uality of earnin"s is indicated by<

A. ,arnin"s derived lar"ely from newly introduced products.
:. $eclaration of both cash and stoc! dividends.
C. Dse of the FF+ method of inventory durin" sustained inflation.
$. A history of increasin" earnin"s and conservative accountin" methods.
&4. n evaluatin" the uality of a company0s earnin"s which of the followin" factors is least
important?
A. The accountin" methods used by mana"ement.
:. The trend of the company0s earnin"s over a period of years.
C. The dollar amount of earnin"s per share.
$. The stability and sources of the company0s earnin"s.
&&. The measures most often used in evaluatin" solvency--the current ratio uic! ratio and
amount of wor!in" capital are developed from amounts appearin" in the<
A. :alance sheet.
:. ncome statement.
C. Statement of retained earnin"s.
$. Statement of cash flows.
&'. (hich of the followin" is not a measure of profitability?

A. ,;S.
:. *+.
C. *+,.
$. 6*.
14-/
. Traditionally stoc! of financially sound companies with stable earnin"s usually have a
price7earnin"s ratio of<
A. /.
:. 12.
C. 174.
$. #.
1. *eturn on euity computations are used in evaluatin"<

A. iuidity.
:. ;rofitability.
C. @ross profit.
$. (hether a ratio is improvin" or deterioratin" over time.
2. The financial ratio intended to measure the effectiveness with which mana"ement has
utili9ed the resources of the business re"ardless of how these resources are financed is<
A. @ross profit rate.
:. Current ratio.
C. *eturn on assets.
$. *eturn on euity.
#. The return on assets ratio usually is computed as<

A. 6et sales divided by avera"e total assets.
:. @ross profit divided by avera"e total assets.
C. +peratin" income divided by avera"e total assets.
$. 6et income divided by avera"e total assets.
4. f a company has a current ratio of 2 to 1 and purchases inventory on credit what will this
do to its current ratio?
A. ncrease the current ratio.
:. $ecrease the current ratio.
C. $oes not chan"e the current ratio.
$. Cannot be determined.
14-1&
&. The return on euity ratio usually is computed as<

A. 6et income divided by avera"e total assets.
:. +peratin" income divided by avera"e total stoc!holders0 euity.
C. @ross profit divided by avera"e total stoc!holders0 euity.
$. 6one of the above answers is correct.
'. The measurement that best reflects investors0 e%pectations about future earnin"s is<
A. ,arnin"s per share.
:. *eturn on assets.
C. The price7earnin"s ratio.
$. *eturn on euity.
). The interest covera"e ratio is computed by dividin"<

A. +peratin" income by annual interest e%pense.
:. 6et income by annual interest e%pense.
C. Carryin" value of bonds by cash interest payments.
$. ,arnin"s per share by the prime interest rate.
. Amal"amated Corporation0s net income was 324 in 2/ and 3 in 21.
(hat percenta"e increase in net income must Amal"amated achieve in 211 to offset the
decline in profits in 21?
A. )&.
:. #.
C. ##.##.
$. .
/. f a retail store has a current ratio of 2.& and current assets of 31/& the amount of
wor!in" capital is<
A. 3).
:. 3#.
C. 3##.
$. 311).
14-1'
/. The ;la9a Company has wor!in" capital of 3&4 and a current ratio of # to 1. The
amount of current assets is<
A. 34&.
:. 3&4.
C. 31.
$. 32).
/1. $urin" the years 2/ throu"h 211 ;owers nc. reported the followin" amounts of net
income Gdollars in thousandsH<
*elative to the prior year the percenta"e chan"e in net income<

A. (as the same in 21 and 211.
:. (as lar"er in 211 than in 21.
C. (as smaller in 211 than in 21.
$. Cannot be determined without !nowin" how many shares of stoc! were outstandin".
Shown below are selected data from the balance sheet of Compros a small electronics store
Gdollar amounts are in thousandsH<
/2. *efer to the above data. (hat is the uic! ratio?

A. 1.& to 1.
:. .) to 1.
C. .4& to 1.
$. Some other amount.
14-1)
/#. *efer to the above data. (hat is the current ratio?

A. &. to 1.
:. 1.& to 1.
C. .) to 1.
/4. *efer to the above data. (hat is wor!in" capital amounts to<
A. 322&.
:. 3#.
C. 31&.
/&. *efer to the above data. (hat is Compro0s debt ratio?

A. )&.
:. 2&.
C. '.
Shown below are selected data from the balance sheet of :ill0s Auto ;arts a retail store
Gdollar amounts are in thousandsH<
/'. *efer to the above data. (hat is the uic! ratio?

A. &.
:. 1.& to 1.
C. 2.
14-1
/). *efer to the above data. (hat is the current ratio?

A. 1.2 to 1.
:. ess than 2 to 1 but not 1.2 to 1.
C. 2.' to 1.
$. =ore than 2 to 1 but not 2.' to 1.
/. *efer to the above data. (or!in" capital amounts to<

A. 3&'
:. 3&#
C. 32)
//. *efer to the above data. :ill0s debt ratio is<

A. 22.
:. 2).
C. &).
Shown below are selected data from the financial statements of Supreme Co. $ollar amounts
are in millions Ge%cept for the per share dataH.
;er share data Gthese amounts stated in actual dollars not millionsH<
Supreme reported earnin"s per share for the year of 34 and paid cash dividends of 31 per
share. At year end the (all Street Iournal listed Supreme0s capital stoc! as tradin" at 3 per
share.
14-1/
1. *efer to the above data. Supreme0s "ross profit rate was<
A. 42./.
:. &).).
C. 2..
11. *efer to the above data. (hat was Supreme0s operatin" income? Gin millionsH<
A. 3)1.
:. 3#/.
C. 32).
12. *efer to the above data. Supreme0s return on assets was<

A. 1.
:. '.)&.
C. 1&.
$. Some other percenta"e.
1#. *efer to the above data. Supreme0s return on euity was<

A. 11.
:. 2&.
C. ).&.
$. 1'.#.
14. *efer to the above data. Supreme0s price7earnin"s ratio at year end was<
A. 2&.
:. 22.
C. 1.
14-2
122. Computation of profitability ratios

Shown below are selected data from a recent annual report of Tall +a!s Co. G$ollar amounts
are in thousands.H
Compute for the year the company0s<
14-#
12#. ;rofitability measures

Shown below is a recent income statement for :-$ ,lectric.
Assume that comparative balance sheets for :-$ ,lectric indicate avera"e total assets for the
year of 32& and avera"e total euity of 32&. Compute the followin"<
14-#1
124. ;ercenta"e chan"es

Selected information from the financial statements of ;erfectly :a!ed Ca!e Co. appears
below<
GaH Compute the percenta"e chan"e in each of the above items from 21 to 211. Dse a K or -
to indicate increase or decrease.
GbH Compute net income as a percenta"e of net sales in each year. G*ound to the nearest one-
tenth of 1H
14-#2
12&. ;ercenta"e chan"es8 p7e ratios and investors0 e%pectations

Shown below are @amma nc.0s earnin"s per share for a four-year period alon" with the per-
share mar!et price of the company0s stoc! at each year-end. The earnin"s in 211 were the
hi"hest in the company0s history.
GaH Compute the percenta"e chan"e in earnin"s per share in 2/ 21 and 211. G;lace your
answers in the spaces provided above.H
GbH Compute the p7e ratio of stoc! at the end of each of the four years. G;lace your answers in
the spaces provided above.H
GcH (hat does the p7e ratio at the end of 211 indicate about investors0 e%pectations of
earnin"s per share for the comin" year? ,%plain your reasonin".
14-##
12'. ,ffects of events on financial measurements

ndicate the probable effects of each of the followin" strate"ies or events upon the financial
measurements of indsay Corp. listed below. Dse the code letters  L ncrease $ L $ecrease
and 6, L 6o ,ffect.
14-#4
12). Financial ratios

Shown below are some !ey fi"ures from the balance sheets of =inuteman @as Company for
two successive years<
$ividends of 3/' were declared and paid in 21. Compute the followin"<
14-#&
12. Financial ratios

@iven below are comparative balance sheets and an income statement for the ,%cellent
Corporation<
All sales were made on account. Cash dividends declared durin" the year totaled 3&&&.
Compute the followin"<
14-#'
12/. ,ffects of transactions upon analytical measurements

$etermine the immediate effect of each of the transactions described be low on the ratio listed
beside each transaction. n the blan! space to the left of each statement you are to indicate the
effect by writin" the appropriate code letter. The code letters are as follows<  L increase the
ratio $ L decrease the ratio and 6, L no effect on this ratio.
14-#)
1#. Dse and interpretation of financial measurements

Shown below are various financial measurements for two companies which are similar in si9e
and sell similar products<
nstructions< 5ou are to enter code letters in the spaces provided in the two ri"ht-hand
columns.
n the first column indicate which of the followin" three "roups probably would be most
interested in the specified financial measurement. dentify one "roup usin" the followin"
code letters< STC L indicatin" short-term creditors TC L indicatin" lon"-term creditors and
S L indicatin" stoc!holders.
n the second column enter an M or a 5 to indicate whether your Jmost interested "roupJ
would prefer the measurement results reported by Co. M or Co. 5.
Consider each financial measurement independently of the others.
1#1. ,valuatin" the adeuacy of net income

Assume that $elta Corp. earns net income of 31 in the current year. dentify two
important factors that investors should consider in evaluatin" the reasonableness of this do llar
amount. ,%plain what investors may learn from each of these considerations.
14-#
1#'. The followin" information is available for the @rant Company for 21<
*euired<
(hat are earnin"s per share for the current year?
(hat is the ;7, ratio?
(hat is the boo! value per share of common stoc!?
(hat is the dividend yield on common stoc!?
(hat is the net profit ratio?
(hat is the return on euity?
14-41
Chapter 14 Financial Statement Analysis Answer Ney
True / False Questions
1. Vertical analysis compares the results of financial information with a business in the same
industry for a number of consecutive periods of time.
FALSE
AACSB: Reflective Thinking

AICPA BB: Industry
AICPA FN: Measurement
earning !"#ective: $
2. The uic! ratio is especially useful in evaluatin" the liuidity of a company with fast
movin" inventories.
FALSE

AICPA BB: Res%urce Management
earning !"#ective: &
#. $eductin" the cost of "oods sold from net income "ives us operatin" income.
FALSE

AICPA BB: Critical Thinking
earning !"#ective: '
14-42
4. The "ross profit rate is "ross profit e%pressed as a percenta"e of net sales.
TRUE

&. The "ross profit rate usually is lowest on fast movin" merchandise and hi"hest on specialty
and novelty products
TRUE
AACSB: Analytic
'. (hen an income statement does not show "ross profit or operatin" income it is called a
consolidated statement.
FALSE

). *+, - return on euity - is measured by dividin" net income by avera"e number of shares
outstandin".
FALSE

earning !"#ective: (
14-4#
. The yield rate on stoc! is measured by dividin" dividends per share by mar!et price per
share.
TRUE

/. The trend in ratios is usually more useful than loo!in" at a sin"le year0s ratio.
TRUE

1. The acid test ratio includes mar!etable securities but does not include accounts
receivable.
FALSE

11. Comparative financial statements show side-by-side financial data for two or more
companies.
FALSE

14-44
12. The uality of earnin"s tends to be hi"her for a company that uses strai"ht-line
depreciation and defers costs whenever possible than for a company which uses accelerated
depreciation and defers costs only when necessary.
FALSE
AACSB: Analytic
earning !"#ective: )
1#. f total current assets are 314 at the end of 5ear 1 increase by 3& by the end of
5ear 2 and increase by 3& in 5ear # the percenta"e increase over the precedin" year is
less in 5ear # than in 5ear 2.
TRUE
AACSB: Analytic
14. (or!in" capital is the e%cess of current assets over current liabilities.
TRUE

earning !"#ective: )
1&. A company0s liuidity refers to its ability to remain profitable.

FALSE

14-4&
1'. nventory is an e%ample of a uic! asset.

FALSE

1). Current assets are those assets that can be converted into cash within a year and never
lon"er.
FALSE

1. The debt ratio is computed by dividin" total liabilities by current assets.
FALSE

1/. The lower the current ratio the more liuid the company appears.
FALSE
AACSB: Analytic
AICPA FN: Risk Analysis
14-4'
122. Computation of profitability ratios

Shown below are selected data from a recent annual report of Tall +a!s Co. G$ollar amounts
are in thousands.H
Compute for the year the company0s<
AACSB: Analytic
earning !"#ective: *
14-/
12#. ;rofitability measures

Shown below is a recent income statement for :-$ ,lectric.
Assume that comparative balance sheets for :-$ ,lectric indicate avera"e total assets for the
year of 32& and avera"e total euity of 32&. Compute the followin"<
AACSB: Analytic
14-/
124. ;ercenta"e chan"es

Selected information from the financial statements of ;erfectly :a!ed Ca!e Co. appears
below<
GaH Compute the percenta"e chan"e in each of the above items from 21 to 211. Dse a K or -
to indicate increase or decrease.
GbH Compute net income as a percenta"e of net sales in each year. G*ound to the nearest one-
tenth of 1H
AACSB: Analytic
AICPA BB: Industry
14-/1
12&. ;ercenta"e chan"es8 p7e ratios and investors0 e%pectations

Shown below are @amma nc.0s earnin"s per share for a four-year period alon" with the per-
share mar!et price of the company0s stoc! at each year-end. The earnin"s in 211 were the
hi"hest in the company0s history.
GaH Compute the percenta"e chan"e in earnin"s per share in 2/ 21 and 211. G;lace your
answers in the spaces provided above.H
GbH Compute the p7e ratio of stoc! at the end of each of the four years. G;lace your answers in
the spaces provided above.H
GcH (hat does the p7e ratio at the end of 211 indicate about investors0 e%pectations of
earnin"s per share for the comin" year? ,%plain your reasonin".
GcH The p7e ratio of .& is low by historical standards indicatin" that investors do not e%pect
the rapid earnin"s "rowth of recent years to continue. The sharp declines in stoc! price and
price7earnin"s ratio occurrin" durin" @amma0s Jrecord yearJ su""est that investors may be
e%pectin" earnin"s to decline from current levels. The current price7earnin"s ratio of .& is
even less than that at the end of 2 which was preceded by a decline in earnin"s per share.
AACSB: Analytic
earning !"#ective: ,
14-/2
12'. ,ffects of events on financial measurements

ndicate the probable effects of each of the followin" strate"ies or events upon the financial
measurements of indsay Corp. listed below. Dse the code letters  L ncrease $ L $ecrease
and 6, L 6o ,ffect.
AACSB: Analytic
14-/#
12). Financial ratios

Shown below are some !ey fi"ures from the balance sheets of =inuteman @as Company for
two successive years<
$ividends of 3/' were declared and paid in 21. Compute the followin"<
AACSB: Analytic
14-/4
1##. ncome statement classifications

Simon Eardware and @arfun!el Foods are sole proprietorships with similar amounts of total
assets. Also both businesses earn similar amounts of revenue incur similar amounts of
operatin" e%penses and report similar net incomes. Eowever Simon has a hi"her cost of
"oods sold while @arfun!el Foods has hi"her interest e%pense.
ndicate which of these companies has the hi"her GaH "ross profit rate and GbH return on assets.
n each case e%plain the reasons for each answer.
GaH :oth companies earn similar amounts of revenue but Simon Eardware has the hi"her cost
of "oods sold. Therefore @arfun!el Foods must have the hi"her total "ross profit and also the
hi"her "ross profit rate.
GbH @arfun!el Foods has the hi"her return on assets. *eturn on assets usually is computed by
e%pressin" operatin" income as a percenta"e of avera"e total assets. As both companies have
similar amounts of total assets the company with the hi"her operatin" income will have the
hi"her return on assets.
@arfun!el Foods probably has the hi"her operatin" income. As both companies earn similar
amounts of revenue and net income their total costs and e%penses also must be similar. Simon
however has a hi"her cost of "oods sold which is deducted in arrivin" at operatin" income.
@arfun!el Foods has hi"her interest e%pense but interest is deducted after the determination
of operatin" income. Therefore @arfun!el Foods probably has the hi"her operatin" income of
the two businesses.
6ote to instructor< ncome ta%es is another Jnon-operatin" itemJ which may cause two
businesses with similar net incomes to have different levels of operatin" income. Eowever
both Simon Eardware and @arfun!el Foods are or"ani9ed as sole proprietorships and
therefore do not include income ta%es e%pense in their income statements.
AACSB: C%mmunicati%ns
AICPA FN: Re-%rting
14-1
1#4. mprovin" the current ratio

Carter Corporation financed construction of a new addition to its facilities with a lar"e lon"-
term note payable. As a condition of obtainin" the loan Carter a"reed to maintain a current
ratio at year-end of at least 1.) to 1. f Carter fails to maintain this ratio the lender may
demand immediate repayment of the principal amount of the note and all unpaid accrued
interest. As the end of the year approaches Carter is concerned about the ma"nitude of its
current ratio. Su""est some actions that the company mi"ht ta!e to increase the ma"nitude of
the current ratio.
;ayin" any current liabilities will increase the current ratio. The company co uld also consider
postponin" until after year-end any routine transactions that would reduce current assets such
as the acuisition of euipment or scheduled maintenance and repair e%penditures. The sale of
e%istin" inventory Gor any other current assetH for a price above cost would also cause the
current ratio to increase.
AACSB: Analytic
AICPA FN: /ecisi%n Making
14-11
1#&. :elow is a number of ratios. =atch the computation to one of the ratios. f there is no
match fill in JnoneJ
Ga.H 6et income - preferred dividends divided by avera"e number of common shares
outstandin".
Gb.H 6et sales divided by avera"e accounts receivable
Gc.H +peratin" income divided by avera"e total assets
Gd.H Current assets divided by current liabilities
Ge.H Annual dividend divided by current stoc! price
Gf.H Current assets minus current liabilities
G".H Total liabilities divided by total assets
Gh.H 6et income divided by avera"e total euity
Gi.H Common stoc!holder0s euity divided by shares of common stoc! outstandin".
G.H Current stoc! price divided by earnin"s per share
Ga.H ,arnin"s per share Gb.H A7* turnover rate Gc.H *eturn on assets Gd.H Current ratio Ge.H none
s7b dividend yield Gf.H (or!in" capital G".H $ebt ratio Gh.H *eturn on euity GiH none s7b boo!
value per share G.H ;rice7earnin"s ratio

14-12
S*LUT(*$S T* C"A#TER 14 1&'M($UTE QU())ES
QU() A QU() 
1 : 1 C
- : - $ G31#4 - #)/ L 3''2H
 A  A
4 A 4 :
 C  C
QU() C
a Current ratio at year-end 4 to 1

3) ÷ 31)& L 4
+ (or!in" capital at the be"innin" of the year Gin millionsH 3#&

3'2& - 32)& L 3#&
c @ross profit rate 4).4

3/ ÷ 31/ L 4).4
, *eturn on avera"e total assets 4

34& ÷ OG31& K 312H ÷ 2P L 4
e *eturn on avera"e total stoc!holdersQ euity 4'.2

3# ÷ OG3&)& K 3)2&H ÷ 2P L 4'.2
QU() !
a Accounts receivable turnover G3/#' ÷ 32#4H L 4 times

+ :oo! value per share at the end of the current year L G34#2' ÷ 1 sharesH L 34#.2'
c ,arnin"s per share of capital stoc! G3& ÷ 1 sharesH L 3&.
, *eturn on assets G3/ ÷O G3&&' K 3&)2/H72P L 1&
e *eturn on common stoc!holdersQ euity is computed by dividin" 3& by 34222&.
OG34#2' K 3411/H ÷ 2P
.
14-11
S*LUT(*$S T* C"A#TER 14 SELF'TEST QUEST(*$S FR*M TET**5
1 b 2 a c d # c 4 d Gsee belowH & b Gsee belowH ' b ) d

(hy answers A : and C in uestion 4 are incorrect<
A The return on assets 12 G324 ÷ 32H , exceeds the return on euity which is 1
G3 ÷ 3H.
: The current ratio is 1.' to 1 G34 ÷ 3#H.
C (or!in" capital amounts to 31 G34 - 3#H.
ncrease in net income reuired in uestion &< G34 - 31'H ÷ 31' L 1&
14-111

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Chapter 14 Financial Statement Analysis

True / False Questions

12. The uality of earnin"s tends to be hi"her for a company

1#. f total current assets are 314 at the end of 5ear

1&. A company0s liuidity refers to its ability to remain profitable.

1'. nventory is an e%ample of a uic! asset.

Multiple Choice Questions

#). A comparative financial statement

4. +ne number e%pressed as a percenta"e of another is called<

41. The e%cess of current assets over current liabilities is called<

42. >uic! assets include which of the followin"?

44. The price7earnin"s ratio is measured by dividin"

4. The term classified financial statements refers<

&. (hich of the followin" is not a measure of short-term liuidity?

&1. The current ratio will be BBBBBBBBBBBBBBB the uic! ratio.

&2. (hich of the followin" is not a measure of lon"-term credit ris!?

&#. A hi"h uality of earnin"s is indicated by<

&'. (hich of the followin" is not a measure of profitability?

1. *eturn on euity computations are used in evaluatin"<

#. The return on assets ratio usually is computed as<

&. The return on euity ratio usually is computed as<

). The interest covera"e ratio is computed by dividin"<

*elative to the prior year the percenta"e chan"e in net income<

/2. *efer to the above data. (hat is the uic! ratio?

/#. *efer to the above data. (hat is the current ratio?

/&. *efer to the above data. (hat is Compro0s debt ratio?

/'. *efer to the above data. (hat is the uic! ratio?

/). *efer to the above data. (hat is the current ratio?

/. *efer to the above data. (or!in" capital amounts to<

//. *efer to the above data. :ill0s debt ratio is<

12. *efer to the above data. Supreme0s return on assets was<

1#. *efer to the above data. Supreme0s return on euity was<

122. Computation of profitability ratios

Compute for the year the company0s<

12#. ;rofitability measures

124. ;ercenta"e chan"es

12&. ;ercenta"e chan"es8 p7e ratios and investors0 e%pectations

12'. ,ffects of events on financial measurements

12). Financial ratios

12. Financial ratios

12/. ,ffects of transactions upon analytical measurements

1#. Dse and interpretation of financial measurements

1#1. ,valuatin" the adeuacy of net income

Chapter 14 Financial Statement Analysis Answer Ney

True / False Questions

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

1&. A company0s liuidity refers to its ability to remain profitable.

AACSB: Reflective Thinking

1'. nventory is an e%ample of a uic! asset.

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

122. Computation of profitability ratios