What Is The First Step in An Analysis of Financial Statements?

What is the first step in an analysis of financial statements?
Do a common-size analysis.
Specify the objectives of the analysis.
Check the auditor's report.
Check references containing financial information.

What is a creditor's objective in performing an analysis of financial
statements?
To decide whether the borrower has the ability to repay interest and principal
on borrowed funds.
To determine whether an investment is warranted by estimating a company's
future earnings stream.
To determine if the firm would be a good place to obtain employment.
To determine the company's taxes for the current year.

What is an investor's objective in financial statement analysis?
To decide whether the borrower has the ability to repay interest and principal
on borrowed funds.
To determine the company's taxes for the current year.
To determine if the firm would be a good place to obtain employment.
To determine whether an investment is warranted by estimating a company's

future earnings stream.
What information does the auditor's report contain?
An opinion as to the fairness of the financial statements.
A detailed coverage of the firm's liquidity, capital resources, and operations.
The results of operations.
An unqualified opinion.
Which of the following would be helpful to an analyst evaluating the
performance of a firm?
Understanding the economic and political environment in which the company
operates.
Reviewing the annual reports of a company's suppliers, customers, and
competitors.
Preparing common-size financial statements and calculating key financial ratios
for the company being evaluated.
All of the above.
Which of the following is not required to be discussed in the Management
Discussion and Analysis of the Financial Condition and Results of
Operations?
Capital resources
Operations
Earnings projections
Liquidity
What type of information found in supplementary schedules is required
for inclusion in an annual report?
Management remuneration and segmental data
Segmental data
Material litigation and management photographs
Inflation data
What information can be gained from sources such as Industry Norms
and Key Business Ratios, Annual Statement Studies, and Industry
Surveys?
Elaborations of financial statement disclosures
The general economic condition
Forecasts of earnings
A company's relative position within its industry

Which of the following is not a tool or technique used by a financial
statement analyst?
Common-size financial statement
Random sampling analysis
Industry comparisons
Trend analysis
What do liquidity ratios measure?
The liquidity of fixed assets.
The overall performance of a firm.
A firm's ability to meet cash needs as they arise.
The extent of a firm's financing with debt relative to equity.

Which category of ratios is useful in assessing the capital structure
and long-term solvency of a firm?
Activity ratios
Profitability ratios
Liquidity ratios
Leverage ratios
What is a serious limitation of financial ratios?
Ratios are screening devices.
Ratios indicate weaknesses only.
Ratios are not predictive.
Ratios can be used only by themselves.

What is the most widely used liquidity ratio?
Quick ratio
Debt ratio
Inventory turnover
Current ratio
What is a limitation common to both the current and quick ratio?
Marketable securities are not liquid.
Prepaid expenses are potential sources of cash.
Inventories may not be truly liquid.
Accounts receivable may not be truly liquid.

Why is the quick ratio a more rigorous test of short-run solvency than
the current ratio?
The quick ratio eliminates prepaid expenses for the numerator.
The quick ratio considers only cash and marketable securities as current assets.
The quick ratio eliminates inventories from the numerator.
The quick ratio eliminates prepaid expenses for the denominator.

What does an increasing collection period for accounts receivable
suggest about a firm's credit policy?
The firm is probably losing qualified customers.
The credit policy may be too lenient.
The collection period has no relationship to a firm's credit policy.
The credit policy is too restrictive.

Which of the following statements about inventory turnover is false?
Inventory turnover measures the efficiency of the firm in managing and selling
inventory.
A low inventory turnover is generally a sign of efficient inventory management.
Inventory turnover is calculated with cost of goods sold in the numerator.
Inventory turnover is a gauge of the liquidity of a firm's inventory.

Which of the following items would cause the cash conversion cycle to
decrease?
Increasing the average collection period.
Increasing the days inventory held.
Increasing days payable outstanding.
None of the above.

What do the asset turnover ratios measure?
The overall efficiency and profitability of the firm.
The distribution of assets in which funds are invested.
The liquidity of the firm's current assets.
Management's effectiveness in generating sales from investments in assets.

Which of the following ratios would not be used to measure the extent of
a firm's debt financing?
Debt to equity
Debt ratio
Times interest earned
Long-term debt to total capitalization

Why is the amount of debt in a company's capital structure important to
the financial analyst?
Debt is equal to total assets.
Equity is riskier than debt.
Debt implies risk.
Debt is less costly than equity.

Why is the fixed charge coverage ratio a broader measure of a firm's coverage
capabilities than the times interest earned ratio?
The fixed charge ratio includes lease payments as well as interest payments.
The times interest earned ratio does not consider the possibility of higher interest rates.
The fixed charge ratio indicates how many times the firm can cover interest payments.
The fixed charge ratio includes both operating and capital leases whereas the times interest
earned ratio includes only operating leases.
Which profit margin measures the overall operating efficiency of the firm?
Return on equity
Net profit margin
Operating profit margin
Gross profit margin

Which ratio or ratios measure the overall efficiency of the firm in managing its
investment in assets and in generating return to shareholders?
Return on investment.
Gross profit margin and net profit margin.
Total asset turnover and operating profit margin.
Return on investment and return on equity.

What does a financial level index greater than one indicate about a firm?
An increased level of borrowing.
More debt financing than equity financing.
The unsuccessful use of financial level.
Operating returns more than sufficient to cover interest payments on borrowed funds.
What does the price to earnings ratio measure?
The "multiple" that the stock market places on a firm's earnings.
The relationship between dividends and market prices.
The earnings for one common share of stock.
The percentage of dividends paid to net earnings of the firm.

JDL's current ratio is:
Refer to the table below for questions 28-31:
1.0 to 1
2.4 to 1
1.5 to 1
0.7 to 1
JDL's quick ratio is:
1.0 to 1
1.5 to 1
0.7 to 1
2.4 to 1
JDL's average collection period is:
11 days.
16 days.
22 days.
6 days.
JDL's inventory turnover is:
37.5 times.
13.5 times.
3.0 times.
1.25 times.
RQM's gross profit margin, operating profit margin, and net profit margin,
respectively, are:
Refer to the table below for questions 32-35:
40.00%, 22.50%, 19.50%.
60.00%, 22.50%, 19.50%.
60.00%, 19.50%, 10.83%.
40.00%, 22.50%, 10.83%.

RQM"s return on equity is:
42%
54%.
19%.
26%.
RQM's return on investment is:
26.5%
12.8%.
22.5%.
10.8%.
RQM's cash flow margin is:
12.8%.
10.8%
2.5%.
1.4%.

What Is The First Step in An Analysis of Financial Statements?

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What is the first step in an analysis of financial statements?

Specify the objectives of the analysis.

Check the auditor's report.

Check references containing financial information.

To determine the company's taxes for the current year.

To determine if the firm would be a good place to obtain employment.

To determine whether an investment is warranted by estimating a company's

An opinion as to the fairness of the financial statements.

A detailed coverage of the firm's liquidity, capital resources, and operations.

The results of operations.

Material litigation and management photographs

The general economic condition

A company's relative position within its industry

Random sampling analysis

The liquidity of fixed assets.

The overall performance of a firm.

A firm's ability to meet cash needs as they arise.

The extent of a firm's financing with debt relative to equity.

Ratios are screening devices.

Ratios indicate weaknesses only.

Ratios are not predictive.

Ratios can be used only by themselves.

Marketable securities are not liquid.

Prepaid expenses are potential sources of cash.

Inventories may not be truly liquid.

Accounts receivable may not be truly liquid.

The quick ratio eliminates inventories from the numerator.

The quick ratio eliminates prepaid expenses for the denominator.

The credit policy may be too lenient.

The collection period has no relationship to a firm's credit policy.

The credit policy is too restrictive.

Inventory turnover is calculated with cost of goods sold in the numerator.

Inventory turnover is a gauge of the liquidity of a firm's inventory.

Increasing the days inventory held.

Increasing days payable outstanding.

None of the above.

The overall efficiency and profitability of the firm.

The distribution of assets in which funds are invested.

The liquidity of the firm's current assets.

Management's effectiveness in generating sales from investments in assets.

Times interest earned

Long-term debt to total capitalization

Equity is riskier than debt.

Debt implies risk.

Debt is less costly than equity.

Net profit margin

Operating profit margin

Gross profit margin

Gross profit margin and net profit margin.

Total asset turnover and operating profit margin.

Return on investment and return on equity.

An increased level of borrowing.

More debt financing than equity financing.

The unsuccessful use of financial level.

The "multiple" that the stock market places on a firm's earnings.

The relationship between dividends and market prices.

The earnings for one common share of stock.

The percentage of dividends paid to net earnings of the firm.

Refer to the table below for questions 28-31: