Financial Statement Analysis

1. Which of the following assets is most liquid?

a.
cash equivalents

b.
receivables

c.
inventories

d.
plant and equipment

2. Which of the following is the least liquid current asset?

a.
cash equivalents

b.
receivables

c.
inventories

d.
plant and equipment

3. Many observers believe that firms "manage" their income statements to

________.

a.
minimize taxes over time

b.
manipulate their stock price

c.
smooth their earnings over time

d.
none of the above

4. One common way to "manage" earnings is to ________.

a.
put secret cash in a Swiss bank account

b.
mislead the auditors

c.

pay senior management large bonuses in good years

d.
adjust reserve accounts

5. FASB 33 deals with the effect of _______ on accounting statements.

a.
currency values

b.
FIFO inventory

c.
inflation

d.
none of the above

6. One of the biggest impediments to a global capital market is __________.

a.
volatile exchange rates

b.
the lack of common accounting standards

c.
timid investors in the U.S.

d.
transparent markets in Europe and Latin America

7. Benjamin Graham thought that the benefits from security analysis had
_________ over his long professional life.

a.
increased greatly

b.
increased slightly

c.
remained constant

d.
decreased

8. If the interest rate on debt is higher than the ROA, then a firm will __________
if it increases the use of debt in its capital structure.

a.
decrease its ROE

b.
increase its ROE

c.
not change its ROE

d.
change its ROE in an indeterminable manner

9. Which of the following is not one of the three key financial statements available
to investors in publicly traded firms?

a.
income statement

b.
balance sheet

c.
statement of operating earnings

d.
statement of cash flows

10. Which of the following balance sheet items is not considered an asset?

a.
inventory

b.
accounts receivable

c.
accrued taxes

d.
All of the above are assets

11. Stockholder's equity can be defined as _________________.

a.
total assets minus total liabilities

b.
liabilities minus long-term debt

c.
retained earnings plus additional paid-in-capital

d.
More than one of the above

12. If a firm issues no new equity, book value will _______________________.

a.
decrease each year by the amount of retained earnings

b.
decrease each year by the amount of retained earnings minus depreciation on
fixed assets

c.
increase each year by the amount of retained earnings

d.
increase each year by the amount of retained earnings plus depreciation on
fixed assets

13. Common size balance sheets are prepared by dividing all quantities by
_____________.

a.
total assets

b.
total liabilities

c.
shareholder's equity

d.
fixed assets

14. Accounting standards in foreign countries often differ from accounting

standards in the USA with respect to __________.

a.
depreciation

b.
reserving practices

c.
treatment of intangibles

d.
all of the above

15. According to the study by Brown and Rozeff, earnings forecasts from Value
Line Investment Survey were __________.

a.
equally accurate as those using a Box-Jenkins model

b.
less accurate than those using a Box-Jenkins model

c.
more accurate than those using a Box-Jenkins model

d.
within 10% of realized values 90% of the time

16. Studies of earnings announcements suggest that market adjustment to earnings

information takes place gradually. This finding is inconsistent with the
underlying assumptions of ____________________.

a.
fundamental analysis

b.
technical analysis

c.
market efficiency

d.
More than one of the above

17. Bernard and Thomas (1989) find evidence consistent with the hypothesis that
__________________ may at least partially explain abnormal returns following
earnings announcements.

a.
taxes

b.
leverage

c.
the difference between market value and book value

d.
trading costs

18. If a firm has a market-to-book-value ratio that is equivalent to the industry

average and an ROE that is less than the industry average, it implies
__________.

a.
the firm has a higher P/E ratio than other firms in the industry

b.
the firm is more likely to avoid insolvency in the short run than other firms in
the industry

c.
the firm is more profitable than other firms in the industry

d.
the firm is utilizing its assets more efficiently than other firms in the industry

19. Over a period of thirty-odd years in managing investment funds, Benjamin

Graham used the approach of investing in the stocks of companies where the
stocks were trading at less than their working capital value. The average return
from using this investment strategy was approximately __________.

a.
20%

b.
15%

c.
10%

d.
5%

20. The process of decomposing ROE into a series of component ratios is called
_______________.

a.
DuPont analysis

b.
technical analysis

c.
comparative analysis

d.
None of the above

21. Which of the following is not a ratio used in the DuPont analysis?

a.
return on sales

b.
profit margin

c.
asset turnover

d.
earnings yield ratio

22. Most large foreign stock exchanges require firms to issue financial statements
which are in conformance with _________ .

a.
GAAP

b.
IAS

c.
FASB

d.
More than one of the above

23. Differences in accounting practices can lead to comparability problems in all of

the following cases except ________________.

a.
accounting for inventory

b.
accounting for depreciation

c.
setting aside reserves for future contingencies

d.
All of the above

24. A firm has a ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is
__________.

a.
8.40

b.
11.90

c.
17.62

d.
47.60

25. If a firm has a positive tax rate, a positive ROA, and the interest rate on debt is
the same as the ROA, then ROA will be __________.

a.
greater than zero but it is impossible to determine how ROA will compare to
ROE

b.
equal to ROE

c.
greater than ROE

d.
less than ROE

26. Given the results of the study by Foster, Olsen and Shevlin, you would want to
__________ the stocks of high-SUE (standardized unexpected earnings) firms
when earnings are announced and __________ the stocks of low-SUE firms when
earnings are announced.

a.
buy, buy

b.
buy, sell

c.
sell, buy

d.
sell, sell

27. A firm has a P/E ratio of 21 and a ROE of 11%. Its market-to-book-value ratio
is __________.

a.
2.31

b.
1.91

c.
0.65

d.
0.53

28. A firm has an ROE of 3%, a debt/equity ratio of 0.5, a tax rate of 40%, and the
interest rate on its debt is 10%. Its ROA is __________.

a.
4%

b.
6%

c.
6.67%

d.
7.50%

29. A firm has a (net profit/pretax profit ratio) of 0.7, a leverage ratio of 1.3, a
(pretax profit/EBIT) of 0.8, an ROE of 16.22%, a quick ratio of 1.5, and a return
on sales ratio of 10%. Its asset turnover is __________.

a.
1.66

b.
2.23

c.
3.38

d.
4.39

30. Economic Value Added (EVA) is ___ .

a.
The difference between the return on assets and the opportunity cost of
capital times the capital base

b.
A measure of the dollar value of the firm's return in excess of its opportunity
cost

c.
Larger for Microsoft than AT&T in 1999

d.
All of the above

31. Which of the following statements is true concerning Economic Value Added?

a.
A growing number of firms tie managers' compensation to EVA.

b.
A profitable firm will always have a positive EVA.

c.
EVA recognizes that the cost of capital is not a real cost.

d.
All of the above

32. A firm has a (net profit / pretax profit) ratio of 0.6, a leverage ratio of 1.5, a
(pretax profit / EBIT) of 0.7, an asset turnover ratio of 4, a current ratio of 2,
and a return on sales ratio of 6%. Its ROE is __________.

a.
7.56%

b.
15.12%

c.
20.16%

d.
30.24%

33. A firm has an ROA of 19%, a debt/equity ratio of 1.8, a tax rate of 30%, and the
interest rate on its debt is 7%. Its ROE is __________.

a.
15.12%

b.
28.42%

c.
37.24%

d.
40.60%

34. The level of real income of a firm can be distorted by the reporting of
depreciation and interest expense. During periods of low inflation, the level of
reported depreciation tends to __________ income, and the level of interest
expense reported tends to __________ income.

a.
understate, overstate

b.
understate, understate

c.
overstate, understate

d.
overstate, overstate

35. If a firm's ratio of (stockholders' equity/total assets) is lower than the industry
average and its ratio of (long-term debt/stockholders' equity) is also lower than
the industry average, this would suggest that the firm __________.

a.
has more current liabilities than the industry average

b.
has more leased assets than the industry average

c.
will be less profitable than the industry average

d.
has more current assets than the industry average

36. The aggregate capitalization of firms listed on the New York Stock Exchange is
approximately ___________ .

a.
$0.8 trillion

b.
$1.8 trillion

c.
$5.4 trillion

d.
$10 trillion

37. __________ best explains a ratio of (net sales/average net fixed assets) that is
lower than the industry average.

a.
The firm expanded its plant and equipment in the past few years

b.
The firm makes more efficient use of its assets than competing firms

c.
The firm has a substantial amount of old plant and equipment

d.
The firm uses MACRS depreciation

38. __________ is a true statement regarding inventory accounting practices.

a.
Assuming that inflation were non-existent or negligible, LIFO would always
be a more accurate method of accounting for inventory

b.
During periods of inflation, LIFO makes for a more accurate matching
of revenues and cost of goods sold

c.
After inflation ends, distortion due to LIFO will disappear as inventory is
sold

d.
During periods of inflation, LIFO overstates earnings relative to FIFO

39. Use the following cash flow data of Haven Hardware for the year ended
December 31, 2001

Reference: Ref. 14-3

What is the net cash provided by operating activities of Haven Hardware?

a.
($30,000)

b.
$220,000

c.
$320,000

d.
$780,000

40. Use the following cash flow data of Haven Hardware for the year ended
December 31, 2001

Reference: Ref. 14-3

What is the net cash provided by or used in investing activities of Haven

Hardware?

a.
($12,000)

b.
($62,000)

c.
$12,000

d.
$164,000

41. Use the following cash flow data of Haven Hardware for the year ended
December 31, 2001

Reference: Ref. 14-3

What is the net cash provided by or used in financing activities of Haven

Hardware?

a.

($10,000)

b.
($120,000)

c.
$10,000

d.
$120,000

42. Use the following cash flow data of Haven Hardware for the year ended
December 31, 2001

Reference: Ref. 14-3

What is the net increase in cash for Haven Hardware for 2001?

a.
($94,000)

b.
($88,000)

c.
$88,000

d.
$188,000

43. Use the following cash flow data of Haven Hardware for the year ended
December 31, 2001

Reference: Ref. 14-3

What is the cash at the end of 2001 for Haven Hardware??

a.
$6,000

b.
$94,000

c.
$736,000

d.
None of the above

44. Which of the following is true of cash flow from operations?

a.
It focuses on measuring the cash flow generated by operations.

b.
Analysts use it as a check on the quality of earnings.

c.
It is less subject to distortion than net income.

d.
All of the above

45. Which of the following is true of cash flow from investing activities?

a.
It is an indication of how the firm is investing its excess cash.

b.
It is a good indication of the attitude of management toward investing
activities.

c.
It is an indication of the type of capital expenditures being made by
management.

d.
All of the above

46. Which of the following is true of cash flow from financing?

a.
It is an indication of the types of financing sources management supports.

b.
Analysts use it as an indication of the quality of earnings.

c.
It offers insights into the financing habits of management.

d.
All of the above

47. The ABS company has a capital base of $1 billion, an opportunity cost of capital
(k) of 15%, a return on assets (ROA) of 37% and a return on equity (ROE) of
23%. What is the economic value added (EVA) for ABS?

a.
$80 million

b.
$140 million

c.
$220 million

d.
$380 million