Financial Accounting, 9e (Harrison/Horngren/Thomas) Chapter 13 Financial Statement Analysis 13.1 Learning Objective 13-1 1) Vertical analysis highlights changes in financial statement balances from period to period Answer: FALSE Diff: LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) The best way to analyze a company is by examining the financial data for several years Answer: TRUE Diff: LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) Trend percentages are computed only for balance sheet items Answer: FALSE Diff: LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) It is generally considered more useful to know the percentage change in financial statement amounts from year to year than to know the absolute dollar amount Answer: TRUE Diff: LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) Trend analysis using income statement data is widely used for predicting the future Answer: TRUE Diff: LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 6) Horizontal analysis compares financial statement items in the current period with other items in the current period Answer: FALSE Diff: LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) The percentage change in financial statement balances is computed by dividing the dollar amount of the most recent period by the base period dollar amount Answer: FALSE Diff: LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) Horizontal analysis and trend analysis are synonymous Answer: TRUE Diff: LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) If a company has sales of $250 in 2010 and $225 in 2011, the percentage increase from 2010 to 2011 is 10% Answer: TRUE Diff: LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) If a company has sales of $150 in 2010 and $225 in 2011, the percentage change from 2010 to 2011 is 50% Answer: TRUE Diff: LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11) Period to period percentage change in comparative financial statements is often called: A) benchmarking B) horizontal analysis C) vertical analysis D) common-size statements Answer: B Diff: LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) The primary focus of horizontal analysis is: A) percentage changes in comparative financial statements B) the balance sheet only C) the changes in individual financial statement amounts as a percentage of some related total D) the change in key financial statement ratios over a certain time frame Answer: A Diff: LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) The percentage change in any individual item shown on comparative financial statements is calculated by dividing the dollar amount of the change from the base period to the current period by: A) the amount shown for the current period B) the base-period amount C) the average of the amounts shown for the base and the current periods D) the amount estimated for the future period Answer: B Diff: LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14) The analysis of percentage changes in comparative statements is known as: A) economic value added analysis B) vertical analysis C) horizontal analysis D) benchmarking analysis Answer: C Diff: LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 15) Horizontal analysis is most closely related to: A) trend analysis B) economic value added analysis C) vertical analysis D) benchmarking Answer: A Diff: LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 16) A form of horizontal analysis that indicates the direction a business is taking is: A) benchmarking B) economic value added analysis C) vertical analysis D) trend percentages Answer: D Diff: LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) The horizontal analysis formula is the current year amount: A) divided by the base year amount B) minus the base year amount divided by the base year amount C) minus the base year amount divided by current year amount D) added to the base year amount divided by the base year amount Answer: B Diff: LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18) Horizontal analysis of financial statements is an: A) analysis tool B) analysis theory C) analysis principle D) analysis requirement Answer: A Diff: LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 19) When computing trend percentages: A) the current year is always equal to 100% B) the base year is always the latest year C) the base year is always equal to 100% D) the base year is equal to the current year plus the previous year divided by two Answer: C Diff: LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 20) Horizontal analysis is performed on: A) only the income statement B) only the balance sheet C) only the statement of retained earnings D) the income statement, the balance sheet, and the statement of retained earnings Answer: D Diff: LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 21) When performing a horizontal analysis on a statement of retained earnings, which would NOT show a percentage change value? A) Dividends paid B) Net income C) Expenses D) Beginning balance of retained earnings Answer: C Diff: LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13.2 Learning Objective 13-2 1) When comparing companies of different sizes, vertical analysis would be a useful tool Answer: TRUE Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 2) When performing vertical analysis of an income statement, net income is usually used as the base Answer: FALSE Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) The relationship of each individual asset as a percentage of total assets is an example of vertical analysis Answer: TRUE Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) Vertical analysis compares an item on the financial statement to the same item in a prior period Answer: FALSE Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) When performing a vertical analysis of the income statement, each item is stated as a percentage of net income Answer: FALSE Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) Vertical analysis is concerned with the format used to prepare financial statements Answer: FALSE Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) A company's net income as a percentage of sales is 15% Using vertical analysis, the cost of goods sold as a percentage of sales must be 85% Answer: FALSE Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 8) Vertical analysis is a less sophisticated analysis tool than horizontal analysis Answer: FALSE Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) Matrix analysis expresses each item on a financial statement in terms of a percent of a base amount Answer: FALSE Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) A thorough analysis of financial statements will include either horizontal or vertical analysis, but not both Answer: FALSE Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 11) Which of the following is typically used as the base in a vertical analysis of an income statement? A) Cash B) Inventory C) Net income D) Net sales Answer: D Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) Which of the following is typically used as the base in a vertical analysis of a balance sheet? A) Total liabilities B) Cash C) Total assets D) Gross sales Answer: C Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 13) Expressing cash and cash equivalents as a percentage of total assets is an example of: A) horizontal analysis B) economic value added C) ratio analysis D) vertical analysis Answer: D Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14) A vertical analysis is primarily concerned with: A) the dollar amount of the change in various financial statement amounts from year to year B) individual financial statement items expressed as a percentage of a base (which represents 100%) C) percentage changes in the balances shown in comparative financial statements D) the change in key financial statement ratios over a specified period of time Answer: B Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) Tech Support Corporation reports the following data: Net sales Cost of goods sold Gross profit $275,000 175,000 $100,000 In a vertical analysis, the gross profit percentage is closest to: A) 63% B) 57% C) 157% D) 36% Answer: D Explanation: D) 100,000/275,000 = 36.3636% rounded to 36% Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 16) Common-size analysis is also known as: A) Trend analysis B) Ratio analysis C) Vertical analysis D) Matrix analysis Answer: C Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) In vertical analysis: A) a base amount is optional B) a base amount is required C) comparative statements are optional D) comparative statements are required Answer: B Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18) A financial statement item expressed as a percentage of a base amount is a result of: A) horizontal analysis B) ratio analysis C) vertical analysis D) comparative analysis Answer: C Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19) In performing a vertical analysis, the base for cash is: A) total liabilities and stockholders' equity B) total assets C) total cash and cash equivalents D) total current assets Answer: B Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 20) In performing a vertical analysis, the base for interest expense is: A) net sales B) total operating expenses C) net income D) interest income Answer: A Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 21) Given the following data: Current liabilities Noncurrent liabilities Stockholders' equity $450,000 650,000 500,000 In vertical analysis, current liabilities would be expressed as: A) 356% B) 90% C) 111% D) 28% Answer: D Explanation: D) 450,000/(450,000 + 650,000 + 500,000) = 450,000/1,600,000 = 28% Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 22) In performing a vertical analysis, the base for sales returns and allowances is: A) sales discounts B) sales C) gross profit D) net sales Answer: D Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 10 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall AICPA Functional: Measurement 13.4 Learning Objective 13-4 1) As another analytical tool, analysts rely on the statement of cash flows as a predictor of eventual success for a given company Answer: TRUE Diff: LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) The statement of cash flows is helpful for spotting weaknesses as well as gauging success Answer: TRUE Diff: LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) On the statement of cash flows of a healthy company, net cash from operating activities is generally less than net income Answer: FALSE Diff: LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) If the sale of plant assets is a company's major source of cash, it may be a sign of financial difficulty Answer: TRUE Diff: LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) On the statement of cash flows of a healthy company, net cash from operating activities generally exceeds net income because of the reduction for depreciation Answer: FALSE Diff: LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) In the statement of cash flows, depreciation and amortization are considered a use of funds Answer: FALSE Diff: LO: 13-4 21 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 22 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 7) In the statement of cash flows, sales of marketable securities are considered an operating activity Answer: FALSE Diff: LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 8) In the statement of cash flows, purchases of fixed assets are considered to be investing activities Answer: TRUE Diff: LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 9) In the statement of cash flows, more purchases of long-term assets than sales of long-term assets are considered a sign of a healthy company Answer: TRUE Diff: LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) In the statement of cash flows, an increase in new borrowing, exceeding the payoff of long-term debt, is a sign of weakness Answer: TRUE Diff: LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 11) When analyzing the statement of cash flows, which of the following statement are true? A) Cash has no effect on the success of the company B) Cash is ignored when analyzing a company C) An excess of cash is the sign of a healthy company D) A company with a large cash balance is ensured success Answer: C Diff: LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 23 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 12) Analyzing the statement of cash flows may help analysts determine the financial health of a company Which of the following signs below is a NOT indicator of a financially healthy company? A) The company's operations are a major source (not a use) of cash B) The company's operations are a major use (not a source) of cash C) The company's investing activities include more purchases than sales of long-term assets D) The company's financing activities are not dominated by borrowing Answer: B Diff: LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) On a statement of cash flows of a struggling company, net income would ordinarily be: A) less than depreciation expense B) more than depreciation expense C) greater than cash provided by operating activities D) more than cash provided by operating activities Answer: C Diff: LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14) On a statement of cash flows, which is considered an operating activity? A) Sale of securities B) Purchase of fixed assets C) Purchase of securities D) Depreciation Answer: D Diff: LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) On a statement of cash flows, which is considered an investing activity? A) Depreciation B) Increase in inventory C) Sale of securities D) Repayment of debt Answer: C Diff: LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 24 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 16) Purchases of fixed assets is a sign of: A) a struggling company B) reinvestment in the company C) a shortage of cash D) a decrease in inventory Answer: B Diff: LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) On a statement of cash flows, an increase or decrease in inventory is considered: A) an operating activity B) an investing activity C) a financing activity D) an investing or financing activity Answer: A Diff: LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18) On a statement of cash flows, repayment of long-term debt is considered: A) an operating activity B) an investing activity C) a financing activity D) a change in operating assets and liabilities Answer: C Diff: LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19) On a statement of cash flows, which of the following are signs of a healthy company? A) Investing activities include more sales of long-term assets than purchases B) Financing activities are dominated by borrowing C) Operating activities are the major source of cash D) Operating activities provide less cash than net income Answer: C Diff: LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 25 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 20) On a statement of cash flows, which is NOT considered an operating activity? A) Depreciation B) Net income C) Increase in inventory D) Repayment of long-term debt Answer: D Diff: LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 21) On a statement of cash flows, which is NOT considered a financing activity? A) Deferred income tax B) Proceeds from long-term debt C) Repayment of long-term debt D) Foreign currency effect on cash Answer: A Diff: LO: 13-4 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13.5 Learning Objective 13-5 1) A firm's ability to pay current liabilities can be evaluated using working capital and the current ratio Answer: TRUE Diff: LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) A company's debt ratio is computed as total assets minus total liabilities Answer: FALSE Diff: LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) A ratio analysis, horizontal analysis, and vertical analysis are all financial analysis tools Answer: TRUE Diff: LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 26 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 4) The acid-test ratio reflects the company's percentage of total assets financed with total debt Answer: FALSE Diff: LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) A high inventory turnover may indicate that a company is experiencing difficulty selling its inventory Answer: FALSE Diff: LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) A ratio can be expressed as a proportion, a rate, or a percent Answer: TRUE Diff: LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) A profitability ratio measures the income or operating success of a company for a given period of time Answer: TRUE Diff: LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) The larger the working capital, the better the ability to pay debts Answer: TRUE Diff: LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) Cash, short-term investments and net current receivables are all components of the acid-test ratio Answer: TRUE Diff: LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) Inventory turnover is calculated by dividing the cost of goods sold by the average receivables Answer: FALSE Diff: LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking 27 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall AICPA Functional: Measurement 11) Ratios that test liquidity include all of the following EXCEPT: A) acid-test ratio B) current ratio C) debt to total assets D) inventory turnover Answer: C Diff: LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) To compute operating income (profit) percentage, divide: A) sales by cost of goods sold B) gross profit by net sales C) net income by stockholders' equity D) operating income by net sales Answer: D Diff: LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) A measure of a company's ability to collect cash from credit customers is the: A) accounts receivable turnover B) earnings per share C) inventory turnover D) acid-test ratio Answer: A Diff: LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14) Kaufman's Department Store had net sales of $20 million and cost of goods sold of $14 million for the year The average inventory for the year was $4 million What was the average number of days in inventory? A) 46 B) 104 C) 92 D) 52 Answer: C Diff: LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 28 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 29 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 15) Depots Clothing Store had an accounts receivable balance of $420,000 at the beginning of the year and a year-end balance of $510,000 Net sales for the year totaled $2,100,000 The average collection period of the receivables was: A) 162 days B) 41 days C) 51 days D) 81 days Answer: D Diff: LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 16) The ratio that provides an estimate of the number of days, on average, that it takes for customers to pay their account is the: A) days' sales in receivables B) current ratio C) accounts receivable turnover D) acid-test ratio Answer: A Diff: LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) The ratio that measures a company's success in using its assets to earn income for the persons who finance the business is the: A) leverage B) rate of return on total assets C) debt ratio D) times-interest-earned ratio Answer: B Diff: LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18) The ratio that measures the number of times that operating income can cover interest expense is the: A) leverage B) rate of return on total assets C) debt ratio D) times-interest-earned ratio Answer: D Diff: LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 30 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 19) The amount of a company's net income earned for each share of its outstanding common stock is termed the: A) return on equity B) price/earnings ratio C) earnings per share D) dividend yield Answer: C Diff: LO: 13-5 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13.6 Learning Objective 13-6 1) Economic value added (EVA) can be computed as net income minus interest expense minus capital charge Answer: FALSE Diff: LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) The cost of capital is a weighted average of the returns demanded by the company's stockholders and lenders Answer: TRUE Diff: LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) Economic value added is a measure of change in corporation's total assets Answer: FALSE Diff: LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) Usually new companies have a lower cost of capital Answer: FALSE Diff: LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 31 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 5) If a corporation's economic value added is negative, stockholders will probably be displeased with the company Answer: TRUE Diff: LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) Cost of capital varies with a company's market value of its common stock Answer: FALSE Diff: LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) If a corporation's cash flows are consistently lower than net income, it could be a sign of a cash shortage in the future Answer: TRUE Diff: LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) When determining economic value added (EVA), capital charge is the amount that stockholders expect to pay per share of common stock Answer: FALSE Diff: LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) A positive economic value added (EVA) suggests an increase in stockholders wealth Answer: TRUE Diff: LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) An efficient capital market is one in which market prices are above stated cost Answer: FALSE Diff: LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 32 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 11) In an efficient market, an investor's search for "underpriced" stock will be unsuccessful unless the investor has knowledge of confidential information Answer: TRUE Diff: LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) The cost of capital is defined as the: A) sum of liabilities and stockholders' equity accounts B) weighted average of the returns demanded by the company's stockholders and lenders C) rate of return demanded by stockholders times the rate of return demanded by lenders D) rate of return demanded by the stockholders divided by the rate of return demanded by lenders Answer: B Diff: LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) Economic value added (EVA) is computed as: A) net income + long-term debt + interest expense B) net income + interest expense - capital charge C) net income - interest expense + capital charge D) net income - long-term debt + interest expense Answer: B Diff: LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14) Which of the following combines the concepts of accounting income and corporate finance to measure whether the company's operations have increased stockholder wealth? A) Gross profit margin B) Earnings per share C) Economic value added D) Price/earnings ratio Answer: C Diff: LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 33 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 15) If economic value added (EVA) is negative: A) stockholders' wealth has decreased B) stockholders' wealth has increased C) stockholders' wealth has stayed the same D) stockholders' earnings per share have increased Answer: A Diff: LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 16) The cost of capital: A) is lower for a start-up company since it is untested B) can be obtained from the financial statements C) is the same for all companies D) is higher for a start-up company since it is untested Answer: D Diff: LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) Cash flow from operations that are consistently lower than net income may imply that: A) a dividend has not been issued in a long time B) the common stock should be split C) the company may be facing a cash shortage D) working capital has decreased Answer: C Diff: LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18) Capital charge is computed as: A) Cost of capital - Notes payable - Loans payable - Long-term debt - Stockholders' equity B) (Notes payable + Loans payable + Long-term debt + Stockholders' equity) × Cost of capital C) Cost of capital + Notes payable + Loans payable + Long-term debt + Stockholders' equity D) (Notes payable + Loans payable + Long-term debt) × (Stockholders' equity + Cost of capital) Answer: B Diff: LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 34 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall 19) If ABC Corporation's debt ratio is higher than its major competitors, ABC may: A) purchase treasury stock B) sell treasury stock C) invest in another company D) be unable to pay its debts Answer: D Diff: LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 20) Red flags in financial statement analysis can include all of the following EXCEPT: A) a debt ratio higher than average B) a slowdown in inventory turnover C) sales increasing while receivables decrease D) increase in income from continuing operations Answer: D Diff: LO: 13-6 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 35 Copyright © 2013 Pearson Education, Inc publishing as Prentice Hall ... in comparative financial statements B) the balance sheet only C) the changes in individual financial statement amounts as a percentage of some related total D) the change in key financial statement... financial statement in terms of a percent of a base amount Answer: FALSE Diff: LO: 13-2 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) A thorough analysis of financial. .. primarily concerned with: A) the dollar amount of the change in various financial statement amounts from year to year B) individual financial statement items expressed as a percentage of a base (which