Question

3. Which of the following is not a potential problem when developing a trend analysis based upon percentage changes from year-to-year? Question 3 options: 1) The lack of reference to a base dollar amount in order to make valid inferences on the relative magnitude of the changes. 2) A negative amount in Year 2 of a balance sheet item and a positive amount in Year 3. 3) Comparing yearly amounts with an average computed over all years to highlight unusual changes. 4) A change in LT Debt from $100,000 in Year 3 to $0 in Year 4.

Question 4 (1 point) For a technology dependent firm, a past trend is a good predictor of future trends when: Question 4 options: 1) The past trends are similar to industry past trends. 2) The drivers of past firm performance will be unchanged over the forecast period. 3) When there is considerable uncertainty about the industry outlook. 4) All of the above statements are true.

Question 5 (1 point) Which of the following is true of common-size income statements? Question 5 options: 1) Each income statement item is dividend by sales. 2) Income statement accounts are presented as a percentage of total assets. 3) A common-size comparison results in more dissimilarities than when comparing on a dollar basis. 4) Common size income statements can’t be used to compare firms of different size. 5) All of the above are income statement items.

Question 6 (1 point) Which of the following statements is false as it relates to common-size balance sheets? I. Examining a firm’s current assets and long term assets as a percentage of total assets can help determine whether a company is becoming more or less liquid. II. A firm with an increasing dollar amount of debt but a decreasing percentage of debt to assets is relying more heavily on debt. III. Common size balance sheets are determined by dividing items by total sales. Question 6 options: 1) I only 2) II only 3) I and II 4) II and III 5) I, II, and III

Question 7 (1 point) Which of the following are true as it relates to common size statements? Question 7 options: 1) Common size analysis is useful in identifying company trends across time but not in comparing a firm to an industry. 2) A common size analysis of ROE cannot provide insight into why a firm’s ROE is falling when the industry average has been increasing. 3) Common size analysis assists comparison of companies across firms and over time. 4) Common size analysis can be developed by dividing all income statement and balance sheet items by either total sales or total assets.

Question 8 (1 point) Ratio analysis is useful in evaluating a firm: 1. against a peer group of companies 2. when assessing how the firm has changed over time 3. According to major categories of ratios such as profitability, liquidity, leverage and asset efficiency 4. All the Above

Answer 1

3. Which of the following is not a potential problem when developing a trend analysis based upon percentage changes from year-to-year?

1) The lack of reference to a base dollar amount in order to make valid inferences on the relative magnitude of the changes.

2) A negative amount in Year 2 of a balance sheet item and a positive amount in Year 3.

3) Comparing yearly amounts with an average computed over all years to highlight unusual changes.

4) A change in LT Debt from $100,000 in Year 3 to $0 in Year 4.

Answer to Q.3: 3 is the correct option. When doing trend analysis, we need base year figures. Also we can study the increase and decrease in value of a positive or negative number but If the value of variable goes from positive to zero or negative we cannot perform trend analysis.

Question 4 (1 point) For a technology dependent firm, a past trend is a good predictor of future trends when:

1) The past trends are similar to industry past trends.

2) The drivers of past firm performance will be unchanged over the forecast period.

3) When there is considerable uncertainty about the industry outlook.

4) All of the above statements are true.

Answer to Q.4: is option 2. If the key performance drivers will remain unchanged in the future, then we can study and make use of the drivers used in previous years to forecast. If there is uncertainty about the future then past performance is not used as an indicator for future.

Question 5 (1 point) Which of the following is true of common-size income statements?

1) Each income statement item is dividend by sales.

2) Income statement accounts are presented as a percentage of total assets.

3) A common-size comparison results in more dissimilarities than when comparing on a dollar basis.

4) Common size income statements can’t be used to compare firms of different size.

5) All of the above are income statement items.

Answer to Q.5: the correct answer is 1. Each income statement item is divided by sales.

Question 6 (1 point) Which of the following statements is false as it relates to common-size balance sheets?

1. Examining a firm’s current assets and long term assets as a percentage of total assets can help determine whether a company is becoming more or less liquid.
2. A firm with an increasing dollar amount of debt but a decreasing percentage of debt to assets is relying more heavily on debt.
3. Common size balance sheets are determined by dividing items by total sales.

1) I only

2) II only

3) I and II

4) II and III

5) I, II, and III

Statement I is true rest are false.

Current assets are more liquid than long term assets.

When debt is increasing and assets are increasing by a greater proportion than the percentage of Debts to assets will increase, implying lesser dependence on debt

Common size balance sheet are divided by total assets

Question 7 (1 point) Which of the following are true as it relates to common size statements?

1) Common size analysis is useful in identifying company trends across time but not in comparing a firm to an industry.

2) A common size analysis of ROE cannot provide insight into why a firm’s ROE is falling when the industry average has been increasing.

3) Common size analysis assists comparison of companies across firms and over time.

4) Common size analysis can be developed by dividing all income statement and balance sheet items by either total sales or total assets.

Correct answer is 3.

Statement 1 is false. Common size is useful for comparison of one company with another and with industry also. Statement 3 is true.

Statement 4 is false because it mentions either. Balance sheet is only divided by total assets and income statement is only divided by total sales.

Question 8 (1 point) Ratio analysis is useful in evaluating a firm:

1. against a peer group of companies

2. when assessing how the firm has changed over time

3. According to major categories of ratios such as profitability, liquidity, leverage and asset efficiency

4. All the Above

Correct answer is 4. Ratio analysis is a very useful tool, it helps to compare performance against other companies, also helps to compare how the firm is performing over time and across categories.