Learning Objective 12.1 Questions
1) In addition to annual reports, financial information regarding a company can come from all of the following sources EXCEPT
A) a company's own press releases.
B) the popular press.
D) a company's Web site.
E) the Internal Revenue Service.
2) When analyzing the financial statements of a potential debtor, the primary concerns of creditors include
A) interest revenue.
B) dividend revenue.
C) short-term liquidity only.
D) long-term solvency only.
E) short-term liquidity and long-term solvency.
3) A pro forma statement is
A) a comparative financial statement of the current year's results versus the prior year's results.
B) a statement by management, commenting on the results of the current operating period.
C) a projected financial statement based on predicted results.
D) an agreement between a company and its lenders, describing details concerning the loan payback.
E) a statement by the Internal Revenue Service, accepting a company's tax returns.
4) Which of the following statement(s) describe the principal reason(s) why investors and creditors use financial statement analysis?
1. To assess the risks associated with expected returns
2. To evaluate top and middle level management
3. To predict the amount of expected returns
4. To establish recommended dividend and interest payments
A) 1 and 2
B) 1, 2, and 3
C) 1 and 3
D) 1 and 4
E) 2, 3, and 4
5) Short-term liquidity is
A) a company's ability to turn plant assets into cash.
B) a company's ability to meet current payments as they become due.
C) current assets divided by current liabilities.
D) a company's ability to sell intangible assets.
E) a company's ability to shift current liabilities into long-term liabilities.
6) List the assets in the order from most liquid to least liquid.
A) Inventory, accounts receivable, cash
B) Inventory, cash, accounts receivable
C) Accounts receivable, inventory, cash
D) Cash, inventory, accounts receivable
E) Cash, accounts receivable, inventory
7) With respect to creditors and equity investors, which of the following statements is incorrect?
A) Creditors are concerned with assessing the short-term liquidity of a company.
B) Creditors are concerned with assessing the long-term solvency of a company.
C) Equity investors are concerned about dividend payments.
D) Both creditors and equity investors are concerned about profitability.
E) Creditors are more concerned about future security prices than equity investors.
8) The Internet is a powerful, useful tool used by investors. Which statement is false regarding the Internet as it relates to investors?
A) The Internet provides almost immediate access to company press releases including company profitability.
B) Investors can purchase and sell securities online without the use of a broker.
C) The Internet is always an accurate source of company information.
D) An investor can use the Internet to get useful information about potential companies to invest in.
E) Often purchasing and selling stock online is free, but there are instances when an investor must have a brokerage account and pay for services.
9) Since financial statements report on past results, they are not particularly useful to investors and creditors, who want to predict future returns and their risks.
10) A pro forma statement is a carefully formulated expression of predicted results conveyed in a statement.