SD5-Financial Statement Analysis

SD5-Financial Statement Analysis - CHAPTER 5 FINANCIAL...

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CHAPTER 5 FINANCIAL STATEMENT ANALYSIS LEARNING OBJECTIVES 1. How analysts use historical financial statements in financial statement analysis. 2. How to calculate and interpret operating, credit, and investment ratios. 3. How to prepare a trend analysis of a company’s financial ratios. 4. How analysts use financial statement analysis to help prepare a valuation forecast. 5. The cautions analysts must consider when using financial statement analysis. TRUE/FALSE QUESTIONS 1. The purpose of financial statement analysis is not only to understand the historical results of financial statements but also to use that information to forecast the future. (easy, L.O. 1, Introduction, true) 2. Operating ratios measure a firm’s ability to repay its obligations. (moderate, L.O. 2, Section 1, false) 3. One of the common credit ratios is the return on capital ratio. (moderate, L.O. 2, Section 1, false) 4. The revenue growth rate is a ratio that measures the expansion or contraction of the business. (moderate, L.O. 2, Section 1, true) 5. A ratio is most meaningful when the numerator and denominator are related to each other. (easy, L.O. 2, Section 1, true) 6. When an interest coverage ratio is computed, the lower the result, the better the firm’s ability to make interest payments. (difficult, L.O. 2, Section 1, false) 7. The MB ratio is a popular metric used to determine the relationship between the market price of a stock and its earnings power as measured by earnings per share. (moderate, L.O. 2, Section 1, false) 8. The only ratio that measures return on investment is the return on common equity. (moderate, L.O. 2, Section 1, false) 9. The benchmark used in cross-sectional analysis is the prior performance of the firm currently undergoing analysis. (moderate, L.O. 3, Section 2, false) 10. A firm “cannibalizes” its revenue when it adds additional store locations into an area in which the firm already has existing stores. (moderate, L.O. 3, Section 2, true) 11. The benchmark used in trend analysis is a given firm’s performance over a period of time. (easy, L.O. 3, Section 2, true) 12. When analyzing revenue growth in trend analysis, often the analyst will not only look at overall revenue growth rates but also at revenue growth by business segment. (moderate, L.O. 3, Section 2, true) 28
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13. Cause-of-action analysis is a special kind of evaluation in which the reasons for a change in a specific item over some period are identified. (moderate, L.O. 3, Section 2, false) 14. In cross-sectional analysis, we compare two or more companies using financial ratios, and we may also compare the companies’ ratios to an industry average. (moderate, L.O. 4, Section 3, true) 15. In doing ratio analysis, we must recognize that different firms provide different levels of disclosure.
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This note was uploaded on 11/22/2010 for the course CAC BSA taught by Professor Kairus during the Spring '10 term at Korea University.

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SD5-Financial Statement Analysis - CHAPTER 5 FINANCIAL...

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