Financial Statement Analysis and Valuation 6th edition by Peter D. Easton Test bank

LO: 3
10. An increase in common stock would be reflected in the statement of stockholders’ equity.
Answer: True
Rationale: The statement of stockholders’ equity reports on changes in the accounts that make up
stockholders’ equity. This includes contributed capital, retained earnings, and other equity.
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test bank (T/F & MC), Module 1  1-4
Topic: Return on Assets
LO: 4
11. Return on Assets (ROA) measures the profit the company makes on each dollar of total assets it
uses.
Answer: True
Rationale: Return on Assets is a profitability metric that measures how much profit the company
made for each dollar of assets the company holds on average during the year.
Topic: Return on Assets
LO: 4
12. Return on Assets (ROA) = (Net Income / Sales) × Asset Turnover
Answer: True
Rationale: Return on Assets = Net Income / Average Assets. This is the disaggregation of the ROA
into its components
Topic: Asset Turnover
LO: 4
13. Consider two companies (A and B) with equal profit margins of 18%. Company A has an asset
turnover of 1.2 and Company B has an asset turnover of 1.5. If all else is equal, Company B with its’
higher asset turnover, is less profitable because it requires more revenue to turn its assets over.
Answer: False
Rationale: Asset turnover is an efficiency metric. The higher the turnover, the more efficient the
company is with its assets and thus, the more profitable. Algebraically, ROA = PM × AT. Company A
above is less profitable: 18% × 1.2 = 21.6% whereas Company B’s ROA is 18% × 1.5 = 27.0%.
Topic: Financial Accounting and Business Analysis
LO: 5
14. Financial statements are influenced by five important forces that determine a company’s competitive
intensity: (A) industry competition, (B) buyer power, (C) supplier power, (D) product substitutes, and
(E) threat of entry.
Answer: True
Rationale: By systematically considering these five business forces, we can gain better insights from
financial statements.
Topic: Audit Report
LO: 7
15. A “clean” audit report asserts—among other things—that (a) the auditor has prepared all necessary
financial statements and (b) management has expressed its opinion that they are prepared in
conformity with GAAP.
Answer: False
Rationale: The statement is reversed: A “clean” audit report asserts—among other things—that (a)
management has prepared all necessary financial statements and (b) the auditor has expressed its
opinion that they are prepared in conformity with GAAP.
© Cambridge Business Publishers, 2021
1-5  Financial Statement Analysis & Valuation, 6 th Edition
Multiple Choice
Topic: Users of Financial Statement Information
LO: 2
1. Which of the following groups would likely not be interested in the financial statements of a large
public company such as Procter & Gamble?
A)  Shareholders
B)  Employees
C)  Competitors
D)  Taxing agencies
E)  None of these are correct
Answer: E
Rationale: All of these parties would use the financial statements, albeit in different ways and for
different purposes.
Topic: Users of Financial Statement Information
LO: 2
2. The SEC adopted Regulation FD, to curb public companies’ practice of:
A)  Routinely filing extensions for annual reports (Form 10-K)
B)  Selectively disclosing information
C)  Reporting pro forma (non-GAAP) numbers
D)  Hiring auditors for non-audit services such as consulting engagements
E)  None of these are correct
Answer: B
Rationale: Reg FD reads as follows: “Whenever an issuer discloses any material nonpublic
information regarding that issuer, the issuer shall make public disclosure of that information . . .
simultaneously, in the case of an intentional disclosure; and . . . promptly, in the case of a non-
intentional disclosure.”
Topic: Components of the Balance Sheet
LO: 3
3. A list of assets, liabilities and equity can be found on which of the following?
A)  Balance Sheet
B)  Income Statement
C)  Statement of Assets and Liabilities
D)  Statement of Cash Flows
E)  Statement of Stockholders’ Equity
Answer: A
Rationale: A balance sheet lists amounts for assets, liabilities and equity at a point in time.
© Cambridge Business Publishers, 2021
test bank (T/F & MC), Module 1  1-6
Topic: Balance Sheet
LO: 3
4. Which of the following items would not be found on a balance sheet? (Select all that apply)
A) Stockholders’ Equity