FINANCIAL STATEMENT ANALYSIS AND FINANCIAL
STATEMENT MODELING QUIZ QUESTIONS AND
ANSWERS WITH VERIFIED TESTS 100% CORRECT
ANSWERS.
⫸ Porter's Five Forces - Bargaining Power of Customers. Answer: Companies have less pricing
power when the bargaining power of customers is higher. The fewer the customers and the
lower the switching costs, the greater the power the customers have.
⫸ Forecasts Under Inflation or Deflation - Input Costs. Answer: Could be significant in many
industries with great impact on earnings
⫸ Forecasts Under Inflation or Deflation - Structure of the Industry. Answer: -If the industry is
DOMINATE BY A FEW LARGE FIRMS (MORE CONCENTRATED), sellers should increase the
price to cover rising costs
-If the industry is OVERWHELMED BY MANY SMALL FIRMS (LESS CONCENTRATED), the
increase in price not work efficiently
⫸ Forecasts Under Inflation or Deflation - Price Elasticity of Demand. Answer: The larger the
price elasticity of demand, the larger the negative impact of a price increase on unit sales.
-When demand is RELATIVELY PRICE ELASTIC, if prices increase then unit sales decrease, and
vice versa.
-When demand is RELATIVELY INELASTIC, if prices increase then the unit sales may decrease
only slightly, or not at all
-As total output could be maintained despite passing on 100% inflation to customers, the gross
profit margin would fall, but the dollar amount of gross profit would remain unimpacted
⫸ Forecasts Under Inflation or Deflation - Peers' Reactions. Answer: -When the input costs are
decreasing, the firm first responds by reducing prices that may increase unit sales and may or
may not decrease margins
-When the input costs increase, the firm that increases its prices too quickly may face
decreasing unit sales. The ones that increase their prices too slowly will also face falling margins
, ⫸ Forecasts Under Inflation or Deflation - Pricing Strategy and Market Position. Answer: Based
on the firm's current pricing strategy and market position, when input prices are increasing, a
company might:
-Increase its prices to maintain margins
-Stabilize prices to increase market share (with lower margin)
⫸ Forecasts Under Inflation or Deflation - Impacts of Inflation Rate in Different Markets.
Answer: Although HIGH INFLATION IN THE EXPORT MARKET MIGHT BENEFIT THE COMPANY,
these gains could be wiped out due to CURRENCY DEPRECIATION (relative purchasing power
parity)
⫸ Forecasts Under Inflation or Deflation - Impacts of Inflation Rate in Different Products.
Answer: EXAMPLE: An increase in the price of wheat will likely have a more severe impact on a
bakery than a supermarket. So, bakeries will increase the prices more than supermarkets
⫸ Forecasts Under Inflation or Deflation - Industry Costs Under Inflation or Deflation: Specific
Purchasing Characteristics. Answer: -INDUSTRIES WHOSE COSTS ARE HEDGED: Inflation is
slowly incorporated into cost forecasts
-INDUSTRIES WHSOE COSTS ARE NOT HEDGED: Inflation is quickly incorporated into cost
forecast
⫸ Forecasts Under Inflation or Deflation - Industry Costs Under Inflation or Deflation: Input
Price Drivers. Answer: EXAMPLE: Weather patterns should be incorporated into cost forecasts
of industries with agricultural products
⫸ Forecasts Under Inflation or Deflation - Industry Costs Under Inflation or Deflation:
Competitive Environment. Answer: Firms having ACCESS TO SUBSTITUTE INPUTS are
VERTICALLY INTEGRATED experience smaller impacts from rising input costs
⫸ Forecasts Under Inflation or Deflation - Company Costs Under Inflation or Deflation. Answer:
-Key influencing factors (e.g., weather, tariffs, etc.) on cost should be identified first and then
costs should be monitored based on product categories and locations
-Influence on inflation or deflation on each item should be assessed
-Also need to consider if cheaper substitutes or increased efficiency can offset the impact of
rising input prices
⫸ Technological Developments. Answer: Refers to some advances in technology which bring up
significant results such as cutting the costs of production, increasing sales, or developing a
whole new replacement or alternatives. Accordingly:
STATEMENT MODELING QUIZ QUESTIONS AND
ANSWERS WITH VERIFIED TESTS 100% CORRECT
ANSWERS.
⫸ Porter's Five Forces - Bargaining Power of Customers. Answer: Companies have less pricing
power when the bargaining power of customers is higher. The fewer the customers and the
lower the switching costs, the greater the power the customers have.
⫸ Forecasts Under Inflation or Deflation - Input Costs. Answer: Could be significant in many
industries with great impact on earnings
⫸ Forecasts Under Inflation or Deflation - Structure of the Industry. Answer: -If the industry is
DOMINATE BY A FEW LARGE FIRMS (MORE CONCENTRATED), sellers should increase the
price to cover rising costs
-If the industry is OVERWHELMED BY MANY SMALL FIRMS (LESS CONCENTRATED), the
increase in price not work efficiently
⫸ Forecasts Under Inflation or Deflation - Price Elasticity of Demand. Answer: The larger the
price elasticity of demand, the larger the negative impact of a price increase on unit sales.
-When demand is RELATIVELY PRICE ELASTIC, if prices increase then unit sales decrease, and
vice versa.
-When demand is RELATIVELY INELASTIC, if prices increase then the unit sales may decrease
only slightly, or not at all
-As total output could be maintained despite passing on 100% inflation to customers, the gross
profit margin would fall, but the dollar amount of gross profit would remain unimpacted
⫸ Forecasts Under Inflation or Deflation - Peers' Reactions. Answer: -When the input costs are
decreasing, the firm first responds by reducing prices that may increase unit sales and may or
may not decrease margins
-When the input costs increase, the firm that increases its prices too quickly may face
decreasing unit sales. The ones that increase their prices too slowly will also face falling margins
, ⫸ Forecasts Under Inflation or Deflation - Pricing Strategy and Market Position. Answer: Based
on the firm's current pricing strategy and market position, when input prices are increasing, a
company might:
-Increase its prices to maintain margins
-Stabilize prices to increase market share (with lower margin)
⫸ Forecasts Under Inflation or Deflation - Impacts of Inflation Rate in Different Markets.
Answer: Although HIGH INFLATION IN THE EXPORT MARKET MIGHT BENEFIT THE COMPANY,
these gains could be wiped out due to CURRENCY DEPRECIATION (relative purchasing power
parity)
⫸ Forecasts Under Inflation or Deflation - Impacts of Inflation Rate in Different Products.
Answer: EXAMPLE: An increase in the price of wheat will likely have a more severe impact on a
bakery than a supermarket. So, bakeries will increase the prices more than supermarkets
⫸ Forecasts Under Inflation or Deflation - Industry Costs Under Inflation or Deflation: Specific
Purchasing Characteristics. Answer: -INDUSTRIES WHOSE COSTS ARE HEDGED: Inflation is
slowly incorporated into cost forecasts
-INDUSTRIES WHSOE COSTS ARE NOT HEDGED: Inflation is quickly incorporated into cost
forecast
⫸ Forecasts Under Inflation or Deflation - Industry Costs Under Inflation or Deflation: Input
Price Drivers. Answer: EXAMPLE: Weather patterns should be incorporated into cost forecasts
of industries with agricultural products
⫸ Forecasts Under Inflation or Deflation - Industry Costs Under Inflation or Deflation:
Competitive Environment. Answer: Firms having ACCESS TO SUBSTITUTE INPUTS are
VERTICALLY INTEGRATED experience smaller impacts from rising input costs
⫸ Forecasts Under Inflation or Deflation - Company Costs Under Inflation or Deflation. Answer:
-Key influencing factors (e.g., weather, tariffs, etc.) on cost should be identified first and then
costs should be monitored based on product categories and locations
-Influence on inflation or deflation on each item should be assessed
-Also need to consider if cheaper substitutes or increased efficiency can offset the impact of
rising input prices
⫸ Technological Developments. Answer: Refers to some advances in technology which bring up
significant results such as cutting the costs of production, increasing sales, or developing a
whole new replacement or alternatives. Accordingly:
