Chapter 2
Financial Statements and Analysis
Learning Goals
1. Review-the-contents-of-the-stockholders’-report-and-the-procedures-for-consolidating-international-
financial-statements.-
2. Understand-who-uses-financial-ratios,-and-how.-
3. Use-ratios-to-analyze-a-firm’s-liquidity-and-activity.-
4. Discuss-the-relationship-between-debt-and-financial-leverage-and-the-ratios-used-to-analyze-a-firm’s-
debt.-
5. Use-ratios-to-analyze-a-firm’s-profitability-and-market-value.-
6. Use-a-summary-of-financial-ratios-and-the-DuPont-System-of-analysis-to-perform-a-complete-ratio-
analysis.-
-True/False-
1. The-Financial-Accounting-Standards-Board-(FASB)-is-the-federal-regulatory-body-that-governs-the-
sale-and-listing-of-securities.-
Answer:-FALSE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
Topic:-Accounting-Standards-and-Regulation-
2. GAAP-is-the-accounting-profession’s-rule-setting-body.-
Answer:-FALSE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
Topic:-Accounting-Standards-and-Regulation-
3. Generally-accepted-accounting-principles-are-authorized-by-the-Financial-Accounting-Standards-
Board-(FASB).-
Answer:-TRUE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
Topic:-Accounting-Standards-and-Regulation-
4. Publicly-owned-corporations-are-those-which-are-financed-by-the-proceeds-from-the-treasury-
securities.-
Answer:-FALSE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
, Chapter 2 Financial Statements and Analysis 49
Topic:-Accounting-Standards-and-Regulation-
5. Publicly-owned-corporations-are-required-by-the-Securities-and-Exchange-Commission-(SEC)-and-
individual-state-securities-commissions-to-provide-their-stockholders-with-an-annual-stockholders’-
report.-
Answer:-TRUE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
Topic:-Accounting-Standards-and-Regulation-
6. The-president’s-letter,-as-the-first-component-of-the-stockholders’-report,-is-the-primary-
communication-from-management-to-the-firm’s-employees.-
Answer:-FALSE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
Topic:-Stockholders’-Report-
7. Common-stock-dividends-paid-to-stockholders-are-equal-to-the-earnings-available-for-common-
stockholders-divided-by-the-number-of-shares-of-common-stock-outstanding.-
Answer:-FALSE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
Topic:-Dividends-
8. The-income-statement-is-a-financial-summary-of-the-firm’s-operating-results-during-a-specified-
period-while-the-balance-sheet-is-a-summary-statement-of-the-firm’s-financial-position-at-a-given-
point-in-time.-
Answer:-TRUE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
Topic:-Income-Statement-
9. The-par-value-of-common-stock-is-an-arbitrarily-assigned-per-share-value-used-primarily-for-
accounting-purposes.-
Answer:-TRUE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
Topic:-Balance-Sheet-
10. Paid-in-capital-in-excess-of-par-represents-the-firm’s-book-value-received-from-the-original-sale-of-
common-stock.-
Answer:-FALSE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
Topic:-Balance-Sheet-
11. Earnings-per-share-represents-amount-earned-during-the-period-on-each-outstanding-share-of-
common-stock.-
,50 Gitman • Principles of Finance, Eleventh Edition
Answer:-TRUE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
Topic:-Earnings-
12. Net-fixed-assets-represent-the-difference-between-gross-fixed-assets-and-the-total-expense-recorded-
for-the-depreciation-of-fixed-assets.-
Answer:-TRUE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
Topic:-Balance-Sheet-
13. Earnings-per-share-results-from-dividing-earnings-available-for-common-stockholders-by-the-number-
of-shares-of-common-stock-authorized.-
Answer:-FALSE-
Level-of-Difficulty:-2-
Learning-Goal:-1-
Topic:-Earnings-
14. Retained-earnings-represent-the-cumulative-total-of-all-earnings-retained-and-reinvested-in-the-firm-
since-its-inception.-
Answer:-TRUE-
Level-of-Difficulty:-2-
Learning-Goal:-1-
Topic:-Balance-Sheet-
15. The-balance-sheet-is-a-statement-which-balances-the-firm’s-assets-(what-it-owns)-against-its-debt-
(what-it-owes).-
Answer:-FALSE-
Level-of-Difficulty:-2-
Learning-Goal:-1-
Topic:-Balance-Sheet-
16. The-amount-paid-in-by-the-original-purchasers-of-common-stock-is-shown-by-two-entries-in-the-
firm’s-balance-sheet—common-stock-and-paid-in-capital-in-excess-of-par-on-common-stock.-
Answer:-TRUE-
Level-of-Difficulty:-2-
Learning-Goal:-1-
Topic:-Balance-Sheet-
17. The-original-price-per-share-received-by-the-firm-on-a-single-issue-of-common-stock-is-equal-to-the-
sum-of-the-common-stock-and-paid-in-capital-in-excess-of-par-accounts-divided-by-the-number-of-
shares-outstanding.-
Answer:-TRUE-
Level-of-Difficulty:-2-
Learning-Goal:-1-
Topic:-Balance-Sheet-
, Chapter 2 Financial Statements and Analysis 51
18. The-statement-of-cash-flows-reconciles-the-net-income-earned-during-a-given-year,-and-any-cash-
dividends-paid,-with-the-change-in-retained-earnings-between-the-start-and-end-of-that-year.-
Answer:-FALSE-
Level-of-Difficulty:-2-
Learning-Goal:-1-
Topic:-Statement-of-Cash-Flows-
19. The-cumulative-translation-adjustment-is-an-equity-reserve-account-on-the-parent-company’s-books-
in-which-translation-gains-and-losses-are-accumulated.-
Answer:-TRUE-
Level-of-Difficulty:-2-
Learning-Goal:-1-
Topic:-International-Accounting-
20. The-statement-of-cash-flows-provides-insight-into-the-firm’s-assets-and-liabilities-and-reconciles-
them-with-changes-in-its-cash-and-marketable-securities-during-the-period-of-concern.-
Answer:-FALSE-
Level-of-Difficulty:-2-
Learning-Goal:-1-
Topic:-Statement-of-Cash-Flows-
21. A-U.S.-parent-company’s-foreign-equity-accounts-are-translated-into-dollars-using-the-exchange-rate-
that-prevailed-when-the-parent’s-equity-investment-was-made-(the-historical-rate).-
Answer:-TRUE-
Level-of-Difficulty:-2-
Learning-Goal:-1-
Topic:-International-Accounting-
22. A-U.S.-parent-company’s-foreign-retained-earnings-are-adjusted-to-reflect-gains-and-losses-resulting-
from-currency-movements-as-well-as-each-year’s-operating-profits-or-losses.-
Answer:-FALSE-
Level-of-Difficulty:-3-
Learning-Goal:-1-
Topic:-International-Accounting-
23. The-Financial-Accounting-Standards-Board-(FASB)-Standard-No.-52-mandates-that-U.S.-based-
companies-translate-their-foreign-currency-denominated-assets-and-liabilities-into-dollars-using-the-
current-rate-(translation)-method.-
Answer:-TRUE-
Level-of-Difficulty:-3-
Learning-Goal:-1-
Topic:-International-Accounting-
24. Time-series-analysis-is-the-evaluation-of-the-firm’s-financial-performance-in-comparison-to-other-
firm(s)-at-the-same-point-in-time.-
Answer:-FALSE-
Level-of-Difficulty:-1-
Financial Statements and Analysis
Learning Goals
1. Review-the-contents-of-the-stockholders’-report-and-the-procedures-for-consolidating-international-
financial-statements.-
2. Understand-who-uses-financial-ratios,-and-how.-
3. Use-ratios-to-analyze-a-firm’s-liquidity-and-activity.-
4. Discuss-the-relationship-between-debt-and-financial-leverage-and-the-ratios-used-to-analyze-a-firm’s-
debt.-
5. Use-ratios-to-analyze-a-firm’s-profitability-and-market-value.-
6. Use-a-summary-of-financial-ratios-and-the-DuPont-System-of-analysis-to-perform-a-complete-ratio-
analysis.-
-True/False-
1. The-Financial-Accounting-Standards-Board-(FASB)-is-the-federal-regulatory-body-that-governs-the-
sale-and-listing-of-securities.-
Answer:-FALSE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
Topic:-Accounting-Standards-and-Regulation-
2. GAAP-is-the-accounting-profession’s-rule-setting-body.-
Answer:-FALSE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
Topic:-Accounting-Standards-and-Regulation-
3. Generally-accepted-accounting-principles-are-authorized-by-the-Financial-Accounting-Standards-
Board-(FASB).-
Answer:-TRUE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
Topic:-Accounting-Standards-and-Regulation-
4. Publicly-owned-corporations-are-those-which-are-financed-by-the-proceeds-from-the-treasury-
securities.-
Answer:-FALSE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
, Chapter 2 Financial Statements and Analysis 49
Topic:-Accounting-Standards-and-Regulation-
5. Publicly-owned-corporations-are-required-by-the-Securities-and-Exchange-Commission-(SEC)-and-
individual-state-securities-commissions-to-provide-their-stockholders-with-an-annual-stockholders’-
report.-
Answer:-TRUE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
Topic:-Accounting-Standards-and-Regulation-
6. The-president’s-letter,-as-the-first-component-of-the-stockholders’-report,-is-the-primary-
communication-from-management-to-the-firm’s-employees.-
Answer:-FALSE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
Topic:-Stockholders’-Report-
7. Common-stock-dividends-paid-to-stockholders-are-equal-to-the-earnings-available-for-common-
stockholders-divided-by-the-number-of-shares-of-common-stock-outstanding.-
Answer:-FALSE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
Topic:-Dividends-
8. The-income-statement-is-a-financial-summary-of-the-firm’s-operating-results-during-a-specified-
period-while-the-balance-sheet-is-a-summary-statement-of-the-firm’s-financial-position-at-a-given-
point-in-time.-
Answer:-TRUE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
Topic:-Income-Statement-
9. The-par-value-of-common-stock-is-an-arbitrarily-assigned-per-share-value-used-primarily-for-
accounting-purposes.-
Answer:-TRUE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
Topic:-Balance-Sheet-
10. Paid-in-capital-in-excess-of-par-represents-the-firm’s-book-value-received-from-the-original-sale-of-
common-stock.-
Answer:-FALSE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
Topic:-Balance-Sheet-
11. Earnings-per-share-represents-amount-earned-during-the-period-on-each-outstanding-share-of-
common-stock.-
,50 Gitman • Principles of Finance, Eleventh Edition
Answer:-TRUE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
Topic:-Earnings-
12. Net-fixed-assets-represent-the-difference-between-gross-fixed-assets-and-the-total-expense-recorded-
for-the-depreciation-of-fixed-assets.-
Answer:-TRUE-
Level-of-Difficulty:-1-
Learning-Goal:-1-
Topic:-Balance-Sheet-
13. Earnings-per-share-results-from-dividing-earnings-available-for-common-stockholders-by-the-number-
of-shares-of-common-stock-authorized.-
Answer:-FALSE-
Level-of-Difficulty:-2-
Learning-Goal:-1-
Topic:-Earnings-
14. Retained-earnings-represent-the-cumulative-total-of-all-earnings-retained-and-reinvested-in-the-firm-
since-its-inception.-
Answer:-TRUE-
Level-of-Difficulty:-2-
Learning-Goal:-1-
Topic:-Balance-Sheet-
15. The-balance-sheet-is-a-statement-which-balances-the-firm’s-assets-(what-it-owns)-against-its-debt-
(what-it-owes).-
Answer:-FALSE-
Level-of-Difficulty:-2-
Learning-Goal:-1-
Topic:-Balance-Sheet-
16. The-amount-paid-in-by-the-original-purchasers-of-common-stock-is-shown-by-two-entries-in-the-
firm’s-balance-sheet—common-stock-and-paid-in-capital-in-excess-of-par-on-common-stock.-
Answer:-TRUE-
Level-of-Difficulty:-2-
Learning-Goal:-1-
Topic:-Balance-Sheet-
17. The-original-price-per-share-received-by-the-firm-on-a-single-issue-of-common-stock-is-equal-to-the-
sum-of-the-common-stock-and-paid-in-capital-in-excess-of-par-accounts-divided-by-the-number-of-
shares-outstanding.-
Answer:-TRUE-
Level-of-Difficulty:-2-
Learning-Goal:-1-
Topic:-Balance-Sheet-
, Chapter 2 Financial Statements and Analysis 51
18. The-statement-of-cash-flows-reconciles-the-net-income-earned-during-a-given-year,-and-any-cash-
dividends-paid,-with-the-change-in-retained-earnings-between-the-start-and-end-of-that-year.-
Answer:-FALSE-
Level-of-Difficulty:-2-
Learning-Goal:-1-
Topic:-Statement-of-Cash-Flows-
19. The-cumulative-translation-adjustment-is-an-equity-reserve-account-on-the-parent-company’s-books-
in-which-translation-gains-and-losses-are-accumulated.-
Answer:-TRUE-
Level-of-Difficulty:-2-
Learning-Goal:-1-
Topic:-International-Accounting-
20. The-statement-of-cash-flows-provides-insight-into-the-firm’s-assets-and-liabilities-and-reconciles-
them-with-changes-in-its-cash-and-marketable-securities-during-the-period-of-concern.-
Answer:-FALSE-
Level-of-Difficulty:-2-
Learning-Goal:-1-
Topic:-Statement-of-Cash-Flows-
21. A-U.S.-parent-company’s-foreign-equity-accounts-are-translated-into-dollars-using-the-exchange-rate-
that-prevailed-when-the-parent’s-equity-investment-was-made-(the-historical-rate).-
Answer:-TRUE-
Level-of-Difficulty:-2-
Learning-Goal:-1-
Topic:-International-Accounting-
22. A-U.S.-parent-company’s-foreign-retained-earnings-are-adjusted-to-reflect-gains-and-losses-resulting-
from-currency-movements-as-well-as-each-year’s-operating-profits-or-losses.-
Answer:-FALSE-
Level-of-Difficulty:-3-
Learning-Goal:-1-
Topic:-International-Accounting-
23. The-Financial-Accounting-Standards-Board-(FASB)-Standard-No.-52-mandates-that-U.S.-based-
companies-translate-their-foreign-currency-denominated-assets-and-liabilities-into-dollars-using-the-
current-rate-(translation)-method.-
Answer:-TRUE-
Level-of-Difficulty:-3-
Learning-Goal:-1-
Topic:-International-Accounting-
24. Time-series-analysis-is-the-evaluation-of-the-firm’s-financial-performance-in-comparison-to-other-
firm(s)-at-the-same-point-in-time.-
Answer:-FALSE-
Level-of-Difficulty:-1-
