D366 Financial Statement Analysis - Set 5 - Part 2

Correct Answer: The actual usage or output of the asset

The units-of-production method allocates depreciation based on actual usage or output, so expense rises and falls with how intensively the asset is used, matching cost to activity.

Correct Answer: Annual dividend per share divided by market price per share

Dividend yield equals the annual dividend per share divided by the current market price per share, expressed as a percentage. It shows the cash return an investor earns from dividends relative to the share price.

Correct Answer: Financing activities

Repaying loan principal is a financing activity because it involves settling obligations to lenders. Interest paid, however, is usually classified as an operating activity under many frameworks.

Correct Answer: 100 (index of 100)

In index-number trend analysis, the base-year figure is set to 100, and subsequent years are expressed relative to it, making it easy to see the percentage growth or decline over time.

Correct Answer: PEG ratio

The PEG ratio divides the price-to-earnings ratio by the expected earnings growth rate. It helps assess whether a stock's P/E is justified by its growth prospects; a PEG near 1.0 is often considered reasonable.

Correct Answer: Raised more cash from debt or equity than it repaid or distributed

Positive financing cash flow means the company raised more cash through borrowing or issuing stock than it paid out in debt repayments and dividends, often to fund growth or operations.

Correct Answer: Hide obligations that increase a company's true leverage

Off-balance-sheet financing keeps certain obligations off the balance sheet, which can understate a company's true leverage and risk. Analysts adjust for such items to assess real financial position.

Correct Answer: The total cash a company collects from its customers

FIFO and LIFO change how inventory costs flow to COGS and ending inventory, affecting gross profit and taxes. However, the actual cash collected from customers depends on sales, not the inventory costing method chosen.

Correct Answer: Rising input costs or increasing price competition

A downward trend in gross margin over time suggests rising costs of goods sold or pricing pressure from competition, eroding the profit earned on each sales dollar; further investigation is warranted.

Correct Answer: Operating activities

Under U.S. GAAP, interest paid is typically classified as an operating activity because it relates to the cost of financing that flows through the income statement, unlike principal repayments, which are financing.

Correct Answer: Value the company above its accounting net worth

A market-to-book ratio above 1.0 means the market values the company more than its recorded equity, often reflecting expectations of future growth, intangible assets, or earning power not fully captured on the balance sheet.

Correct Answer: Using accounting choices to influence reported earnings toward a desired result

Earnings management involves using discretion in accounting choices and estimates to shape reported earnings toward a target. Aggressive earnings management reduces the quality and reliability of reported results.

Correct Answer: Deteriorating earnings quality that warrants investigation

A persistent gap where net income rises but operating cash flow falls can indicate aggressive revenue recognition or growing receivables, suggesting lower earnings quality and the need for closer analysis.

Correct Answer: Balance sheet

Book value of equity is taken from the balance sheet, where it equals total assets minus total liabilities. It is compared to market value to assess how the market prices the company relative to its net assets.

Correct Answer: Reducing capital expenditures while maintaining operating cash flow

Free cash flow equals operating cash flow minus capital expenditures, so reducing capital spending while keeping operating cash flow steady increases free cash flow available to the firm.

Correct Answer: Comparing companies of different sizes on a proportional basis

Because common-size statements express items as percentages, they let analysts compare companies of very different sizes on a proportional basis, focusing on structure and relationships rather than absolute amounts.

Correct Answer: Higher future earnings growth

A high P/E relative to peers typically signals that investors expect stronger future earnings growth, and are willing to pay more per dollar of current earnings, though it can also indicate overvaluation.

Correct Answer: The amount of depreciation expense recognized each period

Different depreciation methods allocate different amounts of expense to each period, which changes reported net income over time, even though the total depreciation over the asset's life is the same and no cash flow differs.

Correct Answer: The net change in cash for the period

Summing the cash flows from operating, investing, and financing activities gives the net change in cash and cash equivalents for the period, which reconciles the beginning and ending cash balances.

Correct Answer: A mature company generating cash, investing, and returning capital to investors

This pattern, positive operating cash flow funding investments and debt repayment or dividends, is typical of a mature, healthy company that generates cash from operations and returns value to investors.