Financial statement analysis is an exact science. FALSE
Prospective analysis is the forecasting of future payoffs—typically earnings and cash flows, or both. TRUE
A security can be under or overvalued, depending on the extent of an incorrect interpretation or faulty evaluation of available information by the aggregate market. TRUE
A capital-intensive company requires high cash turnover. FALSE
The income statement is the only one of the four basic financial statements that does not contain balances at a specific point in time. FALSE
A creditor’s risk is said to be asymmetric because the downside is limited to the required interest payments. TRUE
All other things being equal, the lower a company’s cost of equity the higher its stock price should be. TRUE
When comparing two companies the company with the highest net income should normally have the highest stock price. FALSE
A bank with a loan to a company is generally exposed to greater risk than the shareholders of the company. FALSE
Dividend yield is defined as dividends divided by shareholders’ equity. FALSE
Earnings Yield is the reciprocal of the price/earnings ratio. TRUE
Debt-to-equity ratio is a commonly used measure of liquidity. FALSE
When calculating the return on assets you should use average total assets. TRUE
The current ratio is used to evaluate the company’s operating performance. FALSE
The current ratio will always be greater than or equal to the acid test ratio. TRUE
If a company has no liabilities its return on equity will equal its return on assets. TRUE
Inventory turnover is generally a more important ratio for a manufacturing firm than a service firm. TRUE
In a common size income statement net income is expressed as 100 percent. FALSE
In a common size balance sheet total assets are expressed as 100 percent. TRUE
Common size statements are useful for inter-company comparisons. TRUE
Two popular techniques of comparative analysis are year-to-year change analysis and index-number trend analysis. TRUE
The explanatory notes (footnotes) accompanying the financial statements are generally of little value in aiding the financial analyst when interpreting the financial statements. FALSE
The SEC requires that Management Discussion and Analysis found in the annual report (10K) contains, among other things, a discussion about the company’s liquidity, capital resources and results of operations. TRUE
The statement of cash flows is separated into four parts: operating, investing, financing and planning. FALSE
Details of compensation paid to officers and directors can be found in proxy statement. TRUE
The value of a bond is equal to the sum of the present value of future expected interest and principal payments, discounted at the coupon rate. FALSE
Theoretically the value of a stock should equal the sum of the present value of future expected dividends, discounted at the cost of equity. TRUE

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