Financial Statement Analysis Workbook, 5th Edition

Fill in the Blanks on Each Chapter (Answers)

CHAPTER 1: THE ADVERSARIAL NATURE OF FINANCIAL REPORTING

1. The following are three ways that corporations can use financial reporting to enhance their value:
   1. Reduce their cost of capital
   2. Improve their credit ratings
   3. Increase their price‐earnings multiple
2. The true purpose of financial reporting is to obtain cheap capital.
3. Corporations routinely smooth their earnings because the appearance of smooth growth receives a higher price‐earnings multiple.
4. According to the “big bath” hypothesis, reversals of the excess write‐offs offer an artificial means of stabilizing earnings in subsequent periods.
5. The following are some of the powerful limitations to continued growth faced by companies:
   1. Entry of competition
   2. Increasing base
   3. Markets share constraints
6. Some of the commonly heard rationalizations for declining growth are:
   1. Our year‐over‐year comparisons were distorted.
   2. New products will get growth back on track.
   3. We're diversifying away from mature markets.
7. Diversification reached its zenith of popularity during the “conglomerate” movement of the 1960s. However, by the 1980s, the stock market had converted the diversification premium into a(n) conglomerate discount.
8. Cross‐selling is one of the ways that the notion of diversification as a means of maintaining high earnings growth is revived from time to time.
9. Some of the stories used to sell stocks to individual investors are:
   1. A new product with unlimited sales potential
   2. A “play” in some ...