Deck 14: Managerial Accounting

Question 1

Horizontal analysis can be carried out on statement of financial position data but not on income statement data.

Answer 1

False

Question 2

A component of an entity represents a separate major line of business.

Answer 2

True

Question 3

The gain (loss) on disposal of a discontinued operation is not reported on the income statement.

Answer 3

False

Question 4

Explain and apply horizontal analysis.

Question 5

Identify and calculate ratios that are used to analyze liquidity.

Question 6

Earnings per share must be reported separately for continuing operations and discontinued operations.

Question 7

Identify and calculate ratios that are used to analyze profitability.

Question 8

Understand the limitations of financial analysis.

Question 9

Identify and calculate ratios that are used to analyze solvency.

Question 10

When there is a disposal of a component of an entity, the income statement should report both profit from continuing operations and profit (loss) from discontinued operations.

Question 11

One objective of the income statement is to separate the results of continuing operations from those of discontinued operations.

Question 12

Assets and liabilities of a discontinued operation are reported on the statement of financial position at fair value.

Question 13

Comparisons of company data with industry averages provide information about a company's relative position within the industry.

Question 14

Explain and apply vertical analysis.

Question 15

Horizontal analysis is a technique for evaluating a financial statement item in the current year with other items in the current year.

Question 16

Understand the concept of sustainable income and indicate how discontinued items are presented.

Question 17

Sustainable income is the most likely level of profit to be obtained in the future.

Question 18

Horizontal analysis is also called trend analysis.

Question 19

Identifying discontinued items is important if a potential investor is going to use reported profit to estimate a company's value.

Question 20

Assets or liabilities of discontinued items are always reported as non-current.

Question 21

On a statement of financial position analyzed vertically, total assets are represented by 100%.

Question 22

The current ratio should not be interpreted on its own without also looking at the receivables turnover and inventory turnover ratios.

Question 23

When preparing a vertical analysis on an income statement, net sales are represented by 100%.

Question 24

If a company has sales of $100 in 2015 (the base period) and $560 in 2016 (the analysis period), the percentage of the base period is 460%.

Question 25

The cash current debt coverage ratio may be a better indicator of liquidity than the current ratio.

Question 26

The receivables turnover ratio is useful in assessing the profitability of receivables.

Question 27

If a company has sales of $220 in 2015 and $560 in 2016, the percentage increase in sales from 2015 to 2016 is 155%.

Question 28

In horizontal analysis, if an item has a negative amount in the base year, and a positive amount in the following year, the percentage change will exceed 100%.

Question 29

An assessment of liquidity can be done based on only one ratio, such as the current ratio or the receivables ratio.

Question 30

Vertical analysis is a technique for evaluating a series of financial statement data over a period of time to determine the increase (decrease) that has taken place.

Question 31

Vertical analysis makes it easier to compare different companies.

Question 32

Using vertical analysis on the income statement, a company's profit as a percentage of net sales is 15%; therefore, the cost of goods sold as a percentage of net sales must be 85%.

Question 33

The inventory turnover ratio is a measure of liquidity that focuses on efficient use of inventory.

Question 34

Liquidity ratios measure the ability of the company to survive over a long period of time.

Question 35

In the vertical analysis of a statement of financial position, the base for current liabilities is total liabilities.

Question 36

In horizontal analysis, the base year is the most current year being examined.

Question 37

On an income statement analyzed vertically, each item is expressed as a percentage of profit.

Question 38

The inventory turnover ratio measures the number of times, on average, the inventory was sold during the period.

Question 39

Vertical analysis expresses each item in a financial statement as a percent of a base amount.

Question 40

The first step in any comprehensive analysis is to perform a horizontal and vertical analysis.

Question 41

The discontinued operations section of the income statement refers to
(a)discontinuance of a product line.
(b)the profit or loss on products that have been completed and sold.
(c)sale of obsolete equipment and discontinued inventory items.
(d)the disposal of a major line of business or major geographical area of operations.

Question 42

Profitability ratios are frequently used as a basis for evaluating management's operating effectiveness.

Question 43

From a creditor's point of view, the higher the debt to total assets ratio, the lower the risk that the company may be unable to pay its obligations.

Question 44

Free cash flow is the cash available after a company pays dividends.

Question 45

Which of the following income statement figures would probably be the best indicator of a company's future performance?
(a)total revenues
(b)gross profit
(c)profit
(d)profit from continuing operations

Question 46

Leveraging and return on common shareholders' equity are closely related.

Question 47

The price-earnings ratio reflects investors' expectations about the future profitability of the company.

Question 48

Earnings before interest and tax (EBIT) is a proxy for the amount available to cover interest payments.

Question 49

Even if a company has a low debt to total assets ratio, it may have difficulty paying interest on debt if it also has a low times interest earned ratio.

Question 50

Factors that may limit the usefulness of financial analysis include alternative accounting policies, professional judgement, other comprehensive income, diversification, inflation, and economic factors.

Question 51

An accrual-based equivalent to the debt to total assets ratio is the cash total debt coverage ratio.

Question 52

Comparisons of earnings per share with other companies and the industry averages are usually not very meaningful.

Question 53

Sustainable income differs from actual profit by the amount of
(a)irregular revenues, expenses, gains and losses.
(b)dividends declared.
(c)changes in accounting policies.
(d)comprehensive income.

Question 54

An investor interested in purchasing a company's shares for their income potential would be more interested in the company's dividend yield and payout ratios than its price-earnings ratio.

Question 55

The return on common shareholders' equity is affected by both the return on assets and debt to total assets ratios.

Question 56

Dividend yield measures profit generated by each share, based on the market price per share.

Question 57

An income statement would not include
(a)assets held for sale of a discontinued operation.
(b)a loss on disposal of a component of an entity.
(c)an operating loss on discontinued operations.
(d)an unusually large bad debt expense.

Question 58

A solvency ratio measures the profit or operating success of a company for a given period of time.

Question 59

Both the profit margin ratio and the asset turnover ratio affect a company's return on assets.

Question 60

Many firms today are so diversified that they cannot be classified by industry.

Question 61

A horizontal analysis is being conducted with year one as the base year.If year one equals $800, year two equals $840, and year three equals $896, the percentage of the base period for year three is
(a)89%.
(b)100%.
(c)105%.
(d)112%.

Question 62

In vertical analysis of an income statement, the 100% figure is
(a)profit.
(b)cost of goods sold.
(c)gross profit.
(d)net sales.

Question 63

Wilson Corporation reports that this years' profit is $750,000, but this amount includes depreciation of $60,000 and an irregular gain of $150,000.Based on this year's results what is the company's sustainable income?
(a)$750,000
(b)$600,000
(c)$690,000
(d)540,000

Question 64

On financial statements that include vertical analysis, which of the following is set at 100%?
(a)total liabilities
(b)profit
(c)total assets
(d)cost of goods sold

Question 65

Under which of the following cases would a percentage change not be calculated?
(a)The trend of the amounts is decreasing but all amounts are positive.
(b)There is no amount in the base year.
(c)The trend of the amounts is decreasing but all amounts are negative.
(d)The trend of the amounts is increasing but all amounts are negative.

Question 66

If, over a three-year period, sales increased by 30%, and cost of goods sold increased by 45%,
(a)the sales trend is unfavourable, but the cost of goods sold trend is favourable.
(b)the sales trend is favourable, but the cost of goods sold trend is unfavourable.
(c)both trends are favourable.
(d)both trends are unfavourable.

Question 67

Assets and liabilities of a discontinued operation that are held for sale are reported
(a)separately on statement of financial position.
(b)at higher of their carrying amount or fair value.
(c)at lower of fair value or cost.
(d)separately on the statement of comprehensive income.

Question 68

Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time
(a)that has been arranged from the highest number to the lowest number.
(b)that has been arranged from the lowest number to the highest number.
(c)to determine which items are in error.
(d)to determine the amount and/or percentage increase or decrease that has taken place.

Question 69

Assume the following sales data for a company: What is the percentage increase in sales from 2015 to 2016?
(a)14%
(b)97%
(c)16%
(d)50%

Question 70

Horizontal analysis of comparative financial statements includes the
(a)development of vertically analyzed statements.
(b)calculation of liquidity ratios.
(c)calculation of dollar amount changes and percentage changes from the previous to the current year.
(d)evaluation of financial statement data that expresses each item in the current period's financial statement as a percentage of a base amount.

Question 71

Assets that are held for sale as discontinued operations
(a)are separately identified on the statement of comprehensive income.
(b)are removed from the statement of financial position and are disclosed in the notes instead.
(c)are not separately identified on the statement of financial position until they are sold.
(d)are segregated and reported on the statement of financial position at the lower of their carrying amount and fair value.

Question 72

Which of the following items appears on the income statement before profit from continuing operations?
(a)loss from discontinued operations (net of income tax)
(b)profit from discontinued operations (net of income tax)
(c)income tax expense
(d)gain on sale of discontinued operations (net of income tax)

Question 73

Horizontal analysis is a technique for evaluating financial statement data
(a)within a period of time.
(b)over a period of time.
(c)on a certain date.
(d)as it may appear in the future.

Question 74

All of the following statements about vertical analysis are true except
(a)vertical analysis makes it easier to for intercompany comparisons.
(b)vertical analysis is seldom performed on the income statement.
(c)vertical analysis makes it easier to compare companies of different sizes.
(d)vertical analysis is seldom performed on the cash flow statement.

Question 75

A component of an entity, for the purpose of discontinued operations, represents all of the following except
(a)a major line of business.
(b)major geographical area of operations.
(c)a clearly distinguishable component from the rest of the company.
(d)a major line of business held for future use.

Question 76

Horizontal analysis is also called
(a)percentage analysis.
(b)trend analysis.
(c)vertical analysis.
(d)economic analysis.

Question 77

In horizontal analysis, the percentage of a base-period amount is calculated by
(a)dividing the analysis period amount by the base period amount.
(b)dividing the dollar amount of the change since the base period by the base period amount.
(c)dividing the item under analysis by net sales.
(d)dividing the item under analysis by total assets.

Question 78

Comparisons of financial data made within a company are called
(a)intracompany comparisons.
(b)interior comparisons.
(c)intercompany comparisons.
(d)intramural comparisons.

Question 79

In horizontal analysis, each item is expressed as a percentage of the
(a)retained earnings amount.
(b)total assets amount.
(c)profit amount.
(d)base year amount.

Question 80

All of the following statements about vertical analysis are true except
(a)vertical analysis is also called common size analysis.
(b)amounts on the income statement are expressed as a percentage of net sales.
(c)vertical analysis shows the relative size of each item in the statement of financial position.
(d)vertical analysis is also called trend analysis.