Deck 18: Financial Analysis: the Big Picture

Question 1

In the vertical analysis of the income statement, each item is generally stated as a percentage of net income.

Answer 1

False

Question 2

Meaningful analysis of financial statements will include either horizontal or vertical analysis, but not both.

Answer 2

False

Question 3

Vertical analysis is useful in making comparisons of companies of different sizes.

Answer 3

True

Question 4

Another name for trend analysis is horizontal analysis.

Question 5

If a company has sales of $110 in 2010 and $154 in 2011, the percentage increase in sales from 2010 to 2011 is 140%.

Question 6

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

Question 7

A ratio can be expressed as a percentage, a rate, or a proportion.

Question 8

Vertical and horizontal analyses are concerned with the format used to prepare financial statements.

Question 9

Measures of a company's liquidity are concerned with the frequency and amounts of dividend payments.

Question 10

Horizontal, vertical, and circular analyses are the most common tools of financial statement analysis.

Question 11

Vertical analysis is a more sophisticated analytical tool than horizontal analysis.

Question 12

In horizontal analysis, if an item has a negative amount in the base year, and a positive amount in the following year, no percentage change for that item can be computed.

Question 13

Analysis of financial statements is enhanced with the use of comparative data.

Question 14

Calculating financial ratios is a financial reporting requirement under generally accepted accounting principles.

Question 15

The current ratio is a measure of all the ratios calculated for the current year.

Question 16

A solvency ratio measures the income or operating success of an enterprise for a given period of time.

Question 17

Common size analysis expresses each item within a financial statement in terms of a percent of a base amount.

Question 18

Intracompany comparisons of the same financial statement items can often detect changes in financial relationships and significant trends.

Question 19

Comparisons of company data with industry averages can provide some insight into the company's relative position in the industry.

Question 20

Using vertical analysis of the income statement, a company's net income as a percentage of net sales is 10%; therefore, the cost of goods sold as a percentage of sales must be 90%.

Question 21

Which one of the following is primarily interested in the liquidity of a company?

A) Federal government
B) Stockholders
C) Long-term creditors
D) Short-term creditors

Question 22

In vertical analysis, the base amount in an income statement is usually net sales.

Question 23

The days in inventory is computed by multiplying inventory turnover by 365.

Question 24

Using borrowed money to increase the rate of return on common stockholders' equity is called "trading on the equity."

Question 25

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

Question 26

The rate of return on total assets will be greater than the rate of return on common stockholders' equity if the company has been successful in trading on the equity at a gain.

Question 27

Which one of the following is not a characteristic generally evaluated in analyzing financial statements?

A) Liquidity
B) Profitability
C) Marketability
D) Solvency

Question 28

A current ratio of 1.2 to 1 indicates that a company's current assets exceed its current liabilities.

Question 29

The three basic tools of analysis are horizontal analysis, vertical analysis, and ratio analysis.

Question 30

A percentage change can be computed only if the base amount is zero or positive.

Question 31

When the disposal of a significant segment occurs, the income statement should report both income from continuing operations and income (loss) from discontinued operations.

Question 32

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

Question 33

Extraordinary items are reported net of applicable taxes in a separate section of the income statement.

Question 34

An event or transaction should be classified as an extraordinary item if it is unusual in nature or if it occurs infrequently.

Question 35

Inventory turnover measures the number of times on the average the inventory was sold during the period.

Question 36

Variations among companies in the application of generally accepted accounting principles may reduce quality of earnings.

Question 37

Profitability ratios measure the ability of the enterprise to survive over a long period of time.

Question 38

Short-term creditors are usually most interested in evaluating

A) solvency.
B) liquidity.
C) marketability.
D) profitability.

Question 39

Pro forma income usually excludes items that the company thinks are unusual or nonrecurring.

Question 40

In analyzing the financial statements of a company, a single item on the financial statements

A) should be reported in bold-face type.
B) is more meaningful if compared to other financial information.
C) is significant only if it is large.
D) should be accompanied by a footnote.

Question 41

In analyzing financial statements, horizontal analysis is a

A) requirement.
B) tool.
C) principle.
D) theory.

Question 42

Under which of the following cases may a percentage change be computed?

A) The trend of the balances is decreasing but all balances are positive.
B) There is no balance in the base year.
C) There is a positive balance in the base year and a negative balance in the subsequent year.
D) There is a negative balance in the base year and a positive balance in the subsequent year.

Question 43

Vertical analysis is also known as

A) perpendicular analysis.
B) common size analysis.
C) trend analysis.
D) straight-line analysis.

Question 44

Which one of the following is not a tool in financial statement analysis?

A) Horizontal analysis
B) Circular analysis
C) Vertical analysis
D) Ratio analysis

Question 45

Horizontal analysis is appropriately performed

A) only on the income statement.
B) only on the balance sheet.
C) only on the statement of retained earnings.
D) on all three of these statements.

Question 46

Horizontal analysis evaluates 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 47

A technique for evaluating financial statements that expresses the relationship among selected items of financial statement data is

A) common size analysis.
B) horizontal analysis.
C) ratio analysis.
D) vertical analysis.

Question 48

Horizontal analysis is also called

A) linear analysis.
B) vertical analysis.
C) trend analysis.
D) common size analysis.

Question 49

Assume the following sales data for a company: If 2009 is the base year, what is the percentage increase in sales from 2009 to 2010?

A) 23%
B) 30%
C) 77%
D) 130%

Question 50

Long-term creditors are usually most interested in evaluating

A) liquidity and solvency.
B) solvency and marketability.
C) liquidity and profitability.
D) profitability and solvency.

Question 51

The formula for horizontal analysis of changes since the base period is the current year amount

A) divided by the base year amount.
B) minus the base year amount divided by the base year amount.
C) minus the base year amount divided by the current year amount.
D) plus the base year amount divided by the base year amount.

Question 52

Stockholders are most interested in evaluating

A) liquidity and solvency.
B) profitability and solvency.
C) liquidity and profitability.
D) marketability and solvency.

Question 53

A stockholder is interested in the ability of a firm to

A) pay consistent dividends.
B) appreciate in share price.
C) survive over a long period.
D) all of these.

Question 54

A horizontal analysis performed on a statement of retained earnings would not show a percentage change in

A) dividends paid.
B) net income.
C) expenses.
D) beginning retained earnings.

Question 55

In ratio analysis, the ratios are never expressed as a

A) rate.
B) negative figure.
C) percentage.
D) simple proportion.

Question 56

Assume the following cost of goods sold data for a company:
2011 $1,500,000
2010 1,200,000
2009 1,000,000
If 2009 is the base year, what is the percentage increase in cost of goods sold from 2009 to 2011?

A) 150%
B) 50%
C) 67%
D) 33%

Question 57

Horizontal analysis evaluates 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 58

Comparisons of financial data made within a company are called

A) intracompany comparisons.
B) interior comparisons.
C) intercompany comparisons.
D) intramural comparisons.

Question 59

Comparative balance sheets are usually prepared for

A) one year.
B) two years.
C) three years.
D) four years.

Question 60

Assume the following sales data for a company: If 2009 is the base year, what is the percentage increase in sales from 2009 to 2011?

A) 100%
B) 160%
C) 60%
D) 62.5%

Question 61

Vertical analysis is also called

A) common size analysis.
B) horizontal analysis.
C) ratio analysis.
D) trend analysis.

Question 62

In performing a vertical analysis, the base for sales revenues on the income statement is

A) net sales.
B) sales.
C) net income.
D) cost of goods available for sale.

Question 63

Walker Clothing Store had a balance in the Accounts Receivable account of $390,000 at the beginning of the year and a balance of $410,000 at the end of the year. Net credit sales during the year amounted to $2,000,000. The average collection period of the receivables in terms of days was

A) 30 days.
B) 365 days.
C) 146 days.
D) 73 days.

Question 64

In common size analysis,

A) a base amount is required.
B) a base amount is optional.
C) the same base is used across all financial statements analyzed.
D) the results of the horizontal analysis are necessary inputs for performing the analysis.

Question 65

In performing a vertical analysis, the base for sales returns and allowances is

A) sales.
B) sales discounts.
C) net sales.
D) total revenues.

Question 66

Parr Hardware Store had net credit sales of $6,500,000 and cost of goods sold of $5,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $600,000 and $700,000, respectively. The receivables turnover was

A) 7.7 times.
B) 10.8 times.
C) 9.3 times.
D) 10 times.

Question 67

Waters Department Store had net credit sales of $16,000,000 and cost of goods sold of $12,000,000 for the year. The average inventory for the year amounted to $2,000,000. The average number of days in inventory during the year was

A) 91 days.
B) 61 days.
C) 46 days.
D) 26 days.

Question 68

The current ratio is

A) calculated by dividing current liabilities by current assets.
B) used to evaluate a company's liquidity and short-term debt paying ability.
C) used to evaluate a company's solvency and long-term debt paying ability.
D) calculated by subtracting current liabilities from current assets.

Question 69

Each of the following is a liquidity ratio except the

A) acid-test ratio.
B) current ratio.
C) debt to total assets ratio.
D) inventory turnover.

Question 70

Blanco, Inc. has the following income statement (in millions): Using vertical analysis, what percentage is assigned to Cost of Goods Sold?

A) 60%
B) 40%
C) 100%
D) None of the above

Question 71

The acid-test (quick) ratio

A) is used to quickly determine a company's solvency and long-term debt paying ability.
B) relates cash, short-term investments, and net receivables to current liabilities.
C) is calculated by taking one item from the income statement and one item from the balance sheet.
D) is the same as the current ratio except it is rounded to the nearest whole percent.

Question 72

Blanco, Inc. has the following income statement (in millions): Using vertical analysis, what percentage is assigned to Net Income?

A) 100%
B) 82%
C) 18%
D) None of the above

Question 73

In performing a vertical analysis, the base for cost of goods sold is

A) total selling expenses.
B) net sales.
C) total revenues.
D) total expenses.

Question 74

Waters Department Store had net credit sales of $16,000,000 and cost of goods sold of $12,000,000 for the year. The average inventory for the year amounted to $2,000,000. Inventory turnover for the year is

A) 8 times.
B) 14 times.
C) 6 times.
D) 4 times.

Question 75

Each of the following is included in computing the acid-test ratio except

A) cash.
B) inventory.
C) receivables.
D) short-term investments.

Question 76

Vertical analysis is a technique which expresses each item within a financial statement

A) in dollars and cents.
B) in terms of a percentage of the item in the previous year.
C) in terms of a percent of a base amount.
D) starting with the highest value down to the lowest value.

Question 77

Which one of the following would not be considered a liquidity ratio?

A) Current ratio
B) Inventory turnover
C) Acid-test ratio
D) Return on assets

Question 78

A liquidity ratio measures the

A) income or operating success of an enterprise over a period of time.
B) ability of the enterprise to survive over a long period of time.
C) short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash.
D) number of times interest is earned.

Question 79

In performing a vertical analysis, the base for prepaid expenses is

A) total current assets.
B) total assets.
C) total liabilities and stockholders' equity.
D) prepaid expenses.

Question 80

A ratio calculated in the analysis of financial statements

A) expresses a mathematical relationship between two numbers.
B) shows the percentage increase from one year to another.
C) restates all items on a financial statement in terms of dollars of the same purchasing power.
D) is meaningful only if the numerator is greater than the denominator.