Deck 17: Financial Statement Analysis

Question 1

An annual report provides information about a company's financial condition.

Answer 1

True

Question 2

The audit report in the annual report is prepared by an internal auditor of a company.

Answer 2

False

Question 3

An external auditor is responsible for assessing the effectiveness of a company's internal controls.

Answer 3

True

Question 4

Management's discussion and analysis of financial condition and results of operations section of the annual report is the company's attempt to explain its financial statements and discuss its performance.

Question 5

An adverse opinion is issued if the auditor finds that the financial statements are not presented fairly.

Question 6

To accurately determine the financial performance of a company, it is necessary to compare performance ________.

A) with a competing company
B) to the budget
C) with companies in different industries
D) only with profitable companies

Question 7

Investors and creditors can evaluate a company by examining only one year's data.

Question 8

Which of the following is not a way to accurately determine the financial performance of a company?

A) carefully examining one year's data
B) from year to year
C) with a competing company
D) with the same industry as a whole

Question 9

A summary of significant accounting policies and explanations of specific items on the financial statements are included in ________.

A) the balance sheet
B) the income statement
C) the notes to financial statements
D) the report of the independent registered public accounting firm

Question 10

The audit report in the annual report attests to the fairness of the presentation of the financial statements.

Question 11

In an audit report in the annual report, a qualified opinion states that the financial statements are presented fairly in all material respects.

Question 12

Ratio analysis is used most effectively to measure a company against other companies in different industries.

Question 13

Investors and creditors cannot evaluate a company by examining only one year's data.

Question 14

List the three ways to analyze financial statements. State what each of these ways provides to investors and creditors.

Question 15

The income statement is also known as the ________.

A) statement of operations
B) statement of cash flows
C) statement of stockholders' equity
D) statement of financial position

Question 16

Ratio analysis ________.

A) provides a year-to year comparison of a company's performance in different periods
B) is used most effectively to measure a company against other companies in the same industry and to denote trends within the company
C) cannot be used to measure a company against other companies in the same industry because the necessary information is not available
D) provides a way to compare different companies

Question 17

To accurately determine the financial performance of a company, it is necessary to compare its performance from year to year, with a competing company, and with the same industry as a whole.

Question 18

A quarterly report filed with the Securities and Exchange Commission is called a Form 10-K.

Question 19

There are three main ways to analyze financial statements. Which of the following does not represent one of these ways of analyzing financial statements?

A) horizontal analysis
B) ratio analysis
C) financial statement analysis
D) vertical analysis

Question 20

Horizontal analysis provides a year-to-year comparison of a company's performance in different periods.

Question 21

Data for Kalil, Inc. follows: Prepare a horizontal analysis of the comparative income statement of Kalil, Inc. (Round to one decimal place.) Use a multi-step format for the income statement.

Question 22

The following is summary of information presented on the financial statements of a company on December 31, 2017. With respect to net income, a horizontal analysis reveals ________. (Round your answer to two decimal places.)

A) that net income is 134.62% of net sales revenue
B) a $26,000 increase in net income
C) a 134.62% decrease in net income
D) a 134.62% increase in net income

Question 23

Which of the following is used to determine how the sales revenue of a company has changed from one year to the next?

A) vertical analysis of the balance sheet
B) horizontal analysis of the income statement
C) horizontal analysis of the balance sheet
D) vertical analysis of the income statement

Question 24

Atlantis, Inc. reported the following data: The horizontal analysis shows that cost of goods sold has ________. (Round your answer to two decimal places.)

A) increased by 28.63%
B) decreased by 28.63%
C) increased by 55.91%
D) decreased by 55.91%

Question 25

Horizontal analysis is the study of percentage changes in comparative financial statements.

Question 26

What is an annual report? Briefly describe the key parts of the annual report.

Question 27

Which of the following is not a part of a corporation's annual report?

A) report of independent registered public accounting firm
B) MD&A
C) notes to financial statements
D) horizontal and vertical analysis

Question 28

The horizontal analysis of the balance sheet shows the changes in net sales and net income.

Question 29

Barn Owl, Inc. reported the following data: Increase (Decrease) The horizontal analysis shows that the amount of total liabilities has __________.

A) increased by $22,500
B) increased by $2,400
C) decreased by $2,400
D) increased by $23,700

Question 30

The following is summary of information presented on the financial statements of a company on December 31, 2017. With respect to current liabilities, a horizontal analysis reveals ________. (Round your answer to two decimal places.)

A) that current liabilities are 37.98% of total equity
B) a 38.60% increase in current liabilities
C) a current ratio of 0.87
D) a 27.85% increase in current liabilities

Question 31

The auditor's report ________.

A) attests that the financial statements are error-free
B) is prepared by the internal auditors
C) states whether the financial statements are presented in accordance with GAAP
D) does not include an assessment of the effectiveness of the company's internal controls

Question 32

Annual reports ________.

A) are required to be prepared by every corporation
B) discuss the company's competitors and the risks related to the company's business
C) are also called a Form 10-Q
D) only include the company's financial statements

Question 33

The following is a summary of information presented on the financial statements of a company on December 31, 2017. With respect to net sales revenue, a horizontal analysis reveals ________.

A) a 19.80% increase in net sales revenue
B) a 238.41% decrease in net sales revenue
C) a decrease of $52,000 in net sales revenue
D) a $52,000 increase in net sales revenue

Question 34

The following is a summary of information presented on the financial statements of a company on December 31, 2017. With respect to long-term liabilities, a horizontal analysis reveals ________.

A) long-term liabilities decreased by $14,000
B) long-term liabilities decreased by 24.56%
C) long-term liabilities decreased by 24.53%
D) long-term liabilities decreased by $7,000

Question 35

Data for Sherman, Inc. are as follows: Prepare a horizontal analysis of the comparative income statement of Sherman, Inc. (Round to one decimal place.) Use a multi-step income statement.

Question 36

Donald Corp. reported the following on its comparative income statement (in millions): Prepare a horizontal analysis of revenues and cost of goods sold, both in dollar amounts and in percentages, for 2016 and 2017. (Round your percentage answers to two decimal places.)

Question 37

The horizontal analysis of the balance sheet is based on the comparative balance sheet.

Question 38

Horizontal analysis compares each item in the income statement to the net sales amount.

Question 39

Which of the following statements, regarding the management's discussion and analysis (MD&A) part of the annual report is not correct?

A) Investors are not interested in the MD&A because it is written by the company and could present a biased view of the company's financial condition and result.
B) It often contains information that is not found in the financial data.
C) It provides forward-looking formation.
D) The MD&A is the company's attempt to explain its financial statements and to discuss its performance.

Question 40

Which of the following best describes horizontal analysis?

A) comparing financial statement amounts from year to year for the same company
B) expressing each financial statement amount as a percentage of a budgeted amount
C) comparing a company's financial statements with other companies
D) calculating key ratios to evaluate performance

Question 41

In a vertical analysis of the income statement, each line item is shown as a percentage of net sales.

Question 42

The trend analysis report of Doppler, Inc. is given below (in millions): Which of the following is a correct conclusion from the above analysis?

A) Net income for 2018 is 168% of that for 2014.
B) Net income for 2017 is 152% of the previous year.
C) Net income for 2017 decreased by 152% from 2016.
D) Net income for 2018 increased by 168% from 2017.

Question 43

When performing vertical analysis of a balance sheet, the base amount is ________.

A) total assets
B) total cash and cash equivalents
C) net income
D) gross profit

Question 44

Which of the following is used to see how a company's operating expenses, as a percentage of net sales, have changed from one year to the next?

A) vertical analysis
B) horizontal analysis
C) ratio analysis
D) analysis of internal control system

Question 45

Vertical analysis involves comparing each figure in the financial statements with a corresponding figure of the previous year.

Question 46

A vertical analysis would be used if an analyst wants to see how gross profit of a company has changed from one year to the next.

Question 47

In a vertical analysis of the balance sheet, each line item is shown as a percentage of stockholders' equity.

Question 48

A vertical analysis of a financial statement reveals the relationship of each statement item to its base amount, which is 100%.

Question 49

Data for Dumouchelle, Inc. follow: Prepare a horizontal analysis of the comparative balance sheet of Dumouchelle, Inc. (Round to one decimal place.)

Question 50

The vertical analysis statement of Bateman, Inc. is as shown below: The figure 47.0% shown for gross profit in 2017 signifies that the gross profit is ________.

A) equal to 47.0% of net income
B) increased by 47.0% over the previous year
C) 47.0% of net sales revenue
D) 47.0% of cost of goods sold

Question 51

The trend analysis report of Marshall, Inc. is given below (in millions): Which of the following is a correct conclusion from the above analysis?

A) Net income for 2016 has increased by 115% over that for 2014.
B) Net income for 2016 has decreased by 15% over that for 2014.
C) Net income for 2016 has decreased by 115% over that for 2014.
D) Net income for 2016 has increased by 15% over that for 2014.

Question 52

Geary, Inc. provides the following historical data: Prepare the trend analysis report. Use 2011 as the base year, and round answers to the nearest percent.

Question 53

When performing vertical analysis of an income statement, the base amount is ________.

A) total expenses
B) net sales
C) sales revenue
D) gross profit

Question 54

Which of the following best describes trend analysis?

A) calculating key ratios to evaluate performance
B) expressing each financial statement amount as a percentage of a budgeted amount
C) comparing a company's financial statements with that of other companies
D) expressing each year's financial statement amounts as a percentage of the base year amounts

Question 55

Turcotte Corp. reported the following revenues and net income amounts. Calculate Turcotte's trend analysis for revenues and cost of goods sold. Use 2013 as the base year, and round to the nearest percent.

Question 56

Data for Nobell, Inc. follow: Prepare a horizontal analysis of the comparative balance sheet of Nobell, Inc. (Round to one decimal place.)

Question 57

The vertical analysis statement of Peterson, Inc. is as shown below: The 20% shown for net income in 2017 signifies that net income ________.

A) is 20% of net sales revenues
B) increased by 20% over the previous year
C) is 20% of gross profit
D) equals 20 times of the income before income tax

Question 58

A horizontal analysis would be used if an analyst wants to see how the assets of a company have changed from one year to the next.

Question 59

Shelcal, Inc. provides the following data for the year 2017: The cost of goods sold as a percentage of net sales revenue is ________. (Round your answer to two decimal places.)

A) 62.45%
B) 62.58%
C) 61.90%
D) 62.24%

Question 60

Trend analysis is a form of horizontal analysis.

Question 61

Benchmarking is the comparison of a company's current year results with a previous year's performance.

Question 62

A common-size statement reports the same percentages that appear in a vertical analysis.

Question 63

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

Question 64

A common-size statement reports the same percentages that appear in a ________.

A) horizontal analysis
B) financial statement
C) vertical analysis
D) cost statement

Question 65

Prepare a vertical analysis of the income statement shown below. (Round to two decimal places.)

Question 66

Prepare a vertical analysis for the balance sheet data given below. (Round to two decimal places.)

Question 67

Empire Moving Company reported the following amounts on its balance sheet as of December 31, 2016 and December 31, 2017: For the vertical analysis, what is the percentage of total liabilities for December 31, 2016? (Round your answer to two decimal places.)

A) 100.00%
B) 41.52%
C) 36.26%
D) 41.18%

Question 68

What is a common-size statement? Why are these statements useful?

Question 69

In a vertical analysis of the balance sheet, the base amount is (100%) is total liabilities.

Question 70

Kapow, Inc. provides the following: Perform a vertical analysis of Kapow's balance sheet for each year. (Round to one decimal place.)

Question 71

Data for Martin Corp. and Tante, Inc. follow: Prepare a comparative common-size income statement for each company for the year ending December 31, 2017. Round to two decimal places. Use a multi-step format for the income statement.

Question 72

Olivera, Inc. provides the following data for 2017: The gross profit as a percentage of net sales is ________. (Round your answer to two decimal places.)

A) 36.04%
B) 37.92%
C) 62.08%
D) 39.09%

Question 73

Prepare a comparative common-size income statement for Marion, Inc. for 2017 and 2016 data. (Round percentages to one decimal place.)

Question 74

Benchmarking often compares a company against a key competitor or the industry average.

Question 75

Benchmarking is the practice of comparing a company with other leading companies.

Question 76

Argentina Moving Company reported the following amounts on its balance sheet as of December 31, 2016 and December 31, 2017: For the vertical analysis, what is the percentage of stockholders' equity as of December 31, 2017? (Round your answer to two decimal places.)

A) 100.00%
B) 58.13%
C) 53.48%
D) There is not enough information provided to make this computation.

Question 77

Common-size statements ________.

A) allow the users to compare numbers in relative terms rather than absolute amounts
B) report dollar amounts and percentages
C) create a dollar value bias
D) show the same percentages that appear in a horizontal analysis

Question 78

Dollar value bias is the bias one sees from comparing number in relative (dollars) rather than absolute (percentage) terms.

Question 79

For the vertical analysis of the balance sheet, the base amount is also the total of liabilities and stockholders' equity.

Question 80

Brink Moving Company reported the following amounts on its balance sheet as of December 31, 2016 and December 31, 2017: For the vertical analysis, what is the percentage of current assets as of December 31, 2017? (Round your answer to two decimal places.)

A) 30.77%
B) 22.84%
C) 29.61%
D) 44.44%