Deck 12: Financial Statement Analysis

Question 1

In a horizontal analysis balance sheet,the percentage change columns do not add up in the same way as the dollar amounts because each of the percentages was calculated using a different denominator.

Answer 1

True

Question 2

A firm's ability to convert non-cash assets into cash is referred to as liquidity.

Answer 2

True

Question 3

In a trend analysis of cost of goods sold over the last three months,all cost of goods sold accounts are shown as a percentage of the current quarter.

Answer 3

False

Question 4

The type of analysis that looks at the changes in the account balances over time is referred to as horizontal analysis.

Question 5

Unlike the percentage columns in a horizontal analysis,the columns in a common-size percentage statement can be totaled.

Question 6

Generally Accepted Accounting Principles require that companies present financial statements that include the current year and two previous years.

Question 7

Working capital is the difference between a firm's total assets and total liabilities.

Question 8

In preparing a common-size balance sheet,you express all asset account balances as a percentage of cash.

Question 9

Because an absolute dollar change does not give the whole picture,a percentage change is often included in a horizontal analysis.

Question 10

The percentage change,as shown in horizontal analysis,is calculated as:
current year account balance - previous year account balance ÷current year account balance

Question 11

In preparing a common-size balance sheet,you express all individual liability or equity account balances as a percentage of total assets.

Question 12

In preparing a common-size income statement,you express all revenue and expense accounts as a percentage of net income.

Question 13

Another form of horizontal analysis is called trend analysis.

Question 14

Land is the ultimate liquid asset.

Question 15

A firm's ability to pay its obligations as they come due and to meet any unforeseen needs for cash is referred to as liquidity.

Question 16

Vertical analysis is also referred to as common-size analysis.

Question 17

Common-size statements are especially helpful in comparing companies of different size.

Question 18

The first step in preparing a horizontal analysis of a firm's financial statements is to break down the balance sheet to indicate which assets are expected to sold in within the next two years.

Question 19

A helpful approach to examine changes in the relative size of account balances within a single statement is referred to as horizontal analysis.

Question 20

Trend analysis is very useful for analyzing the financial statements,but not for analyzing supplemental information reported in corporate annual reports.

Question 21

Which of the following is the formula for calculating the percentage change in the horizontal analysis of a financial statement? a. $\frac{Current\;year\;account\;balance\;-\;total\;assets}{Previous\;year\;account\;balance}$


b. $\frac{Total\;assets\;-\;previous\;year\;account\;balance}{Previous\;year\;account\;balance}$


c. $\frac{Current\;year\;account\;balance\;-\;previous\;year\;account\;balance}{Previous\;year\;account\;balance}$


d. $\frac{Total\;assets\;-\;previous\;year\;account\;balance}{Current\;year\;account\;balance}$

Question 22

Horizontal analysis is

A)Looking at the changes in the account balances reported on a financial statement over time.
B)Looking at the changes in the account balances within a financial statement for one year.
C)Preparing an analysis of the profitability ratios in columns.
D)None of these ans choices are correct.

Question 23

Which of the following is the formula for calculating the percentage in trend analysis?
a. $\frac{current\;year\;account\;balance}{Base\;year\;account\;balance}$


b. $\frac{Total\;assets\;-\;previous\;year\;account\;balance}{Previous\;year\;account\;balance}$


c. $\frac{Current\;year\;account\;balance\;-\;previous\;year\;account\;balance}{Previous\;year\;account\;balance}$


d. $\frac{Total\;assets\;-\;previous\;year\;account\;balance}{Current\;year\;account\;balance}$

Question 24

Because an absolute dollar change does not give the whole picture,horizontal analysis generally includes which of the following?

A)Rational dollars
B)Percentage changes
C)Explanations
D)Budget amounts

Question 25

Earnings per share represents how much of a company's current net income could be distributed for each share of stock held by an investor.

Question 26

The gross margin percentage shows how much of each sales dollar is available to cover operating expenses and provide a profit after the cost of goods sold has been covered.

Question 27

Assume that the accounts receivable balances are $110,000,$112,000 and $116,000 for 2011,2012,and 2013,respectively.The trend percentage for 2013 is

A) 3.6%
B)5.5%
C)103.6%
D)105.5%

Question 28

Rather than looking only at the balances reported on the financial statements,it is helpful to look at the changes in the account balances over time.This is called

A)Common analysis.
B)Vertical analysis.
C)Horizontal analysis.
D)Benchmarking

Question 29

The formula for return on common stockholders' equity is Net sales revenue minus preferred dividends divided by average common stockholders' equity.

Question 30

Inventory turnover measures how many times,on average,a company's inventory is sold during the year.

Question 31

While the current and acid-test ratios provide information about liquidity,they do not indicate the underlying quality of current assets.

Question 32

Turbo Company's accounts receivable account balance was $100,000 at the beginning of the year and $120,000 at the end of the year.Turbo's percentage change calculation at the end of the current year is

A)16.7% decrease.
B)16.7% increase.
C) 20% decrease.
D) 20% increase.

Question 33

Probably the most common measure of short-term liquidity is the quick ratio.

Question 34

The price-earnings ratio indicates what multiple of current earnings investors are willing to pay for a share of stock.

Question 35

The quality of assets is assessed through the profitability ratios.

Question 36

The calculations are the easy part of a horizontal analysis,the challenge is

A)gathering the data.
B)interpreting the results.
C)both gathering the data and interpreting the results.
D)Neither gathering the data nor interpreting the results.

Question 37

Dun & Bradstreet's Industry Norms and Key Business Ratios provide financial ratios for key industries,as well as condensed common-sized balance sheets and income statements.

Question 38

A form of horizontal analysis in which each year's account balance is expressed as a percentage of the base year' is called

A)Trend analysis.
B)Percentage analysis.
C)Common size analysis.
D)Quick analysis.

Question 39

Which of the following authorities require that companies present comparative financial statements that include both the current year and the previous year?

A)IRS
B)GAAP
C)IIA
D)GAAS

Question 40

The current ratio is also referred to as the quick ratio.

Question 41

In preparing a common-size balance sheet,you express all account balances as a percentage of

A)Total stockholders' equity.
B)Total liabilities.
C)Total assets plus total liabilities minus stockholders' equity.
D)Total assets.

Question 42

Another term for vertical analysis is

A)Common-size analysis.
B)Liquidity analysis.
C)Horizontal analysis.
D)Leverage analysis.

Question 43

The following financial statement items are shown for J&T Manufacturing.
$\begin{array}{lr}\text { Net Sales } & \$ 840,000 \\\text { Cost of Goods Sold } & \$ 360,000 \\\text { Insurance Expense } & \$ 28,000 \\\text { Total Operating Expenses } & \$ 120,000 \\\text { Net Income } & \$ 56,000\end{array}$ Calculate the common-size percentage for Gross Margin.

A) 0.8%
B) 11.6%
C) 42.8%
D) 57.1%

Question 44

On a common-size balance sheet,common stock is shown as a percentage of

A)Total liabilities.
B)Total assets.
C)Current liabilities.
D)Total stockholders' equity.

Question 45

The following financial statement items are shown for J&T Manufacturing.
$$\begin{array} { l r } \text { Inventory } & \$ 24,000 \\\text { Total assets } & \$ 120,000 \\\text { Salaries payable } & \$ 12,000 \\\text { Total liabilities } & \$ 52,000\end{array}$$ Calculate the common-size percentage for inventory.

A) 8%
B) 14%
C) 20%
D) 500%

Question 46

Common-size statements are especially useful in comparing

A)A company's performance across time.
B)Companies of different size.
C)Supplemental information included in the corporate annual report.
D)None of these ans choices are correct.

Question 47

The formula for preparing a common-size income statement is a. $\frac{\text{Individual Revenue or Expense Account Balance}}{\text{Net Sales Revenue}}$

b. $\frac{\text{Individual Revenue or Expense Account Balance}}{\text{Net Income}}$

c. $\frac{\text{Individual Revenue or Expense Account Balance}}{\text{Operating Income }}$

d. $\frac{\text{Individual Revenue or Expense Account Balance}}{\text{Gross Profit}}$

Question 48

On a common-size income statement,income taxes are shown as a percentage of

A)Operating income.
B)Net sales revenue.
C)Net income.
D)Gross profit.

Question 49

The formula for determining the common-size percentage for liabilities is a. $\frac{\text{Individual Liability Account Balance}}{\text{Total Liabilities}}$

b. $\frac{\text{Individual Liability Account Balance}}{\text{Total Assets}}$

c. $\frac{\text{Individual Liability Account Balance}}{\text{Total Assets plus Total Liabilities minus Equity Individual  }}$

d. $\frac{\text{Individual Liability Account Balance}}{\text{Total Assets and Liabilities}}$

Question 50

A helpful approach to examine changes in the relative size of account balances within a single statement is referred to as

A)Common-size analysis.
B)Vertical analysis.
C)Trend analysis.
D)Common-size analysis and Vertical analysis,but not Trend analysis.

Question 51

Which of the following is $\textbf{ not }$ a use of trend analysis?

A)For revealing more information about performance than is revealed by just one year's worth of change
B)For comparing changes in related accounts.
C)To measure liquidity
D)All of these ans choices are uses of trend analysis

Question 52

On a common-size income statement,selling expense is shown as a percentage of

A)Net sales revenue.
B)Operating income.
C)Net income.
D)Gross profit.

Question 53

Which of the following is $\textbf{ not }$ a use of trend analysis?

A)For revealing more information about performance than is revealed by just one year's worth of change
B)For comparing changes in related accounts.
C)For analyzing information other than that found on the balance sheet and income statement,such as supplemental information reported in annual reports
D)All of these ans choices are uses of trend analysis

Question 54

In preparing a common-size income statement,you express all revenue and expense account as a percentage of

A)Net income.
B)Operating income.
C)Gross profit.
D)Net sales revenue.

Question 55

On a common-size balance sheet,notes payable is shown as a percentage of

A)Total liabilities.
B)Current liabilities.
C)Total assets.
D)Total stockholders' equity.

Question 56

On a common-size balance sheet,notes receivable is shown as a percentage of

A)Total liabilities.
B)Current liabilities.
C)Total stockholders' equity.
D)Total assets.

Question 57

In interpreting common-size financial statements denominated in a foreign currency,a word of caution is

A)There may be differences in the accounting principles the companies use for reporting.
B)There may be differences in the culture of the company's stakeholders.
C)There may be differences in the time period covered in the statements.
D)None of these ans choices are correct.

Question 58

The following financial statement items are shown for J&T Manufacturing.
$$\begin{array} { l r } \text { Inventory } & \$ 24,000 \\\text { Total assets } & \$ 120,000 \\\text { Salaries payable } & \$ 12,000 \\\text { Total liabilities } & \$ 52,000\end{array}$$ Calculate the common-size percentage for salaries payable.

A) 7%
B) 10%
C) 23%
D) 433%

Question 59

On a common-size income statement,interest expense is shown as a percentage of

A)Operating income.
B)Net sales revenue.
C)Net income.
D)Gross profit.

Question 60

The formula used in preparing a common-size balance sheet is $\begin{array}{|c|l|}\hline \text{a.} & \frac{\text{Individual Asset Account Balance}}{\text{Total Assets}} \\ \hline\text{b.} &\frac{\text{Individual Asset Account Balance}}{\text{Previous Year Account Balance}} \\\hline \text{c.} &\frac{\text{Current Year Account Balance - Previous Year Account Balance}}{\text{Previous Year Account Balance }} \\\hline \text{d.} & \frac{\text{Individual Asset Account Balance}}{\text{Total Assets and Liabilities}} \\\hline\end{array}$

Question 61

Investigating liquidity is important because

A)If a company cannot pay its bills on time,it will have difficulty obtaining resources needed to continue operating.
B)A company needs the ability to take advantage of opportunities as they arise.
C)Both if a company cannot pay its bills on time, it will have difficulty obtaining resources needed to continue operating and a company needs the ability to take advantage of opportunities as they arise.
D)Neither if a company cannot pay its bills on time, it will have difficulty obtaining resources needed to continue operating nor a company needs the ability to take advantage of opportunities as they arise.

Question 62

The difference between a firm's current assets and its current liabilities is

A)Cash flow.
B)Working capital.
C)Current ratio.
D)None of these ans choices are correct.

Question 63

The current ratio is calculated as

A)Current assets divided by current liabilities.
B)Current assets divided by total assets.
C)Current liabilities divided by current assets.
D)Current liabilities divided by total liabilities.

Question 64

The inventory turnover measures

A)How many days,on average,it takes between when an order is placed until the inventory is shipped.
B)How many times,on average,a company's inventory is sold during the year.
C)How many times,on average,the company takes to replace inventory during the year.
D)How many days,on average,it takes between when inventory is received to its sale to customers.

Question 65

The acid-test is calculated as: a. $\frac{\text{Cash + Cash Equivalents + Accounts Receivable }}{\text{Current Liabilities}}$

b. $\frac{\text{Cash + Cash Equivalents + Inventory + Accounts Receivable}}{\text{Current Liabilities}}$

c. $\frac{\text{Cash + Cash Equivalents + Accounts Receivable}}{\text{Current Assets }}$

d. $\frac{\text{Cash + Cash Equivalents + Inventory + Accounts Receivable}}{\text{Current Assets}}$

Question 66

The following financial statement items are shown for J&T Manufacturing.
$\begin{array}{lr}\text { Net Sales } & \$ 840,000 \\\text { Cost of Goods Sold } & \$ 360,000 \\\text { Insurance Expense } & \$ 28,000 \\\text { Total Operating Expenses } & \$ 120,000 \\\text { Net Income } & \$ 56,000\end{array}$ Calculate the common-size percentage for Insurance Expense.

A) 3.3%
B) 5.8%
C) 23.3%
D) 50.0%

Question 67

The accounts receivable turnover is calculated as a. $\frac{\text { Gross sales }}{\text { Ending Accounts Receivable Balance }}$

b. $\frac{\text{Gross sales }}{\text{Average Accounts Receivable Balance}}$

c. $\frac{\text{Net credit sales }}{\text{Average Accounts Receivable Balance }}$

d. $\frac{\text{Net credit sales}}{\text{Ending Accounts Receivable Balance}}$

Question 68

A more stringent measure of liquidity than the current ratio is referred to as

A)Current asset turnover.
B)Acid-test.
C)Collectability test.
D)None of these ans choices are correct.

Question 69

The average collection period is calculated as a. $\frac{365 \text { days }}{\text { Ending Accounts Receivable Balance }}$

b. $\frac{365 \text { days }}{\text { Net Credit Sales }}$

c. $\frac{365 \text { days }}{\text { Average Accounts Receivable Balance }}$

d. $\frac{365 \text { days }}{\text { Accounts Receivable Turnover }}$

Question 70

Which of the following will probably $\textbf{ not }$ be a result if a company's liquidity is poor?

A)Workers will quit if they are not paid on time.
B)Debt or Equity will exceed the company's maximum allowed amount.
C)Banks may not loan the company funds.
D)Customers will seek other sources of goods when the company's product is not available.

Question 71

The inventory turnover is calculated as a. $\frac{\text {Net sales}}{\text { Ending Inventory Balance }}$

b. $\frac{\text { Cost of Goods Sold }}{\text { Ending Inventory Balance }}$

c. $\frac{\text { Net sales }}{\text { Average Inventory Balance }}$

d. $\frac{\text {Cost of Goods Sold }}{\text { Average Inventory Balance }}$

Question 72

Which of the following is $\textbf{ not }$ a measure of liquidity?

A)Working capital
B)Average collection period
C)Acid-test
D)Price-earnings ratio

Question 73

The average days to sell inventory is calculated as a. $\frac{365 \text { days }}{\text { Ending Inventory Balance }}$

b. $\frac{365 \text { days }}{\text { Inventory Turnover }}$

c. $\frac{365 \text { days }}{\text { Average Inventory Balance }}$

d. $\frac{365 \text { days }}{\text { Cost of Goods Sold }}$

Question 74

Probably the most common measure of short-term liquidity is the

A)Acid-test.
B)Current ratio.
C)Quick ratio.
D)Working capital.

Question 75

A firm's ability to pay its obligations as they come due and to meet any unforeseen needs for cash is called

A)Current ratio
B)Liquidity
C)Working capital
D)Accounts receivable turnover

Question 76

The average collection period reveals

A)How many days,on average,it takes between when an order is placed until the cash is collected.
B)How many days,on average,the company takes to collect cash from a credit sale.
C)How many days,on average,the company takes to collect past due accounts.
D)How many days,on average,it takes between when an original contact is made to collect an account until the cash is collected.

Question 77

The calculation of working capital is

A)Current assets plus current liabilities.
B)Current assets less current liabilities.
C)Current assets times current liabilities.
D)Current assets divided by current liabilities.

Question 78

Because the assets included in the current ratio have different levels of liquidity that reflect different degrees of collectability,many companies use which of the following ratios to measure current liquidity?

A)Current ratio.
B)Acid-test.
C)Working capital.
D)None of these ans choices are correct.

Question 79

A problem with the current and acid test ratios is that,although they provide information about liquidity,they do not

A)Indicate the dollar amounts of the differences.
B)Indicate the underlying quality of the current assets.
C)Include all the current assets.
D)Include all the liabilities.

Question 80

Because the assets included in the current ratio have different levels of liquidity that reflect different degrees of collectability,many companies use which of the following ratios to measure current liquidity?

A)Current ratio.
B)Working capital.
C)Quick ratio.
D)None of these ans choices are correct.