Deck 13: Financial Statement Analysis

Question 1

The percentage change in any individual item shown on comparative financial statements is calculated by dividing the dollar amount of the change from the base period to the current period by:

A) the amount shown for the current period.
B) the base-period amount.
C) the average of the amounts shown for the base and the current periods.
D) the amount estimated for the future period.

Answer 1

B

Question 2

When computing trend percentages:

A) the current year is always equal to 100%.
B) the base year is always the latest year.
C) the base year is always equal to 100%.
D) the base year is equal to the current year plus the previous year divided by two.

Answer 2

C

Question 3

Horizontal analysis is performed on:

A) only the income statement.
B) only the balance sheet.
C) only the statement of retained earnings
D) the income statement, the balance sheet, and the statement of retained earnings.

Answer 3

D

Question 4

If a company has sales of $250 in 2010 and $225 in 2011, the percentage increase from 2010 to 2011 is 10%.

Question 5

Trend analysis using income statement data is widely used for predicting the future.

Question 6

A form of horizontal analysis that indicates the direction a business is taking is:

A) benchmarking.
B) economic value added analysis.
C) vertical analysis.
D) trend percentages.

Question 7

The percentage change in financial statement balances is computed by dividing the dollar amount of the most recent period by the base period dollar amount.

Question 8

The primary focus of horizontal analysis is:

A) percentage changes in comparative financial statements.
B) the balance sheet only.
C) the changes in individual financial statement amounts as a percentage of some related total.
D) the change in key financial statement ratios over a certain time frame.

Question 9

Horizontal analysis and trend analysis are synonymous.

Question 10

Horizontal analysis compares financial statement items in the current period with other items in the current period.

Question 11

If a company has sales of $150 in 2010 and $225 in 2011, the percentage change from 2010 to 2011 is 50%.

Question 12

Vertical analysis highlights changes in financial statement balances from period to period.

Question 13

Trend percentages are computed only for balance sheet items.

Question 14

Period to period percentage change in comparative financial statements is often called:

A) benchmarking.
B) horizontal analysis.
C) vertical analysis.
D) common-size statements.

Question 15

It is generally considered more useful to know the percentage change in financial statement amounts from year to year than to know the absolute dollar amount.

Question 16

The best way to analyze a company is by examining the financial data for several years.

Question 17

The analysis of percentage changes in comparative statements is known as:

A) economic value added analysis.
B) vertical analysis.
C) horizontal analysis.
D) benchmarking analysis.

Question 18

Horizontal analysis of financial statements is an:

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

Question 19

The horizontal analysis formula 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 current year amount.
D) added to the base year amount divided by the base year amount.

Question 20

Horizontal analysis is most closely related to:

A) trend analysis.
B) economic value added analysis.
C) vertical analysis.
D) benchmarking.

Question 21

Vertical analysis is a less sophisticated analysis tool than horizontal analysis.

Question 22

Matrix analysis expresses each item on a financial statement in terms of a percent of a base amount.

Question 23

Which of the following is typically used as the base in a vertical analysis of a balance sheet?

A) Total liabilities
B) Cash
C) Total assets
D) Gross sales

Question 24

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

Question 25

Common-size analysis is also known as:

A) Trend analysis.
B) Ratio analysis.
C) Vertical analysis.
D) Matrix analysis.

Question 26

Vertical analysis compares an item on the financial statement to the same item in a prior period.

Question 27

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

Question 28

Which of the following is typically used as the base in a vertical analysis of an income statement?

A) Cash
B) Inventory
C) Net income
D) Net sales

Question 29

A financial statement item expressed as a percentage of a base amount is a result of:

A) horizontal analysis.
B) ratio analysis.
C) vertical analysis.
D) comparative analysis.

Question 30

When comparing companies of different sizes, vertical analysis would be a useful tool.

Question 31

A vertical analysis is primarily concerned with:

A) the dollar amount of the change in various financial statement amounts from year to year.
B) individual financial statement items expressed as a percentage of a base (which represents 100%).
C) percentage changes in the balances shown in comparative financial statements.
D) the change in key financial statement ratios over a specified period of time.

Question 32

Expressing cash and cash equivalents as a percentage of total assets is an example of:

A) horizontal analysis.
B) economic value added.
C) ratio analysis.
D) vertical analysis.

Question 33

When performing vertical analysis of an income statement, net income is usually used as the base.

Question 34

Vertical analysis is concerned with the format used to prepare financial statements.

Question 35

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

Question 36

In performing a vertical analysis, the base for cash is:

A) total liabilities and stockholders' equity.
B) total assets.
C) total cash and cash equivalents.
D) total current assets.

Question 37

In vertical analysis:

A) a base amount is optional.
B) a base amount is required.
C) comparative statements are optional.
D) comparative statements are required.

Question 38

Tech Support Corporation reports the following data: In a vertical analysis, the gross profit percentage is closest to:

A) 63%.
B) 57%.
C) 157%.
D) 36%.

Question 39

When performing a horizontal analysis on a statement of retained earnings, which would NOT show a percentage change value?

A) Dividends paid
B) Net income
C) Expenses
D) Beginning balance of retained earnings

Question 40

The relationship of each individual asset as a percentage of total assets is an example of vertical analysis.

Question 41

Prepare a vertical analysis for Crestwood Corporation's balance sheet to determine the component percentages of its assets, liabilities, and stockholders' equity. Round percentages to the nearest one-tenth percent.

Question 42

Common-size financial statements report only dollar amounts.

Question 43

If a balance sheet is subjected to vertical analysis which shows that current assets (using total assets as the base) have increased from 42% to 56%, this would always mean that:

A) current assets have increased as a percentage of total assets.
B) the dollar amount of total assets has increased.
C) the dollar amount of total assets has decreased.
D) the dollar amount of current assets has increased.

Question 44

In performing a vertical analysis, the base for interest expense is:

A) net sales.
B) total operating expenses.
C) net income.
D) interest income.

Question 45

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

A) net sales.
B) total revenues.
C) total expenses.
D) gross profit.

Question 46

Which of the following would be most helpful in the comparison of different size companies?

A) Horizontal analysis
B) Comparison of their net incomes
C) Comparison of their working capital balances
D) Preparation of common-size financial statements

Question 47

To perform vertical analysis, financial statements must first be converted to common-size format.

Question 48

A common-size statement is less effective than a horizontal analysis when comparing companies.

Question 49

A financial statement that shows each item as a percentage of one key item on the statement is referred to as:

A) benchmarking.
B) common-size statement.
C) horizontal analysis.
D) statement of cash flows.

Question 50

Given the following data: In a vertical analysis, net income would be expressed as:

A) 18%.
B) 45%.
C) 30%.
D) 82%.

Question 51

Given the following data: In a vertical analysis, cash would be expressed as:

A) 935%.
B) 217%.
C) 46%.
D) 11%.

Question 52

Prepare a vertical analysis for Winkler Corporation using the information shown below (round percentages to the nearest one-tenth percent):

Question 53

Given the following data: In a vertical analysis, cost of goods sold would be expressed as:

A) 166%.
B) 40%.
C) 60%.
D) 250%.

Question 54

Common-size financial statements are particularly valuable for identifying areas for improvements.

Question 55

Benchmarking is the process of comparing a company to standards set by the leading company in the industry.

Question 56

If the assets shown on a balance sheet are subjected to vertical analysis (using total assets as the base), an increase in the figure for current assets from 56% to 60% would always mean that:

A) the dollar amount of noncurrent assets has increased.
B) the dollar amount of total assets has increased.
C) total current assets have increased as a percentage of total assets.
D) the dollar amount of current assets has increased.

Question 57

Given the following data: In vertical analysis, current liabilities would be expressed as:

A) 356%.
B) 90%.
C) 111%.
D) 28%.

Question 58

On a common-size balance sheet each item is expressed as a percentage of:

A) current assets.
B) operating income.
C) total assets.
D) net income.

Question 59

Prepare a vertical analysis for Westwood Corporation by completing the right column of the following balance sheet with the appropriate percentages. Round percentages to the nearest one-tenth percent.

Question 60

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

A) sales discounts.
B) sales.
C) gross profit.
D) net sales.

Question 61

In the statement of cash flows, an increase in new borrowing, exceeding the payoff of long-term debt, is a sign of weakness.

Question 62

The statement of cash flows is helpful for spotting weaknesses as well as gauging success.

Question 63

On the statement of cash flows of a healthy company, net cash from operating activities generally exceeds net income because of the reduction for depreciation.

Question 64

When benchmarking financial statements of two key competitors, the gross margin of Company A is expressed as a percentage of:

A) the total gross margins of Companies A and B.
B) Company B's gross margin.
C) a common standard for both Company A and Company B.
D) Company A's sales.

Question 65

In the statement of cash flows, sales of marketable securities are considered an operating activity.

Question 66

In the statement of cash flows, depreciation and amortization are considered a use of funds.

Question 67

Analyzing the statement of cash flows may help analysts determine the financial health of a company. Which of the following signs below is a NOT indicator of a financially healthy company?

A) The company's operations are a major source (not a use) of cash.
B) The company's operations are a major use (not a source) of cash.
C) The company's investing activities include more purchases than sales of long-term assets.
D) The company's financing activities are not dominated by borrowing.

Question 68

On a statement of cash flows of a struggling company, net income would ordinarily be:

A) less than depreciation expense.
B) more than depreciation expense.
C) greater than cash provided by operating activities.
D) more than cash provided by operating activities.

Question 69

As another analytical tool, analysts rely on the statement of cash flows as a predictor of eventual success for a given company.

Question 70

On a statement of cash flows, which is considered an operating activity?

A) Sale of securities
B) Purchase of fixed assets
C) Purchase of securities
D) Depreciation

Question 71

In the statement of cash flows, more purchases of long-term assets than sales of long-term assets are considered a sign of a healthy company.

Question 72

Benchmarking financial statements represents a form of:

A) horizontal analysis.
B) vertical analysis.
C) gross profit analysis.
D) trend analysis.

Question 73

If the sale of plant assets is a company's major source of cash, it may be a sign of financial difficulty.

Question 74

In the statement of cash flows, purchases of fixed assets are considered to be investing activities.

Question 75

On a statement of cash flows, which is considered an investing activity?

A) Depreciation
B) Increase in inventory
C) Sale of securities
D) Repayment of debt

Question 76

On the statement of cash flows of a healthy company, net cash from operating activities is generally less than net income.

Question 77

Computer City, Inc.'s comparative income statement is shown below:
Required:
Prepare a common-size income statement for 2012 and 2011 showing the percentages for each item listed above. Round percentages to one-tenth percent.

Question 78

On a common-size balance sheet, income taxes payable is expressed as a percentage of:

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

Question 79

When analyzing the statement of cash flows, which of the following statement are true?

A) Cash has no effect on the success of the company.
B) Cash is ignored when analyzing a company.
C) An excess of cash is the sign of a healthy company.
D) A company with a large cash balance is ensured success.

Question 80

Walton Company's return on sales for the most recent year was 5%. The industry leader reports a return on sales of 7%. The comparison of each company's return on sales is an example of:

A) benchmarking.
B) gross margin analysis.
C) detail analysis.
D) intercompany analysis.