Deck 12: Financial Statement Analysis

Question 1

The percentage change in a financial statement line item over two years is computed by dividing the dollar amount of the line item in the most recent year by the prior year dollar amount of the line item.

Answer 1

False

Question 2

Horizontal analysis highlights changes in financial statement line items over time and provides a complete picture of a business.

Answer 2

False

Question 3

Steadily increasing income from operations means that a company is growing its revenues but not controlling its costs,which usually signals expansion and growth in the business's value in future years.

Answer 3

False

Question 4

A thorough analysis of a company begins with understanding a company's business and industry.

Question 5

Horizontal analysis compares a financial statement line item in the current year with the same line item in the prior year.

Question 6

If a company has sales of $250 in 2019 and $225 in 2020,the percentage decrease from 2019 to 2020 is 10%.

Question 7

Accounting data should paint a picture of the results of implementing a particular business strategy by a company.

Question 8

Trend percentages are a form of horizontal analysis.

Question 9

If a company has sales of $150 in 2018 and $225 in 2019,the percentage change from 2018 to 2019 is 50%.

Question 10

An annual report is filed by every public company with the:

A)FASB.
B)SEC.
C)U.S.Treasury department.
D)An annual report is not filed.

Question 11

Trend percentages are a form of horizontal analysis that are computed only for balance sheet items.

Question 12

Declining income from operations indicates a slowdown in business activity.

Question 13

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

Question 14

Learning about what's happening in the industry,markets,general economic conditions,trends in product development,and specific company strategies puts a company's numbers in context and helps you understand why they turned out as they did.

Question 15

Every public company's annual report filed begins with the income statement.

Question 16

The description section of a company's business in an annual report does NOT generally include information about:

A)income taxes.
B)the company's products.
C)sales and distribution strategies.
D)product design and development.

Question 17

In the Management's Discussion and Analysis section of the annual report,you will find management's explanation for trends in sales.

Question 18

Financial analysis involves more than just looking at financial reports and doing some math.

Question 19

A company's business section of the annual report provides vital information about the company's products,its marketing and promotion,sales and distribution strategies,product design and development,manufacturing and quality assurance,and inventory management.

Question 20

MD&A stands for:

A)Management's Discussion and Analysis.
B)Management's Decisions and Analysis.
C)Marketing Discussion and Analysis.
D)Marketing Decisions and Analysis.

Question 21

The ratio of the dollar amount of each individual asset to the dollar amount of total assets is an example of vertical analysis.

Question 22

When computing trend percentages:

A)the current year is always equal to 100%.
B)the base year is always the current 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.

Question 23

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

A)benchmarking.
B)current ratio.
C)vertical analysis.
D)trend percentages.

Question 24

Vertical analysis compares a line item on the balance sheet,in a current period,to the same line item on the balance sheet in a prior period.

Question 25

How is the trend percentage for sales in 2019 computed? The base year is 2012.

A)Year 2019 sales ÷ Year 2012 sales
B)(Year 2019 sales - Year 2012 sales)÷ Year 2012 sales
C)(Year 2019 sales - Year 2012 sales)÷ Year 2019 sales
D)(Year 2019 sales ÷ Year 2012 sales)× 100

Question 26

The formula for the percentage change in a financial statement line item 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 27

Horizontal analysis is most closely related to:

A)trend analysis.
B)current ratio.
C)vertical analysis.
D)benchmarking.

Question 28

Year to year percentage changes in line items from comparative financial statements is called:

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

Question 29

Nekich Company reports the following sales figures(in millions): What is the trend percentage in 2020 if 2015 is the base year? (Round your final answer to the nearest whole percentage)

A)92%
B)88%
C)85%
D)96%

Question 30

The primary focus of horizontal analysis is:

A)percentage changes in line items from comparative financial statements.
B)the balance sheet only.
C)the amount of individual financial statement line items as a percentage of some related total,such as total assets.
D)the income statement only.

Question 31

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

Question 32

How is the percentage change (for horizontal analysis)for sales from 2018 to 2019 computed?

A)Year 2019 sales ÷ Year 2018 sales
B)(Year 2019 sales - Year 2018 sales)÷ Year 2018 sales
C)(Year 2019 sales - Year 2018 sales)÷ Year 2019 sales
D)(Year 2019 sales ÷ Year 2018 sales)× 100

Question 33

Goelzer Company reports the following trend percentages for net income: Given the above data,which statement is FALSE assuming 2015 is the base year?

A)When compared to 2017,net income is falling in 2018.
B)Net income is increasing in 2016 and 2017.
C)Net income is lower in 2019 than in 2015.
D)Net income is higher in 2019 than in 2015.

Question 34

Zebra Company reports the following figures for the years ending December 31,2019 and 2018: What are the percentage changes from 2018 to 2019 for Net Sales,Cost of Goods Sold and Gross Profit,respectively? (Round your final answers to one decimal place,X.X%)

A)100%,30.8%,33.3%
B)100%,0.8%,0.8%
C)30.8%,32.6%,33.3%
D)32.6%,33.3%,30.8%

Question 35

Bryanwood Company reports the following data: Based on the above information,what can be said about the company's business strategy?

A)The company has lost control of operating expenses.
B)The company has reduced cost of goods sold in total dollar amount.
C)The company has successfully undertaken some cost-cutting measures for operating expenses.
D)The company has fewer sales in 2019 than 2018.

Question 36

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.

Question 37

For the period from 2019 to 2020,a company reports the following: If sales are $8,000,000 in 2019,what are sales in 2020?

A)$3,200,000
B)$8,000,000
C)$10,800,000
D)$11,200,000

Question 38

Goelzer Company reports the following information for 2020 and 2021.Calculate the amount and percentage of increase or decrease for each financial statement line item doing a horizontal analysis.Use one decimal place for percentages.

Question 39

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

Question 40

Zemanowski Company reports the following sales figures (in millions): What is the trend percentage in 2017 if 2015 is the base year? (Round your final answer to the nearest whole percentage)

A)109%
B)101%
C)104%
D)105%

Question 41

You are using a leading competitor,Company B,for benchmarking your company,Company A.When benchmarking,the gross margin of Company A is expressed as a percentage of:

A)the net sales of Companies A and B.
B)Company B's net sales.
C)Company A's net income.
D)Company A's net sales.

Question 42

A vertical analysis is primarily concerned with:

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

Question 43

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

A)benchmarking.
B)common-size statement.
C)horizontal analysis.
D)financial ratio analysis.

Question 44

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

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

Question 45

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

A)gross profit
B)operating income
C)net income
D)net sales

Question 46

Benchmarking compares a company to some standard set by others.

Question 47

In performing vertical analysis,the base for inventory is:

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

Question 48

Common-size financial statements report only dollar amounts.

Question 49

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

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

Question 50

You are the CEO of Company A and you are using an industry leader (Leader Company)for benchmarking.Company A is much smaller than Leader Company in terms of total assets and total sales revenue.You should compare the:

A)gross profit of Company A to the gross profit of Leader Company.
B)net income of Company A to the net income of Leader Company.
C)net sales of Company A to the net sales of Leader Company.
D)net income to net sales ratio of Company A to net income to net sales ratio of Leader Company.

Question 51

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 52

Szidon Company reports the following data: Using benchmarking,what can be said about Szidon Company?

A)Szidon is inferior to the key competitor because the key competitor's net income percentage is higher.
B)Szidon is superior to the key competitor because net income is higher.
C)There is not enough information to make any conclusions.
D)There is conflicting information so no conclusions can be reached.

Question 53

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 Walton Company's return on sales to the industry leader is an example of:

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

Question 54

Benchmarking common size variables against a key competitor provides meaningful information only if the companies are similar in size.

Question 55

On a common-size income statement,income taxes expense is expressed as a percentage of:

A)net income.
B)total stockholders' equity.
C)total assets.
D)net sales.

Question 56

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

A)total liabilities
B)total stockholders' equity
C)total assets
D)net sales

Question 57

Mussa Corporation reports the following data: In vertical analysis,the cost of goods sold percentage is closest to: (Round your final answer to the nearest whole percentage)

A)37%.
B)59%.
C)63%.
D)170%.

Question 58

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

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

Question 59

In vertical analysis:

A)a base amount is optional.
B)a base amount is required.
C)line items from balance sheets are examined only.
D)line items from income statements are examined only.

Question 60

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 61

In performing vertical analysis,the base for income before taxes is:

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

Question 62

Cash,short-term investments and net current receivables are all components of the numerator of the quick ratio.

Question 63

In performing vertical analysis,the base for income tax expense is:

A)net sales.
B)gross revenues.
C)net income.
D)gross profit.

Question 64

A company's debt ratio is computed as total assets minus total liabilities divided by total assets.

Question 65

A vertical analysis of a balance sheet shows that current assets have increased from 42% to 56%.This means 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 long-term assets has increased.

Question 66

Given the following data: In vertical analysis,current liabilities would be expressed as: (Round your final answer to the nearest whole percent. )

A)35%.
B)39%.
C)34%.
D)50%.

Question 67

Prepare a vertical analysis for Katrina Corporation using the information shown below.Round percentages to one decimal place.

Question 68

A firm's ability to pay current liabilities can be evaluated using the quick ratio and the current ratio.

Question 69

In performing vertical analysis,the base for operating expenses is:

A)net sales.
B)gross profit.
C)net income.
D)operating income.

Question 70

Given the following data: In vertical analysis,Accounts Receivable,net would be expressed as: (Round your final answer to the nearest whole percent)

A)3%.
B)33%.
C)10%.
D)22%.

Question 71

Hull Company reports the following data: Based on the above data,what can be said about the Hull Company?

A)The company is controlling operating expenses.
B)The company is doing better than the industry average.
C)The company is losing control of operating expenses.
D)The company is increasing sales over time.

Question 72

Given the following data: In vertical analysis,net income would be expressed as: (Round your final answer to the nearest whole percent)

A)7%.
B)36%.
C)64%.
D)29%.

Question 73

Reimer Company reports the following data: When evaluating the results of operations,what can be said about Reimer Company?

A)Using vertical analysis,the company's profitability declined in 2018.
B)Using horizontal analysis,the company's profitability declined in 2018.
C)Using vertical analysis,the company's profitability declined in 2019.
D)Using horizontal analysis,the company's profitability declined in 2019.

Question 74

Wilhelm Company's gross profit percentages for the past 3 years are: Based on the above data,what can be said about the Wilhelm Company?

A)The sales volume is decreasing.
B)The company is decreasing the income tax expense.
C)The company is controlling operating expenses.
D)The company is controlling cost of goods sold.

Question 75

Dynasty Incorporated has the following data available at December 31,2019:
Prepare a balance sheet with vertical analysis of for Dynasty.Round percentages to one decimal place.

Question 76

In 2018,the Zenon Company reported that property,plant and equipment were equal to 12% of total assets.In 2018,current assets were equal to 88% of total assets.In 2019 the company reported that property,plant and equipment were equal to 28% of total assets.In 2019,current assets were equal to 72% of total assets.What conclusion can be reached from this information?

A)In 2019,the company is downsizing.
B)In 2019,property,plant and equipment as a proportion of total assets increased.
C)In 2019,the company is investing in the future.
D)B and C.

Question 77

A high inventory turnover may indicate that a company is experiencing difficulty selling its inventory.

Question 78

In general,the larger the working capital,the better the ability to pay debts.

Question 79

The quick ratio reflects the company's percentage of total assets financed with debt.

Question 80

Inventory turnover is calculated by dividing the cost of goods sold by the average inventory.