Deck 17: Financial Statement Analysis

Question 1

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

Answer 1

False

Question 2

Ratio analysis ________.

A)cannot be used to evaluate a company's financial condition
B)is used most effectively to compare a company against other companies in the same industry and to denote trends within the company
C)cannot be used to compare a company against other companies in the same industry because the necessary information is not available
D)cannot be used to evaluate a company's performance

Answer 2

B

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

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

Question 7

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 8

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

Question 9

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

Question 10

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 11

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

Question 12

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

Question 13

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

Question 14

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

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

Question 15

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 16

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 17

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

Question 18

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

Question 19

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 20

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

Question 21

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 22

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 23

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

Question 24

The following is a summary of information presented on the financial statements of a company on December 31,2019. With respect to net sales revenue,a horizontal analysis reveals ________.

A)a 19.48% increase in net sales revenue
B)a 237.77% decrease in net sales revenue
C)a decrease of $51,000 in net sales revenue
D)a $51,000 increase in net sales revenue

Question 25

Horizontal analysis compares the change in each statement item from one year to the next.

Question 26

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)employees' pay rates

Question 27

Data for Sherwood,Inc.for the years ended December 31,2019 and 2018 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 28

Provide a description of the contents of each of the following components of the annual report.

Question 29

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 30

Horizontal analysis is computed by dividing a specific statement line item by its base amount and then multiplying by 100.

Question 31

McDonald 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 2019 and 2018.(Round your percentage answers to two decimal places. )

Question 32

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

Question 33

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

Question 34

Which of the following best describes horizontal analysis?

A)comparing financial statement line items 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 35

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 performance.
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 36

The following is a summary of information presented on the financial statements of a company on December 31,2019. With respect to net income,a horizontal analysis reveals ________.(Round your answer to two decimal places. )

A)that net income is 11.03% of net sales revenue
B)a $29,000 increase in net income
C)a 110.34% decrease in net income
D)a 110.34% increase in net income

Question 37

The horizontal analysis is computed by which of the following formulas?

A)((earlier period amount - later period amount)/base period amount)× 100
B)(later period amount/earlier period amount)× 100
C)(base period amount/dollar amount of change)× 100
D)(dollar amount of change/base period amount)× 100

Question 38

Provide a description of the contents of each of the following components of the annual report.

Question 39

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

Question 40

MacMan,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 27.91%
B)decreased by 27.91%
C)increased by 34.80%
D)decreased by 34.80%

Question 41

Vertical analysis involves comparing an amount for a line item in the financial statements with a corresponding amount for the line item of the previous year.

Question 42

The following is summary of information presented on the financial statements of a company on December 31,2019. With respect to current liabilities,a horizontal analysis reveals ________.(Round your answer to two decimal places. )

A)that current liabilities are 38.05% of total equity
B)a 65.96% increase in current liabilities
C)a current ratio of 0.90
D)a 39.74% increase in current liabilities

Question 43

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

Question 44

Data for Michelle,Inc.follow:
Assets
Current Assets:
Liabilities
Stockholders' Equity
Prepare a horizontal analysis of the comparative balance sheet of Michelle,Inc.(Round to one decimal place. )

Question 45

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

Question 46

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

Question 47

Beary,Inc.provides the following historical data:
Prepare the trend analysis report.Use 2014 as the base year,and round answers to the nearest percent.

Question 48

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 49

Night Owl,Inc.reported the following data: The horizontal analysis shows that the amount of total liabilities has ________.

A)increased by $22,800
B)increased by $2400
C)decreased by $2400
D)increased by $24,000

Question 50

Data for Gobell,Inc.follow:
Assets
Current Assets:
Liabilities
Stockholders' Equity
Prepare a horizontal analysis of the comparative balance sheet of Gobell,Inc.(Round to one decimal place. )

Question 51

Trend analysis is a form of horizontal analysis.

Question 52

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

Question 53

Sapphire Corp.reported the following revenues and net income amounts.
Calculate Sapphire's trend analysis for revenues and cost of goods sold.Use 2015 as the base year,and round to the nearest percent.

Question 54

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

A)Net income for 2017 has increased by 115% over that for 2015.
B)Net income for 2017 has decreased by 15% over that for 2015.
C)Net income for 2017 has decreased by 115% over that for 2015.
D)Net income for 2017 has increased by 15% over that for 2015.

Question 55

The following is a summary of information presented on the financial statements of a company on December 31,2019. With respect to long-term liabilities,a horizontal analysis reveals ________.

A)long-term liabilities decreased by $19,000
B)long-term liabilities decreased by 33.33%
C)long-term liabilities decreased by 16.98%
D)long-term liabilities decreased by $7000

Question 56

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

Question 57

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 line item as a percentage of the base year amount

Question 58

A vertical analysis percent is computed by dividing the base amount by the specific item and then multiplying by 100.

Question 59

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

A)Net income for 2019 is 174% of net income for 2015.
B)Net income for 2018 is 151% of the previous year.
C)Net income for 2018 decreased by 151% from 2017.
D)Net income for 2019 increased by 174% from 2018.

Question 60

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

Question 61

In a vertical analysis of the balance sheet,the base amount is total liabilities.

Question 62

Modern Moving Company reported the following amounts on its balance sheet as of December 31,2019 and December 31,2018: For the vertical analysis,what is the percentage of stockholders' equity as of December 31,2019? (Round your answer to two decimal places. )

A)100.00%
B)54.11%
C)55.79%
D)There is not enough information provided to make this computation.

Question 63

Mercer,Inc.provides the following data for 2019: The gross profit as a percentage of net sales is ________.(Round your answer to two decimal places. )

A)37.96%
B)39.80%
C)60.20%
D)40.8%

Question 64

In 2018,Spirit Company's net income was 10% of net sales revenue.In 2019,the net income was 5% of net sales revenue.There is no need for investors to be alarmed because a drop from 10% to 5% is not significant.

Question 65

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

Question 66

The vertical analysis of the income statement of Bates,Inc.is as shown below: The figure 47.0% shown for gross profit in 2019 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 67

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

Question 68

The vertical analysis of the income statement of Settler,Inc.is as shown below: The 20% shown for net income in 2019 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 69

Martin Company's cost of goods sold is 40% of net sales revenue.This means that for every $1 of net sales revenue,Martin has $0.60 of gross profit.

Question 70

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 71

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 72

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

Question 73

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

Question 74

Reliable Moving Company reported the following amounts on its balance sheet as of December 31,2019 and December 31,2018: For the vertical analysis,what is the percentage of total liabilities for December 31,2018? (Round your answer to two decimal places. )

A)100.00%
B)39.55%
C)29.03%
D)45.37%

Question 75

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

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

Question 76

Prepare a vertical analysis of the income statement shown below.(Round to two decimal places. )
Operating Expenses:
Other Income and (Expenses):

Question 77

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

Question 78

Shelcal,Inc.provides the following data for the year 2019: The cost of goods sold as a percentage of net sales revenue is ________.(Round your answer to two decimal places. )

A)58.46%
B)58.57%
C)57.95%
D)58.26%

Question 79

Allstate Moving Company reported the following amounts on its balance sheet as of December 31,2019 and December 31,2018: For the vertical analysis,what is the percentage of current assets as of December 31,2019? (Round your answer to two decimal places. )

A)29.31%
B)29.41%
C)41.67%
D)41.46%

Question 80

Prepare a vertical analysis for the balance sheet data given below.(Round to two decimal places. )
Assets
Current Assets:
Liabilities
Current Liabilities:
Stockholders' Equity