Question 1

In a common-size balance sheet, the 100% amount is:
A) current assets.
B) working capital.
C) total assets.
D) total stockholders' equity.

Accepted Answer

In a common-size balance sheet, the 100% amount refers to total assets. This allows for each individual line item on the balance sheet to be expressed as a percentage of total assets, providing a more accurate picture of the company's financial health and the composition of its assets.

Question 2

Which of the following statements is true regarding vertical analysis?
A) Vertical analysis compares financial data for a single entity over time.
B) Vertical analysis is used to compare companies of different sizes.
C) Vertical analysis compares trends of one company with a different company.
D) Vertical analysis expresses one item of a statements as a percentage of another item in a different statement.

Accepted Answer

Vertical analysis is used to compare companies of different sizes by expressing each item in a financial statement as a percentage of a base item within the same statement, allowing for comparison regardless of size.

Question 3

The percentage analysis of increases and decreases in individual items in comparative financial statements is called:
A) vertical analysis.
B) solvency analysis.
C) profitability analysis.
D) horizontal analysis.

Accepted Answer

The percentage analysis of increases and decreases in individual items in comparative financial statements is called horizontal analysis. Vertical analysis refers to the analysis of financial statements where each item on the statement is expressed as a percentage of a base figure. Solvency analysis is the evaluation of a company's ability to meet its financial obligations. Profitability analysis is the assessment of a company's ability to generate profits. Therefore, D is the correct answer.

Question 4

Emerald Company issued additional shares of stock. Which of the following is true with regard to the effect of the stock issuance transaction on Emerald's ratio computations?
A) Earnings per share decreases
B) The debt to equity ratio increases
C) The asset turnover ratio increases
D) Return on equity remained unchanged

Accepted Answer

When a company issues additional shares of stock, the total number of outstanding shares increases, which dilutes the earnings per share. This is because the same amount of earnings is now spread out among a larger number of shares, causing the earnings per share to decrease. The debt to equity ratio and asset turnover ratio are not directly affected by the stock issuance, and the return on equity can only be determined by considering additional information about the company's profitability.

Question 5

Ruby Company sold inventory on credit. Its gross profit percentage is 23%. The effect of this transaction is that the:
A) current ratio was unchanged.
B) earnings per share increased.
C) working capital decreased.
D) debt to equity ratio increased.

Accepted Answer

When Ruby Company sells inventory on credit, it recognizes revenue and cost of goods sold, leading to an increase in net income. Since the gross profit percentage is 23%, this indicates that the sale contributes positively to earnings, thus increasing earnings per share.

Question 6

Which of the following profitability ratios would be determined through a common-size vertical analysis of the income statement?
A) Gross profit percentage
B) Return on assets
C) Return on equity
D) Earnings per share

Accepted Answer

Gross profit percentage is derived from the income statement and can be calculated by dividing gross profit by net sales. Common-size vertical analysis converts all income statement items to a percentage of net sales, which makes it easy to calculate the gross profit percentage. Return on assets, return on equity, and earnings per share are all profitability ratios that rely on information from both the income statement and the balance sheet, so they cannot be determined solely through a common-size vertical analysis of the income statement.

Question 7

In considering equity and debt financing, which of the following statements is generally true?
A) The lower the measure of the long-term debt to equity ratio, the greater the likelihood that the company will have difficulty in meeting its obligation in some future period.
B) Interest and dividend payments are not required to be made by the issuing company.
C) The higher the measure of the debt to equity ratio, the greater the likelihood that the company will have difficulty in meeting its obligation in some future period.
D) Most companies prefer to have no debt and rely exclusively on equity financing.

Accepted Answer

A higher measure of debt to equity ratio means that a company has more debt compared to equity, which increases the risk of default in the future if the company is unable to make debt payments. Therefore, the statement "The higher the measure of the debt to equity ratio, the greater the likelihood that the company will have difficulty in meeting its obligation in some future period" is generally true. A lower long-term debt to equity ratio indicates a more conservative financing strategy, which may be preferred by some companies. However, it does not necessarily mean that the company will have difficulty meeting its obligations in the future. Interest and dividend payments are required to be made by the issuing company, regardless of whether they are financed through debt or equity. Lastly, while some companies may prefer to have no debt and rely solely on equity financing, others may choose to use a mix of both to achieve an optimal capital structure.

Question 8

What type of analysis is indicated by the following? 
A) Vertical analysis
B) Horizontal analysis
C) Liquidity analysis
D) Common-size analysis

Accepted Answer

The answer of What type of analysis is indicated by...

Question 9

Return ratios are measures of the relationship between the:
A) profit earned and the investment made in the company by the various groups of creditors and investors.
B) revenue earned and the total equity of a company.
C) total equity of a company and its cash flows for the period.
D) profitability and liquidity aspects of a company.

Accepted Answer

Return ratios, such as return on equity or return on assets, help to measure the profitability of a company in relation to the investment made by its various stakeholders, including creditors and investors. These ratios indicate how much profit the company is generating for each unit of investment made by these groups.

Question 10

Horizontal analysis of comparative financial statements includes the:
A) development of common-size statements.
B) calculation of liquidity ratios.
C) calculation of dollar amount changes and percentage changes from the previous to the current year.
D) evaluation of financial statement data.

Accepted Answer

Horizontal analysis of comparative financial statements involves calculating dollar amount changes and percentage changes from the previous to the current year, allowing for a comparison of changes in financial performance over time. Development of common-size statements, calculation of liquidity ratios, and evaluation of financial statement data are not specific components of horizontal analysis.

Question 11

Percentage analyses, ratios, turnovers, and other measures of financial position and operating results are:
A) a substitute for sound judgment.
B) useful analytical measures.
C) enough information for analysis, industry information is not needed.
D) unnecessary for analysis, but reaction is better.

Accepted Answer

Percentage analyses, ratios, turnovers, and other measures of financial position and operating results are useful analytical measures because they provide insight into the company's financial health and performance. However, they should not be used as a substitute for sound judgment, and industry information should also be considered in the analysis.

Question 12

An analysis in which all the components of an income statement are expressed as a percentage of net sales is called:
A) vertical analysis.
B) horizontal analysis.
C) liquidity analysis.
D) common-size analysis.

Accepted Answer

The answer of An analysis in which all the components...

Question 13

The percent of fixed assets to total assets is an example of:
A) vertical analysis.
B) solvency analysis.
C) profitability analysis.
D) horizontal analysis.

Accepted Answer

The percent of fixed assets to total assets is an example of vertical analysis, which compares different items on a financial statement to a single base figure to understand the relative significance of each component.

Question 14

Which of the following generally indicates a positive change?
A) Earnings per share decreases
B) The debt to total assets ratio increases
C) The acid test ratio decreases
D) The return on equity increases

Accepted Answer

An increase in return on equity indicates that the company is generating more profit using shareholder's investments, which is generally considered a positive change. A decrease in earnings per share, an increase in the debt to total assets ratio, and a decrease in the acid test ratio are all typically negative changes.

Question 15

Horizontal analysis is analysis in which:
A) financial statement lines are expressed as a percent of the base (earliest) year.
B) all items are presented as a percentage of one selected item on the financial statement.
C) a statistic is calculated for the relationship between two items on a single financial statement or for two items on different financial statements.
D) ratios are presented for the past two accounting periods.

Accepted Answer

In horizontal analysis, financial statement lines are expressed as a percentage of the base (earliest) year to analyze the trend of changes over time. Other answer choices describe different types of analysis such as vertical analysis, common size analysis, and ratio analysis.

Question 16

A banker is analyzing a company which operates in the automotive industry. Which of the following will likely be the banker's most important consideration in determining whether the company should receive a loan?
A) The automotive plant's capacity.
B) Inflation has been consistently high for several years.
C) The company has state-of-the-art automated equipment which enhances the efficiency of its operating process.
D) The company has a large amount of interest payments related to other outstanding loans.

Accepted Answer

The banker will be most concerned with the company's existing debt obligations and its ability to service additional debt, as indicated by the large amount of interest payments related to other outstanding loans. This directly affects the company's creditworthiness and risk of default.

Question 17

Which of the following is considered a profitability ratio?
A) Return on equity
B) Acid test ratio
C) Inventory turnover ratio
D) Debt to equity ratio

Accepted Answer

Return on equity is a profitability ratio that measures the amount of net income returned as a percentage of shareholders' equity.

Question 18

Each of the following is included in a public company's MD&A except:
A) material trends, events, or known uncertainties.
B) statements about what management expects to occur in the future.
C) management's views of the financial condition and performance of the company.
D) names and experience of the company's managers, directors, and officers.

Accepted Answer

The MD&A (Management's Discussion and Analysis) provides an overview of the company's financial performance and future prospects. It includes discussions on material trends, events, or uncertainties affecting the company's business, management's views of the financial condition and performance of the company, and statements about what management expects to occur in the future. However, it does not include information about the names and experience of the company's managers, directors, and officers, as this information is typically included in the company's annual report or proxy statement.

Question 19

In a common-size income statement, the 100% amount is:
A) net income.
B) operating income.
C) gross profit.
D) net sales.

Accepted Answer

In a common-size income statement, the 100% amount is typically the net sales. This allows for easier comparison of expenses and profitability across different time periods or companies.

Question 20

Which of the following statements is true regarding horizontal analysis?
A) It can only be used with balance sheet accounts.
B) It can only be used with income statement accounts.
C) It expresses each financial statement line item as a percent of the largest amount on the statement.
D) It expresses each financial statement line item as a percent of the earliest year amount.

Accepted Answer

Horizontal analysis, also known as trend analysis, compares financial statement line items over multiple periods. The percentage change from the earliest period to the current period is calculated and expressed as a percentage of the earliest period amount. Therefore, choice (D) is the correct answer.

Quiz 12: Financial Statement Analysis

In a common-size balance sheet, the 100% amount is:

Which of the following statements is true regarding vertical analysis?

The percentage analysis of increases and decreases in individual items in comparative financial statements is called:

Emerald Company issued additional shares of stock. Which of the following is true with regard to the effect of the stock issuance transaction on Emerald's ratio computations?

Ruby Company sold inventory on credit. Its gross profit percentage is 23%. The effect of this transaction is that the:

Which of the following profitability ratios would be determined through a common-size vertical analysis of the income statement?

In considering equity and debt financing, which of the following statements is generally true?

What type of analysis is indicated by the following?

Return ratios are measures of the relationship between the:

Horizontal analysis of comparative financial statements includes the:

Percentage analyses, ratios, turnovers, and other measures of financial position and operating results are:

An analysis in which all the components of an income statement are expressed as a percentage of net sales is called:

The percent of fixed assets to total assets is an example of:

Which of the following generally indicates a positive change?

Horizontal analysis is analysis in which:

A banker is analyzing a company which operates in the automotive industry. Which of the following will likely be the banker's most important consideration in determining whether the company should receive a loan?

Which of the following is considered a profitability ratio?

Each of the following is included in a public company's MD&A except:

In a common-size income statement, the 100% amount is:

Which of the following statements is true regarding horizontal analysis?