Question 1

Common size financial statements are an example of horizontal analysis.

Accepted Answer

Common size financial statements are an example of vertical analysis, where each line item is expressed as a percentage of a base figure within the same period, facilitating comparison across companies or periods. Horizontal analysis, on the other hand, compares financial data across multiple periods.

Question 2

One reason a managerial accountant might need to analyze financial statements of other firms is to assess the viability of a vendor.

Accepted Answer

Managerial accountants may need to analyze the financial statements of other firms to assess the viability of a vendor before entering into a business agreement with them. This analysis helps them evaluate the financial stability of the vendor and make informed decisions about the business relationship.

Question 3

When the amount of net sales is used as the base amount for all income statement items, horizontal analysis is being performed.

Accepted Answer

Horizontal analysis, also known as trend analysis, compares financial data across multiple periods, not against a base amount like net sales. It involves calculating the change in each line item over time, rather than comparing all items to a single base figure, which is more characteristic of vertical analysis.

Question 4

If a company records fictitious sales, income will increase, but operating cash flows will not be affected.

Accepted Answer

Recording fictitious sales increases income on the income statement due to the recognition of revenue that did not actually occur. However, operating cash flows, which are reported on the cash flow statement, will not be affected because no actual cash transaction took place.

Question 5

If net income is substantially less than operating cash flows, this is a sign of possible accounting irregularities.

Accepted Answer

A substantial difference between net income and operating cash flows can occur for legitimate reasons, such as significant non-cash expenses (e.g., depreciation) or changes in working capital, and does not necessarily indicate accounting irregularities.

Question 6

To assess control of operations, managers expect that successful implementation of their plan will be reflected in subsequent financial statements as substantially increased profits.

Accepted Answer

The answer of To assess control of operations, managers expect...

Question 7

Whenever an asset increases, the corresponding part of the transaction will always be an increase to net income.

Accepted Answer

When an asset increases, it does not always result in an increase in net income. For example, if an asset is purchased with cash, the asset will increase but there will be no impact on net income. Net income is impacted by revenues and expenses, not just changes in assets.

Question 8

One example of vertical analysis is the determination that interest expense rose from 1.2% of net sales to 1.4% of net sales from one period to the next period.

Accepted Answer

This statement describes a vertical analysis, as it compares the interest expense as a percentage of net sales between two periods.

Question 9

Vertical analysis is performed on the balance sheet because it represents a point in time, while horizontal analysis is performed on the income statement because it covers a period of time.

Accepted Answer

Vertical analysis can be performed on both the balance sheet and income statement to show the relative size of each item. Horizontal analysis can also be applied to both to compare financial data over time.

Question 10

A managerial accountant may analyze his/her company's own financial statements in order to assess the appearance of his/her firm to investors.

Accepted Answer

A managerial accountant may perform financial analysis of their own company's financial statements in order to evaluate the financial health of the company and identify areas for improvement. This analysis is useful in determining how attractive the company may be to potential investors.

Question 11

One example of vertical analysis is the determination that long-term assets increased by 2.5% over time.

Accepted Answer

Vertical analysis involves comparing each item on a financial statement to a base figure from the same statement, not analyzing changes over time.

Question 12

Recording fictitious sales will cause operating cash flows and net income to increase.

Accepted Answer

Recording fictitious sales increases net income by recognizing revenue that has not been earned, but it does not affect operating cash flows because no actual cash transaction occurs from these fake sales.

Question 13

News articles and credit reports are valuable sources of financial information.

Accepted Answer

News articles and credit reports provide valuable information about financial events, trends, and creditworthiness that can be useful for making financial decisions.

Question 14

If sales revenue of a retail company increases by 10% because the company sells more units of product, the company's cost of goods sold will increase by 10% as well.

Accepted Answer

The cost of goods sold is directly proportional to the number of units sold. If the number of units sold increases by 10%, the cost of goods sold will also increase by 10%.

Question 15

An increase in gross margin of 7% from one period to the next implies that the company's net income will have increased by 7% as well.

Accepted Answer

Gross margin is calculated as the difference between revenue and cost of goods sold, while net income takes into account all expenses. Therefore, an increase in gross margin does not necessarily directly translate to an increase in net income. Other expenses such as overhead costs, taxes, and interest expenses can also impact net income.

Question 16

The statement of cash flows divides a company's profitability into operating, investing, and financing activities.

Accepted Answer

The statement of cash flows divides a company's cash inflows and outflows into operating, investing, and financing activities, not its profitability.

Question 17

In general, managers should analyze financial statements primarily from the perspective of their customers.

Accepted Answer

Managers should analyze financial statements primarily from the perspective of their company or organization, taking into account factors such as profitability, liquidity, and solvency. While customer satisfaction and financial performance are correlated, analyzing financial statements primarily from the customer's perspective can lead to a narrow focus that does not fully reflect the overall financial health of the company.

Question 18

The management discussion and analysis section of the annual report explains financial results that are not obvious simply from reading the basic financial statements.

Accepted Answer

The management discussion and analysis section provides additional context, explanations and interpretations of the financial results that are not immediately clear from the basic financial statements. This section helps readers gain a deeper understanding of the company's financial performance and overall situation.

Question 19

Horizontal analysis examines the change in financial statement amounts over time.

Accepted Answer

Horizontal analysis compares financial statement amounts from different periods to identify changes and trends in a company's performance over time.

Question 20

It is important for managers to analyze their company's financial statements so that they can anticipate and answer questions from investors and creditors.

Accepted Answer

Managers need to have a clear understanding of their company's financial statements in order to make informed decisions and communicate effectively with external stakeholders such as investors and creditors. By analyzing financial statements, managers can identify trends, strengths, and weaknesses within their company's financial performance, and use this information to respond to inquiries from investors and creditors.

Quiz 14: Analyzing Financial Statements: a Managerial Perspective