Question 1

Trend percentages are generally computed only for income statement items.

Accepted Answer

Trend percentages can be computed for both income statement and balance sheet items to analyze changes over time.

Question 2

When performing a trend analysis, the base year is generally the most recent year.

Accepted Answer

The base year in a trend analysis is typically chosen based on the specific needs of the analysis and may not always be the most recent year. The base year serves as a benchmark for comparison to later years in order to identify trends and changes over time.

Question 3

Financial leverage exists when a company earns more income on borrowed money than the related interest expense on the money.

Accepted Answer

Financial leverage is the use of borrowed money to increase the return on investment. If the return earned on the investment made with the borrowed money is greater than the related interest expense on the borrowed money, then financial leverage exists.

Question 4

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

Accepted Answer

A low inventory turnover ratio means that a company is selling its products slowly or facing difficulty in selling its inventory. It indicates that the company has invested more in inventory than required, which might result in obsolescence or spoilage.

Question 5

When performing vertical analysis of a balance sheet, net income is usually used as the base.

Accepted Answer

When performing vertical analysis of a balance sheet, total assets or total liabilities and equity are typically used as the base instead of net income.

Question 6

The rate of return on net sales shows the percentage of each sales dollar earned as net income.

Accepted Answer

The rate of return on net sales is also known as net profit margin and it shows the percentage of each sales dollar earned as net income.

Quiz 13: Financial Statement Analysis