Question 1

Selected data from the financial statements are provided below:
Rags to Riches 
 
-Refer to Rags to Riches. Which of the following would result from a horizontal analysis of the company's income statement?

Accepted Answer

Horizontal analysis compares financial statement line items from one period to another. Therefore, the correct answer would reflect a change from one year to the next. Choice C shows a percentage decrease in cost of goods sold from 2014 to 2015, indicating a favorable change in the company's profitability. Choices A, B, and D do not reflect a change from one period to another and are therefore incorrect.

Question 2

Horizontal analysis is analysis in which

Accepted Answer

Horizontal analysis involves comparing financial statement line items from one period to another expressed as a percentage of a base year (usually the earliest year in the comparison). Option B describes vertical analysis, and option C describes ratio analysis. Option D does not accurately describe horizontal analysis.

Question 3

Selected data from the financial statements are provided below:
Rags to Riches 
 
-Refer to Rags to Riches. Which of the following would result from a horizontal analysis of the company's balance sheet?

Accepted Answer

Horizontal analysis compares changes in financial statement items over a period of time. Therefore, we can determine the increase or decrease in accounts receivable from one year to the next. Option A provides a specific dollar amount and percentage increase in accounts receivable, making it the best choice. Options B, C, and D are unrelated to a horizontal analysis of the balance sheet.

Question 4

A financial analyst is comparing two companies using a top-down approach. Which of the following would cause problems in the evaluation process?

Accepted Answer

The answer of A financial analyst is comparing two companies...

Question 5

Which of the following would report the market price of the company's stock?

Accepted Answer

The market price of a company's stock is not reported on the balance sheet, income statement, or statement of cash flows. However, Item 5 in Form 10-K (the annual report filed by public companies with the Securities and Exchange Commission) includes information about the company's stock price and market trends.

Question 6

Match these terms to their correct definition.
a.Accounts receivable turnover ratio
e.Net profit margin percentage
b.Cash ratio
f.Operating margin percentage
c.Gross profit percentage
g.Quick ratio
d.Inventory turnover ratio
h.Total payout ratio
-Measurement of the proportion of each sales dollar that is available to pay other expenses and provide profit for owners.

Accepted Answer

The measurement of the proportion of each sales dollar that is available to pay other expenses and provide profit for owners is the Gross profit percentage.

(Note: The other terms listed are financial ratios, but they do not match the definition given in the question.)

Question 7

Selected data from the financial statements are provided below:
Rags to Riches 
 
-Refer to Rags to Riches. Which of the following would result from a vertical analysis of the company's income statement?

Accepted Answer

A vertical analysis of the income statement expresses each item as a percentage of net sales. Therefore, the gross profit percentage as a percentage of net sales would be calculated, resulting in option B being the correct choice. Options A, C, and D are not directly related to a vertical analysis of the income statement.

Question 8

Annual reports are filed with the SEC on

Accepted Answer

Annual reports are filed with the SEC on Form 10-K. Form 8-K is used for current reports of significant events, and Form 10-Q is used for quarterly reports. The MD&A section is a required component in Form 10-K, but it is not a form itself.

Question 9

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?

Accepted Answer

The company's ability to manage its existing debt, as indicated by a large amount of interest payments related to other outstanding loans, is a critical factor in determining its creditworthiness and ability to take on and repay additional loans.

Question 10

The auditor's opinions regarding effectiveness of a public company's internal controls and appropriateness of its financial statements are found within the Form 10-K on

Accepted Answer

The auditor's opinions regarding effectiveness of a public company's internal controls and appropriateness of its financial statements are included in Item 8 of the Form 10-K, which is the section titled "Financial Statements and Supplementary Data." Item 1 is "Business," Item 7 is "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 9 is "Changes in and Disagreements with Accountants on Accounting and Financial Disclosure."

Question 11

Which of the following statements is true regarding horizontal analysis?

Accepted Answer

Horizontal analysis involves comparing the current year's financial statement line items with an earlier year's financial statement line items. This comparison is typically expressed as a percentage change or a percentage of the earlier year amount. Therefore option D is correct. Option A and B are incorrect because horizontal analysis can be used with both balance sheet and income statement accounts. Option C is incorrect because financial statement line items are typically expressed as a percentage of the same year amount, not the largest amount on the statement.

Question 12

In evaluating a company's financial statements, the least useful information would be derived from a comparison of the current period data with

Accepted Answer

Comparing current period data with the same company's data from five years ago is generally considered the least useful. This is because financial performance can be significantly influenced by numerous factors over such a long period, making it difficult to draw relevant conclusions for the current period's performance. Shorter term comparisons, such as with the prior year, another company in the same industry, or against economic and industry data, are typically more relevant for assessing current financial health and trends.

Question 13

When an investor is evaluating whether to purchase stock in a company, which of the following considerations is most important?

Accepted Answer

The most important consideration for an investor is whether the company will earn a satisfactory return on the amount invested by stockholders. This is because the ultimate goal of investing in stocks is to make a profit, and a company's ability to generate returns on investments is a key indicator of how likely it is to deliver on that goal. While the other considerations listed (working capital, key ratios, and cash flows) are also important, they are ultimately secondary to the company's ability to deliver returns to shareholders.

Question 14

Selected data from the financial statements are provided below:
Rags to Riches 
 
-Refer to Rags to Riches. Which of the following would result from a horizontal analysis of the company's income statement?

Accepted Answer

Horizontal analysis compares financial data across multiple periods to determine the increase or decrease of each item. Therefore, the only choice that reflects an increase in a specific item in relation to the prior period is A, which states that net sales in 2015 increased to 140.74% of the 2014 amount. B refers to the relationship between gross profit and net sales, while C and D are both ratios that do not directly relate to changes in specific financial items over time.

Question 15

Match these terms to their correct definition.
a.Accounts receivable turnover ratio
e.Net profit margin percentage
b.Cash ratio
f.Operating margin percentage
c.Gross profit percentage
g.Quick ratio
d.Inventory turnover ratio
h.Total payout ratio
-Measures the proportion of each sales dollar that is profit.

Accepted Answer

The answer of Match these terms to their correct definition.
a.Accounts...

Question 16

Time series (or trend)analysis is analysis in which

Accepted Answer

Time series or trend analysis compares changes in dollar amounts and percentages over several years to identify trends and patterns. It helps in identifying growth or decline in the company's financial position and performance over time. Option B is referring to common size analysis, option C is referring to ratio analysis, and option D is not a correct definition of time series analysis.

Question 17

When a financial analyst determines the percentage change in operating income for the five-year period from 2011 to 2015, she is performing a

Accepted Answer

Time series analysis involves analyzing data over a period of time to identify trends, patterns, and changes in performance indicators such as operating income. In this case, the financial analyst is calculating the percentage change in operating income over a five-year period to identify the trend and direction of the company's profitability. Vertical analysis involves analyzing the financial statements for a single period to determine the relative proportions of each line item. Profitability analysis involves assessing the profitability of a company based on various metrics such as return on investment, return on equity, and profit margins. Cross-sectional analysis involves comparing the financial performance of different companies within the same industry or sector.

Question 18

The working capital of a company is equal to

Accepted Answer

Working capital is the difference between a company's current assets (such as cash, accounts receivable, and inventory) and its current liabilities (such as accounts payable and short-term debt). Therefore, option A, which states that working capital is equal to current assets minus current liabilities, is the best choice.

Question 19

Each of the following is included in the MD&A section of a public company's Form 10-K except

Accepted Answer

The section does not typically include names and experience of the company's managers, directors, and officers. It focuses on discussing the company's financial condition, performance, and future expectations. This information may also include material trends, events, or known uncertainties.

Question 20

Form 10-K for a public company is required to include the following financial statements for the most recent period of time including: Income Statements and
Statement of Cash Flows Balance Sheets

Accepted Answer

A Form 10-K for a public company is required to include the Balance Sheets and Statement of Cash Flows for the most recent 2 years and the Income Statements for the most recent 3 years. Therefore, option D (3 years for Income Statements and 2 years for Balance Sheets and Statement of Cash Flows) is the correct choice.

Quiz 12: Financial Statement Analysis

Selected data from the financial statements are provided below: Rags to Riches -Refer to Rags to Riches. Which of the following would result from a horizontal analysis of the company's income statement?