Question 1

Most trade associations provide common-size statements based on data gathered from member companies.

Accepted Answer

Trade associations often collect financial data from their member companies and use that data to create common-size financial statements that can be useful for benchmarking and industry analysis.

Question 2

A decrease in cost of goods sold from 46.5% to 45.0% from 2012 to 2013 indicates a favorable long-term trend.

Accepted Answer

A decrease in cost of goods sold indicates a less favorable long-term trend, as it means that the company is spending more on producing each unit of product.

Question 3

On a comparative balance sheet that shows horizontal analysis, the percentage of change in total assets must equal the percentage of change in total liabilities and stockholders' equity.

Accepted Answer

This is because the total assets and total liabilities and stockholders' equity are two sides of the same equation (Assets = Liabilities + Stockholders' Equity). Therefore, any change in one side will result in a corresponding change in the other side, maintaining the balance.

Question 4

The price-earnings ratio compares the present market value of a corporation's common stock with the earnings per share of that stock.

Accepted Answer

The given statement is true. The price-earnings ratio (P/E ratio) is calculated by dividing the market price per share by the earnings per share (EPS). It is a commonly used valuation metric to determine the relative value or attractiveness of a stock compared to its peers or the overall market.

Question 5

The rate of return on total assets measures how effectively management has used the assets of the company.

Accepted Answer

The rate of return on total assets is a financial ratio that indicates how efficient a company's management is at using its assets to generate earnings.

Question 6

Comparison of amounts and percentages for only two years is adequate to indicate long-term trends.

Accepted Answer

Comparing amounts and percentages for only two years is not enough to indicate long-term trends. Long-term trends require analysis of data over a period of several years or even decades.

Question 7

A company reported net income of $80,000 for 2012, and net income of $100,000 for 2013. Net income increased by ____________________ percent.

Accepted Answer

The answer of A company reported net income of $80,000...

Question 8

Quick assets include cash, receivables, and inventories.

Accepted Answer

Quick assets include cash and receivables but exclude inventories because inventories are not as easily converted into cash without potentially losing value.

Question 9

The current ratio is a measure of profitability.

Accepted Answer

The current ratio is a measure of liquidity, not profitability. It measures a company's ability to pay off its short-term liabilities with its current assets.

Question 10

When horizontal analysis is performed, no percentage change is computed for a given item if there is no balance for that item in the base year.

Accepted Answer

This is true because the percentage change cannot be computed if there is no base year balance to compare it to.

Question 11

In vertical analysis, it is customary to express each item on the balance sheet as a percentage of total liabilities.

Accepted Answer

In vertical analysis, each item on the balance sheet is expressed as a percentage of total assets, not total liabilities.

Question 12

Since each firm is a unique entity, comparison of data for the firm with industry averages is of no use in financial analysis.

Accepted Answer

While firms may differ in their operations and performance, comparison of their financial data with industry averages can still provide useful insights and benchmarks for financial analysis. It helps in evaluating the firm's performance in relation to its industry peers and identifying areas where it may need to improve. However, it is important to consider the specific circumstances of each firm and not solely rely on industry averages in financial analysis.

Question 13

A company reported an expense of $30,000 for the current year that was $6,000 higher than the previous year. The increase from last year to this year was ____________________ percent.

Accepted Answer

The answer of A company reported an expense of $30,000...

Question 14

A comparison of data for the current period with the same data of the company for previous periods is called ____________________ analysis.

Accepted Answer

The answer of A comparison of data for the current...

Question 15

The fair market value of a share of common stock is determined by dividing the stockholders' equity by the number of shares of common stock outstanding.

Accepted Answer

The fair market value of a share of common stock is determined by supply and demand in the open market, and is not directly related to the stockholders' equity or number of shares outstanding.

Question 16

The ability of a company to pay its debts when due is known as liquidity.

Accepted Answer

Liquidity refers to a company's ability to meet its financial obligations, including paying off its debts, as they come due.

Question 17

In horizontal analysis, the earlier period is called the ____________________ period.

Accepted Answer

The answer of In horizontal analysis, the earlier period is...

Question 18

A high ratio of stockholders' equity to total liabilities indicates a greater risk for creditors.

Accepted Answer

A high ratio of stockholders' equity to total liabilities indicates a stronger financial position for the company and a higher ability to pay back debts, which reduces the risk for creditors.

Question 19

A firm had current liabilities of $60,000 on December 31, 2012, and $51,000 on December 31, 2013. Current liabilities decreased by ____________________ percent.

Accepted Answer

The answer of A firm had current liabilities of $60,000...

Question 20

In horizontal analysis, the base year is the most recent year.

Accepted Answer

In horizontal analysis, the base year is the earlier year used for comparison with subsequent years.

Quiz 23: Financial Statement Analysis