Question 1

The common-size percent is computed by:

Accepted Answer

The common-size percent is calculated by dividing the analysis amount by the base amount, and then multiplying the result by 100 to express it as a percentage. This allows for easy comparison of financial data over time or between companies.

Question 2

Trend analysis is also called:

Accepted Answer

Trend analysis is also referred to as index number trend analysis, where data is analyzed and compared over time using index numbers. Financial analysis refers to the analysis of financial statements using various techniques such as ratio analysis. Ratio analysis itself is a separate technique used to analyze financial statements. Industry analysis is a study of a particular industry's performance and trends. Output analysis is a type of analysis used in manufacturing and operations management to assess production efficiency.

Question 3

Current assets minus current liabilities is:

Accepted Answer

Working capital is calculated as current assets minus current liabilities. It represents the funds available to a company for its day-to-day operations.

Question 4

Dividing accounts receivable, net by net sales and multiplying the result by 365 is the:

Accepted Answer

Dividing accounts receivable, net by net sales and multiplying the result by 365 gives us the number of days it takes on average to collect from customers, which is known as days' sales uncollected.

Question 5

Phoenix Company reported sales of $400,000 for Year 1, $450,000 for Year 2, and $500,000 for Year 3. Using Year 1 as the base year, what were the percentage increases for Year 2 and Year 3 compared to the base year?

Accepted Answer

The percentage increase for Year 2 is calculated as (($450,000 - $400,000) / $400,000) * 100 = 12.5%. For Year 3, it is (($500,000 - $400,000) / $400,000) * 100 = 25%.

Question 6

Net sales divided by average accounts receivable, net is the:

Accepted Answer

The formula given is the accounts receivable turnover ratio.

Question 7

Financial statements with data for two or more successive accounting periods placed in columns side by side, sometimes with changes shown in dollar amounts and percents, are referred to as:

Accepted Answer

The term "comparative statements" refers to financial statements that compare data from two or more accounting periods side by side, often showing changes in dollar amounts and percentages.

Question 8

The dollar change for a financial statement item is calculated by:

Accepted Answer

The dollar change for a financial statement item is calculated by subtracting the base period amount from the analysis period amount. This gives the absolute dollar change between two periods without considering the percentage change.

Question 9

A financial statement analysis report:

Accepted Answer

All of the statements mentioned in the options are true. A financial statement analysis report enables readers to see the process and rationale of analysis, helps preparers to organize their reasoning and verify the logic of analysis, serves as a method of communication to users, and helps users and preparers to refine conclusions based on evidence from key building blocks.

Question 10

In horizontal analysis the percent change is computed by:

Accepted Answer

In horizontal analysis, the percent change is computed by taking the difference between the analysis period amount and the base period amount, dividing that difference by the base period amount, and then multiplying by 100 to get the percentage change. Therefore, option D is the correct answer.

Question 11

Comparative financial statements in which each individual financial statement amount is expressed as a percentage of a base amount, and in which the base amount is expressed as 100%, are called:

Accepted Answer

Common-size comparative statements express each financial statement item as a percentage of a base amount (usually total assets, sales, or equity), allowing for easy comparison between companies of different sizes or within the same company over time.

Question 12

Common-size statements:

Accepted Answer

Common-size statements express each item as a percentage of a base amount, highlighting the relative importance of each item.

Question 13

Dividing ending inventory by cost of goods sold and multiplying the result by 365 is the:

Accepted Answer

Dividing ending inventory by cost of goods sold gives the inventory turnover ratio. Multiplying it with 365 gives the number of days' sales in inventory, which measures the average number of days it takes for a company to sell its inventory. Therefore, the correct answer is option C, Days' sales in inventory.

Question 14

A company's sales in Year 1 were $250,000 and in Year 2 were $287,500. Using Year 1 as the base year, the sales trend percent for Year 2 is:

Accepted Answer

Sales trend percent = (Year 2 sales / Year 1 sales) x 100%
                     = ($287,500 / $250,000) x 100%
                     = 1.15 x 100%
                     = 115%
Therefore, the sales trend percent for Year 2 using Year 1 as the base year is 115%.

Question 15

Current assets divided by current liabilities is the:

Accepted Answer

Current assets divided by current liabilities is the current ratio. It measures the ability of a company to pay its short-term obligations.

Question 16

To compute trend percents the analyst should:

Accepted Answer

To compute trend percents, the analyst should select a base period, assign each item in the base period statement a weight of 100%, and then express financial numbers from other periods as a percent of their base period number. This allows for a comparison of how specific items have changed over time. Option B subtracts the analysis period number from the base period number, which is not a correct method for computing trend percents. Option C subtracts the base period amount from the analysis period amount and divides the result by the analysis period amount, which is a correct method for computing percent change but not trend percents. Option D suggests comparing amounts across industries using Dun and Bradstreet, which is not a correct method for computing trend percents.

Question 17

Horizontal analysis:

Accepted Answer

Horizontal analysis is a method used to evaluate changes in financial data across time, such as comparing the financial statements of a company from one year to the next. Vertical analysis is a different method that expresses each line item on a financial statement as a percentage of a base number, such as total assets or revenues. Financial ratios are a tool used to analyze relationships between different financial statement items, and can be used in horizontal or vertical analysis.Comparing financial data across industries is a form of benchmarking, which is a separate analysis technique.

Question 18

A corporation reported cash of $14,000 and total assets of $178,300. Its common-size percent for cash equals:

Accepted Answer

Common-size percent is calculated by taking the specific item (in this case, cash) as a percentage of the total assets.

Common-size percent for cash = (Cash / Total assets) x 100

= ($14,000 / $178,300) x 100

= 0.0785 x 100

= 7.85%

Therefore, the answer is B) 7.85%.

Question 19

Quick assets divided by current liabilities is the:

Accepted Answer

Quick assets (cash, marketable securities, and accounts receivables) are highly liquid assets that can easily be turned into cash to cover current liabilities. The ratio of quick assets to current liabilities is known as the acid-test ratio, also known as the quick ratio. This ratio provides a more conservative measure of a company's ability to meet its short-term obligations than the current ratio because it excludes inventory and prepaid expenses, which may not be easily liquidated.

Question 20

Comparative financial statements in which each individual financial statement amount is expressed as a percentage of a base amount are called:

Accepted Answer

Common-size comparative statements express all individual financial statement amounts as a percentage of a base amount, such as total assets or net sales. This allows for easier comparison between different periods or companies with varying levels of assets or sales.

Quiz 17: Analysis of Financial Statements