Question 1

Buford Corporation had a profit of $3,500,000 in 2012. Using 2012 as the base year, profit decreased by 45% in 2013 and increased by 180% in 2014.
Instructions
Calculate the profit reported by Buford Corporation for 2013 and 2014.

Accepted Answer

The answer of Buford Corporation had a profit of $3,500,000...

Question 2

The following are income statements of two companies that are both in the fast food industry. All amounts are in 000's and are for the year ended December 31, 2014.  Instructions
Using vertical analysis determine which corporation is the more profitable and identify the most significant cause of the difference.

Accepted Answer

The answer of The following are income statements of two...

Question 3

The income statements for Davis Manufacturing Inc. are provided for two recent years:  
Instructions 
a. Using the above information to prepare a vertical analysis for Davis.
a., identify the reason for Davis's decreasing profit at the same time that revenue is increasing.
b. Using the analysis completed in part

Accepted Answer

The answer of The income statements for Davis Manufacturing Inc....

Question 4

The total revenue figures for Dabous & Sons Construction Company are as follows: $\begin{array} {| l| l| l| l| l| l|  }
\hline  &2014&2013&2012&2011&2010\
\hline \text { Revenue }&\$19,690&\$10,350&\$9,692&\$9,984&\$9,496\
\hline 
\end{array}$
 Instructions 
a. Using Horizontal analysis calculate the percentage of change from the base year amount, assuming 2010 is the base year.
b. Using Horizontal analysis, calculate the percentage change for each year.

Accepted Answer

The answer of The total revenue figures for Dabous &...

Question 5

Match between columns
                        Premises: Receivables turnover
Payout ratio
Interest coverage
Inventory turnover
Asset turnover
Current ratio
Earnings per share
Price-earnings
Debt to total assets
Free cash flow

Accepted Answer

The Answer of L = Liquidity ratio and P = is...

Question 6

The CEO and CFO of a publically traded company must ensure and personally declare that the reported financial information is
A) accurate.
B) relevant.
C) understandable.
D) all of the above.

Accepted Answer

The CEO and CFO are required to ensure and personally declare that the reported financial information is accurate, relevant, and understandable. This is part of their responsibility under regulations like the Sarbanes-Oxley Act in the United States, which aims to protect investors by improving the accuracy and reliability of corporate disclosures.

Question 7

The balance sheets of two competing companies in the same industry are provided below. The companies have approximately the same volume of sales and similar operating capacities.  Instructions 
a. Calculate the Debt to Total Assets ratio for both companies. Which company is more solvent?
b. Based on the information provided, can horizontal analysis be used to determine which company is more profitable?

Accepted Answer

The answer of The balance sheets of two competing companies...

Question 8

Comparative information taken from the London Antiques Corporation financial statements is shown below: $\begin{array}{lrr}
&2014&2013\
\text { 1. Notes receivable } & \$ 80,000 & \$-0- \
\text { 2. Accounts receivable } & 182,000 & 140,000 \
\text { 3. Retained earnings } & 49,000 & (40,000) \
\text { 4. Sales } & 930,000 & 750,000 \
\text { 5. Operating expenses } & 170,000 & 200,000 \
\text { 6. Income taxes payable } & 95,000 & 70,000
\end{array}$ Instructions
Using horizontal analysis, show the percentage change from 2013 to 2014 with 2013 as the base year.

Accepted Answer

The answer of Comparative information taken from the London Antiques...

Question 9

A higher price-earnings ratio generally means that
A) investors favour that company and have a high expectation of future profitability.
B) investors do not expect future profitability.
C) investors feel the shares are underpriced.
D) investors will not see growth or expansion.

Accepted Answer

A higher price-earnings ratio indicates that investors have a favorable view of the company and expect higher future earnings, which justifies a higher stock price relative to current earnings.

Question 10

The comparative balance sheet of Alto Communications Corporation appears below:  Instructions 
a. Using horizontal analysis, show the percentage change for each balance sheet item using 2013 as a base year.
b. Using vertical analysis, prepare a common size comparative balance sheet.
c. Comment on your analysis.

Accepted Answer

The answer of The comparative balance sheet of Alto Communications...

Question 11

Ratios are used as tools in financial analysis
A) instead of horizontal and vertical analyses.
B) because they may provide information that is not apparent from inspection of the individual components of the ratio.
C) because even single ratios by themselves are quite meaningful.
D) because they are prescribed by GAAP.

Accepted Answer

Ratios provide insights into relationships between different components of financial statements and can help identify trends or potential areas for improvement or concern. They offer a more holistic view than simply looking at individual line items.

Question 12

The use of alternative accounting principles
A) is not a problem in ratio analysis because the notes to the statements disclose the principles used.
B) may be a problem in ratio analysis even if disclosed.
C) is not a problem in ratio analysis since eventually all principles will lead to the same end.
D) is only a problem in ratio analysis with respect to inventory.

Accepted Answer

The use of alternative accounting principles can be a problem in ratio analysis even if these principles are disclosed in the notes to the financial statements. Different accounting methods can significantly affect financial ratios and comparisons, making it challenging to accurately compare financial performance across companies that use different accounting principles.

Question 13

Although depreciation expense and the carrying amount of property, plant and equipment may be different in one or more periods because of the choice of depreciation methods, in total, over the life of the assets, there is no difference. This is called
A) difference in assumptions.
B) permanent difference.
C) timing difference.
D) irrelevant differences.

Accepted Answer

This is known as a timing difference. The total amount of depreciation over the life of an asset will be the same regardless of the depreciation method chosen; however, the amount of depreciation expense recognized in any given period may vary depending on the method used. This creates a timing difference in the recognition of depreciation expense.

Question 14

Because of the importance of this ratio, publically traded companies are required to report it directly on the income statement.
A) payout ratio
B) EPS ratio
C) asset turnover ratio
D) profit margin ratio

Accepted Answer

EPS (Earnings Per Share) ratio is the metric that publicly traded companies are required to report directly on their income statements. It is a key indicator of a company's profitability on a per-share basis, making it crucial for investors.

Question 15

The following items were taken from the financial statements of Smalley, Inc., over a five-year period:  Instructions
Using horizontal analysis and 2010 as the base year, calculate the trend percentages for net sales, cost of goods sold, and gross profit. Explain whether the trends are favourable or unfavourable for each item.

Accepted Answer

The answer of The following items were taken from the...

Question 16

There are no standard ratio formulas incorporating
A) comprehensive income.
B) profit.
C) net sales.
D) total assets.

Accepted Answer

Comprehensive income is a broader measure of income under U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) that includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Unlike profit, net sales, and total assets, which are commonly used in various financial ratio calculations (such as profit margin, return on assets, etc.), comprehensive income is not typically used in standard financial ratio formulas. This is because comprehensive income includes items that are not realized through normal business operations, making it less useful for analyzing operational efficiency or profitability.

Question 17

Instructions a. Does horizontal analysis provide a useful tool to compare the above companies? Explain your answer using an example to demonstrate how it is useful or not useful. b. Suggest a ratio that could be used as an alternative to evaluate the profitability of the two companies and calculate the ratio. Compare the companies' profitability based on your calculations.

Accepted Answer

The answer of Instructions a. Does horizontal analysis provide a useful...

Question 18

A limitation in calculating ratios in financial statement analysis is that
A) it requires comparisons.
B) no one other than management would be interested in them.
C) some financial statements contain many estimates.
D) they seldom identify problem areas in a company.

Accepted Answer

Ratios in financial statement analysis often rely on figures that include estimates, such as depreciation or allowances for doubtful accounts. These estimates can introduce variability and uncertainty into the ratio analysis, making it a limitation.

Question 19

Below is the partial balance sheet for Abbott Limited:  Instructions
Using the following selected items from the comparative balance sheet of Abbott Limited, illustrate horizontal and vertical analysis. Discuss the results of each type of analysis.

Accepted Answer

The answer of Below is the partial balance sheet for...

Question 20

The income statements for the first three years of operations of Carol's Music Ltd. are provided below: 
 Instructions 
a. Is Carol's gross profit improving over the three years or not? Use horizontal analysis, with 2013 as the base year, to support your answer.
b. Provide one explanation for the decline in income from operations other than changes in gross profit. Support your answer using vertical analysis.
c. Although profit is decreasing, Carol has not been concerned because her cash flows have increased from year to year. Using the information available in the income statements, explain why this is so.

Accepted Answer

The answer of The income statements for the first three...

Quiz 17: Financial Statement Analysis

Buford Corporation had a profit of $3,500,000 in 2012. Using 2012 as the base year, profit decreased by 45% in 2013 and increased by 180% in 2014. Instructions Calculate the profit reported by Buford Corporation for 2013 and 2014.

Set A For each of the ratios or measures listed below, indicate by the appropriate code letter, whether it is a liquidity ratio, a profitability ratio, or a solvency ratio.

The CEO and CFO of a publically traded company must ensure and personally declare that the reported financial information is

A higher price-earnings ratio generally means that

Ratios are used as tools in financial analysis

The use of alternative accounting principles

Although depreciation expense and the carrying amount of property, plant and equipment may be different in one or more periods because of the choice of depreciation methods, in total, over the life of the assets, there is no difference. This is called

Because of the importance of this ratio, publically traded companies are required to report it directly on the income statement.

There are no standard ratio formulas incorporating

A limitation in calculating ratios in financial statement analysis is that

Below is the partial balance sheet for Abbott Limited: Instructions Using the following selected items from the comparative balance sheet of Abbott Limited, illustrate horizontal and vertical analysis. Discuss the results of each type of analysis.