Question 1

In a vertical analysis of the income statement,each line item is shown as a percentage of gross profit.

Accepted Answer

In a vertical analysis of the income statement, each line item is shown as a percentage of net sales, not gross profit.

Question 2

If you are comparing your company's results with those of other companies in the industry,the process is called:

Accepted Answer

Benchmarking involves comparing a company's performance with that of other companies in the same industry. Therefore, this is the best choice for the given question. Horizontal analysis compares a company's financial data over multiple periods. Trend analysis involves identifying patterns in financial data over time. Sensitivity analysis tests how sensitive a financial model is to changes in assumptions. None of these processes specifically compare a company's results with those of other companies in the industry.

Question 3

Please refer to the following data: \(\begin{array}{|l|r|r|r|r|}
\hline & 2017 & & 2016 & \
\hline \text { Rollar amounts in millions) } & \text { Amount } & \% \text { of total } & \text { Amount } & \text { \% of total } \
\hline \text { Revenues } & \$ 6355 & 100.0 \% & \$ 4920 & 100.0 \%\\hline \text { Cost of sales } & 3370 & 53.0 \% & 2200 & 44.7 \% \
\hline \text { Gross profit } & \$ 2985 & 47.0 \% & \$ 2720 & 55.3 \% \
\hline \text { Expenses: } & & & & \\hline\text {Sales and marketing expense }&\$ 675 & 10.6 \% & \$ 580 & 11.8 \% \
\hline\text { General and } & & \
\text { administrative expense } & 410 & 6.5 \%&425&8.6\%\\hline \text { Research and } & & \
\text { development expense } & 470 & 7.4 \%&390&7.9\% \\hline \text { Other expense } & 400 & 6.3 \% & 695 & 14.1 \% \
\hline \text { Total expenses } & \$ 1955 & 30.8 \% & \$ 2090 & 42.5 \% \
\hline & & & & \\hline \text { Profit before tax } & \$ 1030 & 16.2 \% & \$ 630 & 12.8 \% \
\hline \text { Income tax expense } & 230 & 3.6 \% & 210 & 4.3 \% \
\hline \text { Profit (loss) } & \$ 800 & 12.6 \% & \$ 420 & 8.5 \% \
\hline
\end{array}\) Which of the following statements is a valid conclusion based on this data?

Accepted Answer

Profitability in 2017 improved as the profit increased from 8.5% to 12.6% of sales revenue, indicating a significant improvement in profit margin.

Question 4

Please refer to the partial balance sheet data provided below: \(\begin{array}{|l|c|c|c|c|}
\hline \text { (Dollar amounts in millions) } & 2017 & & 2016 & \
\hline & \text { Amount } & \% \text { of total } & \text { Amount } & \% \text { of total } \
\hline{\text { Liabilities }} & \
\hline \text { Current liabilities } & \\hline \text { Accounts payable } & \$ 8500 & 3.1 \% & \$ 7300 & 2.9 \% \
\hline \text { Other current liabilities } & 1400 & 0.5 \% & 3900 & 1.6 \% \
\hline \text { Total current liabilities } & 9900 & 3.6 \% & 11200 & 4.5 \% \
\hline \text { Long-term loans payable } & 54000 & 19.7 \% & 30000 & 12.0 \% \
\hline \text { Total liabilities } & \$ 63900 & 23.4 \% & \$ 41200 & 16.5 \% \\hline \text { Shareholders' equity } \\hline \text { Share capital } & 161000 & 58.9 \% & 161000 & 64.4 \% \
\hline \text { Retained earnings } & 48700 & 17.8 \% & 47900 & 19.2 \% \
\hline \text { Total shareholders' equity } & \$ 209700 & 76.6 \% & \$ 208900 & 83.5 \% \
\hline \text { Total liabilities and shareholder's' equity } & \$ 273600 & 100.0 \% & \$ 250100 & 100.0 \% \
\hline
\end{array}\) Which of the following would be a valid conclusion from the above data?

Accepted Answer

Shareholders' equity, as a percentage of total liabilities and shareholders' equity, declined from 83.5% in 2016 to 76.6% in 2017.

Question 5

Please refer to the vertical analysis of a section of a balance sheet,shown below: $\begin{array}{|c|c|c|c|c|}
\hline \text { (Dollar amounts in millions) } & 2017 & & 2016 & \
\hline & \text { Amount } & \% \text { of total } & \text { Amount } & \% \text { of total } \
\hline \text { Assets } & & & & \\hline \text { Current assets: } & & & & \
\hline \text { Cash } & \$ 10000 & 3.7 \% & \$ 7200 & 2.9 \% \
\hline \text { Accounts receivable, net } & 15600 & 5.7 \% & 16800 & 6.7 \% \\hline \text { Inventory } & 38000 & 13.9 \% & 31000 & 12.4 \% \
\hline \text { Total current assets } & 63600 & 23.2 \% & 55000 & 22.0 \% \
\hline \text { Property, plant and equipment, net } & 195000 & 71.3 \% & 168000 & 67.2 \% \
\hline \text { Other non-current assets } & 15000 & 5.5 \% & 27100 & 10.8 \% \
\hline \text { Total assets } & \$ 273600 & 100.0 \% & \$ 250100 & 100.0 \% \
\hline
\end{array}$ Which of the following statements accurately describes the data shown for total current assets?

Accepted Answer

Current assets as a percentage of total assets increased from 22.0% in 2016 to 23.2% in 2017.

Question 6

If an analyst wishes to compare several different companies that vary in size,which of the following types of financial statement analysis would be used?

Accepted Answer

Common-size financial statement analysis involves converting all financial statement line items into percentages relative to a common base (such as sales or total assets). This allows for easy comparison of companies of different sizes and can highlight differences in operational efficiency, profitability, and financial structure. Vertical analysis is a similar technique but only compares line items within a single year's financial statements. Horizontal analysis compares line items across multiple years but does not adjust for company size differences. Ratio analysis also compares line items across multiple years but typically requires adjustment for size differences using financial ratios.

Question 7

The Arlington Company prepared a common-size income statement to compare its results with its key competitor,Bardo Company.Please refer to the following data: $\begin{array}{|l|r|r|} 
\hline& \text { Arlington Co. } &{\text { Bardo Co. }} \
\hline \text { Revenues } & 100.0 \% & 100.0 \% \
\hline \text { Cost of sales } & 42.1 \% & 47.8 \% \
\hline \text { Gross profit } & 57.9 \% & 52.2 \% \
\hline \text { Selling and general expenses: } & &\\hline \text { Sales and marketing expense } & 26.3 \% & 8.6 \% \
\hline \text { General and administrative expense } & 12.0 \% & 10.8 \% \
\hline \text { Research and development expense } & 4.1 \% & 10.2 \% \
\hline \text { Total selling and general expenses } & 42.4 \% & 29.6 \% \
\hline & & \\hline \text { Profit before tax } & 15.5 \% & 22.6 \% \
\hline \text { Income tax expense } & 3.3 \% & 5.8 \% \
\hline \text { Profit (loss) } & 12.2 \% & 16.8 \% \
\hline
\end{array}$ Which of the following statements can be correctly concluded from the above data?

Accepted Answer

The answer of The Arlington Company prepared a common-size income...

Question 8

Vertical analysis is used with the income statement,but not with the balance sheet.

Accepted Answer

Vertical analysis can be used with both the income statement and balance sheet. It involves comparing each line item on a financial statement to a base item (such as total revenue for income statement or total assets for balance sheet) to determine its relative percentage.

Question 9

Please refer to the partial balance sheet data provided below: \(\begin{array}{|l|c|c|c|c|}
\hline \text { (Dollar amounts in millions) } & 2017 & & 2016 & \
\hline & \text { Amount } & \% \text { of total } & \text { Amount } & \% \text { of total } \
\hline{\text { Liabilities }} & \
\hline \text { Current liabilities } & \\hline \text { Accounts payable } & \$ 8500 & 3.1 \% & \$ 7300 & 2.9 \% \
\hline \text { Other current liabilities } & 1400 & 0.5 \% & 3900 & 1.6 \% \
\hline \text { Total current liabilities } & 9900 & 3.6 \% & 11200 & 4.5 \% \
\hline \text { Long-term loans payable } & 54000 & 19.7 \% & 30000 & 12.0 \% \
\hline \text { Total liabilities } & \$ 63900 & 23.4 \% & \$ 41200 & 16.5 \% \\hline \text { Shareholders' equity } \\hline \text { Share capital } & 161000 & 58.9 \% & 161000 & 64.4 \% \
\hline \text { Retained earnings } & 48700 & 17.8 \% & 47900 & 19.2 \% \
\hline \text { Total shareholders' equity } & \$ 209700 & 76.6 \% & \$ 208900 & 83.5 \% \
\hline \text { Total liabilities and shareholder's' equity } & \$ 273600 & 100.0 \% & \$ 250100 & 100.0 \% \
\hline
\end{array}\) Which of the following is a valid conclusion from the above data?

Accepted Answer

The percentage of total liabilities increased from 16.5% in 2016 to 23.4% in 2017, indicating a shift towards greater debt financing. Meanwhile, the percentage of total shareholders' equity decreased from 83.5% to 76.6%, indicating less reliance on equity financing.

Question 10

Which of the following is the definition of benchmarking?

Accepted Answer

Benchmarking is the practice of comparing a company with other companies in that industry to identify best practices and areas for improvement. It involves analyzing key performance metrics and processes to gain a competitive edge.

Question 11

Oglethorpe Company reports the following information from the vertical analysis of their income statement: Profit:
4.2 % in 2017
3.9% in 2016
Which of the following statements could be logically concluded from the above data?

Accepted Answer

The company has improved the profit they make per dollar of sales in 2017.

Question 12

Oglethorpe Company reports the following information from the vertical analysis of their balance sheet: Current assets:
23.5 % in 2017
23.9% in 2016
Which of the following statements could be logically concluded from the above data?

Accepted Answer

The data shows that the proportion of current assets to total assets decreased by 0.4%, which means the current assets declined in proportion to total assets. There is no information given to determine the company's ability to pay current liabilities or current ratio from the vertical analysis of the balance sheet.

Question 13

Please refer to the vertical analysis of a section of a balance sheet,shown below: $\begin{array}{|c|c|c|c|c|}
\hline \text { (Dollar amounts in millions) } & 2017 & & 2016 & \
\hline & \text { Amount } & \% \text { of total } & \text { Amount } & \% \text { of total } \
\hline \text { Assets } & & & & \\hline \text { Current assets: } & & & & \
\hline \text { Cash } & \$ 10000 & 3.7 \% & \$ 7200 & 2.9 \% \
\hline \text { Accounts receivable, net } & 15600 & 5.7 \% & 16800 & 6.7 \% \\hline \text { Inventory } & 38000 & 13.9 \% & 31000 & 12.4 \% \
\hline \text { Total current assets } & 63600 & 23.2 \% & 55000 & 22.0 \% \
\hline \text { Property, plant and equipment, net } & 195000 & 71.3 \% & 168000 & 67.2 \% \
\hline \text { Other non-current assets } & 15000 & 5.5 \% & 27100 & 10.8 \% \
\hline \text { Total assets } & \$ 273600 & 100.0 \% & \$ 250100 & 100.0 \% \
\hline
\end{array}$ Which of the following statements is valid regarding the data shown above?

Accepted Answer

Property, plant and equipment increased from 67.2% of total assets in 2016 to 71.3% in 2017, indicating growth as a percentage of total assets.

Question 14

Which of the following balance sheets displays shows only percentages?

Accepted Answer

A common-size balance sheet shows all accounts as a percentage of total assets, liabilities, or equity. Therefore, it displays only percentages.

Question 15

Shelcal Ltd provides the following data for the year 2016: $$\begin{array} { | l | l | } 
\hline \text { Sales revenue } & \$ 430,000 \
\hline \text { Sales returns and allowances } & 1300 \
\hline \text { Sales discounts } & 830 \
\hline \text { Net sales revenue } & \$ 427,870 \
\hline \text { Cost of sales } & \$ 259,000 \
\hline
\end{array}$$ On a vertical analysis report,cost of sales as a percentage of net sales will amount to:

Accepted Answer

Cost of sales as a percentage of net sales is calculated as (Cost of Sales / Net Sales Revenue) * 100. So, (259,000 / 427,870) * 100 = 60.53%.

Question 16

Olivera Ltd provides the following data for the year 2016: $$\begin{array} { | l | l | } 
\hline \text { Sales revenue } & \$ 629,000 \
\hline \text { Sales returns and allowances } & 20,000 \
\hline \text { Sales discounts } & 6000 \
\hline \text { Net sales revenue } & \$ 603,000 \
\hline \text { Cost of sales } & \$ 390,000 \
\hline
\end{array}$$ On a vertical analysis report,the gross profit as a percentage of net sales will be:

Accepted Answer

Gross profit is calculated as Net Sales Revenue minus Cost of Sales. Gross profit percentage is then calculated as (Gross Profit / Net Sales Revenue) * 100. Here, Gross Profit = $603,000 - $390,000 = $213,000. Gross Profit Percentage = ($213,000 / $603,000) * 100 = 35.32%.

Question 17

Please refer to the vertical analysis of a section of a balance sheet,shown below: $\begin{array}{|c|c|c|c|c|}
\hline \text { (Dollar amounts in millions) } & 2017 & & 2016 & \
\hline & \text { Amount } & \% \text { of total } & \text { Amount } & \% \text { of total } \
\hline \text { Assets } & & & & \\hline \text { Current assets: } & & & & \
\hline \text { Cash } & \$ 10000 & 3.7 \% & \$ 7200 & 2.9 \% \
\hline \text { Accounts receivable, net } & 15600 & 5.7 \% & 16800 & 6.7 \% \\hline \text { Inventory } & 38000 & 13.9 \% & 31000 & 12.4 \% \
\hline \text { Total current assets } & 63600 & 23.2 \% & 55000 & 22.0 \% \
\hline \text { Property, plant and equipment, net } & 195000 & 71.3 \% & 168000 & 67.2 \% \
\hline \text { Other non-current assets } & 15000 & 5.5 \% & 27100 & 10.8 \% \
\hline \text { Total assets } & \$ 273600 & 100.0 \% & \$ 250100 & 100.0 \% \
\hline
\end{array}$ Which of the following statements accurately describes the 13.9% shown for Inventory in 2017?

Accepted Answer

In 2017, the inventory is 13.9% of the total assets, as indicated by the vertical analysis percentage shown in the balance sheet.

Question 18

Please refer to the partial balance sheet data provided below: \(\begin{array}{|l|c|c|c|c|}
\hline \text { (Dollar amounts in millions) } & 2017 & & 2016 & \
\hline & \text { Amount } & \% \text { of total } & \text { Amount } & \% \text { of total } \
\hline{\text { Liabilities }} & \
\hline \text { Current liabilities } & \\hline \text { Accounts payable } & \$ 8500 & 3.1 \% & \$ 7300 & 2.9 \% \
\hline \text { Other current liabilities } & 1400 & 0.5 \% & 3900 & 1.6 \% \
\hline \text { Total current liabilities } & 9900 & 3.6 \% & 11200 & 4.5 \% \
\hline \text { Long-term loans payable } & 54000 & 19.7 \% & 30000 & 12.0 \% \
\hline \text { Total liabilities } & \$ 63900 & 23.4 \% & \$ 41200 & 16.5 \% \\hline \text { Shareholders' equity } \\hline \text { Share capital } & 161000 & 58.9 \% & 161000 & 64.4 \% \
\hline \text { Retained earnings } & 48700 & 17.8 \% & 47900 & 19.2 \% \
\hline \text { Total shareholders' equity } & \$ 209700 & 76.6 \% & \$ 208900 & 83.5 \% \
\hline \text { Total liabilities and shareholder's' equity } & \$ 273600 & 100.0 \% & \$ 250100 & 100.0 \% \
\hline
\end{array}\) Which of the following accurately describes the 3.6% figure shown for total current liabilities in 2017?

Accepted Answer

The answer of Please refer to the partial balance sheet...

Question 19

Which of the following is NOT true of benchmarking?

Accepted Answer

The answer of Which of the following is NOT true...

Question 20

In a vertical analysis of the income statement,each line item is shown as a percentage of profit.

Accepted Answer

In a vertical analysis of the income statement, each line item is shown as a percentage of revenue or sales, not profit. The purpose of a vertical analysis is to analyze the proportion of each expense or revenue item in relation to the total revenue or sales.

Quiz 18: Financial Statement Analysis