Question 1

Vertical analysis is a tool to evaluate individual financial statement items or groups of items in terms of a specific base amount.

Accepted Answer

Vertical analysis expresses financial statement items as a percentage of a base amount, usually total assets or total revenue. This allows for easy comparison between different time periods or companies of different sizes.

Question 2

A ratio expresses a relation between two amounts and can be expressed as a percent,rate,or proportion.

Accepted Answer

A ratio can be expressed in different forms depending on the context, including as a percent, rate or proportion.

Question 3

Earnings per share is calculated using income before interest and income taxes.

Accepted Answer

Earnings per share is calculated using net income, not income before interest and income taxes.

Question 4

A trend percent is calculated by dividing the analysis period amount by the base period amount and multiplying the result by 100.

Accepted Answer

This is the correct formula for calculating trend percent.

Question 5

Trend analysis of financial statement items can include comparisons of relations between items on different financial statements.

Accepted Answer

Trend analysis involves comparing financial statement items over time, as well as comparing relations between items on different financial statements to identify patterns and trends.

Question 6

Horizontal analysis is used to understand the relative importance of each financial statement item.

Accepted Answer

Horizontal analysis is used to compare historical financial information over a series of reporting periods, not to understand the relative importance of each item.

Question 7

An advantage of common-size statements is that they show patterns in data across periods.

Accepted Answer

The answer of An advantage of common-size statements is that...

Question 8

The percent change of a comparative financial statement item is computed by subtracting the estimated period amount from the base period amount,dividing the result by the base period amount and multiplying that result by 100.

Accepted Answer

The percent change is computed by subtracting the base period amount from the estimated period amount, dividing the result by the base period amount, and multiplying that result by 100.

Question 9

Vertical analysis is used to reveal patterns in data covering two or more successive periods.

Accepted Answer

Vertical analysis is a method of financial statement analysis in which each entry for each of the three major categories of accounts (assets, liabilities, and equities) in a balance sheet is represented as a proportion of the total account. It is typically used to analyze a single period, not multiple periods.

Question 10

Liquidity refers to the availability of resources to meet short-term cash requirements.

Accepted Answer

Liquidity refers to the ability to quickly and easily convert assets into cash in order to meet short-term financial needs. Therefore, the statement is true.

Question 11

Horizontal analysis is used to reveal patterns in data covering successive periods.

Accepted Answer

Horizontal analysis is a technique used to compare data over consecutive periods to reveal any trends or patterns.

Question 12

Graphical analysis of the balance sheet can be useful in assessing sources of financing.

Accepted Answer

Graphical analysis of a balance sheet can help identify the composition of a company's assets and liabilities, which in turn can provide insights into the sources of financing. For example, if the majority of the assets are funded through equity, it suggests that the company has relied primarily on investments from shareholders, while a preponderance of debt indicates reliance on borrowing.

Question 13

The percent change of a comparative financial statement item is computed by subtracting the base period amount from the analysis period amount,dividing the result by the base period amount and multiplying that result by 100.

Accepted Answer

This is the correct formula for calculating percent change on a comparative financial statement item.

Question 14

Trend analysis is computing percents that show patterns in data across periods.

Accepted Answer

Trend analysis involves calculating percentages or ratios that indicate trends or patterns in data over a period of time. These calculations can help identify any growth or decline in a particular area or variable being analyzed.

Question 15

To be useful,a ratio must refer to economically important relationships,such as a sale price compared to its cost.

Accepted Answer

Ratios that refer to economically important relationships, such as cost and revenue, are more useful in decision-making than ratios that do not have a significant impact on the financial performance of a business.

Question 16

The base amount for a common-size balance sheet is usually total assets.

Accepted Answer

The base amount for a common-size balance sheet is usually total assets, which is expressed as 100%. All other line items on the balance sheet are expressed as a percentage of total assets.

Question 17

Comparative financial statements are reports that show financial amounts in side by side columns on a single statement for analysis purposes.

Accepted Answer

Comparative financial statements do indeed show financial amounts in side by side columns on a single statement for analysis purposes.

Question 18

A corporation reported cash of $14,000,total assets of $178,300,and net income of $50,000.Its common-size percent for cash equals 7.85%.

Accepted Answer

The common-size percent for cash is calculated by dividing the cash amount by the total assets and multiplying by 100%. In this case, (14,000 ÷ 178,300) x 100% = 7.85%. Therefore, the statement is true.

Question 19

Trend analysis is a form of horizontal analysis that can reveal patterns in data across successive periods.

Accepted Answer

This statement is true. Trend analysis compares data from one period to the next to identify patterns and trends. It is a type of horizontal analysis that helps to track changes in a company's financial performance over time.

Question 20

Horizontal analysis is used to reveal patterns in data covering two or more successive periods.

Accepted Answer

Horizontal analysis involves comparing financial data from different periods to identify trends and patterns in the performance of a company or organization over time. It is commonly used in financial analysis and reporting to evaluate changes in revenue, expenses, and other financial metrics.

Quiz 13: Analysis of Financial Statements