Question 1

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

Accepted Answer

Horizontal analysis compares financial data over a period of time to identify trends and patterns.

Question 2

Horizontal analysis is used to reveal changes in the relative importance of each financial statement item.

Accepted Answer

Horizontal analysis is used to evaluate trends over time by comparing financial statement items across multiple periods, not to assess their relative importance.

Question 3

Earnings per share are calculated only on income from continuing operations.

Accepted Answer

Earnings per share (EPS) are calculated based on net income, which includes income from both continuing and discontinued operations, unless specified otherwise.

Question 4

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 to identify patterns and changes. This can include comparing relationships between items on different financial statements, such as comparing changes in net income to changes in total assets or changes in cash flows from operating activities to changes in accounts receivable.

Question 5

An advantage of common-size statements is that they reflect the dollar magnitude (size) of the different companies under analysis.

Accepted Answer

Common-size statements express items as a percentage of a common base, such as total assets or net sales. Therefore, they do not reflect the dollar magnitude of the companies being analyzed.

Question 6

Analysis of a single financial number is often of limited value.

Accepted Answer

Analysis of a single financial number does not provide a comprehensive understanding of the financial performance or position of an entity. It is often necessary to consider multiple financial numbers and their interrelationships to gain meaningful insights into an entity's financial health. For example, analyzing only one financial number, such as revenue or net income, without considering expenses or cash flows, can be misleading and result in inaccurate conclusions.

Question 7

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

Accepted Answer

Horizontal analysis is a technique used in financial statement analysis to compare data from two or more periods to identify trends and patterns over time. It involves comparing line items in financial statements such as income statements, balance sheets, and cash flow statements to reveal changes or trends in financial performance. Therefore, the statement "Horizontal analysis is used to reveal patterns in data covering two or more successive periods" is true.

Question 8

Ratios must refer to economically important relationships, such as a sale price compared to its cost.

Accepted Answer

This is correct. Ratios are used to analyze and compare economic data, such as the relationship between revenues and expenses, profit margins, and return on investment. These relationships help businesses make informed decisions about pricing, production, and investment strategies.

Question 9

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

Accepted Answer

Trend analysis is a form of horizontal analysis that examines changes in data over time to identify patterns and trends, making it a useful tool for forecasting future performance.

Question 10

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

Accepted Answer

A ratio can be expressed as a percent (e.g. 50%), rate (e.g. 3:1) or proportion (e.g. 2/3).

Question 11

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

Question 12

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

Accepted Answer

Graphical analysis of the balance sheet can provide a visual representation of the company's sources of financing, such as debt and equity, and can aid in understanding the financial health of the organization.

Question 13

A trend percent, or index number, 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 a trend percent or index number.

Question 14

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

Accepted Answer

Vertical analysis is used to analyze financial statements by expressing each item as a percentage of a base figure within a single period, not across multiple periods.

Question 15

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 is a technique used to analyze financial statements by expressing each individual item or group of items as a percentage of a base amount. This helps in understanding the relative proportions of each item in the financial statement.

Question 16

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

Accepted Answer

To calculate the common-size percent for cash, divide the cash amount by total assets and multiply by 100. 
($14,000 ÷ $178,300) x 100 = 7.85% 
Therefore, the statement is true.

Question 17

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

Accepted Answer

Liquidity refers to the ability of an individual or organization to easily convert assets into cash or cash equivalents to meet short-term financial obligations. Therefore, the statement is true.

Question 18

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 compare financial amounts for analysis purposes by displaying the amounts in side by side columns on a single statement.

Question 19

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. This allows for easier comparison between companies of different sizes.

Question 20

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 computing percent change on a comparative financial statement item.

Quiz 17: Analysis of Financial Statements