Question 1

You are using a leading competitor,Company B,for benchmarking your company,Company A.When benchmarking,the gross margin of Company A is expressed as a percentage of:
A)the net sales of Companies A and B.
B)Company B's net sales.
C)Company A's net income.
D)Company A's net sales.

Accepted Answer

When benchmarking, the gross margin of Company A should be expressed as a percentage of its own net sales. Therefore, the correct choice is D. Using the net sales of Companies A and B (A), Company B's net sales (B), or Company A's net income (C) would not accurately reflect the gross margin of Company A.

Question 2

A vertical analysis is primarily concerned with:
A)the dollar amount of the change in various financial statement line items from year to year.
B)individual financial statement line items expressed as a percentage of a base (which represents 100%).
C)percentage changes in the balances of line items from comparative financial statements.
D)the change in key financial statement ratios over a specified period of time.

Accepted Answer

A vertical analysis involves expressing each financial statement line item as a percentage of a base amount, usually total revenue or total assets. This allows for easier comparison of different line items and helps identify trends over time. It does not focus on dollar amounts or changes in ratios.

Question 3

A financial statement that shows each line item as a percentage of one key item on the statement is referred to as a:
A)benchmarking.
B)common-size statement.
C)horizontal analysis.
D)financial ratio analysis.

Accepted Answer

A common-size statement is a financial statement that presents each line item as a percentage of a single base figure. This allows for easy comparison between different companies or different periods for the same company. Benchmarking refers to comparing a company's performance to that of its competitors or industry standards. Horizontal analysis is the comparison of financial statements from different periods. Financial ratio analysis involves calculating and analyzing various financial ratios to evaluate a company's performance.

Question 4

Expressing cash and cash equivalents as a percentage of total assets is an example of:
A)horizontal analysis.
B)current ratio.
C)ratio analysis.
D)vertical analysis.

Accepted Answer

Expressing cash and cash equivalents as a percentage of total assets is an example of vertical analysis, which compares different items on a financial statement to a base figure to understand their relative proportions.

Question 5

Which of the following is typically used as the base in a vertical analysis of an income statement?
A)gross profit
B)operating income
C)net income
D)net sales

Accepted Answer

Net sales is typically used as the base in a vertical analysis of an income statement because it represents the total revenue generated from sales before any expenses or deductions are accounted for. Dividing each income statement item by net sales allows for a percentage comparison and analysis of each item's contribution to the overall revenue.

Question 6

Benchmarking compares a company to some standard set by others.

Accepted Answer

Benchmarking involves comparing a company's performance, processes or practices to those of other companies or industry standards. Therefore, it is true that benchmarking involves comparing a company to some standard set by others.

Question 7

In performing vertical analysis,the base for inventory is:
A)total stockholders' equity.
B)total assets.
C)total cash and cash equivalents.
D)total current assets.

Accepted Answer

In vertical analysis, inventory is typically compared to total assets to determine its proportion of the company's assets, making total assets the correct base for inventory.

Question 8

Common-size financial statements report only dollar amounts.

Accepted Answer

Common-size financial statements present financial information as a percentage of a common base, such as total assets or total revenue. This allows for easier comparison of financial data between companies of different sizes or within the same company over time.

Question 9

A financial statement line item expressed as a percentage of a base amount is a result of:
A)horizontal analysis.
B)economic value added.
C)vertical analysis.
D)comparative analysis.

Accepted Answer

This is a characteristic of vertical analysis, which presents financial statement line items as a percentage of a base amount (usually total assets for the balance sheet and total revenue for the income statement). Horizontal analysis involves comparing financial statement line items over time (such as year-over-year or quarter-over-quarter) and expressing the change as a percentage. Economic value added (EVA) is a financial performance metric that measures a company's true economic profit after accounting for the cost of capital. Comparative analysis involves comparing financial information across different companies or industries.

Question 10

You are the CEO of Company A and you are using an industry leader (Leader Company)for benchmarking.Company A is much smaller than Leader Company in terms of total assets and total sales revenue.You should compare the:
A)gross profit of Company A to the gross profit of Leader Company.
B)net income of Company A to the net income of Leader Company.
C)net sales of Company A to the net sales of Leader Company.
D)net income to net sales ratio of Company A to net income to net sales ratio of Leader Company.

Accepted Answer

Comparing the net income to net sales ratio is the best choice for benchmarking as it considers the profitability of the companies relative to their revenue. This ratio is also more comparable across companies of different sizes, as it provides a standardized measure of profitability. Comparing gross profit or net sales alone does not provide a clear depiction of the company's profitability. Net income comparison may be affected by factors such as differences in tax rates or interest expense, which may vary significantly between Company A and Leader Company.

Question 11

A company's net income as a percentage of sales is 15%.Using vertical analysis,the cost of goods sold as a percentage of sales must be 85%.

Accepted Answer

Vertical analysis does not directly determine the cost of goods sold as a percentage of sales based on net income percentage. It involves comparing each line item on a financial statement to a base figure from that statement, not inferring specific expense percentages from net income percentage.

Question 12

Szidon Company reports the following data:  Using benchmarking,what can be said about Szidon Company?
A)Szidon is inferior to the key competitor because the key competitor's net income percentage is higher.
B)Szidon is superior to the key competitor because net income is higher.
C)There is not enough information to make any conclusions.
D)There is conflicting information so no conclusions can be reached.

Accepted Answer

The answer of Szidon Company reports the following data: ...

Question 13

Walton Company's return on sales for the most recent year was 5%.The industry leader reports a return on sales of 7%.The comparison of Walton Company's return on sales to the industry leader is an example of:
A)benchmarking.
B)gross margin analysis.
C)detail analysis.
D)intercompany analysis.

Accepted Answer

Benchmarking involves comparing a company's performance to that of industry leaders or competitors. In this case, the comparison of Walton Company's return on sales to the industry leader's return on sales is an example of benchmarking. Gross margin analysis, detail analysis, and intercompany analysis are not relevant to this scenario.

Question 14

Benchmarking common size variables against a key competitor provides meaningful information only if the companies are similar in size.

Accepted Answer

Benchmarking against a key competitor can provide meaningful insights even if the companies are not similar in size, as it helps identify areas of relative efficiency, effectiveness, and competitive advantage, focusing on performance metrics rather than just scale.

Question 15

On a common-size income statement,income taxes expense is expressed as a percentage of:
A)net income.
B)total stockholders' equity.
C)total assets.
D)net sales.

Accepted Answer

Income taxes are typically calculated as a percentage of net sales, as opposed to other financial metrics such as net income, total stockholders' equity, or total assets. By expressing income taxes as a percentage of net sales on a common-size income statement, it can provide insight into how much of a company's revenue is going toward taxes and how that percentage may change over time.

Question 16

Which of the following is typically used as the base in a vertical analysis of a balance sheet?
A)total liabilities
B)total stockholders' equity
C)total assets
D)net sales

Accepted Answer

Total assets are typically used as the base in a vertical analysis of a balance sheet. This allows for a comparison of the relative proportions of each asset category to the total assets, providing insights into a company's financial health and management of its assets.

Question 17

Mussa Corporation reports the following data:  In vertical analysis,the cost of goods sold percentage is closest to: (Round your final answer to the nearest whole percentage)
A)37%.
B)59%.
C)63%.
D)170%.

Accepted Answer

$170,000 ÷ $270,000 = 63%

Question 18

On a common-size balance sheet,each line item is expressed as a percentage of:
A)current assets.
B)operating income.
C)total assets.
D)net income.

Accepted Answer

On a common-size balance sheet, each line item is expressed as a percentage of total assets. This helps to analyze the relative proportions of different assets, liabilities, and equity in a company's financial structure. It also enables comparisons between companies of different sizes and industries, as the percentages provide a standardized basis for evaluation. Expressing line items as a percentage of current assets, operating income, or net income would not provide a comprehensive view of the company's financial position and performance.

Question 19

In vertical analysis:
A)a base amount is optional.
B)a base amount is required.
C)line items from balance sheets are examined only.
D)line items from income statements are examined only.

Accepted Answer

In vertical analysis, a base amount is required to which all other amounts on the financial statement are compared. This allows for the calculation of percentages and the identification of changes in the relative size of different line items over time.

Question 20

Which of the following would be most helpful in the comparison of different size companies?
A)horizontal analysis
B)comparison of their net incomes
C)comparison of their working capital balances
D)preparation of common-size financial statements

Accepted Answer

Preparation of common-size financial statements would be most helpful in comparing different size companies because it adjusts the financial statements to show percentages of each line item in relation to total assets or revenues. This allows for more accurate comparisons between companies of different sizes. A, B, and C may also provide some insights, but they do not adjust for size differences and may not provide a fair comparison.

Quiz 12: Financial Statement Analysis

You are using a leading competitor,Company B,for benchmarking your company,Company A.When benchmarking,the gross margin of Company A is expressed as a percentage of:

A vertical analysis is primarily concerned with:

A financial statement that shows each line item as a percentage of one key item on the statement is referred to as a:

Expressing cash and cash equivalents as a percentage of total assets is an example of:

Which of the following is typically used as the base in a vertical analysis of an income statement?

Benchmarking compares a company to some standard set by others.

In performing vertical analysis,the base for inventory is:

Common-size financial statements report only dollar amounts.

A financial statement line item expressed as a percentage of a base amount is a result of:

You are the CEO of Company A and you are using an industry leader (Leader Company) for benchmarking.Company A is much smaller than Leader Company in terms of total assets and total sales revenue.You should compare the:

A company's net income as a percentage of sales is 15%.Using vertical analysis,the cost of goods sold as a percentage of sales must be 85%.

Szidon Company reports the following data: Using benchmarking,what can be said about Szidon Company?

Walton Company's return on sales for the most recent year was 5%.The industry leader reports a return on sales of 7%.The comparison of Walton Company's return on sales to the industry leader is an example of:

Benchmarking common size variables against a key competitor provides meaningful information only if the companies are similar in size.

On a common-size income statement,income taxes expense is expressed as a percentage of:

Which of the following is typically used as the base in a vertical analysis of a balance sheet?

Mussa Corporation reports the following data: In vertical analysis,the cost of goods sold percentage is closest to: (Round your final answer to the nearest whole percentage)

On a common-size balance sheet,each line item is expressed as a percentage of:

In vertical analysis:

Which of the following would be most helpful in the comparison of different size companies?