Question 1

A firm's ability to pay its obligations as they come due and to meet any unforeseen needs for cash is referred to as liquidity.

Accepted Answer

This statement defines liquidity, which is the ability of a company to convert its assets into cash quickly to meet its short-term obligations and unexpected cash needs.

Question 2

Another form of horizontal analysis is called trend analysis.

Accepted Answer

Trend analysis is a form of horizontal analysis that compares financial data over multiple periods to identify patterns or trends.

Question 3

In a trend analysis of cost of goods sold over the last three months, all cost of goods sold accounts are shown as a percentage of the current quarter.

Accepted Answer

In a trend analysis of cost of goods sold over the last three months, all cost of goods sold accounts are shown as a percentage of the base quarter,

Question 4

Working capital is the difference between a firm's total assets and total liabilities.

Accepted Answer

Working capital is the difference between a firm's current assets and current liabilities,

Question 5

In a horizontal analysis balance sheet, the percentage change columns do not add up in the same way as the dollar amounts because each of the percentages was calculated using a different denominator.

Accepted Answer

Each percentage change is calculated by dividing the difference between the two years' amounts by the amount from the base year, which is a different denominator for each line item. Therefore, the percentage change columns do not add up in the same way as the dollar amounts.

Question 6

Generally Accepted Accounting Principles require that companies present financial statements that include the current year and two previous years.

Accepted Answer

Generally Accepted Accounting Principles require that companies present financial statements that include the current year and the previous year,

Question 7

In preparing a common-size balance sheet, you express all individual liability or equity account balances as a percentage of total assets.

Accepted Answer

In a common-size balance sheet, all individual liability or equity account balances are expressed as a percentage of total assets. This allows for easier comparison between different companies or different periods for the same company.

Question 8

In preparing a common-size income statement, you express all revenue and expense accounts as a percentage of net income.

Accepted Answer

In preparing a common-size income statement, you express all revenue and expense accounts as a percentage of net sales revenue,

Question 9

Vertical analysis is also referred to as common-size analysis.

Accepted Answer

This statement is true. Vertical analysis involves expressing each line item of a financial statement as a percentage of a common base, such as total assets or total revenue. This allows for a comparison of the relative importance of each line item to the whole, and is often used to analyze trends over time or to compare the financial statements of different companies. Common-size analysis is, therefore, a synonym for vertical analysis.

Question 10

Land is the ultimate liquid asset.

Accepted Answer

Cash is the ultimate liquid asset,

Question 11

The first step in preparing a horizontal analysis of a firm's financial statements is to break down the balance sheet to indicate which assets are expected to sold in within the next two years.

Accepted Answer

the first step in preparing a horizontal analysis of a firm's financial statements is to gather the financial statements for at least two years,

Question 12

A helpful approach to examine changes in the relative size of account balances within a single statement is referred to as horizontal analysis.

Accepted Answer

A helpful approach to examine changes in the relative size of account balances within a single statement is referred to as vertical analysis,

Question 13

Trend analysis is very useful for analyzing the financial statements, but not for analyzing supplemental information reported in corporate annual reports.

Accepted Answer

Trend analysis is useful for analyzing the financial statements and also for analyzing supplemental information reported in corporate annual reports,

Question 14

The type of analysis that looks at the changes in the account balances over time is referred to as horizontal analysis.

Accepted Answer

Horizontal analysis, also known as trend analysis, involves comparing financial data over a period of time to identify any significant changes or trends. It looks at the account balances in different periods and calculates the percentage change, allowing for a more comprehensive analysis of a company's financial performance.

Question 15

Because an absolute dollar change does not give the whole picture, a percentage change is often included in a horizontal analysis.

Accepted Answer

A percentage change is often included in a horizontal analysis to provide a more meaningful comparison.

Question 16

Common-size statements are especially helpful in comparing companies of different size.

Accepted Answer

Common-size statements express financial information as a percentage of a base amount, such as total assets or net sales. This makes it easier to compare companies of different sizes because it focuses on the proportion of each item on the statement relative to a common base.

Question 17

A firm's ability to convert non-cash assets into cash is referred to as liquidity.

Accepted Answer

This statement is true. Liquidity refers to a firm's ability to convert its assets into cash quickly and efficiently, without causing significant disruption or loss of value. Non-cash assets such as inventory, equipment, or real estate can be converted into cash through methods such as selling or borrowing against them.

Question 18

In preparing a common-size balance sheet, you express all asset account balances as a percentage of cash.

Accepted Answer

In preparing a common-size balance sheet, you express all asset account balances as a percentage of total assets,

Question 19

The percentage change, as shown in horizontal analysis, is calculated as:
(current year account balance - previous year account balance) ÷ current year account balance

Accepted Answer

The percentage change, as shown in horizontal analysis, is calculated as:
(current year account balance - previous year account balance) ÷ previous year account balance

Question 20

Unlike the percentage columns in a horizontal analysis, the columns in a common-size percentage statement can be totaled.

Accepted Answer

In a common-size percentage statement, each item is expressed as a percentage of a common base amount. Therefore, the columns can be totaled to show the total percentage of each category.

Quiz 12: Performance Evaluation Revisited: a Balanced Approach