Deck 14: Performance Measurement

Question 1

An example of a mandatory change in accounting policy is a change in inventory cost formula.

Answer 1

False

Question 2

Ideally, all changes in accounting policy are applied retrospectively, but on occasion may be reported prospectively.

Answer 2

True

Question 3

Assets and liabilities of a discontinued operation are reported on the statement of financial position at fair value.

Answer 3

False

Question 4

In horizontal analysis, if an item has a negative amount in the base year, and a positive amount in the following year, no percentage change for that item can be calculated.

Question 5

Identifying irregular items is important if a potential investor is going to use reported profit to estimate a company's value.

Question 6

When preparing a vertical analysis on an income statement, net sales are represented by 100%.

Question 7

When the disposal of a component of an entity, the income statement should report both profit from continuing operations and profit (loss) from discontinued operations.

Question 8

One objective of the income statement is to separate the results of continuing operations from those of discontinued operations.

Question 9

If a company has sales of $100 in 2012 (the base period) and $560 in 2013 (the analysis period), the percentage of the base period is 460%.

Question 10

The cumulative effects of a change in accounting policy are disclosed in the income statement.

Question 11

Comparisons of company data with industry averages provide information about a company's relative position within the industry.

Question 12

Horizontal analysis is also called trend analysis.

Question 13

In horizontal analysis, the base year is the most current year being examined.

Question 14

The gain (loss) on disposal of a discontinued operation is not reported on the income statement.

Question 15

If a company has sales of $220 in 2012 and $560 in 2013, the percentage increase in sales from 2012 to 2013 is 155%.

Question 16

Vertical analysis is a technique for evaluating a series of financial statement data over a period of time to determine the increase (decrease) that has taken place.

Question 17

Sustainable income is the most likely level of profit to be obtained in the future.

Question 18

Horizontal analysis is a technique for evaluating a financial statement item in the current year with other items in the current year.

Question 19

Vertical analysis expresses each item in a financial statement as a percent of a base amount.

Question 20

Horizontal analysis can be carried out on statement of financial position data but not on income statement data.

Question 21

From a creditor's point of view, the higher the debt to total assets ratio, the lower the risk that the company may be unable to pay its obligations.

Question 22

A solvency ratio measures the profit or operating success of a company for a given period of time.

Question 23

The receivables turnover ratio is useful in assessing the profitability of receivables.

Question 24

An accrual-based equivalent to the debt to total assets ratio is the cash total debt coverage ratio.

Question 25

Even if a company has a low debt to total assets ratio, it may have difficulty paying interest on debt if it also has a low times interest earned ratio.

Question 26

The cash current debt coverage ratio may be a better indicator of liquidity than the current ratio.

Question 27

The first step in any comprehensive analysis is to perform a horizontal and vertical analysis.

Question 28

An assessment of liquidity can be done based on only one ratio, such as the current ratio or the receivables ratio.

Question 29

The inventory turnover ratio measures the number of times, on average, the inventory was sold during the period.

Question 30

Liquidity ratios measure the ability of the company to survive over a long period of time.

Question 31

On a statement of financial position analyzed vertically, total assets are represented by 100%.

Question 32

The inventory turnover ratio is a measure of liquidity that focuses on efficient use of inventory.

Question 33

Profitability ratios are frequently used as a basis for evaluating management's operating effectiveness.

Question 34

Vertical analysis is useful in making comparisons of companies of different sizes.

Question 35

Free cash flow is the cash available after a company pays dividends.

Question 36

In the vertical analysis of a statement of financial position, the base for current liabilities is total liabilities.

Question 37

The current ratio should not be interpreted on its own without also looking at the receivables turnover and inventory turnover ratios.

Question 38

In an income statement analyzed vertically, each item is expressed as a percentage of profit.

Question 39

Earnings before interest and tax (EBIT) is a proxy for the amount available to cover interest payments.

Question 40

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

Question 41

Dividend yield measures profit generated by each share, based on the market price per share.

Question 42

Comparisons of earnings per share with other companies and the industry averages are usually not very meaningful.

Question 43

A voluntary change in accounting policy is allowed when management can show that the new policy results in
(a)higher profit from continuing operations.
(b)a more reliable and relevant presentation of transactions or events.
(c)smaller write-downs on property, plant, and equipment.
(d)larger write-downs on property, plant, and equipment.

Question 44

Sustainable income differs from actual profit by the amount of
(a)irregular revenues, expenses, gains and losses.
(b)dividends declared.
(c)changes in accounting policies.
(d)comprehensive income.

Question 45

The price-earnings ratio reflects investors' expectations about the future profitability of the company.

Question 46

An income statement would not include
(a)the reduction in prior year's profit from a change in accounting policy.
(b)a loss on disposal of a component of an entity.
(c)an operating loss on discontinued operations.
(d)an unusually large bad debt expense.

Question 47

When a mandatory change in accounting policy occurs
(a)all prior years' financial statements must be changed to reflect the newly adopted policy.
(b)it is always accounted for prospectively.
(c)the new policy is used in reporting the results of operating activities for the current year.
(d)the cumulative effect of the change in policy should be reflected on the current income statement.

Question 48

The return on common shareholders' equity is affected by both the return on assets and debt to total assets ratios.

Question 49

When a company changes an accounting policy, the cumulative effect of the change is disclosed
(a)in the statement of changes in equity (or statement of retained earnings), as an adjustment to the opening balance.
(b)in the statement of comprehensive income.
(c)in the income statement, above profit from continuing operations.
(d)in the income statement, below profit from continuing operations.

Question 50

Both the profit margin ratio and the asset turnover ratio affect a company's return on assets.

Question 51

Factors that may limit the usefulness of financial analysis include alternative accounting policies, professional judgement, other comprehensive income, diversification, inflation, and economic factors.

Question 52

The discontinued operations section of the income statement refers to
(a)discontinuance of a product line.
(b)the profit or loss on products that have been completed and sold.
(c)sale of obsolete equipment and discontinued inventory items.
(d)the disposal of a major line of business or major geographical area of operations.

Question 53

Leveraging and return on common shareholders' equity are closely related.

Question 54

Which of the following income statement figures would probably be the best indicator of a company's future performance?
(a)Total revenues
(b)Gross profit
(c)Profit
(d)Profit from continuing operations

Question 55

Comparisons of financial data made within a company are called
(a)intracompany comparisons.
(b)interior comparisons.
(c)intercompany comparisons.
(d)intramural comparisons.

Question 56

Many firms today are so diversified that they cannot be classified by industry.

Question 57

Ideally, all changes in accounting policy are applied
(a)prospectively.
(b)retrospectively.
(c)proactively.
(d)regressively.

Question 58

Assets that are held for sale as discontinued operations
(a)continue to be depreciated until sold.
(b)are removed from the statement of financial position and are disclosed in the notes instead.
(c)are not separately identified on the statement of financial position until they are sold.
(d)are segregated and reported on the statement of financial position at the lower of their carrying amount and fair value.

Question 59

An investor interested in purchasing a company's shares for their income potential would be more interested in the company's dividend yield and payout ratios than its price-earnings ratio.

Question 60

Which of the following items appears on the income statement before profit from continuing operations?
(a)Change in accounting policy
(b)Profit from discontinued operations
(c)Income tax expense
(d)Gain on sale of discontinued operations

Question 61

All of the following statements about vertical analysis are true except
(a)Vertical analysis is also called common size analysis.
(b)Amounts on the income statement are expressed as a percentage of net sales.
(c)Vertical analysis shows the relative size of each item in the statement of financial position.
(d)Vertical analysis is also called trend analysis.

Question 62

Horizontal analysis is a technique for evaluating financial statement data
(a)within a period of time.
(b)over a period of time.
(c)on a certain date.
(d)as it may appear in the future.

Question 63

In vertical analysis of an income statement, the 100% figure is
(a)profit.
(b)cost of goods sold.
(c)gross profit.
(d)net sales.

Question 64

If, over a three-year period, sales increased by 30%, and cost of goods sold increased by 45%,
(a)the sales trend is unfavourable, but the cost of goods sold trend is favourable.
(b)the sales trend is favourable, but the cost of goods sold trend is unfavourable.
(c)both trends are favourable.
(d)both trends are unfavourable.

Question 65

In horizontal analysis, the percentage of a base-period amount is calculated by
(a)dividing the analysis period amount by the base period amount.
(b)dividing the dollar amount of the change since the base period by the base period amount.
(c)dividing the item under analysis by net sales.
(d)dividing the item under analysis by total assets.

Question 66

Use the following information for questions .
In performing a vertical analysis, the percentage for accounts receivable is
(a)0.5%.
(b)1.0%.
(c)5.0%.
(d)10.0%.

Question 67

In horizontal analysis, each item is expressed as a percentage of the
(a)retained earnings figure.
(b)total assets figure.
(c)profit figure.
(d)base year figure.

Question 68

Horizontal analysis showed a 25% increase in accounts receivable in 2013 over 2012. Vertical analysis showed accounts receivable declining from 7.5% to 6.8% over the same period. Given this information, what conclusion(s) may be reached?
(a)The dollar amount of accounts receivable increased.
(b)The dollar amount of accounts receivable decreased.
(c)It cannot be determined if the dollar amount of accounts receivable increased or decreased.
(d)This result is impossible. An error has been made in the calculations.

Question 69

On financial statements that include vertical analysis, which of the following is set at 100%?
(a)Total liabilities
(b)Profit
(c)Total assets
(d)Cost of goods sold

Question 70

Under which of the following cases would a percentage change not be calculated?
(a)The trend of the amounts is decreasing but all amounts are positive.
(b)There is no amount in the base year.
(c)The trend of the amounts is decreasing but all amounts are negative.
(d)The trend of the amounts is increasing but all amounts are negative.

Question 71

Vertical analysis is a technique that expresses each item in a financial statement
(a)in dollars and cents.
(b)as a percentage of the item in the previous year.
(c)as a percentage of a base amount.
(d)starting with the highest value down to the lowest value.

Question 72

Assume the following sales data for a company: If 2010 is the base year, what is the percentage increase in sales from 2010 to 2013?
(a)283%
(b)135%
(c)35%
(d)28%

Question 73

In performing a vertical analysis, the base for prepaid expenses is
(a)total current assets.
(b)total assets.
(c)total liabilities.
(d)prepaid expenses in a previous year.

Question 74

In vertical analysis
(a)a base amount is required.
(b)a base amount is optional.
(c)the same base is used across all financial statements being analyzed.
(d)the results of the horizontal analysis are necessary inputs for vertical analysis.

Question 75

Horizontal analysis is also called
(a)Percentage analysis.
(b)Trend analysis.
(c)Vertical analysis.
(d)Economic analysis.

Question 76

All of the following statements about vertical analysis are true except
(a)Vertical analysis makes it easier to for intercompany comparisons.
(b)Vertical analysis is seldom performed on the income statement.
(c)Vertical analysis makes it easier to compare companies of different sizes.
(d)Vertical analysis is seldom performed on the cash flow statement.

Question 77

Horizontal analysis of comparative financial statements includes the
(a)development of vertically analyzed statements.
(b)calculation of liquidity ratios.
(c)calculation of dollar amount changes and percentage changes from the previous to the current year.
(d)evaluation of financial statement data that expresses each item in the current period's financial statement as a percentage of a base amount.

Question 78

Use the following information for questions .
In performing a vertical analysis, the percentage for cost of goods sold is
(a)4.4%.
(b)40.0%.
(c)44.4%.
(d)400.0%.

Question 79

Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time
(a)that has been arranged from the highest number to the lowest number.
(b)that has been arranged from the lowest number to the highest number.
(c)to determine which items are in error.
(d)to determine the amount and/or percentage increase or decrease that has taken place.

Question 80

A horizontal analysis is being conducted with year one as the base year. If year one equals $800, year two equals $840, and year three equals $896, the percentage of the base period for year three is
(a)89%.
(b)100%.
(c)105%.
(d)112%.