Deck 14: Performance Measurement

Question 1

Calculate and interpret ratios that are used to analyze solvency.

Answer 1

Horizontal analysis is a technique for evaluating a series of data, such as line items in a company's financial statements, by expressing them as percentage increases or decreases over two or more years (or periods of time). The horizontal percentage of a base-period amount is calculated by dividing the amount in a specific year (period) by a base-year (period) amount. This percentage calculation normally covers multiple years (periods). The horizontal percentage change for the period is calculated by dividing the dollar amount of the change between two years (or periods) by the prior-year (period) amount. This percentage calculation normally covers two years (or periods) only. Vertical analysis is a technique for evaluating data within one year (or period) by expressing each item in a financial statement as a percentage of a relevant total (base amount) in that same financial statement. For example, the vertical percentage of a base amount can be determined by expressing each item on the income statement as a percentage of revenue (or net sales) or each item on the statement of financial position as a percentage of total assets by dividing the financial statement amount under analysis by the base amount for that particular financial statement.

Question 2

If a company has sales of $100 in 2017 (the base period) and $560 in 2018 (the analysis period), the percentage of the base period is 460%.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

Explain and apply comparative analysis.

Question 8

Calculate and interpret ratios that are used to analyze liquidity.

Question 9

Horizontal analysis is also called

A) percentage analysis.
B) trend analysis.
C) vertical analysis.
D) economic analysis.

Question 10

In horizontal analysis, if an item has a negative amount in the base year, and a positive amount in the following year, the percentage change will exceed 100%.

Question 11

If a company has sales of $220 in 2017 and $560 in 2018, the percentage increase in sales from 2017 to 2018 is 155%.

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

Comparisons of financial data made within a company are called

A) intracompany comparisons.
B) interior comparisons.
C) intercompany comparisons.
D) intramural comparisons.

Question 17

On an income statement analyzed vertically, each item is expressed as a percentage of net income.

Question 18

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

Question 19

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

Question 20

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

Question 21

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 22

In vertical analysis of an income statement, the 100% figure is

A) net income.
B) cost of goods sold.
C) gross profit.
D) net sales.

Question 23

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 24

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 25

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 26

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 27

Vertical analysis

A) 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.
B) expresses each item in a financial statement as a percent of a base amount.
C) makes it more difficult to compare different companies.
D) is also called trend analysis.

Question 28

In horizontal analysis, each item is expressed as a percentage of the

A) retained earnings amount.
B) total assets amount.
C) net income amount.
D) base year amount.

Question 29

A horizontal analysis is being conducted with year one as the base year. If year one equals $900, year two equals $960, and year three equals $995, the percentage of the base period for year three is

A) 89%.
B) 100%.
C) 106%.
D) 111%.

Question 30

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 31

Horizontal analysis showed a 25% increase in accounts receivable in 2018 over 2017. 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 32

Assume the following sales data for a company: What is the percentage increase in sales from 2017 to 2018?

A) 11%
B) 88%
C) 12%
D) 47%

Question 33

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 34

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 35

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 36

On financial statements that include vertical analysis, which of the following is set at 100%?

A) total liabilities
B) net income
C) total assets
D) cost of goods sold

Question 37

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 38

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 39

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 40

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 41

Use the following information for questions.
Nelly Inc. reported net credit sales of $24,000,000 and cost of goods sold of $18,000,000 for the year. The average inventory for the year was $6,000,000.
Best Baskets Limited (BBL) had a current ratio of 0.8:1 before borrowing $50,000 from the bank with a short-term note payable. What effect did the borrowing transaction have on BBL's current ratio?

A) The ratio remained unchanged.
B) The ratio decreased.
C) The ratio increased.
D) Cannot be determined.

Question 42

A high receivables turnover ratio may indicate that

A) customers are making payments quickly.
B) a large portion of the company's sales are on credit.
C) many customers are not paying their receivables.
D) the company's sales have increased.

Question 43

Use the following information for questions.
Nelly Inc. reported net credit sales of $24,000,000 and cost of goods sold of $18,000,000 for the year. The average inventory for the year was $6,000,000.
Some of the ratios that are used to determine a company's short-term debt paying ability are

A) asset turnover, times interest earned, current ratio, and receivables turnover.
B) times interest earned, inventory turnover, current ratio, and receivables turnover.
C) times interest earned, current ratio, and inventory turnover.
D) current ratio, receivables turnover, and inventory turnover.

Question 44

Use the following information for questions.
Nelly Inc. reported net credit sales of $24,000,000 and cost of goods sold of $18,000,000 for the year. The average inventory for the year was $6,000,000.
A supplier to a company would be most interested in the

A) asset turnover ratio.
B) profit margin ratio.
C) current ratio.
D) free cash flow.

Question 45

Use the following information for questions.
Nelly Inc. reported net credit sales of $24,000,000 and cost of goods sold of $18,000,000 for the year. The average inventory for the year was $6,000,000.
If a company has a current ratio of 1.3:1, what effects will the borrowing of cash by short-term debt and collection of accounts receivable have on the ratio?

Question 46

Use the following information for questions.
Nelly Inc. reported net credit sales of $24,000,000 and cost of goods sold of $18,000,000 for the year. The average inventory for the year was $6,000,000.
The days in inventory during the year was

A) 15 days.
B) 11 days.
C) 91 days.
D) 122 days.

Question 47

The current ratio is

A) calculated by dividing current liabilities by current assets.
B) used to evaluate a company's liquidity and short-term debt paying ability.
C) used to evaluate a company's solvency and long-term debt paying ability.
D) calculated by subtracting current liabilities from current assets.

Question 48

Use the following information for questions.
Nelly Inc. reported net credit sales of $24,000,000 and cost of goods sold of $18,000,000 for the year. The average inventory for the year was $6,000,000.
A weakness of the current ratio is

A) the difficulty of the calculation.
B) that it doesn't take into account the composition of the current assets.
C) that it is rarely used by sophisticated analysts.
D) that it can be expressed as a percentage, as a rate, or as a proportion.

Question 49

A common measure of liquidity is

A) return on assets.
B) receivables turnover.
C) profit margin.
D) debt to total assets.

Question 50

Horizontal analysis

A) is also called trend analysis.
B) can be carried out on statement of financial position data but not on income statement data.
C) is a technique for evaluating a financial statement item in the current year with other items in the current year.
D) uses the base year as the most current year being examined.

Question 51

Use the following information for questions.
Nelly Inc. reported net credit sales of $24,000,000 and cost of goods sold of $18,000,000 for the year. The average inventory for the year was $6,000,000.
Which one of the following would not be considered a liquidity ratio?

A) current ratio
B) inventory turnover ratio
C) receivables turnover ratio
D) return on assets ratio

Question 52

The current ratio is a

A) liquidity ratio.
B) profitability ratio.
C) solvency ratio.
D) cash flow ratio.

Question 53

An inventory turnover ratio

A) measures the number of times, on average, the inventory was sold during the period.
B) is a measure of solvency that focuses on efficient use of inventory.
C) that is significantly lower than the industry average usually indicates difficulty with selling that inventory and the likelihood of incurring lower than average storage costs.
D) that is significantly higher than the industry average may indicate that a company is maintaining inventory levels that are too high.

Question 54

A company with $60,000 in current assets and $40,000 in current liabilities pays a $1,000 current liability. As a result of this transaction, the current ratio and working capital will

A) both decrease.
B) both increase.
C) increase and remain the same, respectively.
D) remain the same and decrease, respectively.

Question 55

Handles Corp. reported net credit sales of $6,500,000 and cost of goods sold of $3,400,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $525,000 and $575,000, respectively. The receivables turnover ratio was

A) 6.2 times.
B) 11.3 times.
C) 11.8 times.
D) 5.9 times.

Question 56

Short-term creditors are usually most interested in assessing

A) solvency.
B) liquidity.
C) marketability.
D) profitability.

Question 57

The receivables turnover and inventory turnover ratios are used to analyze

A) solvency.
B) profitability.
C) liquidity.
D) leverage.

Question 58

Use the following information for questions.
Nelly Inc. reported net credit sales of $24,000,000 and cost of goods sold of $18,000,000 for the year. The average inventory for the year was $6,000,000.
A liquidity ratio measures the

A) net income or operating success of a company over a period of time.
B) ability of the company to survive over a long period of time.
C) short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.
D) ability of a company to raise capital.

Question 59

Afrikana Inc. had a balance in the Accounts Receivable account of $820,000 at the beginning of the year and a balance of $880,000 at the end of the year. Net credit sales during the year were $5,920,000. The average collection period of the receivables was

A) 45 days.
B) 52 days.
C) 54 days.
D) 104 days.

Question 60

Use the following information for questions.
Nelly Inc. reported net credit sales of $24,000,000 and cost of goods sold of $18,000,000 for the year. The average inventory for the year was $6,000,000.
The inventory turnover ratio for the year was

A) 3.0 times.
B) 33.3 times.
C) 4.0 times.
D) 25.0 times.

Question 61

The following ratios have been calculated for Rosco and Ramsey Limited for 2018: Financial statement information for 2018 for Rosco and Ramsey Limited with missing information follows: InstructionsUsing the above ratios and information from Rosco and Ramsey Limited's financial statements, fill in the missing information on the financial statements. Follow the sequence indicated. Show calculations that support your answers.

Question 62

Comparative information taken from Water Works Corporation's financial statements is shown below: InstructionsUsing horizontal analysis, calculate the percentage change from 2017 to 2018.

Question 63

The following items were taken from the financial statements of McGonigal Inc. over a four-year period: InstructionsUsing horizontal analysis and 2013 as the base year, calculate the horizontal percentages of a base period for net sales, cost of goods sold, and gross profit. Explain whether the trends are favourable or unfavourable for each item.

Question 64

Selected data from McAllister Corp. are presented below: InstructionsCalculate all of the profitability ratios that can be determined from the above information.

Question 65

The following items were taken from the financial statements of Nesci Ltd. over a three-year period: InstructionsUsing horizontal analysis and 2016 as the base year, calculate the horizontal percentages of a base period for net sales, cost of goods sold, and gross profit. Explain whether the trends are favourable or unfavourable for each item.

Question 66

Presented below are liquidity and solvency ratios for Carmelo Industries, along with industry averages: InstructionsAnalyze the company's liquidity and solvency using the information presented. Present a conclusion on the liquidity and solvency, supported by your analysis.