Question 1

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

Accepted Answer

In horizontal analysis, the base year is the previous year being examined, not the most current year.

Question 2

Companies report most changes in accounting principle currently.

Accepted Answer

Companies typically report changes in accounting principles retrospectively, adjusting prior period financial statements to reflect the new principle as if it had always been applied.

Question 3

Comprehensive income includes all changes in stockholders' equity during a period except those resulting from investments by stockholders and distributions to stockholders.

Accepted Answer

Comprehensive income includes all changes in stockholders' equity during a period except those resulting from investments by stockholders and distributions to stockholders. This includes gains or losses from investments, foreign currency translation adjustments, unrealized gains or losses on certain financial instruments, and certain pension adjustments.

Question 4

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

Accepted Answer

Horizontal analysis compares a financial statement item over multiple periods, not just within the current year.

Question 5

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

Accepted Answer

Common size analysis is a technique of presenting financial statement data in a standardized format by expressing each item as a percentage of a base amount. This helps in analyzing and comparing financial statements of different companies or different periods.

Question 6

If a company has sales of $130 in 2017 and $182 in 2016, the percentage decrease in sales from 2016 to 2017 is 40%.

Accepted Answer

The percentage decrease in sales from 2016 to 2017 is actually about 28.6% [(182-130)/182 x 100%]. Therefore, the statement is false.

Question 7

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

Accepted Answer

This is true. Separating the results of continuing and discontinued operations provides investors and analysts with a clearer picture of a company's ongoing financial performance. Discontinued operations are reported separately because they are expected to have a significant impact on the company's financial results and are often the result of a major strategic decision, such as divesting a business unit. By separating them from continuing operations, investors can better evaluate the ongoing profitability and financial health of the company.

Question 8

Analysts are interested in sustainable income, which is equal to the past year's net income.

Accepted Answer

Analysts are interested in sustainable earnings, which is the level of earnings that is expected to continue into the future, rather than simply looking at the past year's net income.

Question 9

The loss on disposal of a significant component of a business is disclosed in the statement of retained earnings.

Accepted Answer

The loss on disposal of a significant component of a business is generally disclosed in the income statement and not in the statement of retained earnings. The statement of retained earnings only shows the changes in the retained earnings account over a specific period of time.

Question 10

When the disposal of a significant segment occurs, the income statement should report both income from continuing operations and income (loss) from discontinued operations.

Accepted Answer

This is true according to Generally Accepted Accounting Principles (GAAP). Income (loss) from discontinued operations should be reported separately after income from continuing operations, to provide clarity to investors and analysts.

Question 11

Improper recognition of income is not one of the factors affecting the quality of earnings.

Accepted Answer

Improper recognition of income is actually one of the factors that can negatively impact the quality of earnings. Other factors include aggressive accounting practices, irregularities in financial reporting, and lack of transparency.

Question 12

Another name for horizontal analysis is trend analysis.

Accepted Answer

Horizontal analysis involves comparing the financial statements of a company over a period of time to identify trends and changes. Another term for this is trend analysis.

Question 13

Other comprehensive income includes all changes in stockholder's equity during a period including those changes resulting from investments by stockholder's.

Accepted Answer

Other comprehensive income includes changes in equity other than those resulting from investments by stockholders, such as unrealized gains or losses on investments, gains or losses from changes in foreign currency exchange rates, and certain pension plan adjustments.

Question 14

Because pro forma earnings are based on specific rules, these amounts are highly reliable.

Accepted Answer

Pro forma earnings can be subject to manipulation and may not always provide a complete and accurate picture of a company's financial performance. Therefore, they are not always highly reliable.

Question 15

A change in accounting principle occurs when the principle used in the current year is different from the one used by competitors in the current year.

Accepted Answer

A change in accounting principle occurs when a company switches from one generally accepted accounting principle to another, or when a new principle is adopted by the accounting standard-setting bodies. It has nothing to do with what competitors are doing.

Question 16

Alternative accounting methods affect the quality of earnings.

Accepted Answer

Alternative accounting methods can affect the way a company reports its financial results, which can impact the quality of earnings. For example, using aggressive accounting methods may artificially inflate earnings, while conservative methods may result in lower reported earnings. This can make it difficult for investors to accurately assess a company's financial performance and can lead to incorrect investment decisions.

Question 17

Comprehensive income includes all revenues, expenses, gains, losses, and dividends.

Accepted Answer

Comprehensive income includes all revenues, expenses, gains, and losses, but not dividends. Dividends are not considered a component of comprehensive income.

Question 18

A primary purpose of vertical analysis is to observe trends over a three-year period.

Accepted Answer

The primary purpose of vertical analysis is to compare different components of a company's financial statements within the same year, in order to analyze the relative proportions of those components. While this analysis can be helpful in identifying trends over a longer time period, such as three years, that is not its primary purpose.

Question 19

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 computed.

Accepted Answer

This is because the percentage change formula involves dividing the difference between the two amounts by the base year amount, which would result in a division by zero error if the base year amount is negative. Therefore, no percentage change can be calculated for that item.

Question 20

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.

Accepted Answer

Vertical analysis evaluates financial statement data by expressing each item as a percentage of a base amount within a single period, not over time.

Quiz 13: Financial Statement Analysis