Question 1

Calculating financial ratios is a financial reporting requirement under generally accepted accounting principles.

Accepted Answer

Calculating financial ratios is not a requirement under generally accepted accounting principles (GAAP); rather, it is a tool used for financial analysis. GAAP focuses on the preparation and presentation of financial statements.

Question 2

Using vertical analysis of the income statement, a company's net income as a percentage of net sales is 10%; therefore, the cost of goods sold as a percentage of sales must be 90%.

Accepted Answer

The given statement is incorrect. The vertical analysis of the income statement only provides percentages of the individual line items in relation to the net sales, but it does not provide information on the cost of goods sold as a percentage of sales. The cost of goods sold as a percentage of sales can only be determined by dividing the cost of goods sold by the net sales.

Question 3

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

Accepted Answer

Common size analysis converts each line item in a financial statement to a percentage of a common base amount, usually total assets or total sales, making it easier to compare companies or track changes within a company over time.

Question 4

Meaningful analysis of financial statements will include either horizontal or vertical analysis, but not both.

Accepted Answer

Meaningful analysis of financial statements should include both horizontal and vertical analysis as they provide different insights into the financial health and performance of a company. Horizontal analysis examines changes in financial performance over time, while vertical analysis compares financial data as a percentage of a base amount (usually total assets or total revenues).

Question 5

Vertical and horizontal analyses are concerned with the format used to prepare financial statements.

Accepted Answer

Vertical and horizontal analyses are methods used to analyze financial statements over time (horizontal) or by comparing each item as a percentage of a base amount within the same period (vertical), not the format of the statements.

Question 6

Comparisons of company data with industry averages can provide some insight into the company's relative position in the industry.

Accepted Answer

Comparing a company's data to industry averages can help to determine if the company is performing better or worse than its competitors. This information can be useful for identifying areas for improvement and developing strategies to stay competitive.

Question 7

Vertical analysis is a more sophisticated analytical tool than horizontal analysis.

Accepted Answer

Vertical analysis evaluates each line item as a percentage of a base figure within the same period, making it simpler and more straightforward, whereas horizontal analysis looks at amounts across multiple periods, requiring more complex comparisons and trend analysis.

Question 8

If a company has sales of $110 in 2016 and $154 in 2017, the percentage increase in sales from 2016 to 2017 is 140%.

Accepted Answer

To calculate the percentage increase in sales from 2016 to 2017, we can use the following formula:

Percentage increase = [(new value - old value)/old value] x 100%

Using the given values, we get:

Percentage increase = [(154 - 110)/110] x 100%
Percentage increase = 40%

Therefore, the percentage increase in sales from 2016 to 2017 is actually 40%, not 140%. Thus, the answer is B, false.

Question 9

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 10

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

Accepted Answer

A solvency ratio measures an enterprise's ability to meet its long-term financial obligations, not its income or operating success.

Question 11

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 calculation involves dividing by the base year amount, which is negative, resulting in an undefined value.

Question 12

The current ratio is a measure of all the ratios calculated for the current year.

Accepted Answer

The current ratio specifically measures a company's ability to pay its short-term obligations with its short-term assets, not all ratios calculated for the current year.

Question 13

A ratio can be expressed as a percentage, a rate, or a proportion.

Accepted Answer

This is true. A ratio can be converted into a percentage (e.g. 2:5 = 40%), a rate (e.g. 2:5 can also be expressed as a rate of 2/5) or a proportion (e.g. 2/5 = 4/10 = 0.4).

Question 14

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

Accepted Answer

Vertical analysis calculates each item on a company's financial statement as a percentage of a single, predetermined item. This makes it easier to compare companies of different sizes, as the percentages can be compared directly.

Question 15

In the vertical analysis of the income statement, each item is generally stated as a percentage of net income.

Accepted Answer

In the vertical analysis of the income statement, each item is generally stated as a percentage of net sales or revenue, not net income.

Question 16

Another name for trend analysis is horizontal analysis.

Accepted Answer

Trend analysis is also known as horizontal analysis, as it involves analyzing financial data over a period of time to identify patterns or trends in performance.

Question 17

Measures of a company's liquidity are concerned with the frequency and amounts of dividend payments.

Accepted Answer

Measures of a company's liquidity are concerned with the company's ability to meet its short-term obligations, such as paying off debts and covering expenses. Dividend payments do not necessarily indicate the company's liquidity.

Question 18

Horizontal, vertical, and circular analyses are the most common tools of financial statement analysis.

Accepted Answer

The answer of Horizontal, vertical, and circular analyses are the...

Question 19

Analysis of financial statements is enhanced with the use of comparative data.

Accepted Answer

Comparative data allows for comparison of financial data over time or against industry benchmarks, providing added context and insight for analysis of financial statements.

Question 20

Intracompany comparisons of the same financial statement items can often detect changes in financial relationships and significant trends.

Accepted Answer

Intracompany comparisons involve comparing financial statement items within the same company over time, allowing one to detect changes and trends. This can be helpful in identifying areas that require improvement or areas of strength for the company.

Quiz 14: Financial Statement Analysis