Question 1

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

Accepted Answer

A change in inventory cost formula is typically a voluntary change in accounting policy, unless a new accounting standard mandates it.

Question 2

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

Accepted Answer

Ideally, all changes in accounting policy should be applied retrospectively, meaning that they should be reflected in the financial statements as if they had always been used by the company. However, in some cases, retrospective application may be impractical or impossible, and in these cases, the change may be reported prospectively, meaning that it is only reflected in future financial statements.

Question 3

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

Accepted Answer

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.

Accepted Answer

This is because a negative amount in the base year would result in a negative percentage change, which cannot be represented.

Question 5

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

Accepted Answer

Identifying irregular items, such as one-time gains or losses, is important for determining the true ongoing profitability of a company, which is necessary for estimating its value accurately. Ignoring irregular items can lead to distorted financial statements and inaccurate valuations.

Question 6

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

Accepted Answer

In vertical analysis, each item on the income statement is expressed as a percentage of the base amount, which is typically net sales. Therefore, 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.

Accepted Answer

When a component of an entity is disposed of, the income statement should report both profit from continuing operations and profit (loss) from discontinued operations. This is in accordance with accounting standards such as Generally Accepted Accounting Principles (GAAP) in the United States. The income from discontinued operations should be reported separately from income from continuing operations to provide investors with a better understanding of the company's financial performance.

Question 8

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

Accepted Answer

The income statement separates the profits and losses of continuing operations from those of discontinued operations in order to provide a clearer picture of the ongoing business 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%.

Accepted Answer

The percentage of the base period can be calculated using the following formula: (Analysis period/Base period) x 100%. Plugging in the numbers, we get: (560/100) x 100% = 560%. Therefore, the statement is false.

Question 10

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

Accepted Answer

The cumulative effects of a change in accounting policy are not disclosed in the income statement but are disclosed in the notes to the financial statements. The income statement only reflects the current period's impact of the change in accounting policy.

Question 11

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

Accepted Answer

Comparing a company's data with industry averages can help determine if the company is performing better or worse than its competitors within the industry.

Question 12

Horizontal analysis is also called trend analysis.

Accepted Answer

Horizontal analysis compares financial statement data over a period of time to identify trends and changes, hence it is also called trend analysis.

Question 13

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

Accepted Answer

In horizontal analysis, the base year is the earlier year being used as a benchmark for comparison with the most current year being examined.

Question 14

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

Accepted Answer

The gain or loss on disposal of a discontinued operation is reported on the income statement as a separate line item below income from continuing operations. This is in accordance with the requirements of ASC 205-20.

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%.

Accepted Answer

The percentage increase is calculated as [(New value - Old value) / Old value] * 100. In this case, the percentage increase is [(560 - 220) / 220] * 100 = 154.55%, which is approximately 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.

Accepted Answer

The answer of Vertical analysis is a technique for evaluating...

Question 17

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

Accepted Answer

Sustainable income refers to the level of profit that a company is likely to earn consistently in the future, based on its current operations and market conditions. It takes into account factors such as revenue growth, cost structure, and market trends, and is considered a more reliable indicator of long-term profitability than one-time or short-term gains. Therefore, 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.

Accepted Answer

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

Question 19

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

Accepted Answer

Vertical analysis is a technique used in financial analysis where each item in a financial statement is expressed as a percentage of a base amount, which is usually the total amount or a key figure in the statement. This helps to highlight the relative size and importance of each item within the statement.

Question 20

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

Accepted Answer

Horizontal analysis can be carried out on both statement of financial position and income statement data. It involves comparing financial data for different periods to identify trends and changes in performance over time.

Quiz 14: Performance Measurement