Question 1

Which of the following considerations is most important for a stockholder when evaluating whether to purchase stock in a company?
A)Will earnings per share be distributed to stockholders?
B)Will the company earn a fair return on the amount invested by the stockholders?
C)Will the key ratios be reported on the balance sheet?
D)Will cash flows from operations exceed the amount of net income for the period?

Accepted Answer

While all of these considerations may be important to shareholders, the most important consideration when evaluating whether to purchase stock in a company is whether the company will earn a fair return on the amount invested by the stockholders. This is because the ultimate goal for most investors is to earn a return on their investment, and the company's ability to generate profits and increase the value of the stock is crucial to achieving this goal. Earnings per share, key ratios, and cash flows from operations are important metrics that can help investors evaluate a company's financial health, but they are not as critical as the company's ability to generate a fair return.

Question 2

Trend analysis is analysis
A)of dollar changes and percentage changes over several years.
B)in which all items are presented as a percentage of one selected item on a financial statement.
C)in which a statistic is calculated for the relationship between two items on a single financial statement or for two items on different financial statements.
D)of all ratios that increased or decreased over past accounting periods.

Accepted Answer

Trend analysis involves analyzing dollar and percentage changes over multiple years to identify patterns and trends in financial data. Option B refers to common size analysis, option C refers to ratio analysis, and option D is too broad and does not accurately describe the focus of trend analysis.

Question 3

Which of the following statements is true regarding valuation amounts on the balance sheet?
A)Stockholders' equity reflects the amount the stockholders would receive upon liquidation.
B)Assets are recorded at current cost.
C)Stockholders' equity reflects the current market value of the stock
D)There are a variety of assumptions used in determining amounts reported on the balance sheet.

Accepted Answer

The valuation amounts on the balance sheet are based on a variety of assumptions, such as historical cost, current cost, and net realizable value. Therefore, option D is the correct answer. Option A is incorrect because stockholders' equity reflects the book value of the company, not the liquidation value. Option B is incorrect because assets are recorded at historical cost, current cost, or net realizable value, depending on the type of asset. Option C is incorrect because stockholders' equity reflects the book value of the company, not the current market value of the stock.

Question 4

Sunshine Farm Supply
Following are selected data from the financial statements of Sunshine Farm Supply: 
-Refer to the data for Sunshine Farm Supply.
Which of the following would result from a horizontal analysis of its balance sheet?
A)Accounts receivable increased $22,000 or 57.9% during 2016.
B)Accounts receivable is five times larger than Merchandise inventory in 2016.
C)Accounts receivable is 13.3% of total assets for 2016.
D)Merchandise inventory is 2.7% of total assets for 2016.

Accepted Answer

A horizontal analysis of the balance sheet would compare the changes in accounts receivable and merchandise inventory from one period to another. Option A states that accounts receivable increased by $22,000 or 57.9% during 2016, indicating a significant change in this account. Options B and C relate to ratios and proportions which do not necessarily reflect changes over time. Option D provides no comparison to a previous period.

Question 5

What is the minimum number of years for which publicly traded companies must include the following statements in their annual report filed with the SEC?

Accepted Answer

The answer of What is the minimum number of years...

Question 6

Sunshine Farm Supply
Following are selected data from the financial statements of Sunshine Farm Supply: 
-Refer to the data for Sunshine Farm Supply.
Which of the following would not result from a vertical analysis of its balance sheet?
A)Accounts receivable increased $22,000 or 36.7% during 2016.
B)Accounts receivable is five times larger than Merchandise inventory in 2016.
C)Accounts receivable is 13.3% of total assets for 2016.
D)Merchandise inventory is 2.7% of total assets for 2016.

Accepted Answer

Vertical analysis involves expressing each item in a financial statement as a percentage of a base amount, such as total assets for a balance sheet. Option A describes a change in dollar amount and percentage over time, which is horizontal analysis, not vertical analysis.

Question 7

Sunshine Farm Supply
Following are selected data from the financial statements of Sunshine Farm Supply: 
-Refer to the data for Sunshine Farm Supply.
Which of the following would result from a horizontal analysis of its income statement?
A)Cost of goods sold is 45.5% of net sales for 2016.
B)Gross profit is 42.1% of net sales for 2016.
C)Cost of goods sold decreased $50,000 or 23.8% during 2016.
D)Accounts receivable total 13.3% of total assets for 2016.

Accepted Answer

Horizontal analysis compares financial statement items from year to year to determine the overall increase or decrease. Therefore, Choice C (Cost of goods sold decreased $50,000 or 23.8% during 2016) would result from a horizontal analysis of the income statement as it compares the cost of goods sold from 2015 to 2016. The other choices do not pertain to an analysis of changes from one year to the next.

Question 8

In a vertical analysis of the income statement, the 100% amount is
A)Net income
B)Gross profit
C)Operating income
D)Net sales

Accepted Answer

In a vertical analysis of the income statement, the 100% amount is typically assigned to net sales. This allows all other line items on the income statement to be expressed as a percentage of sales. Therefore, the correct choice is D) Net sales.

Question 9

Which of the following is least useful in evaluating a company's financial statements?
A)Comparison with government economic data for the economy as a whole
B)Comparison with other companies in the same industry
C)Comparison of the company's current period data with accounting data from 5 years ago
D)Comparison of the company's current period data with that of the last year

Accepted Answer

Comparison of the company's current period data with accounting data from 5 years ago is least useful in evaluating a company's financial statements because it does not provide a current perspective on the company's financial performance.

Question 10

Horizontal analysis is analysis
A)of dollar changes and percentage changes over two or more years.
B)in which all items are presented as a percentage of one selected item on a financial statement.
C)in which a statistic is calculated for the relationship between two items on a single financial statement or for two items on different financial statements
D)of all ratios that increased or decreased over past accounting periods.

Accepted Answer

Horizontal analysis involves comparing dollar changes and percentage changes over two or more years on a financial statement. Option B describes vertical analysis, while option C describes ratio analysis. Option D is too general and does not accurately describe horizontal analysis.

Question 11

Which of the following is the most serious limitation to financial statement analysis of publicly traded companies?
A)Some companies do not use GAAP.
B)Inflation can distort comparisons between years.
C)Some companies report nonoperating items such as extraordinary gains and losses, while others do not.
D)Different industries use different account names.

Accepted Answer

Inflation can distort comparisons between years. This is because inflation affects the reported values of assets and liabilities on the balance sheet, as well as revenues and expenses on the income statement. Therefore, it can be difficult to compare financial statements across different periods if not adjusted for inflation.

Question 12

Sunshine Farm Supply
Following are selected data from the financial statements of Sunshine Farm Supply: 
-Refer to the data for Sunshine Farm Supply.
Which of the following would result from a vertical analysis of its income statement?
A)Accounts receivable increased $22,000 or 57.9% during 2016.
B)Gross profit is 57.9% of net sales for 2016.
C)Cost of goods sold increased $50,000 or 23.8% during 2016.
D)Net sales increased $110,000 or 28.9% during 2016.

Accepted Answer

Vertical analysis involves calculating and expressing each line item on the income statement as a percentage of net sales. Therefore, only option B is a result of a vertical analysis. Options A, C, and D provide information on how individual line items changed in dollar amounts or percentages, but they do not reflect the impact on these line items in relation to net sales.

Question 13

The calculations for some profitability ratios are the same as the calculations for common-size analysis of the income statement.Which of the following profitability ratios would also be determined through a common-size analysis of the income statement?
A)gross profit ratio
B)debt-to-equity ratio
C)acid-test ratio
D)earnings per share

Accepted Answer

The gross profit ratio can be calculated by dividing gross profit by net sales. In a common-size analysis of the income statement, gross profit would be presented as a percentage of net sales. Therefore, the calculation for the gross profit ratio is essentially the same as the calculation for the common-size analysis of gross profit. The other ratios listed (debt-to-equity, acid-test, earnings per share) do not involve comparing income statement line items as a percentage of sales.

Question 14

The dollar change and percentage change in the accounts receivable account from 2013 to 2014 is calculated for Allison Corporation.This is an example of
A)horizontal analysis
B)vertical analysis
C)profitability analysis
D)solvency assessment

Accepted Answer

The calculation of dollar change and percentage change in the accounts receivable account from 2013 to 2014 is an example of horizontal analysis, which compares financial data over different time periods to identify trends and changes. Vertical analysis compares financial data within the same period to determine the composition of accounts, profitability analysis looks at earnings and expenses to determine profitability, and solvency assessment considers a company's ability to meet its financial obligations over the long-term.

Question 15

A financial analyst is comparing two companies.Which of the following would cause major problems in the evaluation process?
A)One company has a fiscal year that ends on October 31, while the other company has a fiscal year that ends on August 31.
B)One company reported nonoperating activities, while the other company did not.
C)The companies operate in different industries.
D)Inflation has been low for the past several years.

Accepted Answer

Comparing companies from different industries can cause major problems in the evaluation process because industries have different growth prospects, risks, and financial characteristics. This makes it difficult to make direct comparisons between the financial health and performance of the companies.

Question 16

A banker is analyzing a company which operates in the petroleum industry.Which of the following might be a major consideration in determining whether the company should receive a loan?
A)The petroleum industry suffers from political pressures concerning the selling price of its products.
B)Inflation has been high for several years in a row.
C)All companies in the petroleum industry use the same accounting principles.
D)The company has a large amount of interest payments related to many outstanding loans.

Accepted Answer

The answer of A banker is analyzing a company which...

Question 17

Which of the following statements is true regarding vertical analysis?
A)Common-size financial statements can be used to compare businesses of different sizes.
B)Vertical analysis can only be used with balance sheet accounts.
C)Vertical analysis can only be used with income statement accounts.
D)Vertical analysis can only be used with retained earnings accounts.

Accepted Answer

Vertical analysis is a method of analyzing financial statements in which each line item is expressed as a percentage of a base item. This allows for easy comparison of companies of different sizes. It can be used with both income statement and balance sheet accounts. Retained earnings accounts are not typically analyzed separately using vertical analysis.

Question 18

Sunshine Farm Supply
Following are selected data from the financial statements of Sunshine Farm Supply: 
-Refer to the data for Sunshine Farm Supply.
Which of the following results would be found through a vertical analysis of the balance sheet or the income statement of Sunshine Farm Supply?
A)Accounts receivable increased $22,000 during 2016.
B)Total assets increased $70,000 during 2016.
C)Cost of goods sold increased $50,000 or 23.8% during 2016.
D)Gross profit is 57.9% of net sales for 2016.

Accepted Answer

Vertical analysis involves expressing each item in a financial statement as a percentage of a base figure, such as net sales for the income statement. Gross profit as a percentage of net sales is an example of vertical analysis.

Question 19

To review the current market price of the stock, one should review the
A)balance sheet.
B)income statement.
C)statement of cash flows.
D)none of these; it is not on the financial statements.

Accepted Answer

The current market price of a stock is not found on the financial statements. It is determined by the stock market and can be found on stock market exchanges, financial news websites, or brokerage platforms. Financial statements like the balance sheet, income statement, and statement of cash flows provide information on a company's financial health and performance, not its stock market price.

Question 20

Starship Inc.'s gross profit ratio increased from 36.5% in 2015 to 48.6% in 2016.What is the trend in this change?
A)An upward trend
B)A downward trend
C)It depends on whether net sales increased or decreased during the period
D)Trends cannot be determined without the dollar amount of the increase provided

Accepted Answer

The increase in gross profit ratio indicates an improvement in the profitability of the company, which suggests an upward trend.

Quiz 13: Financial Statement Analysis

Which of the following considerations is most important for a stockholder when evaluating whether to purchase stock in a company?

Trend analysis is analysis

Which of the following statements is true regarding valuation amounts on the balance sheet?

Sunshine Farm Supply Following are selected data from the financial statements of Sunshine Farm Supply: -Refer to the data for Sunshine Farm Supply. Which of the following would result from a horizontal analysis of its balance sheet?

What is the minimum number of years for which publicly traded companies must include the following statements in their annual report filed with the SEC?

Sunshine Farm Supply Following are selected data from the financial statements of Sunshine Farm Supply: -Refer to the data for Sunshine Farm Supply. Which of the following would not result from a vertical analysis of its balance sheet?

Sunshine Farm Supply Following are selected data from the financial statements of Sunshine Farm Supply: -Refer to the data for Sunshine Farm Supply. Which of the following would result from a horizontal analysis of its income statement?

In a vertical analysis of the income statement, the 100% amount is

Which of the following is least useful in evaluating a company's financial statements?

Horizontal analysis is analysis

Which of the following is the most serious limitation to financial statement analysis of publicly traded companies?

Sunshine Farm Supply Following are selected data from the financial statements of Sunshine Farm Supply: -Refer to the data for Sunshine Farm Supply. Which of the following would result from a vertical analysis of its income statement?

The calculations for some profitability ratios are the same as the calculations for common-size analysis of the income statement.Which of the following profitability ratios would also be determined through a common-size analysis of the income statement?

The dollar change and percentage change in the accounts receivable account from 2013 to 2014 is calculated for Allison Corporation.This is an example of

A financial analyst is comparing two companies.Which of the following would cause major problems in the evaluation process?

A banker is analyzing a company which operates in the petroleum industry.Which of the following might be a major consideration in determining whether the company should receive a loan?

Which of the following statements is true regarding vertical analysis?

Sunshine Farm Supply Following are selected data from the financial statements of Sunshine Farm Supply: -Refer to the data for Sunshine Farm Supply. Which of the following results would be found through a vertical analysis of the balance sheet or the income statement of Sunshine Farm Supply?

To review the current market price of the stock, one should review the

Starship Inc.'s gross profit ratio increased from 36.5% in 2015 to 48.6% in 2016.What is the trend in this change?