Question 1

If an analyst wishes to see how selling and general expenses of a company have changed from one year to the next, using a horizontal analysis would be the best approach.

Accepted Answer

Horizontal analysis is used to compare financial information over multiple periods (such as year-to-year) to identify trends and changes in performance. It is particularly useful for comparing line items such as expenses or revenues across time periods.

Question 2

Which of the following BEST describes horizontal analysis?
A)Comparing figures year to year
B)Comparing a company's financial figures with other companies that are leaders
C)Showing each figure as a percentage of some other amount, such as total assets
D)Calculating key ratios to evaluate performance

Accepted Answer

Horizontal analysis involves comparing financial figures over multiple periods to identify trends and growth patterns.

Question 3

Which of the following is the base amount when performing vertical analysis of a balance sheet?
A)Gross profit
B)Total cash and cash equivalents
C)Total assets
D)Profit

Accepted Answer

In vertical analysis of a balance sheet, each item is expressed as a percentage of total assets, which is the base amount.

Question 4

Benchmarking is the comparison of a company's current year results with an earlier year's performance.

Accepted Answer

Benchmarking involves comparing a company's performance with competitors or industry standards, not just earlier years of its own performance.

Question 5

If an analyst wishes to compare several different companies that vary in size, which of the following types of financial statement analysis would be used?
A)Horizontal analysis
B)Common- size financial statement analysis
C)Vertical analysis
D)Ratio analysis

Accepted Answer

Common-size financial statement analysis standardizes financial statements by expressing each line item as a percentage of a base figure, allowing for comparison across companies of different sizes.

Question 6

Common- size statements allow the comparison of two or more companies with different amounts of net sales and assets.

Accepted Answer

Common-size statements express financial statement line items as a percentage of a common base, such as net sales or total assets, making it easier to compare companies of different sizes.

Question 7

If an analyst wishes to see how sales revenue of a company has changed from one year to the next, which of the following types of financial statement analysis would be used?
A)Ratio analysis
B)Common- size financial statement analysis
C)Vertical analysis
D)Horizontal analysis

Accepted Answer

Horizontal analysis is used to compare financial data over multiple periods, allowing the analyst to see changes in sales revenue from one year to the next.

Question 8

Vertical analysis is used with the income statement, but not with the balance sheet.

Accepted Answer

Vertical analysis can be used with both the income statement and the balance sheet.

Question 9

In a vertical analysis of the income statement, each line item is shown as a percentage of gross profit.

Accepted Answer

In a vertical analysis of the income statement, each line item is shown as a percentage of net sales, not gross profit.

Question 10

Which of the following BEST describes trend analysis?
A)Showing each figure as a percentage of some other amount, such as total assets
B)Comparing a company's financial figures with other companies that are leaders
C)Calculating key ratios to evaluate performance
D)Showing each year's figures as a percentage of amounts for a base year

Accepted Answer

Trend analysis involves showing each year's figures as a percentage of amounts for a base year to identify patterns over time.

Question 11

In a vertical analysis of the income statement, each line item is shown as a percentage of profit.

Accepted Answer

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

Question 12

Which of the following is the definition of vertical analysis?
A)Vertical analysis is the practice of comparing a company with other companies that are leaders.
B)Vertical analysis is the analysis in which percentages are computed by selecting a base year as 100% and expressing amounts for following years as a percentage of the base amount.
C)Vertical analysis is the analysis of a financial statement that reveals the relationship of each statement item to a specified base, which is the 100% figure.
D)Vertical analysis is the study of percentage changes in comparative financial statements.

Accepted Answer

Vertical analysis involves analyzing financial statements by expressing each item as a percentage of a base figure, typically total sales or total assets, to understand the relative size of each item.

Question 13

If an analyst wishes to see a company's current assets as a percentage of total assets, a vertical analysis would be the best approach.

Accepted Answer

Vertical analysis involves expressing each item in the financial statement as a percentage of a total amount, such as total assets. Therefore, to see current assets as a percentage of total assets, vertical analysis would be the appropriate approach.

Question 14

If an analyst wishes to see how a company's selling and general expenses as a percentage of net sales have changed from one year to the next, which of the following types of financial statement analysis would be used?
A)Ratio analysis
B)Horizontal analysis
C)Ordinary- size financial statement analysis
D)Vertical analysis

Accepted Answer

Vertical analysis is used to show each item on a financial statement as a percentage of a base figure, such as net sales, allowing for comparison of financial statement items over time.

Question 15

The profit for a company was $540 000 this year and $630 000 last year. Profit decreased by 17%.

Accepted Answer

To find the percentage decrease from last year to this year, we can use the formula:

percentage decrease = (difference / original) x 100%

where difference = last year's profit - this year's profit
original = last year's profit

Plugging in the given values, we get:

percentage decrease = ((630,000 - 540,000) / 630,000) x 100%
percentage decrease = (90,000 / 630,000) x 100%
percentage decrease = 14.29%

Therefore, the statement "Profit decreased by 17%" is false.

Question 16

If an analyst wishes to see how gross profit of a company has changed from one year to the next, vertical analysis would be the best approach.

Accepted Answer

Vertical analysis involves expressing each financial statement item as a percentage of a base amount, such as total revenue or total assets. It is used to analyze the composition of individual financial statement items relative to a base amount. In this case, if the analyst wished to see how gross profit changed from one year to the next, they would use horizontal analysis, which involves comparing the dollar amount or percentage change of a financial statement item over time.

Question 17

If an analyst wishes to see how a company's profit as a percentage of net sales has changed from one year to the next, a vertical analysis would be the most appropriate approach.

Accepted Answer

Vertical analysis is used to show each item on a financial statement as a percentage of a base figure, such as net sales, allowing for comparison of financial data across different periods.

Question 18

Which of the following is the base amount when performing vertical analysis of an income statement?
A)Gross profit
B)Net sales
C)Total expenses
D)Sales revenue

Accepted Answer

Net sales are the base amount when performing vertical analysis of an income statement because all other line items are expressed as a percentage of net sales.

Question 19

Investors and creditors generally evaluate a company by using one year's data.

Accepted Answer

Investors and creditors generally evaluate a company by analyzing multiple years of data and financial statements to make informed decisions about the company's financial health and future prospects.

Question 20

Which of the following is the definition of benchmarking?
A)Benchmarking is the practice of comparing a company with other companies in that industry.
B)Benchmarking is the analysis of a financial statement that shows each item as a percentage of net sales or total assets.
C)Benchmarking is the study of percentage changes in financial statement line items year to year.
D)Benchmarking is the comparison of two companies using horizontal analysis.

Accepted Answer

Benchmarking involves comparing a company's processes, performance metrics, and practices with those of other companies in the same industry to identify areas for improvement.

Quiz 18: Financial Statement Analysis

If an analyst wishes to see how selling and general expenses of a company have changed from one year to the next, using a horizontal analysis would be the best approach.

Which of the following BEST describes horizontal analysis?

Which of the following is the base amount when performing vertical analysis of a balance sheet?

Benchmarking is the comparison of a company's current year results with an earlier year's performance.

If an analyst wishes to compare several different companies that vary in size, which of the following types of financial statement analysis would be used?

Common- size statements allow the comparison of two or more companies with different amounts of net sales and assets.

If an analyst wishes to see how sales revenue of a company has changed from one year to the next, which of the following types of financial statement analysis would be used?

Vertical analysis is used with the income statement, but not with the balance sheet.

In a vertical analysis of the income statement, each line item is shown as a percentage of gross profit.

Which of the following BEST describes trend analysis?

In a vertical analysis of the income statement, each line item is shown as a percentage of profit.

Which of the following is the definition of vertical analysis?

If an analyst wishes to see a company's current assets as a percentage of total assets, a vertical analysis would be the best approach.

If an analyst wishes to see how a company's selling and general expenses as a percentage of net sales have changed from one year to the next, which of the following types of financial statement analysis would be used?

The profit for a company was $540 000 this year and $630 000 last year. Profit decreased by 17%.

If an analyst wishes to see how gross profit of a company has changed from one year to the next, vertical analysis would be the best approach.

If an analyst wishes to see how a company's profit as a percentage of net sales has changed from one year to the next, a vertical analysis would be the most appropriate approach.

Which of the following is the base amount when performing vertical analysis of an income statement?

Investors and creditors generally evaluate a company by using one year's data.

Which of the following is the definition of benchmarking?