Question 1

In a common size income statement,each item on the income statement is expressed as a percentage of:
A)net income.
B)gross profit.
C)total expenses.
D)sales revenue.

Accepted Answer

The common size income statement reports each income statement item as a percentage of sales.

Question 2

The following information is taken from the financial statements of Clybourn Company for the current year: $\begin{array}{lr}
\text { Current Assets } & \$ 32,000 \
\text { Total Assets } & 1,424,000 \
\text { Cost of Goods Sold } & 1,040,000 \
\text { Gross Profit } & 320,000 \
\text { Net Income } & 192,000
\end{array}$ The gross profit percentage for the current year rounded to the nearest whole percent is closest to:
A)24%.
B)76%.
C)60%.
D)31%.

Accepted Answer

Gross profit percentage is calculated as (Gross Profit / Sales) * 100. Sales can be found by adding Gross Profit to Cost of Goods Sold, which is $1,360,000. Thus, the percentage is ($320,000 / $1,360,000) * 100 = 23.53%, rounded to 24%.

Question 3

Net income was $753,480 in the current year and $655,200 in the prior year.The year-to-year percentage change in net income is an increase of:
A)15%.
B)55%.
C)87%.
D)13%.

Accepted Answer

Year-to-year change (%)= [(Current year's total − Prior year's total)÷ Prior year's total] × 100 = [($753,480 − $655,200)÷ $655,200] × 100 = 15%

Question 4

Which of the following statements about trend analysis is correct?
A)Time-series analysis is an example of trend analysis.
B)Trend data are always in dollars.
C)Trend analysis is also known as vertical analysis.
D)Common-size analysis is an example of trend analysis.

Accepted Answer

Horizontal analyses compare individual financial statement line items horizontally (from one period to the next),with the general goal of identifying significant sustained changes (trends).Because it compares results over a series of periods,it is sometimes called time-series analysis.

Question 5

To analyze changes in a company's net income over the last ten years,you should perform:
A)horizontal analysis.
B)vertical analysis.
C)cross-section analysis.
D)ratio analysis.

Accepted Answer

Horizontal (trend)analyses are conducted to help financial statement users recognize important financial changes that unfold over time.Horizontal analyses compare individual financial statement line items horizontally (from one period to the next),with the general goal of identifying significant sustained changes (trends).These changes are typically described in terms of dollar amounts and year-over-year percentages.

Question 6

Horizontal analysis:
A)is used to identify trends over time.
B)identifies the relative contribution made by each financial statement line item.
C)provides an understanding of the relationships among various items on financial statements.
D)involves comparing amounts across different financial statements.

Accepted Answer

Horizontal (trend)analyses are conducted to help financial statement users recognize important financial changes that unfold over time.Horizontal analyses compare individual financial statement line items horizontally (from one period to the next),with the general goal of identifying significant sustained changes (trends).These changes are typically described in terms of dollar amounts and year-over-year percentages.

Question 7

Vertical analysis:
A)identifies the relative contribution made by each financial statement line item.
B)identifies trends over time.
C)provides an understanding of the relationships among various items on financial statements by expressing the differences in terms of dollars.
D)involves comparing amounts across different financial statements.

Accepted Answer

Vertical analyses focus on important relationships between items on the same financial statement.These are compared vertically (one account balance versus another)and are typically expressed as percentages to reveal the relative contributions made by each financial statement item.

Question 8

To analyze changes in a company's sales over the last five years,you should perform:
A)vertical analysis.
B)ratio analysis.
C)horizontal analysis.
D)cross-sectional analysis.

Accepted Answer

Horizontal (trend)analyses are conducted to help financial statement users recognize important financial changes that unfold over time.Horizontal analyses compare individual financial statement line items horizontally (from one period to the next),with the general goal of identifying significant sustained changes (trends).These changes are typically described in terms of dollar amounts and year-over-year percentages.

Question 9

Ratio analysis:
A)is required by GAAP as part of every company's income statement and balance sheet.
B)will always identify the best investment decision.
C)will tell you how a company will perform in the future.
D)allows you to evaluate how well a company has performed relative to other different-sized companies within the same industry.

Accepted Answer

Ratio analyses are conducted to understand relationships among various items reported in one or more of the financial statements.Ratio analyses allow you to evaluate how well a company has performed given the level of other company resources.

Question 10

Lyndale,Inc.'s sales are $513,000 and $360,000 during the current and prior years,respectively.The percentage change is:
A)42.5%.
B)70%.
C)29.8%.
D)130%.

Accepted Answer

Year-to-year change (%)= [(Current year's total − Prior year's total)÷ Prior year's total] × 100
= [($513,000 − $360,000)÷ $360,000] × 100 = 42.5%

Question 11

Often loan agreements require the borrower to comply with certain requirements,such as maintaining a particular current ratio or limiting future borrowing.To decide if a company has complied with its loan covenants,a creditor would look at the company's:
A)financial statements.
B)chart of accounts.
C)bank statements.
D)charter.

Accepted Answer

Creditors use financial statements to assess compliance with loan covenants.

Question 12

In a common size balance sheet,each item on the balance sheet is expressed as a percentage of:
A)total assets.
B)total liabilities.
C)net income.
D)total stockholders' equity.

Accepted Answer

In a common size balance sheet,each asset appears as a percent of total assets,and each liability or stockholders' equity item appears as a percent of total liabilities and stockholders' equity.(Note that total assets equals total liabilities and stockholders' equity. )

Question 13

Financial statement analysis is useful for:
A)evaluating a company's success in meeting the challenges that it faces.
B)selecting the most appropriate accounting rules to follow.
C)determining the market price of a company's stock.
D)comparing US companies with foreign companies.

Accepted Answer

Financial statement analysis helps managers,analysts,investors,and creditors assess a company's success in meeting the challenges that it faces.

Question 14

Roscoe Company's comparative balance sheet show total assets of $693,000 and $630,000,for the current and prior years,respectively.The percentage change to be reported in the horizontal analysis is an increase of:
A)10%.
B)9%.
C)5%.
D)4%.

Accepted Answer

Year-to-year change (%)= [(Current year's total − Prior year's total)÷ Prior year's total] × 100
= [($693,000 − $630,000)÷ $630,000] × 100 = 10%

Question 15

Which balance sheet line item has the highest percentage increase from the prior year to the current year? $\begin{array}{lrr}
&\text { Current Year } & \text { Prior Year }\
\text { Cash } & \$ 54,00 C & \$ 36,000 \
\text { Accounts Receivable } & 18,00 \mathrm{C} & 72,000 \
\text { Inventory } & 108,00 \mathrm{C} & 54,000 \
\text { Prepaid Insurance } & 18,00 C & 27,000
\end{array}$
A)Inventory
B)Cash
C)Accounts receivable
D)Prepaid insurance

Accepted Answer

Inventory increased from $54,000 to $108,000, which is a 100% increase, the highest among the listed items.

Question 16

The following information is taken from the financial statements of Clybourn Company for the current year: $\begin{array}{lr}
\text { Current Assets } & \$ 32,000 \
\text { Total Assets } & 1,424,000 \
\text { Cost of Goods Sold } & 1,040,000 \
\text { Gross Profit } & 320,000 \
\text { Net Income } & 192,000
\end{array}$ On a common size income statement for this year,what is the percentage that would be shown next to the dollar amount of cost of goods sold?
A)76%
B)24%
C)31%
D)18%

Accepted Answer

To calculate the percentage of Cost of Goods Sold (COGS) on a common size income statement, divide COGS by total revenue (Gross Profit + COGS) and multiply by 100. Here, COGS is $1,040,000 and Gross Profit is $320,000, making total revenue $1,360,000. So, ($1,040,000 / $1,360,000) * 100 = 76%.

Question 17

A trend analysis to determine a year-to-year dollar amount change is calculated by subtracting the:
A)previous period amount from the current amount.
B)current period amount from the previous period amount.
C)current period amount from the previous period amount and then dividing the result by the previous period amount.
D)previous period amount from the current period amount and then dividing the result by the current period amount.

Accepted Answer

A year-to-year dollar amount change is calculated as current year's total minus prior year's total.

Question 18

The following information is taken from the financial statements of Clybourn Company for the current year: $\begin{array}{lr}
\text { Current Assets } & \$ 32,000 \
\text { Total Assets } & 1,424,000 \
\text { Cost of Goods Sold } & 1,040,000 \
\text { Gross Profit } & 320,000 \
\text { Net Income } & 192,000
\end{array}$ On a common size income statement for the year,what is the percentage that would be shown next to the dollar amount of sales revenue?
A)100%
B)14%
C)60%
D)Cannot be determined

Accepted Answer

Sales revenue is calculated as Cost of Goods Sold plus Gross Profit, which equals $1,360,000. On a common size income statement, sales revenue is always shown as 100%.

Question 19

Assume the following sales data for a company: $\begin{array}{lll}
\text { Year 1 } & \$, 200,000 \
\text { Year 2 } & 5,880,000 \
\text { Year 3 } & 5,250,000
\end{array}$ By what percentage did sales differ between Years 1 and 2 and Years 2 and 3,respectively?
A)40.0% and (10.7%)
B)28.6% and (12.0%)
C)40.0% and (15.0%)
D)32.0% and (10.7%)

Accepted Answer

The percentage increase from Year 1 to Year 2 is calculated as $\frac{5,880,000 - 200,000}{200,000} \times 100 = 2,840\%$. The percentage decrease from Year 2 to Year 3 is calculated as $\frac{5,880,000 - 5,250,000}{5,880,000} \times 100 = 10.7\%$. None of the provided options accurately reflect these calculations, indicating a potential error in the question or answer choices.

Question 20

Which income statement line item had the largest percentage increase from the prior year to the current year? $\begin{array}{lrr}&\text { Current Year } & \text { Prior Year }\
\text { Sales } & \$ 216,000 & \$ 180,000 \
\text { Cost of Goods Sold } & 144,00 C & 108,000 \
\text { Depreciation Expense } & 54,00 C & 36,000 \
\text { Interest Expense } & 3,600 & 9,000
\end{array}$
A)Depreciation Expense
B)Cost of Goods Sold
C)Interest Expense
D)Sales

Accepted Answer

Depreciation Expense increased by 50% from the prior year to the current year (\$36,000 to \$54,000), which is the largest percentage increase among the listed items.

Quiz 13: Measuring and Evaluating Financial Performance

In a common size income statement,each item on the income statement is expressed as a percentage of:

Net income was $753,480 in the current year and $655,200 in the prior year.The year-to-year percentage change in net income is an increase of:

Which of the following statements about trend analysis is correct?

To analyze changes in a company's net income over the last ten years,you should perform:

Horizontal analysis:

Vertical analysis:

To analyze changes in a company's sales over the last five years,you should perform:

Ratio analysis:

Lyndale,Inc.'s sales are $513,000 and $360,000 during the current and prior years,respectively.The percentage change is:

Often loan agreements require the borrower to comply with certain requirements,such as maintaining a particular current ratio or limiting future borrowing.To decide if a company has complied with its loan covenants,a creditor would look at the company's:

In a common size balance sheet,each item on the balance sheet is expressed as a percentage of:

Financial statement analysis is useful for:

Roscoe Company's comparative balance sheet show total assets of $693,000 and $630,000,for the current and prior years,respectively.The percentage change to be reported in the horizontal analysis is an increase of:

A trend analysis to determine a year-to-year dollar amount change is calculated by subtracting the:

Assume the following sales data for a company: $\begin{array}{lll}\text { Year 1 } & \$, 200,000 \\\text { Year 2 } & 5,880,000 \\\text { Year 3 } & 5,250,000\end{array}$ By what percentage did sales differ between Years 1 and 2 and Years 2 and 3,respectively?