Question 1

An analysis procedure that uses percentages to compare each of the parts of an individual statement to a key dollar amount from the financial statements is:
A) Ratio analysis.
B) Contribution analysis.
C) Horizontal analysis.
D) Vertical analysis.

Accepted Answer

Horizontal analysis compares items over many time periods;vertical analysis compares many items within the same time period.

Question 2

The study of an individual financial statement item over several accounting periods is called:
A) Horizontal analysis.
B) Vertical analysis.
C) Ratio analysis.
D) Time and motion analysis.

Accepted Answer

Horizontal analysis is the study of an individual financial statement item over several accounting periods to observe any upward or downward trend. It helps to identify patterns and changes in the financial performance of a company over time. Vertical analysis compares the different items of financial statements within the same accounting period, while ratio analysis uses financial ratios to analyze a company's financial performance. Time and motion analysis has to do with improving the efficiency of a process or operation.

Question 3

Which of the following statements regarding ratio analysis is incorrect?
A) Ratio analysis is a specific form of horizontal analysis.
B) There are many different ratios available for evaluating a firm's performance.
C) Some ratios involve an account from the balance sheet and one from the income statement.
D) Ratio analysis involves making comparisons between different accounts in the same set of financial statements.

Accepted Answer

Horizontal analysis,also called trend analysis,refers to studying the behavior of individual financial statement items over several accounting periods.These periods may be several quarters within the same fiscal year or they may be several different years.Ratio analysis involves studying various relationships between different items reported in a set of financial statements.

Question 4

All of the following are considered to be measures of a company's short-term debt-paying ability except:
A) Current ratio.
B) Earnings per share.
C) Inventory turnover.
D) Average collection period.

Accepted Answer

Liquidity ratios indicate a company's ability to pay short-term debts.These ratios include working capital,current ratio,quick ratio,accounts receivable ratios,and inventory ratios.The earnings per share (EPS)ratio is a measure of earnings performance.

Question 5

Financial statement analysis involves forms of comparison including:
A) Comparing changes in the same item over a number of periods.
B) Comparing key relationships within the same year.
C) Comparing key items to industry averages.
D) All of these answers are correct.

Accepted Answer

Financial statement analysis involves comparing changes in the same item over a number of periods, comparing key relationships within the same year, and comparing key items to industry averages. Therefore, all of these answers are correct.

Question 6

Working capital is defined as:
A) Current assets divided by current liabilities.
B) Total assets minus total liabilities.
C) Current assets less current liabilities.
D) Current liabilities divided by total liabilities.

Accepted Answer

Working capital is calculated by subtracting current liabilities (short-term debts like accounts payable, taxes, and wages payable) from current assets (cash, accounts receivable, inventory, etc.). This measures the amount of capital a business has available to fund its day-to-day operations. Choice A is the current ratio, choice B is total equity, and choice D is the liabilities-to-assets ratio.

Question 7

Darden Company has cash of $40,000,accounts receivable of $60,000,inventory of $32,000,and equipment of $100,000.Assuming current liabilities of $48,000,this company's working capital is:
A) $12,000.
B) $52,000.
C) $144,000.
D) $84,000.

Accepted Answer

Working capital = Current assets - Current liabilities
Working capital = ($40,000 + $60,000 + $32,000)- $48,000 = $84,000

Question 8

Knoell Company paid its sales employees $15,000 in sales commissions.What impact will this transaction have on the firm's working capital?
A) No impact
B) Increase it
C) Decrease it
D) Not enough information is provided to answer the question.

Accepted Answer

A payment of commissions to sales employees is an asset use transaction;the current asset account Cash decreases and the expense account Sales Commissions Expense also increases.Working capital is calculated by subtracting current liabilities from current assets.Since this transaction causes a decrease in current assets,it decreases the amount of working capital.

Question 9

Financial ratios can be used to assess which of the following aspects of a firm's performance?
A) Liquidity
B) Solvency
This term does not even appear in chapter until LO 3 so had to include the LO and topics below
Agree.JMF
C) Profitability
D) All of these answers are correct.
This term does not even appear in chapter until LO 3 so had to include the LO and topics below
Agree.JMF

Accepted Answer

Financial ratios can be used to assess a firm's liquidity, solvency, and profitability. Therefore, all of these answers are correct.

Question 10

Milton Company has total current assets of $46,000,including inventory of $10,000,and current liabilities of $20,000.The company's current ratio is:
A) 0.4.
B) 1.8.
C) 2.8.
D) 2.3.

Accepted Answer

Current ratio = Current assets ÷ Current liabilities
Current ratio = $46,000 ÷ $20,000 = 2.3

Question 11

Which of the following statements regarding the quick ratio is incorrect?
A) The quick ratio is also known as the acid-test ratio.
B) The quick ratio ignores some current assets that are less liquid than others.
C) The quick ratio is a conservative variation of the current ratio.
D) The quick ratio equals quick assets divided by total liabilities.

Accepted Answer

The quick ratio is calculated by dividing quick assets by current liabilities.

Question 12

Factor(s)involved in communicating useful information is (are):
A) Attributes of the users
B) Purpose for which the information will be used
C) Process by which the information is analyzed
D) All of these answers are correct.

Accepted Answer

All three factors listed (attributes of the users, purpose for which the information will be used, and process by which the information is analyzed) play a role in communicating useful information. Users who have different backgrounds or levels of expertise may require information to be presented in different ways. The purpose for which the information will be used will also affect how it needs to be communicated (e.g. providing directions to someone who needs to follow them immediately versus providing a summary of a project to a manager). Finally, the process by which the information is analyzed can affect how it needs to be communicated, as different analytical methods may yield different types of information that need to be presented in different ways.

Question 13

Rialto Company collected $5,000 on account.What impact will this transaction have on the firm's current ratio?
A) No impact
B) Increase it
C) Decrease it
D) Not enough information is provided to answer the question.

Accepted Answer

A collection on account is an asset exchange transaction;the current asset account Cash increases and the current asset account Accounts Receivable decreases.The current ratio is calculated by dividing current assets by current liabilities.Since there is no impact on either the numerator or denominator,this transaction has no impact on the current ratio.

Question 14

Which of the following statements regarding horizontal analysis is incorrect?
A) Percentage analysis involves establishing the relationship of one amount to another.
B) A horizontal analysis of cost of goods sold on the income statement includes dividing net income by total revenue.
C) Percentage analysis attempts to eliminate the materiality problem of comparing firms of different sizes.
D) In doing horizontal analysis,an account is expressed as a percentage of the previous balance of the same account.

Accepted Answer

Horizontal analysis compares items over many time periods;vertical analysis compares many items within the same time period.As such,vertical analysis of cost of goods sold on the income statement includes dividing net income by total revenue.

Question 15

Which of the following is (are)objective(s)of ratio analysis?
A) Assessing past performance.
B) Assessing the prospects for future performance.
C) Analyzing how a company finances its operations.
D) All of these answers are correct.

Accepted Answer

Ratio analysis can be used to assess a company's past performance, forecast its future performance, and analyze its financial structure. Therefore, all three objectives mentioned in choices A, B, and C are correct.

Question 16

Which of the following statements regarding the analysis of absolute amounts of various accounts reported on the financial statements is incorrect?
A) Financial statement users with expertise in particular industries can look at absolute amounts and assess a company's performance in a certain area.
B) To correctly evaluate an absolute amount,the analyst must consider its relative importance.
C) Economic statistics such as the gross national product are built upon totals of absolute amounts reported by businesses.
D) Using absolute amounts eliminates the problem of varying materiality levels.

Accepted Answer

Comparing only absolute amounts has drawbacks because materiality levels differ from company to company or even from year to year for a given company.

Question 17

Which of the following statements regarding the information disclosed in financial statements is incorrect?
A) The costs of providing all possible information about a firm would be prohibitively high for the business.
B) Some information disclosed in financial statements may be irrelevant to some users.
C) Financial statements should be detailed enough to answer any financial-related question an investor might have.
D) When too much information is presented users may suffer from information overload.

Accepted Answer

Financial statements can provide only highly summarized economic information.The costs to a company of providing excessively detailed information would be prohibitive.

Question 18

Select the correct statement regarding vertical analysis.
A) Vertical analysis of the income statement involves showing each item as a percentage of sales.
B) Vertical analysis of the balance sheet involves showing each asset as a percentage of total assets.
C) Vertical analysis examines two or more items from the financial statements of one accounting period.
D) All of these answers are correct.

Accepted Answer

All three statements are correct. Vertical analysis is a technique for analyzing financial statements by expressing each item as a percentage of the base amount. In the income statement, items are expressed as a percentage of sales. In the balance sheet, items are expressed as a percentage of total assets or liabilities and equity. Vertical analysis can also compare two or more items within the same financial statement in one accounting period.

Question 19

Current financial reporting standards assume that users of accounting information:
A) Have an expert's understanding of economic and financial events and conditions.
B) Have a reasonably informed knowledge of business.
C) Have widely differing levels of knowledge about business,and that financial reporting must meet these differing needs.
D) Have only minimal knowledge of business.

Accepted Answer

The current financial reporting standards assume that users of accounting information have a reasonably informed knowledge of business, but not necessarily an expert's understanding. This is why financial statements provide explanations and helpful notes to explain complex financial information in a way that is accessible to a wide variety of users with different levels of knowledge.

Question 20

Common methods of financial statement analysis include all of the following except:
A) Incremental analysis.
B) Horizontal analysis.
C) Vertical analysis.
D) Ratio analysis.

Accepted Answer

Incremental analysis is not a commonly used method of financial statement analysis. The other three choices - horizontal analysis, vertical analysis, and ratio analysis - are commonly used methods.

Quiz 13: Financial Statement Analysis

An analysis procedure that uses percentages to compare each of the parts of an individual statement to a key dollar amount from the financial statements is:

The study of an individual financial statement item over several accounting periods is called:

Which of the following statements regarding ratio analysis is incorrect?

All of the following are considered to be measures of a company's short-term debt-paying ability except:

Financial statement analysis involves forms of comparison including:

Working capital is defined as:

Darden Company has cash of $40,000,accounts receivable of $60,000,inventory of $32,000,and equipment of $100,000.Assuming current liabilities of $48,000,this company's working capital is:

Knoell Company paid its sales employees $15,000 in sales commissions.What impact will this transaction have on the firm's working capital?

Financial ratios can be used to assess which of the following aspects of a firm's performance?

Milton Company has total current assets of $46,000,including inventory of $10,000,and current liabilities of $20,000.The company's current ratio is:

Which of the following statements regarding the quick ratio is incorrect?

Factor(s) involved in communicating useful information is (are) :

Rialto Company collected $5,000 on account.What impact will this transaction have on the firm's current ratio?

Which of the following statements regarding horizontal analysis is incorrect?

Which of the following is (are) objective(s) of ratio analysis?

Which of the following statements regarding the analysis of absolute amounts of various accounts reported on the financial statements is incorrect?

Which of the following statements regarding the information disclosed in financial statements is incorrect?

Select the correct statement regarding vertical analysis.

Current financial reporting standards assume that users of accounting information:

Common methods of financial statement analysis include all of the following except: