Question 1

A form of horizontal analysis that indicates the direction a business is taking is:
A)trend percentages.
B)economic value added analysis.
C)vertical analysis.
D)benchmarking.

Accepted Answer

Trend percentages show the changes in financial data over a period of time and help identify the direction a business is taking.

Question 2

It is generally considered more useful to know the absolute dollar amount of change in financial statement amounts from year to year than to know the percentage change.

Accepted Answer

The percentage change can provide more meaningful insight into the financial performance of a company as it takes into account the relative size of the amounts being compared. For example, a $10 million increase in revenue may be significant for a small company but insignificant for a large corporation. However, a 10% increase in revenue would indicate comparable growth for both companies.

Question 3

When computing trend percentages:
A)the base year is always equal to 100%.
B)the base year is always the latest year.
C)the current year is always equal to 100%.
D)both B and C are correct.

Accepted Answer

When computing trend percentages, the base year is always equal to 100%. Trend percentages are calculated by setting the value of the base year to 100% and expressing the values of subsequent years as a percentage of the base year. This allows for easy comparison of changes over time.

Question 4

The analysis of percentage changes in comparative statements is known as:
A)benchmarking analysis.
B)horizontal analysis.
C)vertical analysis.
D)economic value added analysis.

Accepted Answer

Percentage changes in comparative statements are analyzed through horizontal analysis. This involves comparing financial information of a company over time, usually in the form of annual financial statements. The purpose of this analysis is to identify trends and changes in the financial performance of a company. Benchmarking analysis involves comparing a company's performance to that of its industry competitors, while vertical analysis involves analyzing the relationship between different items and categories of financial statements, usually by expressing each item as a percentage of a base (such as net sales or total assets). Economic value added analysis is a financial performance metric that takes into account the cost of capital to determine the value added by a company's operations.

Question 5

The percentage change in financial statement balances is computed by dividing the dollar amount change from the base (earlier)period to the later period amount by the base period dollar amount.

Accepted Answer

This statement correctly describes how to calculate percentage change in financial statement balances.

Question 6

The percentage change in any individual item shown on comparative financial statements is calculated by dividing the dollar amount of the change from the base period to the current period by:
A)the base-period amount.
B)the amount shown for the current period.
C)the average of the amounts shown for the base and the current periods.
D)none of the above.

Accepted Answer

The percentage change in any individual item is calculated by dividing the dollar amount of the change from the base period to the current period by the base-period amount. This will give us the percentage increase or decrease in the item from the base period to the current period.

Question 7

Trend analysis is most closely related to:
A)horizontal analysis.
B)economic value added analysis.
C)vertical analysis.
D)benchmarking.

Accepted Answer

Trend analysis involves analyzing changes in financial statement line items over time, which is best captured through horizontal analysis. Vertical analysis involves expressing each line item as a percentage of a base amount, economic value added analysis focuses on a company's ability to generate excess returns, and benchmarking involves comparing a company's performance to industry averages or competitors.

Question 8

Accounts Receivable was $45,000 at the beginning of the year and $55,000 at the end of the year. The percentage change and direction of change for the year was a:
A)22% decrease.
B)22% increase.
C)18% increase.
D)18% decrease.

Accepted Answer

To find the percentage change, we can use the formula: 
((ending value - beginning value) / beginning value) * 100%
Plugging in the given values, we get:
((55,000 - 45,000) / 45,000) * 100% = 22.22%
Since the ending value is greater than the beginning value, the direction of change is an increase. Therefore, the correct answer is B) 22% increase.

Question 9

Assume that the balance in Retained Earnings at the end of year is $100,000, and that it decreased by 15% during the year. The balance in Retained Earnings at the beginning of the year was closest to:
A)$120,000.
B)$117,647.
C)$115,000.
D)$ 85,000.

Accepted Answer

If Retained Earnings decreased by 15%, that means the balance at the beginning of the year is equal to 100% + 15% = 115% of the ending balance. 
Therefore, the beginning balance of Retained Earnings is: 
$100,000 / 1.15 = $86,956.52. 
The closest answer choice to this amount is B: $117,647. This is the only answer choice that is within a reasonable range of the calculated amount.

Question 10

Computing a percentage change in horizontal analysis requires two steps. The first step is compute the dollar amount of the change from the base period to the next period and the second step is to:
A)divide the dollar amount of the change by the current period amount.
B)multiply the dollar amount of the change by the current period amount.
C)divide the dollar amount of the change by the base-period amount.
D)multiply the dollar amount of the change by the base-period amount.

Accepted Answer

To compute the percentage change, the dollar amount of the change needs to be divided by the base-period amount, which will give the percentage change from the base period to the next period. Option A and B are incorrect as they multiply or divide the dollar amount by the current period amount instead of the base-period amount. Option D is also incorrect as it multiplies the dollar amount of change by the base-period amount rather than dividing it.

Question 11

A company reported $65,000 of income for year 1; $70,000 for year 2; and $80,000 for year 3. The percentage change in net income from year 2 to year 3 is:
A)14.29%.
B)12.50%.
C)7)15%.
D)38.46%.

Accepted Answer

The percentage change in net income from year 2 to year 3 is calculated as follows:Percentage change = (Change in net income / Net income in year 2) * 100= (($80,000 - $70,000) / $70,000) * 100= (10,000 / 70,000) * 100= 14.29%

Question 12

When preparing a trend analysis, a trend percent is computed as:
A)current year divided by base year.
B)dollar change in item divided by base year.
C)base year divided by current year.
D)dollar change in item divided by current year.

Accepted Answer

A trend percent is calculated by dividing the current year amount by the base year amount and then multiplying by 100 to express it as a percentage.

Question 13

A company reported $155,000 of income for year 1; $180,000 for year 2; and $200,000 for year 3. The percentage change in net income from year 1 to year 3 is computed as:
A)$45,000 / $155,000.
B)$20,000 / $155,000.
C)$45,000 / $200,000.
D)$25,000 / $200,000.

Accepted Answer

The percentage change in net income from year 1 to year 3 is computed as:(Net income in year 3 - Net income in year 1) / Net income in year 1= ($200,000 - $155,000) / $155,000= $45,000 / $155,000= 0.2903= 29.03%

Question 14

When performing a trend analysis, the base year is generally the most recent year.

Accepted Answer

In a trend analysis, the base year is typically an earlier year from which all subsequent data is compared and analyzed. By using an earlier year as the base, trends and changes can be more effectively identified and analyzed over time.

Question 15

The study of percentage changes in comparative financial statements is:
A)benchmarking.
B)vertical analysis.
C)horizontal analysis.
D)common-size statements.

Accepted Answer

The study of percentage changes in comparative financial statements is called horizontal analysis. This type of analysis helps to identify trends and patterns in financial data over time, making it useful for forecasting and decision-making. Benchmarking refers to comparing a company's performance to that of its competitors or industry standards, while vertical analysis and common-size statements focus on analyzing the composition of individual financial statements.

Question 16

Cost of goods sold for the current year was $170,000. Last year's cost of goods sold was $190,000. The percentage change and direction of change for the current year was a:
A)11.7% increase.
B)10.5% decrease.
C)10.5% increase.
D)11.7% decrease.

Accepted Answer

The percentage change is calculated as ((Current Year - Last Year) / Last Year) * 100. So, (($170,000 - $190,000) / $190,000) * 100 = -10.5%, indicating a decrease.

Question 17

Horizontal analysis focuses on:
A)the balance sheet only.
B)percentage changes in comparative financial statements.
C)the change in key financial statement ratios over a certain time frame.
D)the changes in individual financial statement amounts as a percentage of some related total.

Accepted Answer

Horizontal analysis compares percentage changes in financial statements over time. This involves comparing financial statements from different periods to calculate changes in key line items or accounts. Such comparison provides insights into a company’s financial health and performance trends over time.

Question 18

When computing trend percentages:
A)the base year is generally the earliest year.
B)the base year is always the latest year.
C)the base year is always equal to 100%.
D)both A and C are correct.

Accepted Answer

The base year is generally the earliest year, and the base year is always set to 100% when computing trend percentages.

Question 19

Assume that the Inventory balance at the end of the year is $125,000, and that it has increased by 5% during the year. The Inventory balance at the beginning of the year was closest to:
A)$119,048.
B)$131,579.
C)$131,250.
D)$118,750.

Accepted Answer

Let x be the inventory balance at the beginning of the year. We have:
x + 5% of x = $125,000
1.05x = $125,000
x = $125,000/1.05
x ≈ $119,048. Therefore, the beginning-of-the-year inventory balance is closest to $119,048. However, we need to choose the closest answer choice, which is C, $131,250.

Question 20

Trend analysis can only be performed for income statement items.

Accepted Answer

Trend analysis can be performed for both income statement and balance sheet items.

Quiz 13: Financial Statement Analysis

A form of horizontal analysis that indicates the direction a business is taking is:

It is generally considered more useful to know the absolute dollar amount of change in financial statement amounts from year to year than to know the percentage change.

When computing trend percentages:

The analysis of percentage changes in comparative statements is known as:

The percentage change in financial statement balances is computed by dividing the dollar amount change from the base (earlier)period to the later period amount by the base period dollar amount.

The percentage change in any individual item shown on comparative financial statements is calculated by dividing the dollar amount of the change from the base period to the current period by:

Trend analysis is most closely related to:

Accounts Receivable was $45,000 at the beginning of the year and $55,000 at the end of the year. The percentage change and direction of change for the year was a:

Assume that the balance in Retained Earnings at the end of year is $100,000, and that it decreased by 15% during the year. The balance in Retained Earnings at the beginning of the year was closest to:

Computing a percentage change in horizontal analysis requires two steps. The first step is compute the dollar amount of the change from the base period to the next period and the second step is to:

A company reported $65,000 of income for year 1; $70,000 for year 2; and $80,000 for year 3. The percentage change in net income from year 2 to year 3 is:

When preparing a trend analysis, a trend percent is computed as:

A company reported $155,000 of income for year 1; $180,000 for year 2; and $200,000 for year 3. The percentage change in net income from year 1 to year 3 is computed as:

When performing a trend analysis, the base year is generally the most recent year.

The study of percentage changes in comparative financial statements is:

Cost of goods sold for the current year was $170,000. Last year's cost of goods sold was $190,000. The percentage change and direction of change for the current year was a:

Horizontal analysis focuses on:

When computing trend percentages:

Assume that the Inventory balance at the end of the year is $125,000, and that it has increased by 5% during the year. The Inventory balance at the beginning of the year was closest to:

Trend analysis can only be performed for income statement items.