Question 1

Which of the following ratios is most useful in evaluating liquidity?
A)Acid-test ratio.
B)Return on equity.
C)Profit marginy ratio.
D)Asset turnover.

Accepted Answer

The acid-test ratio is the most useful ratio in evaluating liquidity because it focuses solely on the company's ability to pay its short-term debts with its most liquid assets (cash, marketable securities, and accounts receivable). This ratio provides a more accurate view of a company's ability to meet its short-term obligations and is therefore a better indicator of liquidity than the other ratios listed.

Question 2

Comparing changes in net income for one company over time is an example of:
A)Vertical analysis.
B)Horizontal analysis.
C)Diagonal analysis.
D)Both vertical and horizontal analysis.

Accepted Answer

Comparing changes in net income for one company over time is an example of horizontal analysis, as it involves analyzing changes in financial data over a period of time (i.e. horizontally) to identify trends and patterns. Vertical analysis, on the other hand, involves comparing different components of financial data within the same period (i.e. vertically) to understand their relative importance and contribution to the overall financial health of the company. Diagonal analysis is not a recognized form of financial analysis. Therefore, the best answer is B.

Question 3

Use of a longer useful life for depreciation is an example of conservative accounting.

Accepted Answer

The use of a longer useful life for depreciation is an example of aggressive accounting, as it results in lower depreciation expenses and higher reported profits in the short term. Conservative accounting practices typically involve using more conservative estimates and being cautious in reporting financial information.

Question 4

Which of the following is not a common type of comparison in accounting?
A)Comparisons of sales growth between companies.
B)Comparisons of earnings per share between companies.
C)Comparisons of earnings this year with earnings for the same company last year.
D)Comparisons to industry.

Accepted Answer

The answer of Which of the following is not a...

Question 5

Comparing operating expenses as a percentage of sales is an example of:
A)Vertical analysis.
B)Horizontal analysis.
C)Diagonal analysis.
D)Both vertical and horizontal analysis.

Accepted Answer

Comparing operating expenses as a percentage of sales is an example of vertical analysis which involves comparing different items of a company's financial statements to a common base such as sales or total assets. It helps to understand the composition and proportion of expenses relative to sales. Horizontal analysis compares data over different periods, and diagonal analysis is not a commonly used term in financial analysis.

Question 6

Horizontal analysis examines trends in a company
A)Over time.
B)Between income statement accounts in the same year.
C)Between balance sheet accounts in the same year.
D)Between income statement and balance sheet accounts in the same year.

Accepted Answer

Horizontal analysis is used to review trends in a company over time by comparing financial data from two or more periods. This type of analysis helps identify changes in revenue, expenses, and other financial metrics over time, which can provide insights into the company's performance and potential areas for improvement. Choices B, C, and D describe vertical analysis, which compares financial data within the same period among different accounts or categories.

Question 7

A larger estimation of the allowance for uncollectible accounts,the write-down of overvalued inventory and the use of a shorter useful life for depreciation are all examples of conservative accounting.

Accepted Answer

All of these actions result in a more conservative approach to accounting because they reduce the reported income and assets of the company.

Question 8

When using vertical analysis,we express income statement accounts as a percentage of
A)Net income.
B)Gross profit.
C)Sales.
D)Total assets.

Accepted Answer

When using vertical analysis, we express income statement accounts as a percentage of sales. This is because sales are the top line of the income statement and provide a common base for comparison of all other items on the statement. By expressing each item as a percentage of sales, we can easily see the relative size and importance of each item in relation to the overall revenue generated by the company.

Question 9

Which of the following is an example of horizontal analysis?
A)Comparing gross profit across companies.
B)Comparing gross profit with operating expenses.
C)Comparing assets with equity.
D)Comparing the change in sales over time.

Accepted Answer

Horizontal analysis involves comparing financial data over time to identify trends or changes. Comparing the change in sales over time fits this definition and is therefore the best choice. Option A involves comparing data across different companies, which is not an example of horizontal analysis. Option B involves comparing two different financial measures, which is not necessarily an example of horizontal analysis. Option C involves comparing two different categories of financial data, which is also not necessarily an example of horizontal analysis.

Question 10

The following is an example of: 
A)Vertical analysis.
B)Horizontal analysis.
C)Diagonal analysis.
D)Both vertical and horizontal analysis.

Accepted Answer

The answer of The following is an example of: 
A)Vertical...

Question 11

Aggressive accounting practices result in reporting higher income,higher assets,and lower liabilities.

Accepted Answer

Aggressive accounting practices involve manipulating financial statements to inflate earnings, assets, and decrease liabilities, which ultimately results in reporting higher income, higher assets, and lower liabilities.

Question 12

Which of the following is an example of horizontal analysis?
A)Comparing COGS with sales.
B)Comparing net income across companies.
C)Comparing debt with equity.
D)Comparing the growth in sales over time.

Accepted Answer

Horizontal analysis involves comparing financial data over a period of time, such as comparing the growth in sales over multiple years. Choices A, B, and C are examples of vertical analysis, which involves comparing different parts of a company's financial statements within the same period.

Question 13

Conservative accounting practices are those that result in reporting lower income,lower assets,and higher liabilities.

Accepted Answer

Conservative accounting practices aim to be cautious and prudent in reporting financial information. This often results in choosing accounting methods that lead to lower reported income and asset values, and higher reported liabilities. This approach helps to avoid overestimating financial performance and potentially misleading stakeholders.

Question 14

When using vertical analysis,we express balance sheet accounts as a percentage of
A)Sales.
B)Total assets.
C)Total liabilities.
D)Total stockholders' equity.

Accepted Answer

Vertical analysis expresses each item on the financial statement as a percentage of a base amount, which is typically a total or subtotal on the same statement. When using vertical analysis for the balance sheet, we express each account as a percentage of the total assets. This allows for a better understanding of the composition of assets and how they are being utilized by the company.

Question 15

Conservative accounting practices are those that result in reporting higher income,higher assets,and lower liabilities.

Accepted Answer

Conservative accounting practices result in reporting lower income, lower assets, and higher liabilities in order to mitigate the risk of overestimating financial performance.

Question 16

Which of the following is an example of vertical analysis?
A)Comparing gross profit across companies.
B)Comparing income statement items as a percentage of sales.
C)Comparing debt with industry averages.
D)Comparing the change in sales over time.

Accepted Answer

Vertical analysis involves comparing items on an income statement or balance sheet as a percentage of a common base, such as net sales or total assets. Option B describes exactly that practice. Options A, C, and D do not involve vertical analysis as they do not compare items as a percentage of a common base.

Question 17

Which of the following ratios is most useful in evaluating liquidity?
A)Return on assets.
B)Return on equity.
C)Debt to equity ratio.
D)Current ratio.

Accepted Answer

The current ratio is most useful in evaluating liquidity because it measures a company's ability to meet its short-term obligations. It is calculated by dividing current assets by current liabilities, indicating whether a company has enough current assets to cover its current liabilities. A higher current ratio means a company is more capable of paying off its debts in the short term. Return on assets (A) and return on equity (B) are used to evaluate profitability, while the debt to equity ratio (C) indicates a company's leverage and financial risk.

Question 18

Which of the following is correct?

Accepted Answer

The answer of Which of the following is correct? ...

Question 19

The following is an example of: 
A)Vertical analysis.
B)Horizontal analysis.
C)Diagonal analysis.
D)Both vertical and horizontal analysis.

Accepted Answer

The answer of The following is an example of: 
A)Vertical...

Question 20

Changes in accounting estimates usually have no effect on a company's underlying cash flows.

Accepted Answer

Accounting estimates are changes in the assumptions used in the accounting process, such as the useful life of an asset or the amount of bad debt expense. These changes do not directly affect a company's cash flows, which are the inflows and outflows of cash related to its operations, investments, and financing activities. However, accounting estimates can indirectly affect cash flows by influencing a company's reported earnings and financial position, which can affect investor perceptions and ultimately affect the company's access to capital and cost of capital.

Quiz 12: Financial Statement Analysis

Which of the following ratios is most useful in evaluating liquidity?

Comparing changes in net income for one company over time is an example of:

Use of a longer useful life for depreciation is an example of conservative accounting.

Which of the following is not a common type of comparison in accounting?

Comparing operating expenses as a percentage of sales is an example of:

Horizontal analysis examines trends in a company

A larger estimation of the allowance for uncollectible accounts,the write-down of overvalued inventory and the use of a shorter useful life for depreciation are all examples of conservative accounting.

When using vertical analysis,we express income statement accounts as a percentage of

Which of the following is an example of horizontal analysis?

The following is an example of: