Deck 13: Financial Statement Analysis

Question 1

Trend analysis using income statement data is widely used for predicting the future.

Answer 1

True

Question 2

If a company has sales of $150 in 2016 and $225 in 2017, the percentage change from 2016 to 2017 is 50%.

Answer 2

True

Question 3

The primary focus of horizontal analysis is:

A)percentage changes in line items from comparative financial statements.
B)the balance sheet only.
C)the amount of individual financial statement line items as a percentage of some related total, such as total assets.
D)the income statement only.

Answer 3

A

Question 4

Zemanowski Company reports the following sales figures(in millions): What is the trend percentage in 2015 if 2013 is the base year? (Round your final answer to the nearest whole percentage, X%)

A)110%
B)103%
C)105%
D)107%

Question 5

For investment analysis, it is generally considered more useful to calculate the percentage changes in the dollar amounts of financial statement line items from year to year instead of using the absolute dollar amounts.

Question 6

Horizontal analysis compares a financial statement line item in the current year with the same line item in the prior year.

Question 7

If a company has sales of $250 in 2017 and $225 in 2018, the percentage decrease from 2017 to 2018 is 10%.

Question 8

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 amount shown for the current period.
B)the base-period amount.
C)the average of the amounts shown for the base and the current periods.
D)the amount estimated for the future period.

Question 9

Year to year percentage changes in line items from comparative financial statements is called:

A)benchmarking.
B)horizontal analysis.
C)vertical analysis.
D)common-size financial statements.

Question 10

Zebra Company reports the following figures for the years ending December 31, 2017 and 2016: What are the percentage changes from 2016 to 2017 for Net Sales, Cost of Goods Sold and Gross Profit, respectively? (Round your final answers to one decimal place, X.X%)

A)100%, 162.5%, 10.8%
B)100%, 0.9%, 0.4%
C)162.5%, 37.8%, 10.8%
D)37.8%, 10.8%, 162.5%

Question 11

The percentage change in a financial statement line item over two years is computed by dividing the dollar amount of the line item in the most recent year by the prior year dollar amount of the line item.

Question 12

Horizontal analysis highlights changes in financial statement line items over time and provides a complete picture of a business.

Question 13

For the period from 2017 to 2018, a company reports the following: If sales are $7,000,000 in 2017, what are sales in 2018?

A)$2,800,000
B)$7,000,000
C)$9,450,000
D)$9,800,000

Question 14

The formula for the percentage change in a financial statement line item is the current year amount:

A)divided by the base year amount.
B)minus the base year amount divided by the base year amount.
C)minus the base year amount divided by current year amount.
D)added to the base year amount divided by the base year amount.

Question 15

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

A)benchmarking.
B)economic value added analysis.
C)vertical analysis.
D)trend percentages.

Question 16

Horizontal analysis is most closely related to:

A)trend analysis.
B)economic value added analysis.
C)vertical analysis.
D)benchmarking.

Question 17

How is the trend percentage for sales in 2017 computed? The base year is 2012.

A)Year 2017 sales ÷ Year 2012 sales
B)(Year 2017 sales - Year 2012 sales)÷ Year 2012 sales
C)(Year 2017 sales - Year 2012 sales)÷ Year 2017 sales
D)(Year 2017 sales ÷ Year 2012 sales)× 100

Question 18

When computing trend percentages:

A)the current year is always equal to 100%.
B)the base year is always the latest year.
C)the base year is always equal to 100%.
D)the base year is equal to the current year plus the previous year divided by two.

Question 19

Nekich Company reports the following sales figures(in millions): What is the trend percentage in 2018 if 2013 is the base year? (Round your final answer to the nearest whole percentage, X%)

A)92%
B)88%
C)85%
D)95%

Question 20

Trend percentages are a form of horizontal analysis that are computed only for balance sheet items.

Question 21

A vertical analysis is primarily concerned with:

A)the dollar amount of the change in various financial statement line items from year to year.
B)individual financial statement line items expressed as a percentage of a base (which represents 100%).
C)percentage changes in the balances of line items from comparative financial statements.
D)the change in key financial statement ratios over a specified period of time.

Question 22

A financial statement line item expressed as a percentage of a base amount is a result of:

A)horizontal analysis.
B)economic value added.
C)vertical analysis.
D)comparative analysis.

Question 23

Bryanwood Company reports the following data: Based on the above information, what can be said about the company's business strategy?

A)The company has lost control of operating expenses.
B)The company has reduced cost of goods sold.
C)The company has successfully undertaken some cost-cutting measures for operating expenses.
D)The company has fewer sales in 2017 than 2016.

Question 24

Expressing cash and cash equivalents as a percentage of total assets is an example of:

A)horizontal analysis.
B)economic value added.
C)ratio analysis.
D)vertical analysis.

Question 25

In performing vertical analysis, the base for income before taxes is:

A)net income.
B)gross sales.
C)gross profit.
D)net sales.

Question 26

Which of the following is typically used as the base in a vertical analysis of an income statement?

A)gross profit
B)operating income
C)net income
D)net sales

Question 27

When comparing companies of different sizes, vertical analysis is a useful tool.

Question 28

Given the following data: In vertical analysis, current liabilities would be expressed as: (Round your final answer to the nearest whole percent, X%.)

A)80%.
B)42%.
C)39%.
D)47%.

Question 29

Mussa Corporation reports the following data: In vertical analysis, the cost of goods sold percentage is closest to: (Round your final answer to the nearest whole percentage, X%)

A)33%.
B)50%.
C)67%.
D)200%.

Question 30

Vertical analysis compares a line item on the balance sheet, in a current period, to the same line item on the balance sheet in a prior period.

Question 31

In vertical analysis:

A)a base amount is optional.
B)a base amount is required.
C)line items from balance sheets are examined only.
D)line items from income statements are examined only.

Question 32

Which of the following is typically used as the base in a vertical analysis of a balance sheet?

A)total liabilities
B)total stockholders' equity
C)total assets
D)net sales

Question 33

How is the percentage change (for horizontal analysis)for sales from 2016 to 2017 computed?

A)Year 2017 sales ÷ Year 2016 sales
B)(Year 2017 sales - Year 2016 sales)÷ Year 2016 sales
C)(Year 2017 sales - Year 2016 sales)÷ Year 2017 sales
D)(Year 2017 sales ÷ Year 2016 sales)× 100

Question 34

Goelzer Company reports the following trend percentages for net income: Given the above data, which statement is FALSE?

A)When compared to 2015, net income is falling in 2016.
B)Net income is increasing in 2014 and 2015.
C)Net income is lower in 2017 than in 2013.
D)Net income is higher in 2017 than in 2013.

Question 35

A company's net income as a percentage of sales is 15%. Using vertical analysis, the cost of goods sold as a percentage of sales must be 85%.

Question 36

In performing vertical analysis, the base for income tax expense is:

A)net sales.
B)gross revenues.
C)net income.
D)gross profit.

Question 37

The ratio of the dollar amount of each individual asset to the dollar amount of total assets is an example of vertical analysis.

Question 38

In performing vertical analysis, the base for operating expenses is:

A)net sales.
B)gross profit.
C)net income.
D)operating income.

Question 39

In performing vertical analysis, the base for inventory is:

A)total liabilities and stockholders' equity.
B)total assets.
C)total cash and cash equivalents.
D)total current assets.

Question 40

When performing a vertical analysis of the income statement, each line item is stated as a percentage of net income.

Question 41

Hull Company reports the following data: Based on the above data, what can be said about the Hull Company?

A)The company is controlling operating expenses.
B)The company is doing better than the industry average.
C)The company is losing control of operating expenses.
D)The company is increasing sales over time.

Question 42

On a common-size income statement, income taxes expense is expressed as a percentage of:

A)net income.
B)total stockholders' equity.
C)total assets.
D)net sales.

Question 43

A financial statement that shows each line item as a percentage of one key item on the statement is referred to as a:

A)benchmarking.
B)common-size statement.
C)horizontal analysis.
D)financial ratio analysis.

Question 44

You are the CEO of Company A and you are using an industry leader (Leader Company)for benchmarking. Company A is much smaller than Company B in terms of total assets and total sales revenue. You should compare the:

A)gross profit of Company A to the gross profit of Leader Company.
B)net income of Company A to the net income of Leader Company.
C)net sales of Company A to the net sales of Leader Company.
D)net income to net sales ratio of Company A to net income to net sales ratio of Leader Company.

Question 45

Given the following data: In vertical analysis, net income would be expressed as: (Round your final answer to the nearest whole percent, X%.)

A)61%.
B)78%.
C)22%.
D)17%.

Question 46

Szidon Company reports the following data: Using benchmarking, what can be said about Szidon Company?

A)Szidon is inferior to the key competitor because the key competitor's net income percentage is higher.
B)Szidon is superior to the key competitor because net income is higher.
C)There is not enough information to make any conclusions.
D)There is conflicting information so no conclusions can be reached.

Question 47

On a common-size balance sheet, each line item is expressed as a percentage of:

A)current assets.
B)operating income.
C)total assets.
D)net income.

Question 48

Common-size financial statements report only dollar amounts.

Question 49

A vertical analysis of a balance sheet shows that current assets have increased from 42% to 56%. This means that:

A)current assets have increased as a percentage of total assets.
B)the dollar amount of total assets has increased.
C)the dollar amount of total assets has decreased.
D)the dollar amount of long-term assets has increased.

Question 50

Prepare a vertical analysis for Katrina Corporation using the information shown below. Round percentages to one decimal place.

Question 51

Wilhelm Company's gross profit percentages for the past 3 years are: Based on the above data, what can be said about the Wilhelm Company?

A)The sales volume is decreasing.
B)The company is decreasing the income tax expense.
C)The company is controlling operating expenses.
D)The company is controlling cost of goods sold.

Question 52

Benchmarking compares a company to some standard set by others.

Question 53

Which of the following would be most helpful in the comparison of different size companies?

A)horizontal analysis
B)comparison of their net incomes
C)comparison of their working capital balances
D)preparation of common-size financial statements

Question 54

Benchmarking common size variables against a key competitor provides meaningful information only if the companies are similar in size.

Question 55

You are using a leading competitor, Company B, for benchmarking your company, Company A. When benchmarking, the gross margin of Company A is expressed as a percentage of:

A)the net sales of Companies A and B.
B)Company B's net sales.
C)Company A's net income.
D)Company A's net sales.

Question 56

Reimer Company reports the following data: When evaluating the results of operations, what can be said about Reimer Company?

A)Using vertical analysis, the company's profitability declined in 2016.
B)Using horizontal analysis, the company's profitability declined in 2016.
C)Using vertical analysis, the company's profitability declined in 2017.
D)Using horizontal analysis, the company's profitability declined in 2017.

Question 57

Given the following data: In vertical analysis, Accounts Receivable, net would be expressed as: (Round your final answer to the nearest whole percent, X%.)

A)3%.
B)43%.
C)7%.
D)22%.

Question 58

In 2016, the Zenon Company reported that property, plant and equipment were equal to 13% of total assets. In 2016, current assets were equal to 87% of total assets. In 2017 the company reported that property, plant and equipment were equal to 28% of total assets. In 2017, current assets were equal to 72% of total assets. What conclusion can be reached from this information?

A)In 2017, the company is downsizing.
B)In 2017, property, plant and equipment as a proportion of total assets increased.
C)In 2017, the company is investing in the future.
D)B and C.

Question 59

Walton Company's return on sales for the most recent year was 5%. The industry leader reports a return on sales of 7%. The comparison of Walton Company's return on sales to the industry leader is an example of:

A)benchmarking.
B)gross margin analysis.
C)detail analysis.
D)intercompany analysis.

Question 60

Dynasty Incorporated has the following data available at December 31, 2017:
Prepare a vertical analysis of Dynasty's balance sheet. Round percentages to one decimal point.

Question 61

Sales of plant assets for several years, which represent a major source of cash, is a sign of:

A)a struggling company.
B)reinvestment in the company.
C)a shortage of cash.
D)A and C.

Question 62

On a statement of cash flows, which is NOT considered a financing activity?

A)paid income taxes
B)proceeds from long-term debt
C)repayment of long-term debt
D)paid dividends

Question 63

On a statement of cash flows, which is considered an investing activity?

A)depreciation expense
B)increase in inventory
C)sale of securities
D)repayment of debt

Question 64

On the statement of cash flows of a healthy company, Net cash provided by operating activities is generally less than net income.

Question 65

A company reports the following information from the statement of cash flows: Which line item provides a signal that the company may have cash flow problems?

A)net cash provided by operating activities
B)net income
C)net cash provided by investing activities
D)net cash used by financing activities

Question 66

In the statement of cash flows, more purchases of long-term assets than sales of long-term assets are considered a sign of a healthy company.

Question 67

The Statement of Cash Flows for Brown Equipment Company shows purchases of plant assets of $155,000 for 2017 and $118,000 for 2018. The percent of change from 2017 to 2018 is ________.

A)(31.4%)
B)(23.9%)
C)(76.1%)
D)$37,000.

Question 68

Cash flow signs of a healthy company do NOT include:

A)net cash provided by operating activities exceeds net income
B)operating activities represent the major source of cash
C)investing activities include more purchases than sales of long-term assets
D)borrowing $100 million and repaying $15 million

Question 69

Which of the following statements is CORRECT?

A)A shortage of cash could cause a company to face bankruptcy, but lots of cash will ensure success.
B)When analyzing the Statement of Cash Flows, investors should ignore signals of cash flow distress because the company can show improvements in future periods.
C)If the Statement of Cash Flows shows that current assets are increasing far more than current liabilities, the company may have trouble collecting receivables or selling inventory.
D)A sign of a healthy company is that financing activities are dominated by borrowing.

Question 70

Analyzing the statement of cash flows may help investors and analysts determine the financial health of a company. Which of the following signs below is NOT an indicator of a financially healthy company?

A)The company's operations are a major source (not a use)of cash.
B)The company's operations result in Net cash used by operating activities.
C)The company's investing activities include more purchases than sales of long-term assets.
D)The company's financing activities are not dominated by borrowing.

Question 71

On a statement of cash flows, which of the following is a sign of a healthy company?

A)Investing activities include more sales of long-term assets than purchases.
B)Financing activities are dominated by borrowing.
C)Operating activities are the major source of cash.
D)Net cash provided by operating activities is less than net income.

Question 72

Analysts may find the statement of cash flows as helpful for spotting weakness as for gauging success.

Question 73

On a statement of cash flows (indirect method), which item is reported as a line item under cash from operating activities?

A)sale of securities
B)purchase of fixed assets
C)purchase of securities
D)amortization expense

Question 74

If the sale of plant assets is a company's major source of cash, it may be a sign of financial difficulty.

Question 75

Horizontal analysis is performed on information from:

A)only the income statement.
B)only the balance sheet.
C)only the statement of cash flows.
D)the income statement, the balance sheet, and the statement of cash flows.

Question 76

On the statement of cash flows of a healthy company, Net cash provided by operating activities generally exceeds net income because depreciation expense is added back to net income.

Question 77

On a statement of cash flows of a healthy company, net income would ordinarily be:

A)less than depreciation expense.
B)more than depreciation expense.
C)greater than Net cash provided by operating activities.
D)less than Net cash provided by operating activities.

Question 78

On a statement of cash flows, repayment of long-term debt is considered:

A)an operating activity.
B)an investing activity.
C)a financing activity.
D)a noncash investing and financing activity.

Question 79

An example of a company with cash flow problems is:

A)a company sold property, plant and equipment for $160 million and purchased property, plant and equipment for $80 million.
B)a company borrowed $1 million with long-term bonds payable and paid $1 million on long-term notes payable.
C)a company sold property, plant and equipment for $5 million and purchased property, plant and equipment for $25 million.
D)net cash provided by operating activities is $10 million and net income is $6 million.

Question 80

In the statement of cash flows, purchases of plant assets are considered to be investing activities.