Deck 13: Financial Statement Analysis

Question 1

In horizontal analysis, the base year is the most current year being examined.

Answer 1

False

Question 2

Companies report most changes in accounting principle currently.

Answer 2

False

Question 3

Comprehensive income includes all changes in stockholders' equity during a period except those resulting from investments by stockholders and distributions to stockholders.

Answer 3

True

Question 4

Horizontal analysis is a technique for evaluating a financial statement item in the current year with other items in the current year.

Question 5

Common size analysis expresses each item in a financial statement as a percent of a base amount.

Question 6

If a company has sales of $130 in 2017 and $182 in 2016, the percentage decrease in sales from 2016 to 2017 is 40%.

Question 7

One objective of the income statement is to separate the results of continuing operations from those of discontinued operations.

Question 8

Analysts are interested in sustainable income, which is equal to the past year's net income.

Question 9

The loss on disposal of a significant component of a business is disclosed in the statement of retained earnings.

Question 10

When the disposal of a significant segment occurs, the income statement should report both income from continuing operations and income (loss) from discontinued operations.

Question 11

Improper recognition of income is not one of the factors affecting the quality of earnings.

Question 12

Another name for horizontal analysis is trend analysis.

Question 13

Other comprehensive income includes all changes in stockholder's equity during a period including those changes resulting from investments by stockholder's.

Question 14

Because pro forma earnings are based on specific rules, these amounts are highly reliable.

Question 15

A change in accounting principle occurs when the principle used in the current year is different from the one used by competitors in the current year.

Question 16

Alternative accounting methods affect the quality of earnings.

Question 17

Comprehensive income includes all revenues, expenses, gains, losses, and dividends.

Question 18

A primary purpose of vertical analysis is to observe trends over a three-year period.

Question 19

In horizontal analysis, if an item has a negative amount in the base year, and a positive amount in the following year, no percentage change for that item can be computed.

Question 20

Vertical analysis is a technique for evaluating a series of financial statement data over a period of time to determine the increase (decrease) that has taken place.

Question 21

Both profit margin and asset turnover affect a company's return on assets.

Question 22

In a common size income statement, each item is expressed as a percentage of net income.

Question 23

In the vertical analysis of an income statement, each item is generally stated as a percentage of net income.

Question 24

Vertical analysis is useful in making comparisons of companies of different sizes.

Question 25

The current ratio is one of the most utilized measures of profitability.

Question 26

Profitability ratios are frequently used as a basis for evaluating management's operating effectiveness.

Question 27

Horizontal, vertical, and circular analyses are the basic tools of financial statement analysis.

Question 28

Inventory turnover is a measure of liquidity that focuses on efficient use of inventory.

Question 29

Inventory turnover measures the number of times on average the inventory was sold during the period.

Question 30

Intracompany comparisons of the same financial statement items are often useful to detect changes in financial relationships and significant trends.

Question 31

Comparisons of company data with industry averages provide information about a company's relative position within the industry.

Question 32

In a common size income statement, net sales are represented by 100%.

Question 33

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

Question 34

In the vertical analysis of a balance sheet, the base for current liabilities is total liabilities.

Question 35

In a common size balance sheet, total assets are represented by 100%.

Question 36

Leverage and return on equity are closely related.

Question 37

A current ratio of 1.2 to 1 indicates that a company's current assets exceed its current liabilities.

Question 38

From a creditor's point of view, the higher the debt to assets ratio, the lower the risk that the company may be unable to pay its obligations.

Question 39

Accounts receivable turnover is useful in assessing the profitability of receivables.

Question 40

The return on assets will be greater than the rate of return on common stockholders' equity if the company has been successful in trading on the equity at a gain.

Question 41

Using borrowed money to increase the rate of return on common stockholders' equity is called "trading on the equity."

Question 42

Which of the following income statement figures would probably be the best indicator of a company's future performance?

A) Total revenues
B) Income from operations
C) Net income
D) Gross profit

Question 43

A solvency ratio measures the income or operating success of a company for a given period of time.

Question 44

Which of the following is the best definition of sustainable income?

A) Sustainable income is a measure of solvency that does not include capital expenditure.
B) Sustainable income is the same as net income.
C) Sustainable income is income that is unusual in nature and infrequent in occurrence.
D) Sustainable income is the most likely level of income to be obtained in the future.

Question 45

When a change in depreciation method occurs

A) prior years' financial statements should be changed to reflect the newly adopted method.
B) the change should be reported in current and future years.
C) the cumulative effect of the change should be reflected on the income statement as of the beginning of the next year.
D) the cumulative effect of the change in accounting principle should be classified as an discontinued operations on the income statement.

Question 46

The order of presentation of items that may appear on the statement of comprehensive income is

A) Other comprehensive income, Discontinued operations, Income before income taxes.
B) Discontinued operations, Other comprehensive income, Income before income taxes.
C) Income before income taxes, Discontinued operations, Other comprehensive income.
D) Income before income taxes, Other comprehensive income, Discontinued operations.

Question 47

When preparing an income statement, which of the following is the proper order for income statement components?

A) Comprehensive income, Other comprehensive income items, Net income
B) Net income, Comprehensive income, Other comprehensive income items
C) Net income, Other comprehensive income items, Comprehensive income
D) Other comprehensive income items Net income, Comprehensive income

Question 48

Which of the following statements is true with respect to financial statement reporting a change in accounting principle?

A) Comparability across periods is impaired
B) Only a footnote is required to report the change
C) Changes in both depreciation methods and inventory methods are reported retroactively.
D) Management must show that the new accounting principle is preferable to the old method.

Question 49

The discontinued operations section of the income statement refers to

A) discontinuance of a product line.
B) the income or loss on products that have been completed and sold.
C) obsolete equipment and discontinued inventory items.
D) the disposal of a significant component of a business.

Question 50

The current ratio is a measure of all the ratios calculated for the current year.

Question 51

Which of the following items appears on the income statement before income before income taxes?

A) Other comprehensive income
B) Comprehensive income
C) Other revenues and gains
D) Discontinued operations

Question 52

Declining profitability and liquidity ratios are indications that a company may not survive.

Question 53

An income statement would not include

A) other revenue and gains.
B) income from operations.
C) discontinued operations.
D) dividends paid.

Question 54

Dandy Candy Company sold its licorice division resulting in a loss of $80,000. Assuming a tax rate of 25%, the loss on this disposal will be reported on the income statement at what amount?

A) $100,000
B) $20,000
C) $80,000
D) $60,000

Question 55

If a company has a discontinued operation gain of $30,000 and a 32% tax rate, what is the effect on net income?

A) Increase of $30,000.
B) Increase of $20,400.
C) Increase of $9,600.
D) No effect.

Question 56

Liquidity ratios measure the ability of the company to survive over a long period of time.

Question 57

All of the following are reported on the income statement net of tax except

A) loss on operations from a discontinued division.
B) other comprehensive income items.
C) income from operations.
D) loss on disposal of a division.

Question 58

All of the following statements regarding changes in accounting principles are true except which of the following?

A) Most changes in accounting principles are only reported in current periods when the principle change takes place.
B) Changes in accounting principles are allowed when new principles are preferable to old ones.
C) Most changes in accounting principles are retroactively reported.
D) Consistency is one of the biggest concerns when a change in accounting principle is undertaken.

Question 59

Which of the following is not reported net of tax on the statement of comprehensive income?

A) Discontinued operations
B) Other comprehensive income
C) Other revenues and expenses
D) Income from continuing operations

Question 60

Which of the following would not be considered an example of a discontinued operation?

A) Shifting production processes within an operation
B) Elimination of a major class of customers
C) Elimination of an entire activity
D) Disposal of a significant component of a business

Question 61

Which one of the following is not a tool in financial statement analysis?

A) Horizontal analysis
B) Circular analysis
C) Vertical analysis
D) Ratio analysis

Question 62

Reardon Inc. has an investment in trading securities of $140,000. This investment experienced an unrealized loss of $7,000 during the current year. Assuming a 35% tax rate, the effect of this loss on comprehensive income will be

A) no effect.
B) $140,000 increase.
C) $49,000 decrease.
D) $91,000 decrease.

Question 63

Comparisons of financial data made within a company are called

A) intracompany comparisons.
B) interior comparisons.
C) intercompany comparisons.
D) industry comparisons.

Question 64

The disposal of a significant component of a business is called

A) a change in accounting principle.
B) comprehensive income.
C) an other expense.
D) discontinued operations.

Question 65

In reporting discontinued operations, the income statement should show in a special section 1. gains on the disposal of a discontinued component. 2. losses on the disposal of a discontinued component.

A) 1 only.
B) 2 only.
C) neither 1 nor 2.
D) both 1 and 2.

Question 66

A comparison with other companies that provides insight into a company's competitive position is most commonly known as which of the following types of comparisons?

A) Industry average comparison
B) Intracompany comparison
C) Intercompany comparison
D) Comprehensive income comparison

Question 67

Danner Corporation reported net sales of $650,000, $720,000, and $780,000 in the years 2016, 2017, and 2018, respectively. If 2016 is the base year, what percentage do 2018 sales represent of the base?

A) 108%
B) 120%
C) 83%
D) 20%

Question 68

All of the following statements are true regarding comprehensive income except

A) companies are required to report comprehensive income.
B) a company would add an unrealized loss on available-for-sale securities to net income to calculate comprehensive income.
C) comprehensive income does not include changes resulting from investments by stockholders.
D) comprehensive income does not include dividends to stockholders.

Question 69

Under which of the following cases may a percentage change be computed?

A) The trend of the amounts is decreasing but all amounts are positive.
B) There is no amount in the base year.
C) There is a negative amount in the base year and a negative amount in the subsequent year.
D) There is a negative amount in the base year and a positive amount in the subsequent year.

Question 70

Which of the following would be considered an "Other comprehensive income" item?

A) Loss on disposal of discontinued operations
B) Unrealized loss on available-for-sale securities
C) Discontinued operations gain
D) Net income

Question 71

Stellar, Inc. decided on January 1 to discontinue its telescope manufacturing division. On July 1, the division's assets with a book value of $1,260,000 are sold for $900,000. Operating income from January 1 to June 30 for the division amounted to $195,000. Ignoring income taxes, what total amount should be reported on Stellar's income statement for the current year under the caption, Discontinued Operations?

A) $195,000
B) $165,000 loss
C) $360,000 loss
D) $555,000

Question 72

Jack's by the Tracks has the following partial balance sheet: JACK'S BY THE TRACKS.
Balance Sheet (partial)
$\begin{array}{lr}\text { Stockholders' equity. }\\\text { Common stock } & \$ 6,000,000 \\\text { Retained earnings } & 2,000,000 \\\text { Total paid-in capital and retained earnings } & 8,000,000 \\\text { Accumulated other comprehensive income } & \$ 00,000 \\\text { Total stockholders' equity: } & \$ 8,800,000\end{array}$ What effect will the accumulated other comprehensive income have on comprehensive income?

A) No effect on comprehensive income.
B) Increase of $800,000 in comprehensive income.
C) Increase of $8,800,000 in comprehensive income.
D) Decrease of $800,000 in comprehensive income.

Question 73

In analyzing financial statements, horizontal analysis is a

A) requirement.
B) tool.
C) principle.
D) theory.

Question 74

When a horizontal analysis is performed and a zero or negative amount is reported in the base year, then

A) no percentage change can be computed.
B) the percent change will be negative.
C) the accountant has made a mistake.
D) the percentage change will be 100% of greater.

Question 75

Horizontal analysis is also known as

A) linear analysis.
B) vertical analysis.
C) trend analysis.
D) common size analysis.

Question 76

Comprehensive income would not include

A) dividends declared.
B) unrealized gains on available-for-sale securities.
C) discontinued operations.
D) other expenses and losses.

Question 77

On January 1, 2017, Tri-State Industries had cash and common stock of $180,000. At that date the company had no other asset, liability or equity balances. On January 2, 2017, it purchased $160,000 of equity securities for cash that it classified as available-for-sale. It received cash dividends of $12,000 during the year on these securities. In addition, it had an unrealized holding gain on these securities of $32,000 net of tax. Based on this information, what is the amount of comprehensive income in 2017?

A) $44,000
B) $20,000
C) $12,000
D) $32,000

Question 78

Lupton Inc. disposes of an unprofitable segment of its business. The operation of the segment suffered a $200,000 loss in the year of disposal. The loss on disposal of the segment was $100,000. If the tax rate is 30%, and income before income taxes was $1,600,000,

A) the income tax expense on the income before discontinued operations is $390,000.
B) the income from continuing operations is $1,120,000.
C) net income is $1,300,000.
D) the losses from discontinued operations are reported net of income taxes at $300,000.

Question 79

Other comprehensive income is reported on the statement of comprehensive income immediately

A) before income from continuing operations.
B) after comprehensive income.
C) before income before income taxes.
D) after discontinued operations.

Question 80

Which of the following would be considered an "Other Comprehensive Income" item?

A) Net income
B) Gain on disposal of discontinued operations
C) Other revenues and gains
D) Unrealized loss on available-for-sale securities