Deck 15: Financial Statement Analysis

Question 1

The following is a summary of information presented on the financial statements of The Cake Company on December 31, 2014.
$\begin{array}{|l|r|c|}\hline \text { Account }&2014&2013\\\hline \text { Current assets } & \$ 65,000 & \$ 50,000 \\\hline \text { Accounts receivable } & 80,000 & 75,000 \\\hline \text { Merchandise inventory } & 50,000 & 40,000 \\\hline \text { Current liabilities } & 75,000 & 50,000 \\\hline \text { Long-term liabilities } & 30,000 & 50,000 \\\hline \text { Common stock } & 50,000 & 40,000 \\\hline \text { Retained earnings } & 40,000 & 25,000\\\hline \\\hline \text { Net sales revenue } & \$ 525,000 & \$ 500,000 \\\hline \text { Cost of goods sold } & 400,000 & 395,000 \\\hline \text { Gross profit } & \$ 125,000 & \$ 105,000 \\\hline \text { Selling and general expenses } & 45,000 & 50,000 \\\hline \text { Net income before income tax expense } & \$ 80,000 & \$ 55,000 \\\hline \text { Income tax expense } & \$ 24,000 & 16,500 \\\hline \text { Net income } & \$ 56,000 & \$ 38,500 \\\hline\end{array}$


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What would a horizontal analysis report with respect to current liabilities?

A) That current liabilities are 38.46% of total capital
B) A 50.00% increase in current liabilities
C) A current ratio of .87
D) A 33.33% increase in current liabilities

Answer 1

B

Question 2

Benchmarking is the comparison of a company's current year results with an earlier year's performance.

Answer 2

False

Question 3

Please refer to the following trend analysis of Pathways Company:
$$\begin{array} { | l | r | r | r | r | r | r | } \hline & 2015 & 2014 & 2013 & 2012 & 2011 & 2010 \\\hline \text { Net sales } & \$ 4,970 & \$ 4,500 & \$ 3,980 & \$ 3,270 & \$ 4,750 & \$ 4,400 \\\hline \text { Percentages } & 113.0 \% & 102.3 \% & 90.5 \% & 74.3 \% & 108.0 \% & 100.0 \% \\\hline\end{array}$$

-
Which of the following is a correct conclusion from the above analysis?

A) Net sales in 2013 were equal to 90.5% of year 2012 net sales.
B) Net sales in 2013 were up 90.5% over the previous year.
C) Net sales in 2013 were equal to 90.5% of 2010 net sales.
D) Net sales in 2013 were down 90.5% from year 2010.

Answer 3

Net sales in 2013 were equal to 90.5% of 2010 net sales.

Question 4

If an analyst wishes to see how sales revenue of a company has changed from one year to the next, which of the following types of financial statement analysis would be used?

A) Vertical analysis
B) Horizontal analysis
C) Ratio analysis
D) Common-size financial statement analysis

Question 5

Which of the following BEST describes horizontal analysis?

A) Comparing figures year to year
B) Showing each figure as a percentage of some other amount, such as total assets
C) Comparing a company's financial figures with other companies that are leaders
D) Calculating key ratios to evaluate performance

Question 6

Investors and creditors generally evaluate a company by using one year's data.

Question 7

The following is a summary of information presented on the financial statements of The Cake Company on December 31, 2014.
$\begin{array}{|l|r|c|}\hline \text { Account }&2014&2013\\\hline \text { Current assets } & \$ 65,000 & \$ 50,000 \\\hline \text { Accounts receivable } & 80,000 & 75,000 \\\hline \text { Merchandise inventory } & 50,000 & 40,000 \\\hline \text { Current liabilities } & 75,000 & 50,000 \\\hline \text { Long-term liabilities } & 30,000 & 50,000 \\\hline \text { Common stock } & 50,000 & 40,000 \\\hline \text { Retained earnings } & 40,000 & 25,000\\\hline \\\hline \text { Net sales revenue } & \$ 525,000 & \$ 500,000 \\\hline \text { Cost of goods sold } & 400,000 & 395,000 \\\hline \text { Gross profit } & \$ 125,000 & \$ 105,000 \\\hline \text { Selling and general expenses } & 45,000 & 50,000 \\\hline \text { Net income before income tax expense } & \$ 80,000 & \$ 55,000 \\\hline \text { Income tax expense } & \$ 24,000 & 16,500 \\\hline \text { Net income } & \$ 56,000 & \$ 38,500 \\\hline\end{array}$



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What would horizontal analysis report with respect to long-term liabilities?

A) That long-term liabilities decreased by $30,000
B) That long-term liabilities decreased by 40%
C) That long-term liabilities decreased by 60%
D) That long-term liabilities decreased by 67%

Question 8

The following data on Alpha Products, Inc. is available.
Alpha Products, Inc
Comparative Balance Sheet
December 31, 2013 and December 31, 2014
$\begin{array}{|l|r|r|}\hline&2014&2013\\\hline \text { Assets: } & & \\\hline \text { Cash } & \$ 45,100 & \$ 48,500 \\\hline \text { Accounts receivable, net } & 59,800 & 101,500 \\\hline \text { Merchandise inventory } & 150,900 & 171,600 \\\hline \text { Property, plant and equipment, net } & 710,500 & 808,800 \\\hline \text { Total assets } & \$ 966,300 & \$ 1,130,400 \\\hline\\\hline \text { Liabilities and stockholders' equity } & & \\\hline \text { Accounts payable } & \$ 108,200 & \$ 151,600 \\\hline \text { Notes payable (current) } & 70,000 & 70,00 \\\hline \text { Bonds payable } & 154,000 & 280,000 \\\hline \text { Common stock, } \$ 10 \text { par } & 420,000 & 420,000 \\\hline \text { Retained earnings } & 214,100 & 208,800 \\\hline \text { Total liabilities and stockholders' equity } & \$ 966,300 & \$ 1,130,400\\\hline\end{array}$
What was the percent increase or decrease in net property, plant and equipment from 2013 to 2014?

A) 12.2% decrease
B) 12.2% increase
C) 13.8% increase
D) 13.8% decrease

Question 9

A company reported the following amounts of net income:
$\begin{array}{|l|r|}\hline 2011 & \$ 18,000 \\\hline 2012 & \$ 24,000 \\\hline 2013 & \$ 26,000 \\\hline\end{array}$

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Which of the following is the percentage change in net income from 2012 to 2013?

A) 2.00%
B) 10.00%
C) 8.33%
D) 7.69%

Question 10

Horizontal analysis compares each item in the income statement to the net sales amount.

Question 11

If an analyst wishes to see how gross profit of a company has changed from one year to the next, vertical analysis would be the best approach.

Question 12

Please refer to the following trend analysis of Pathways Company:
$$\begin{array} { | l | r | r | r | r | r | r | } \hline & 2015 & 2014 & 2013 & 2012 & 2011 & 2010 \\\hline \text { Net sales } & \$ 4,970 & \$ 4,500 & \$ 3,980 & \$ 3,270 & \$ 4,750 & \$ 4,400 \\\hline \text { Percentages } & 113.0 \% & 102.3 \% & 90.5 \% & 74.3 \% & 108.0 \% & 100.0 \% \\\hline\end{array}$$

-
Which of the following is a correct conclusion from the above analysis?

A) Net sales in 2014 were equal 102.3% of net sales for the previous year.
B) Net sales in 2014 were up 2.3% over the previous year.
C) Net sales in 2014 were 2.3% higher than 2010 net sales.
D) Net sales in 2014 were down 90.5% from year 2010.

Question 13

The net income for a company was $540,000 this year and $630,000 last year. Net income decreased by 17%.

Question 14

A company reported the following amounts of net income:
$\begin{array}{|l|r|}\hline 2011 & \$ 18,000 \\\hline 2012 & \$ 24,000 \\\hline 2013 & \$ 26,000 \\\hline\end{array}$

-
Which of the following is the percentage change in net income from 2011 to 2012?

A) 33.33%
B) 8.33%
C) 10.00%
D) 30.00%

Question 15

Which of the following BEST describes trend analysis?

A) Calculating key ratios to evaluate performance
B) Showing each figure as a percentage of some other amount, such as total assets
C) Comparing a company's financial figures with other companies that are leaders
D) Showing each year's figures as a percentage of amounts for a base year

Question 16

The following is a summary of information presented on the financial statements of The Cake Company on December 31, 2014.
$\begin{array}{|l|r|c|}\hline \text { Account }&2014&2013\\\hline \text { Current assets } & \$ 65,000 & \$ 50,000 \\\hline \text { Accounts receivable } & 80,000 & 75,000 \\\hline \text { Merchandise inventory } & 50,000 & 40,000 \\\hline \text { Current liabilities } & 75,000 & 50,000 \\\hline \text { Long-term liabilities } & 30,000 & 50,000 \\\hline \text { Common stock } & 50,000 & 40,000 \\\hline \text { Retained earnings } & 40,000 & 25,000\\\hline \\\hline \text { Net sales revenue } & \$ 525,000 & \$ 500,000 \\\hline \text { Cost of goods sold } & 400,000 & 395,000 \\\hline \text { Gross profit } & \$ 125,000 & \$ 105,000 \\\hline \text { Selling and general expenses } & 45,000 & 50,000 \\\hline \text { Net income before income tax expense } & \$ 80,000 & \$ 55,000 \\\hline \text { Income tax expense } & \$ 24,000 & 16,500 \\\hline \text { Net income } & \$ 56,000 & \$ 38,500 \\\hline\end{array}$



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What would horizontal analysis report with respect to net income before income tax expense and net income?

A) That both net income before income tax expense and net income are 45.45% of net sales revenue
B) A $25,000 increase in both net income before income tax expense and net income
C) A 45.45% increase in both net income before income tax expense and net income
D) A 145% increase in both net income before income tax expense and net income

Question 17

The following is a summary of information presented on the financial statements of The Cake Company on December 31, 2014.
$\begin{array}{|l|r|c|}\hline \text { Account }&2014&2013\\\hline \text { Current assets } & \$ 65,000 & \$ 50,000 \\\hline \text { Accounts receivable } & 80,000 & 75,000 \\\hline \text { Merchandise inventory } & 50,000 & 40,000 \\\hline \text { Current liabilities } & 75,000 & 50,000 \\\hline \text { Long-term liabilities } & 30,000 & 50,000 \\\hline \text { Common stock } & 50,000 & 40,000 \\\hline \text { Retained earnings } & 40,000 & 25,000\\\hline \\\hline \text { Net sales revenue } & \$ 525,000 & \$ 500,000 \\\hline \text { Cost of goods sold } & 400,000 & 395,000 \\\hline \text { Gross profit } & \$ 125,000 & \$ 105,000 \\\hline \text { Selling and general expenses } & 45,000 & 50,000 \\\hline \text { Net income before income tax expense } & \$ 80,000 & \$ 55,000 \\\hline \text { Income tax expense } & \$ 24,000 & 16,500 \\\hline \text { Net income } & \$ 56,000 & \$ 38,500 \\\hline\end{array}$



-
What would a horizontal analysis report with respect to current assets?

A) An inventory turnover of 8 times
B) A 30% increase in current assets
C) A current ratio of .87
D) Current assets that are 33.33% of total assets

Question 18

The following is a summary of information presented on the financial statements of The Cake Company on December 31, 2014.
$\begin{array}{|l|r|c|}\hline \text { Account }&2014&2013\\\hline \text { Current assets } & \$ 65,000 & \$ 50,000 \\\hline \text { Accounts receivable } & 80,000 & 75,000 \\\hline \text { Merchandise inventory } & 50,000 & 40,000 \\\hline \text { Current liabilities } & 75,000 & 50,000 \\\hline \text { Long-term liabilities } & 30,000 & 50,000 \\\hline \text { Common stock } & 50,000 & 40,000 \\\hline \text { Retained earnings } & 40,000 & 25,000\\\hline \\\hline \text { Net sales revenue } & \$ 525,000 & \$ 500,000 \\\hline \text { Cost of goods sold } & 400,000 & 395,000 \\\hline \text { Gross profit } & \$ 125,000 & \$ 105,000 \\\hline \text { Selling and general expenses } & 45,000 & 50,000 \\\hline \text { Net income before income tax expense } & \$ 80,000 & \$ 55,000 \\\hline \text { Income tax expense } & \$ 24,000 & 16,500 \\\hline \text { Net income } & \$ 56,000 & \$ 38,500 \\\hline\end{array}$



-
What would horizontal analysis report with respect to selling and general expenses?

A) An 11.11% increase in selling and general expenses
B) That selling and general expenses are 10.00% of net sales revenue
C) A 10.00% decrease in selling and general expenses
D) That selling and general expenses are 8.57% of net sales revenue

Question 19

If an analyst wishes to see how operating expenses of a company have changed from one year to the next, using a horizontal analysis would be the best approach.

Question 20

The following is a summary of information presented on the financial statements of The Cake Company on December 31, 2014.
$\begin{array}{|l|r|c|}\hline \text { Account }&2014&2013\\\hline \text { Current assets } & \$ 65,000 & \$ 50,000 \\\hline \text { Accounts receivable } & 80,000 & 75,000 \\\hline \text { Merchandise inventory } & 50,000 & 40,000 \\\hline \text { Current liabilities } & 75,000 & 50,000 \\\hline \text { Long-term liabilities } & 30,000 & 50,000 \\\hline \text { Common stock } & 50,000 & 40,000 \\\hline \text { Retained earnings } & 40,000 & 25,000\\\hline \\\hline \text { Net sales revenue } & \$ 525,000 & \$ 500,000 \\\hline \text { Cost of goods sold } & 400,000 & 395,000 \\\hline \text { Gross profit } & \$ 125,000 & \$ 105,000 \\\hline \text { Selling and general expenses } & 45,000 & 50,000 \\\hline \text { Net income before income tax expense } & \$ 80,000 & \$ 55,000 \\\hline \text { Income tax expense } & \$ 24,000 & 16,500 \\\hline \text { Net income } & \$ 56,000 & \$ 38,500 \\\hline\end{array}$



-
What would horizontal analysis report with respect to net sales revenue?

A) A 5% increase in net sales revenue
B) A dividend yield of $8.20
C) That cost of goods sold is 79.19% of net sales revenue
D) An accounts receivable turnover of 7.24 times

Question 21

Perform a horizontal analysis of the following company's balance sheet. Include both the amount and the percentage of change for each account.
$$\begin{array} { | l | r | r | r | r | } \hline \text { Account } &{ \mathbf { 2 0 1 1 } } & { \mathbf { 2 0 1 0 } } & \text { Change Amount } & \text { Change Percent } \\\hline \text { Current assets } & \$ 121,000 & \$ 100,000 & & \\\hline \text { Accounts receivable } & 117,000 & 125,000 & & \\\hline \text { Merchandise inventory } & 70,000 & 85,000 & & \\\hline \text { Current liabilities } & 63,500 & 50,000 & & \\\hline \text { Long-term liabilities } & 100,000 & 100,000 & & \\\hline \text { Common stock } & 50,000 & 50,000 & & \\\hline \text { Retained earnings } & 94,500 & 110,000 & & \\\hline\end{array}$$

Question 22

If an analyst wishes to see how a company's net income as a percentage of net sales has changed from one year to the next, a vertical analysis would be the most appropriate approach.

Question 23

Which of the following is the base amount when performing vertical analysis of an income statement?

A) Total expenses
B) Net sales
C) Sales revenue
D) Gross profit

Question 24

La Paz Company reported the following information

Which of the following statements is an accurate conclusion about 2014 balances, based on the above data?

A) Although assets grew by over 9%, there was very little rise in stockholders' equity.
B) Total assets dropped slightly in 2014, but there was a significant reduction in total liabilities.
C) The increase in long-term liabilities was offset nearly dollar for dollar by a decrease in current liabilities.
D) The nearly 45% decrease in other long-term assets contributed to an overall decline in total assets.

Question 25

If an analyst wishes to see how a company's operating expenses as a percentage of net sales have changed from one year to the next, which of the following types of financial statement analysis would be used?

A) Vertical analysis
B) Horizontal analysis
C) Ratio analysis
D) Common-size financial statement analysis

Question 26

Please refer to the vertical analysis of a section of a balance sheet, shown below: $\begin{array}{|l|r|r|r|r|}\hline \text { (Dollar amounts in millions) } & 2014 & & 2013 & \\\hline & \text { Amount } & \text { \% of Total } & \text { Amount } & \text { \% of Total } \\\hline \text { Assets } & & & & \\\hline \text { Current assets: } & & & & \\\hline \text { Cash } & \$ 10,000 & 3.7 \% & \$ 7,200 & 2.9 \% \\\hline \text { Accounts receivable, net } & 15,600 & 5.7 \% & 16,800 & 6.7 \% \\\hline \text { Inventory } & 38,000 & 13.9 \% & 31,000 & 12.4 \% \\\hline \text { Total current assets } & 63,600 & 23.2 \% & 55,000 & 22.0 \% \\\hline \text { Property, plant and equipment, net } & 195,000 & 71.3 \% & 168,000 & 67.2 \% \\\hline \text { Other long-term assets } & 15,000 & 5.5 \% & 27,100 & 10.8 \% \\\hline \text { Total assets } & \$ 273,600 & 100.0 \% & \$ 250,100 & 100.0 \% \\\hline\end{array}$



- Which of the following statements accurately describes the 13.9% shown for Inventory in 2014?

A) In 2014, inventory grew 13.9% over the previous year.
B) In 2014, inventory is equal to 13.9% of total assets.
C) In 2014, inventory was equal to 13.9% of the cash balance.
D) Inventory declined as a percentage of total assets over the 2-year period.

Question 27

Which of the following is the definition of vertical analysis?

A) Vertical analysis is the practice of comparing a company with other companies that are leaders.
B) Vertical analysis is the analysis in which percentages are computed by selecting a base year as 100% and expressing amounts for following years as a percentage of the base amount.
C) Vertical analysis is the study of percentage changes in comparative financial statements.
D) Vertical analysis is the analysis of a financial statement that reveals the relationship of each statement item to a specified base, which is the 100% figure.

Question 28

Perform a horizontal analysis of the following company's income statement. Include both the amount and the percentage of change for each account.
$$\begin{array} { | l | r | r | r | l | } \hline \text { Account } & \mathbf { 2 0 1 1 } & \mathbf { 2 0 1 0 } & \text { Change Amount } & \text { Change Percent } \\\hline \text { Net sales revenue } & \$ 557,000 & \$ 500,000 & & \\\hline \text { Cost of goods sold } & 400,000 & 395,000 & \\\hline \text { Gross profit } & 157,000 & 105,000 & & \\\hline \text { Selling and general expenses } & 70,000 & 50,000 & \\\hline \text { Net income before income tax } & 87,000 & 55,000 & \\\hline \text { Income tax expense } & 24,000 & 16,500 & \\\hline \text { Net income } & \$ 63,000 & \$ 38,500 & & \\\hline\end{array}$$

Question 29

Pathways Company provides the following historical data:
$$\begin{array} { | l | r | r | r | r | r | r | } \hline & \mathbf { 2 0 1 5 } & \mathbf { 2 0 1 4 } & \mathbf { 2 0 1 3 } & \mathbf { 2 0 1 2 } & \mathbf { 2 0 1 1 } & \mathbf { 2 0 1 0 } \\\hline \text { Net sales } & \$ 4,970 & \$ 4,500 & \$ 3,980 & \$ 3,270 & \$ 4,750 & \$ 4,400 \\\hline\end{array}$$
Using the year 2010 as a base year, provide a trend analysis using the following format:
$$\begin{array} { | l | r | r | r | r | r | r | } \hline & { \mathbf { 2 0 1 5 } } & { \mathbf { 2 0 1 4 } } & { \mathbf { 2 0 1 3 } } & { \mathbf { 2 0 1 2 } } & { \mathbf { 2 0 1 1 } } & { \mathbf { 2 0 1 0 } } \\\hline \text { Net sales } & \$ 4,970 & \$ 4,500 & \$ 3,980 & \$ 3,270 & \$ 4,750 & \$ 4,400 \\\hline \text { Percentages } & & & & & & \\\hline\end{array}$$

Question 30

In a vertical analysis of the income statement, each line item is shown as a percentage of net income.

Question 31

Please refer to the partial balance sheet data provided below: $\begin{array}{|l|r|r|r|r|}\hline \text { (Dollar amounts in millions) } & 2014 & & 2013 & \\\hline & \text { Amount } & \text { \% of Total } & \text { Amount } & \text { \% of Total } \\\hline \text { Liabilities } & & & & \\ \hline \text { Current assets: } & & & & \\\hline \text { Accounts payable } & \$ 8,500 & 3.1 \% & \$ 7,300 & 2.9 \% \\\hline \text { Other current liabilities } & 1,400 & 0.5 \% & 3,900 & 1.6 \% \\\hline \text { Total current liabilities } & 9,900 & 3.6 \% & 11,200 & 4.5 \% \\\hline \text { Long-term notes payable } & 54,000 & 19.7 \% & 30,000 & 12.0 \% \\\hline \text { Total liabilities } & \$ 63,900 & 23.4 \% & \$ 41,200 & 16.5 \% \\\hline\text { Stockholders' Equity }\\\hline \text { Common stock } & \$ 12,000 & 4.4 \% & \$ 12,000 & 4.8 \% \\\hline \text { Paid-in capital in excess of par } & 149,000 & 54.5 \% & 149,000 & 59.6 \% \\\hline \text { Retained earnings } & 48,700 & 17.8 \% & 47,900 & 19.2 \% \\\hline \text { Total stockholders' equity } & \$ 209,700 & 76.6 \% & \$ 208,900 & 83.5 \% \\\hline \text { Total liabilities and stockholders' equity } & \$ 273,600 & 100.0 \% & \$ 250,100 & 100.0 \% \\\hline\end{array}$



- Which of the following accurately describes the 3.6% figure shown for total current liabilities in 2014?

A) In 2014, total current liabilities increased as a percentage of total liabilities and stockholders' equity over the prior year.
B) In 2014, total current liabilities was equal to 3.6% of total liabilities.
C) In 2014, total current liabilities was equal to 3.6% of total liabilities and stockholders' equity.
D) In 2014, total current liabilities decreased as a percentage of net sales revenue.

Question 32

Please refer to the vertical analysis of a section of a balance sheet, shown below: $\begin{array}{|l|r|r|r|r|}\hline \text { (Dollar amounts in millions) } & 2014 & & 2013 & \\\hline & \text { Amount } & \text { \% of Total } & \text { Amount } & \text { \% of Total } \\\hline \text { Assets } & & & & \\\hline \text { Current assets: } & & & & \\\hline \text { Cash } & \$ 10,000 & 3.7 \% & \$ 7,200 & 2.9 \% \\\hline \text { Accounts receivable, net } & 15,600 & 5.7 \% & 16,800 & 6.7 \% \\\hline \text { Inventory } & 38,000 & 13.9 \% & 31,000 & 12.4 \% \\\hline \text { Total current assets } & 63,600 & 23.2 \% & 55,000 & 22.0 \% \\\hline \text { Property, plant and equipment, net } & 195,000 & 71.3 \% & 168,000 & 67.2 \% \\\hline \text { Other long-term assets } & 15,000 & 5.5 \% & 27,100 & 10.8 \% \\\hline \text { Total assets } & \$ 273,600 & 100.0 \% & \$ 250,100 & 100.0 \% \\\hline\end{array}$


-Which of the following statements is valid regarding the data shown above?

A) Cash grew 3.7% over the previous year balance.
B) In 2014, Inventory represented 13.9% of net sales revenues.
C) Other long-term assets dropped 5.5% over the 2-year period.
D) Property, plant and equipment grew as a percentage of total assets over the 2-year period.

Question 33

Please refer to the vertical analysis of a section of a balance sheet, shown below: $\begin{array}{|l|r|r|r|r|}\hline \text { (Dollar amounts in millions) } & 2014 & & 2013 & \\\hline & \text { Amount } & \text { \% of Total } & \text { Amount } & \text { \% of Total } \\\hline \text { Assets } & & & & \\\hline \text { Current assets: } & & & & \\\hline \text { Cash } & \$ 10,000 & 3.7 \% & \$ 7,200 & 2.9 \% \\\hline \text { Accounts receivable, net } & 15,600 & 5.7 \% & 16,800 & 6.7 \% \\\hline \text { Inventory } & 38,000 & 13.9 \% & 31,000 & 12.4 \% \\\hline \text { Total current assets } & 63,600 & 23.2 \% & 55,000 & 22.0 \% \\\hline \text { Property, plant and equipment, net } & 195,000 & 71.3 \% & 168,000 & 67.2 \% \\\hline \text { Other long-term assets } & 15,000 & 5.5 \% & 27,100 & 10.8 \% \\\hline \text { Total assets } & \$ 273,600 & 100.0 \% & \$ 250,100 & 100.0 \% \\\hline\end{array}$



- Which of the following statements accurately describes the data shown for total current assets?

A) Current assets grew as a percentage of total assets over the 2-year period.
B) Current assets are equal to 23.2% of net sales in 2014.
C) In 2014, current assets grew by 23.2% compared to 2013.
D) In 2014, current assets as a percentage of total assets declined over the previous year.

Question 34

Portofino Company provides the following comparative balance sheet data. Please complete a horizontal analysis using the format shown here:

Question 35

Which of the following is the base amount when performing vertical analysis of a balance sheet?

A) Total assets
B) Total cash and cash equivalents
C) Net income
D) Gross profit

Question 36

Vertical analysis is used with the income statement, but not with the balance sheet.

Question 37

In a vertical analysis of the income statement, each line item is shown as a percentage of gross profit.

Question 38

If an analyst wishes to see a company's current assets as a percentage of total assets, a vertical analysis would be the best approach.

Question 39

Portofino Company provides the following comparative income statement data. Please complete a horizontal analysis using the format shown here:
$\begin{array}{|l|r|r|r|}\hline&&&\text {Amount of}\\&&&\text {Increase}\\ \text { (Dollar cmounts in millions) } & 2014 & 2013 & \text { (Decrease) } & \text { Percentage } \\ \hline \text { Revenues } & \$ 6,355 & \$ 4,920 \\\hline \text { Cost of revenues } & 3,370 & 2,200 \\\hline \text { Gross Profit } & 2,985 & 2,720 \\\hline \text { Operating expenses: } & & \\\hline \text { Sales and marketing expense } & 675 & 580 \\\hline \text { General and administrative expense } & 410 & 425 \\\hline \text { Research and development expense } & 470 & 390 \\\hline \text { Other expense } & 400 & 695 \\\hline \text { Total operating expenses } & \$ 1,955 & \$ 2,090 \\\hline & & \\\hline \text { Income before income tax } & \$ 1,030 & \$ 630 \\\hline \text { Income tax expense } & 230 & 210 \\\hline \text { Net income (loss) } & \$ 800 & \$ 420 \\\hline\end{array}$

Question 40

La Paz Company reported the following data:
$\begin{array}{|l|r|r|r|r|}\hline&&&\text {Amount of}\\&&&\text {Increase}\\ \text { (Dollar cmounts in millions) } & 2014 & 2013 & \text { (Decrease) } & \text { Percentage } \\\hline \text { Revenues } & \$ 6,35 & \$ 4,92 & \$ 1,435 & 29.2 \% \\\hline \text { Cost of revenues } & 3,370 & 2,20 & 1,170 & 53.2 \% \\\hline \text { Gross profit } & 2,98 & 2,72 & 265 & 9.7 \% \\\hline \text { Operating expenses: } & & & & \\\hline \text { Sales and marketing expense } & 675 & 580 & 95 & 16.4 \% \\\hline \text { General and administrative expense } & 410 & 429 & (15) & -3.5 \% \\\hline \text { Research and development expense } & 470 & 390 & 80 & 20.5 \% \\\hline \text { Other expense } & 400 & 695 & (295) & -42.4 \% \\\hline \text { Total operating expenses } & \$ 1,95 & \$ 2,090 & \$(135) & -6.5 \% \\\hline\\\hline \text { Income before income tax } & \$ 1,030 & \$ 630 & \$ 400 & 63.5 \% \\\hline \text { Income tax expense } & 230 & 210 & 20 & 9.5 \% \\\hline \text { Net income(loss) } & \$ 800 & \$ 420 & \$ 380 & 90.5 \% \\\hline \end{array}$

Which of the following statements is an accurate conclusion about the 2014 results, based on the above data?

A) Revenues fell and expenses rose over the 2-year period, resulting in a drop in net income.
B) Net income improved, despite a rise in operating expenses.
C) Gross profit declined over two years, resulting in a drop in net income.
D) The increase in net income resulted primarily from an increase in gross profit coupled with a decrease in operating expenses.

Question 41

Please complete the vertical analysis on the income statement data in the format below:

Question 42

Oglethorpe Company reports the following information from the vertical analysis of their income statement:
Net income:
4.2 % in 2014
3.9% in 2013
Which of the following statements could be logically concluded from the above data?

A) The company made a higher gross profit in 2014 than in 2013.
B) The company made higher net income in 2014 than in 2013.
C) The company has improved the profit they make per dollar of sales in 2014.
D) The company's total net income increased by 0.3% in 2014.

Question 43

Olivera Company provides the following data for the year 2013:
$$\begin{array} { l r } \text { Net sales revenue } & \$ 398,000 \\\text { Cost of goods sold } & \$ 255,000 \\\text { Operating expenses } & \$ 95,000 \\\text { Income tax expense } & \$ 9,000\end{array}$$

- On a vertical analysis, what percentage would be shown for income tax expense?

A) 2.3%
B) 6.3%
C) 2.9%
D) 3.4%

Question 44

Olivera Company provides the following data for the year 2013:
$$\begin{array} { l r } \text { Net sales revenue } & \$ 398,000 \\\text { Cost of goods sold } & \$ 255,000 \\\text { Operating expenses } & \$ 95,000 \\\text { Income tax expense } & \$ 9,000\end{array}$$

-
On a vertical analysis, what percentage would be shown for operating income?

A) 12.9%
B) 33.6%
C) 12.1%
D) 31.4%

Question 45

Benchmarking is often done by comparing a company against either a key competitor or against the industry average.

Question 46

Olivera Company provides the following data for the year 2013:
$$\begin{array} { l r } \text { Sales revenue } & \$ 400,000 \\\text { Sales returns and allowances } & \$ 1,200 \\\text { Sales discounts } & \$ 800 \\\text { Cost of goods sold } & \$ 255,000\end{array}$$ On a vertical analysis, what percentage would be shown for cost of goods sold?

A) 59.4%
B) 61.0%
C) 63.4%
D) 64.1%

Question 47

Please refer to the following data: $\begin{array}{|l|r|r|r|r|}\hline \text { (Dollar amounts in millions) } & 2014 & & 2013 & \\\hline & \text { Amount } & \text { \% of Total } & \text { Amount } & \text { \% of Total } \\\hline \text { Revenues } & \$ 6,355 & 100.0 \% & \$ 4,920 & 100.0 \% \\\hline \text { Cost of revenues } & 3,370 & 53.0 \% & 2,200 & 44.7 \% \\\hline \text { Gross Profit } & 2,985 & 47.0 \% & 2,720 & 55.3 \% \\\hline \text { Operating expenses: } & & & & \\\hline \text { Sales and marketing expense } & 675 & 10.6 \% & 580 & 11.8 \% \\\hline \text { General and administrative expense } & 410 & 6.5 \% & 425 & 8.6 \% \\\hline \text { Research and development expense } & 470 & 7.4 \% & 390 & 7.9 \% \\\hline \text { Other expense } & 400 & 6.3 \% & 695 & 14.1 \% \\\hline \text { Total operating expenses } & \$ 1,955 & 30.8 \% & \$ 2,090 & 42.5 \% \\\hline & & & & \\\hline \text { Income before income tax } & \$ 1,030 & 16.2 \% & \$ 630 & 12.8 \% \\\hline \text { Income tax expense } & 230 & 3.6 \% & 210 & 4.3 \% \\\hline \text { Net income (loss) } & \$ 800 & 12.6 \% & \$ 420 & 8.5 \% \\\hline\end{array}$
Which of the following statements is a valid conclusion based on this data?

A) Profitability in 2014 took a dive as operating expenses increased by 30.8%.
B) Profitability in 2014 improved greatly, as net income increased significantly as a percentage of sales.
C) Net income in 2014 increased 12.6% over the prior year.
D) Net income in 2014 went down because gross profit as a percentage of sales declined over the 2-year period.

Question 48

Common-size statements allow the comparison of two or more companies with different amounts of net sales and assets.

Question 49

Olivera Company provides the following data for the year 2013:
$$\begin{array} { l r } \text { Net sales revenue } & \$ 398,000 \\\text { Cost of goods sold } & \$ 255,000 \\\text { Operating expenses } & \$ 95,000 \\\text { Income tax expense } & \$ 9,000\end{array}$$

- On a vertical analysis, what percentage would be shown for net income?

A) 12.1%
B) 8.8%
C) 9.8%
D) 27.3%

Question 50

Please refer to the partial balance sheet data provided below: $\begin{array}{|l|r|r|r|r|}\hline \text { (Dollar amounts in millions) } & 2014 & & 2013 & \\\hline & \text { Amount } & \text { \% of Total } & \text { Amount } & \text { \% of Total } \\\hline \text { Liabilities } & & & & \\ \hline \text { Current assets: } & & & & \\\hline \text { Accounts payable } & \$ 8,500 & 3.1 \% & \$ 7,300 & 2.9 \% \\\hline \text { Other current liabilities } & 1,400 & 0.5 \% & 3,900 & 1.6 \% \\\hline \text { Total current liabilities } & 9,900 & 3.6 \% & 11,200 & 4.5 \% \\\hline \text { Long-term notes payable } & 54,000 & 19.7 \% & 30,000 & 12.0 \% \\\hline \text { Total liabilities } & \$ 63,900 & 23.4 \% & \$ 41,200 & 16.5 \% \\\hline\text { Stockholders' Equity }\\\hline \text { Common stock } & \$ 12,000 & 4.4 \% & \$ 12,000 & 4.8 \% \\\hline \text { Paid-in capital in excess of par } & 149,000 & 54.5 \% & 149,000 & 59.6 \% \\\hline \text { Retained earnings } & 48,700 & 17.8 \% & 47,900 & 19.2 \% \\\hline \text { Total stockholders' equity } & \$ 209,700 & 76.6 \% & \$ 208,900 & 83.5 \% \\\hline \text { Total liabilities and stockholders' equity } & \$ 273,600 & 100.0 \% & \$ 250,100 & 100.0 \% \\\hline\end{array}$



-Which of the following would be a valid conclusion from the above data?

A) Stockholders' equity was equal to 76.6% of total liabilities in 2014.
B) Stockholders' equity declined to 76.6% of net sales in 2014.
C) Stockholders' equity was up 76.6% over a 2-year period.
D) Stockholders' equity, as a percentage of total liabilities and stockholders' equity, declined over a 2-year period.

Question 51

A common-size statement reports only percentages-no dollar amounts.

Question 52

The common-size statement percentages are the same percentages that appear in horizontal analysis.

Question 53

The Arlington Company prepared a common-size income statement to compare its results with its key competitor, Bardo Company. Please refer to the following data:
$$\begin{array} { | l | r | r | } \hline & \text { Arlington Co. } &{ \text { Bardo Co. } } \\\hline \text { Revenues } & 100.0 \% & 100.0 \% \\\hline \text { Cost of goods sold } & 42.1 \% & 47.8 \% \\\hline \text { Gross Profit } & 57.9 \% & 52.2 \% \\\hline \text { Operating expenses: } & & \\\hline \text { Sales and marketing expense } & 26.3 \% & 8.6 \% \\\hline \text { General and administrative expense } & 12.0 \% & 10.8 \% \\\hline \text { Research and development expense } & 4.1 \% & 10.2 \% \\\hline \text { Total operating expenses } & 42.4 \% & 29.6 \% \\\hline & & \\\hline \text { Income before income tax } & 15.5 \% & 22.6 \% \\\hline \text { Income tax expense } & 3.3 \% & 5.8 \% \\\hline \text { Net income(loss) } & 12.3 \% & 16.8 \% \\\hline\end{array}$$

-
Based on this data, an analyst could conclude that Arlington's total gross profit is higher than Bardo's.

Question 54

Oglethorpe Company reports the following information from the vertical analysis of their balance sheet:
Current assets:
23.5 % in 2014
23.9% in 2013
Which of the following statements could be logically concluded from the above data?

A) The company's current ratio declined.
B) The company's current assets declined in proportion to its total assets.
C) The company's ability to pay current liabilities declined.
D) The company's total current assets declined by 0.4%.

Question 55

Please complete the vertical analysis on the balance sheet data in the format below:

Question 56

Please complete a vertical analysis on the balance sheet data shown in the format below:

Question 57

Olivera Company provides the following data for the year 2013:
$$\begin{array} { l r } \text { Net sales revenue } & \$ 398,000 \\\text { Cost of goods sold } & \$ 255,000 \\\text { Operating expenses } & \$ 95,000 \\\text { Income tax expense } & \$ 9,000\end{array}$$

-
On a vertical analysis, what percentage would be shown for operating expenses?

A) 22.9%
B) 66.4%
C) 23.9%
D) 24.5%

Question 58

Olivera Company provides the following data for the year 2013:
$$\begin{array} { l r } \text { Sales revenue } & \$ 400,000 \\\text { Sales returns and allowances } & \$ 1,200 \\\text { Sales discounts } & \$ 800 \\\text { Cost of goods sold } & \$ 255,000\end{array}$$
On a vertical analysis, what percentage would be shown for gross profit?

A) 35.9%
B) 35.6%
C) 56.1%
D) 44.1%

Question 59

Please complete the vertical analysis of the income statement data shown on the form below:
$$\begin{array} { | l | r | r | } \hline \text { Dollar amounts in millions) } & { \mathbf { 2 0 1 4 } } \\\hline \text { Revenues } & \text { Amount } & \text { \% of total } \\\hline \text { Cost of revenues } & \$ 6,355 & \\\hline \text { Gross profit } & 2,370 & \\\hline \text { Operating expenses: } & & \\\hline \text { Sales and marketing expense } & 675 & \\\hline \text { General and administrative expense } & 410 & \\\hline \text { Research and development expense } & 470 & \\\hline \text { Other expense } & 400 & \\\hline \text { Total operating expenses } & \$ 1,955 & \\\hline & & \\\hline \text { Income before income tax } & \$ 1,030 & \\\hline \text { Income tax expense } & 230 & \\\hline \text { Net income (loss) } & \$ 800 & \\\hline\end{array}$$

Question 60

Please refer to the following data: Which of the following is a valid conclusion from the above data?

A) The company shifted toward greater debt financing and less equity financing over the 2-year period.
B) The company relied heavily on retained earnings to finance asset growth in 2014.
C) Current asset and current liability data suggest a liquidity problem in 2014.
D) The balance in Retained earnings declined over a 2-year period.

Question 61

Days' sales in receivables is a measure of a company's ability to collect receivables.

Question 62

The Arlington Company prepared a common-size income statement to compare its results with its key competitor, Bardo Company. Please refer to the following data:
$$\begin{array} { | l | r | r | } \hline & \text { Arlington Co. } & { \text { Bardo Co. } } \\\hline \text { Revenues } & 100.0 \% & 100.0 \% \\\hline \text { Cost of goods sold } & 42.1 \% & 47.8 \% \\\hline \text { Gross Profit } & 57.9 \% & 52.2 \% \\\hline \text { Operating expenses: } & & \\\hline \text { Sales and marketing expense } & 26.3 \% & 8.6 \% \\\hline \text { General and administrative expense } & 12.0 \% & 10.8 \% \\\hline \text { Research and development expense } & 4.1 \% & 10.2 \% \\\hline \text { Total operating expenses } & 42.4 \% & 29.6 \% \\\hline & & 22.6 \% \\\hline \text { Income before income tax } & 15.5 \% & 5.8 \% \\\hline \text { Income tax expense } & 3.3 \% & 16.8 \% \\\hline \text { Net income(loss) } & 12.2 \% & \\\hline\end{array}$$

-
Which of the following statements can be correctly concluded from the above data?

A) Bardo Company produced higher total net income than Arlington.
B) Bardo produces higher gross profit per dollar of sales than Arlington.
C) Bardo places a higher priority on research and development than Arlington.
D) Bardo's total operating expenses are lower than Arlington's.

Question 63

The Arlington Company prepared a common-size income statement to compare its results with its key competitor, Bardo Company. Please refer to the following data:
$$\begin{array} { | l | r | r | } \hline & \text { Arlington Co. } &{ \text { Bardo Co. } } \\\hline \text { Revenues } & 100.0 \% & 100.0 \% \\\hline \text { Cost of goods sold } & 42.1 \% & 47.8 \% \\\hline \text { Gross Profit } & 57.9 \% & 52.2 \% \\\hline \text { Operating expenses: } & & \\\hline \text { Sales and marketing expense } & 26.3 \% & 8.6 \% \\\hline \text { General and administrative expense } & 12.0 \% & 10.8 \% \\\hline \text { Research and development expense } & 4.1 \% & 10.2 \% \\\hline \text { Total operating expenses } & 42.4 \% & 29.6 \% \\\hline & & \\\hline \text { Income before income tax } & 15.5 \% & 22.6 \% \\\hline \text { Income tax expense } & 3.3 \% & 5.8 \% \\\hline \text { Net income(loss) } & 12.3 \% & 16.8 \% \\\hline\end{array}$$

-
Based on the above data, an analyst could conclude that Arlington's total net income is higher than the industry average.

Question 64

The Arlington Company prepared a common-size income statement to compare its results with its key competitor, Bardo Company. Please refer to the following data:
$$\begin{array} { | l | r | r | } \hline & \text { Arlington Co. } &{ \text { Bardo Co. } } \\\hline \text { Revenues } & 100.0 \% & 100.0 \% \\\hline \text { Cost of goods sold } & 42.1 \% & 47.8 \% \\\hline \text { Gross Profit } & 57.9 \% & 52.2 \% \\\hline \text { Operating expenses: } & & \\\hline \text { Sales and marketing expense } & 26.3 \% & 8.6 \% \\\hline \text { General and administrative expense } & 12.0 \% & 10.8 \% \\\hline \text { Research and development expense } & 4.1 \% & 10.2 \% \\\hline \text { Total operating expenses } & 42.4 \% & 29.6 \% \\\hline & & \\\hline \text { Income before income tax } & 15.5 \% & 22.6 \% \\\hline \text { Income tax expense } & 3.3 \% & 5.8 \% \\\hline \text { Net income(loss) } & 12.3 \% & 16.8 \% \\\hline\end{array}$$

-
Based on this data, an analyst could conclude that Arlington's performance is not as good as Bardo's because it has much higher sales and marketing expenses.

Question 65

If you are comparing your company's results with those of other companies in the industry, the process is called:

A) a horizontal analysis.
B) a trend analysis.
C) benchmarking.
D) sensitivity analysis.

Question 66

Arlington Company wishes to compare itself to a key competitor, but that company is much larger in size than Arlington. Please refer to the following income statement information:
$\begin{array}{|l|r|r|}\hline&\text { Arlington Co. } & \text { Bardo } \mathrm{Co.} \\\hline \text { Revenues } & \$ 8,000 & \$ 46,000 \\\hline \text { Cost of revenues } & 3,370 & 22,000 \\\hline \text { Gross Profit } & 4,630& 24,000 \\\hline \text { Operating expenses: } & & \\\hline \text { Sales and marketing expense } & 2,100 & 3,951 \\\hline \text { General and administrative expense } & 960 & 4,98 \\\hline \text { Research and development expense } & 330 & 4,691 \\\hline \text { Total operating expenses } & \$ 3,390 & \$ 13,601 \\\hline\\\hline \text { Income before income tax } & \$ 1,240 & \$ 10,380 \\\hline \text { Income tax expense } & 260 & 2,670 \\\hline \text { Net income/(loss) } & \$ 980 & \$ 7,710 \\\hline\end{array}$

Please prepare a common-size income statement for the two companies using the following format.
(Round all amounts to the nearest tenth of a percent.)
$$\begin{array} { | l | l | l | } \hline & \text { Arlington Co. } & \text { Bardo Co. } \\\hline \text { Revenues } & & \\\hline \text { Cost of revenues } & & \\\hline \text { Gross Profit } & & \\\hline \text { Operating expenses: } & & \\\hline \text { Sales and marketing expense } & & \\\hline \text { General and administrative expense } & & \\\hline \text { Research and development expense } & & \\\hline \text { Total operating expenses } & & \\\hline & & \\\hline \text { Income before income tax } & & \\\hline \text { Income tax expense } & & \\\hline \text { Net income(loss) } & & \\\hline\end{array}$$

Question 67

Arlington Company has prepared the following common-size income statement to compare its performance with industry averages:
$$\begin{array} { | l | r | r | } \hline & \text { Arlington Co. } & \text { Industry } \\\hline \text { Revenues } & 100.0 \% & 100.0 \% \\\hline \text { Cost of goods sold } & 43.8 \% & 39.7 \% \\\hline \text { Gross Profit } & 56.2 \% & 60.3 \% \\\hline \text { Operating expenses: } & & \\\hline \text { Sales and marketing expense } & 18.1 \% & 21.4 \% \\\hline \text { General and administrative expense } & 12.0 \% & 14.2 \% \\\hline \text { Research and development expense } & 4.1 \% & 4.0 \% \\\hline \text { Total operating expenses } & 34.2 \% & 39.6 \% \\\hline & & \\\hline \text { Income before income tax } & 22.0 \% & 20.7 \% \\\hline \text { Income tax expense } & 4.4 \% & 4.2 \% \\\hline \text { Net income(loss) } & 17.6 \% & 16.5 \% \\\hline\end{array}$$

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Based on the above data, an analyst could conclude that Arlington achieves better results than the industry average by controlling its operating expenses more effectively.

Question 68

Which of the following is the definition of benchmarking?

A) Benchmarking is the study of percentage changes in financial statement line items year to year.
B) Benchmarking is the analysis of a financial statement that shows each item as a percentage of net sales or total assets.
C) Benchmarking is the practice of comparing a company with other companies in that industry.
D) Benchmarking is the comparison of two companies using horizontal analysis.

Question 69

If an analyst wishes to compare several different companies that vary in size, which of the following types of financial statement analysis would be used?

A) Vertical analysis
B) Horizontal analysis
C) Ratio analysis
D) Common-size financial statement analysis

Question 70

The current ratio is widely used to measure a company's ability to pay current liabilities.

Question 71

The Arlington Company prepared a common-size income statement to compare its results with its key competitor, Bardo Company. Please refer to the following data:
$$\begin{array} { | l | r | r | } \hline & \text { Arlington Co. } & { \text { Bardo Co. } } \\\hline \text { Revenues } & 100.0 \% & 100.0 \% \\\hline \text { Cost of goods sold } & 42.1 \% & 47.8 \% \\\hline \text { Gross Profit } & 57.9 \% & 52.2 \% \\\hline \text { Operating expenses: } & & \\\hline \text { Sales and marketing expense } & 26.3 \% & 8.6 \% \\\hline \text { General and administrative expense } & 12.0 \% & 10.8 \% \\\hline \text { Research and development expense } & 4.1 \% & 10.2 \% \\\hline \text { Total operating expenses } & 42.4 \% & 29.6 \% \\\hline & & \\\hline \text { Income before income tax } & 15.5 \% & 22.6 \% \\\hline \text { Income tax expense } & 3.3 \% & 5.8 \% \\\hline \text { Net income(loss) } & 12.3 \% & 16.8 \% \\\hline\end{array}$$

-
Which of the following statements can be correctly concluded from the above data?

A) Arlington's cost of goods sold is lower than Bardo's on a per unit basis.
B) Arlington produces a higher amount of gross profit than Bardo.
C) Arlington makes less total net income than Bardo.
D) Bardo has more effective cost control than Arlington in the area of operating expenses.

Question 72

The inventory turnover ratio indicates how rapidly inventory is sold.

Question 73

Rate of return on net sales is a measure of a company's profitability.

Question 74

Arlington Company has prepared the following common-size income statement to compare its performance with industry averages:
$$\begin{array} { | l | r | r | } \hline & \text { Arlington Co. } & \text { Industry } \\\hline \text { Revenues } & 100.0 \% & 100.0 \% \\\hline \text { Cost of goods sold } & 43.8 \% & 39.7 \% \\\hline \text { Gross Profit } & 56.2 \% & 60.3 \% \\\hline \text { Operating expenses: } & & \\\hline \text { Sales and marketing expense } & 18.1 \% & 21.4 \% \\\hline \text { General and administrative expense } & 12.0 \% & 14.2 \% \\\hline \text { Research and development expense } & 4.1 \% & 4.0 \% \\\hline \text { Total operating expenses } & 34.2 \% & 39.6 \% \\\hline & & \\\hline \text { Income before income tax } & 22.0 \% & 20.7 \% \\\hline \text { Income tax expense } & 4.4 \% & 4.2 \% \\\hline \text { Net income(loss) } & 17.6 \% & 16.5 \% \\\hline\end{array}$$
Which of the following statements can be correctly concluded from the above data?

A) Arlington's gross profit per dollar of sales is higher than the industry average.
B) Arlington's net income is higher than the industry average.
C) Arlington achieves better results than the industry by earning higher revenues.
D) Arlington achieves better profitability than the industry, primarily by controlling operating expenses more effectively.

Question 75

The Arlington Company wishes to compare its performance with industry averages. Please refer to the data below:
$$\begin{array} { | l | r | r | } \hline & \text { Arlington Co. } & { \text { Industry } } \\\hline \text { Revenues } & \$ 8,000 & \$ 98,000 \\ \hline \text { Cost of goods sold } & \$ 3,500 & \$ 38,900 \\\hline \text { Gross Profit } & \$ 4,500 & \$ 59,100 \\\hline\text { Operating expenses: }\\\hline \text { Operating expenses: } & \$ 1,450 &\$21,000 \\\hline \text { Sales and marketing expense } & \$ 960 & \$13,900 \\\hline \text { General and administrative expense } & \$ 330 & \$ 3,880 \\\hline \text { Research and development expense } & \$ 2,740 & \$ 38,780 \\\hline \text { Total operating expenses } & &\\\hline \text { Income before income tax } & \$ 1,760 & \$ 20,320 \\\hline \text { Income tax expense } & \$ 350 &\$4,100 \\\hline \text { Net income(loss) } &\$ 1,410 & \$ 16,100\\\hline\end{array}$$
Please prepare common-sized income statement using the format below. (Round all amounts to the nearest tenth of a percent.)
$$\begin{array} { | l | l | l | } \hline & \text { Arlington Co. } & \text { Bardo Co. } \\\hline \text { Revenues } & & \\\hline \text { Cost of revenues } & & \\\hline \text { Gross Profit } & & \\\hline \text { Operating expenses: } & & \\\hline \text { Sales and marketing expense } & & \\\hline \text { General and administrative expense } & & \\\hline \text { Research and development expense } & & \\\hline \text { Total operating expenses } & & \\\hline & & \\\hline \text { Income before income tax } & & \\\hline \text { Income tax expense } & & \\\hline \text { Net income(loss) } & & \\\hline\end{array}$$

Question 76

Arlington Company has prepared the following common-size income statement to compare its performance with industry averages:
$$\begin{array} { | l | r | r | } \hline & \text { Arlington Co. } & \text { Industry } \\\hline \text { Revenues } & 100.0 \% & 100.0 \% \\\hline \text { Cost of goods sold } & 43.8 \% & 39.7 \% \\\hline \text { Gross Profit } & 56.2 \% & 60.3 \% \\\hline \text { Operating expenses: } & & \\\hline \text { Sales and marketing expense } & 18.1 \% & 21.4 \% \\\hline \text { General and administrative expense } & 12.0 \% & 14.2 \% \\\hline \text { Research and development expense } & 4.1 \% & 4.0 \% \\\hline \text { Total operating expenses } & 34.2 \% & 39.6 \% \\\hline & & \\\hline \text { Income before income tax } & 22.0 \% & 20.7 \% \\\hline \text { Income tax expense } & 4.4 \% & 4.2 \% \\\hline \text { Net income(loss) } & 17.6 \% & 16.5 \% \\\hline\end{array}$$

-
This is an example of benchmarking.

Question 77

Which of the following is NOT true of benchmarking?

A) It is used to compare companies of different sizes.
B) It uses vertical analysis as its primary methodology.
C) It is used to compare a company against its competitors.
D) It is used to compare a company's results against industry averages.

Question 78

Benchmarking means comparing a company's financial results to:

A) industry standards or competitors.
B) its own results in prior years.
C) its budget for the coming year.
D) the expectations of the capital markets.

Question 79

Which of the following balance sheet displays shows only percentages?

A) Horizontal analysis balance sheet
B) A common-size balance sheet
C) A vertical analysis balance sheet
D) A balance sheet as shown in the annual report of a company

Question 80

The inventory turnover ratio is a measure of the company's ability to pay all of its current liabilities if they come due immediately.