Deck 17: Financial Statement Analysis

Question 1

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

Answer 1

False

Question 2

An adverse opinion is issued if the auditor finds that the financial statements are not presented fairly.

Answer 2

True

Question 3

An annual report provides information about a company's financial condition.

Answer 3

True

Question 4

A quarterly report filed with the Securities and Exchange Commission is called a Form 10-K.

Question 5

Which of the following best describes trend analysis?

A) calculating key ratios to evaluate performance
B) expressing each figure as a percentage of a budgeted figure
C) comparing a company's financial statements with that of other companies
D) expressing each year's figures as a percentage of the base year figures

Question 6

An external auditor is responsible for assessing the effectiveness of a company's internal controls.

Question 7

The following is summary of information presented on the financial statements of a company on December 31, 2015. $$\begin{array} { | l | r | r | } \hline \text { Account } & { \mathbf { 1 0 1 5 } } & { \mathbf { 2 0 1 4 } } \\\hline \text { Net Sales Revenue } & \$ 600,000 & \$ 500,000 \\\hline \text { Cost of Goods Sold } & \underline { 450,000 } & \underline { 400,000 } \\\hline \text { Gross Profit } & \$ 150,000 & \$ 100,000 \\\hline \text { Selling Expenses } & \underline { 50,000 } & \underline { 50,000 } \\\hline \text { Net income before income taxexpense } & \$ 100,000 & \$ 50,000 \\\hline \text { Income taxexpense } & \underline { 35,000 } & \underline { 18,000 } \\\hline \text { Net Income } & \underline { \$ 65,000 } & \$ 32,000 \\\hline\end{array}$$ What would a horizontal analysis report show with respect to net income?

A) both net income before income tax expense and net income are 45.45% of net sales revenue
B) a $25,000 increase in net income
C) a 45.45% increase in net income
D) a 103% increase in net income

Question 8

Management's discussion and analysis section of the annual report is the company's attempt to explain its financial statements and to discuss its performance.

Question 9

The study of percentage changes in comparative financial statements is called horizontal analysis.

Question 10

The audit report is prepared by an internal auditor of a company.

Question 11

Trend analysis is a form of horizontal analysis.

Question 12

Which of the following best describes horizontal analysis?

A) comparing figures from year to year for the same company
B) expressing each figure as a percentage of a budgeted figure
C) comparing a company's financial statements with other companies
D) calculating key ratios to evaluate performance

Question 13

The income statement is also known as the:

A) statement of operations.
B) statement of cash flows.
C) statement of stockholders' equity.
D) statement of financial position.

Question 14

If an analyst wants to see how assets of a company have changed from one year to the next, horizontal analysis must be used.

Question 15

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

Question 16

An unqualified opinion in an audit report states that the financial statements are presented fairly, in all material respects.

Question 17

The following is summary of information presented on the financial statements of a company on December 31, 2015. $$\begin{array} { | l | r | r | } \hline \text { Account } & { \mathbf { 1 0 1 5 } } & \ { \mathbf { 2 0 1 4 } } \\\hline \text { Current Assets } & \$ 65,000 & \$ 50,000 \\\hline \text { Accounts Receivable } & 80,000 & 75,000 \\\hline \text { Merchandise Inventory } & 50,000 & 40,000 \\\hline \text { Current Liabilities } & 75,000 & 50,000 \\\hline \text { Long-term Liabilities } & 30,000 & 50,000 \\\hline \text { Common Stock } & 50,000 & 40,000 \\\hline \text { Retained Earnings } & 40,000 & 25,000 \\\hline & & \\\hline \text { Net Sales Revenue } & \$ 525,000 & \$ 500,000 \\\hline \text { Cost of Goods Sold } & \underline { 400,000 } & \underline { 395,000 } \\\hline \text { Gross Profit } & \$ 125,000 & \$ 105,000 \\\hline \text { Selling Expenses } & \underline { 45,000 } & \underline { 50,000 } \\\hline \text { Net income before income taxexpense } & \$ 80,000 & \$ 55,000 \\\hline \text { Income taxexpense } & 24,000 & \underline { 16,500 } \\\hline \text { Net Income } & \underline { \$ 56,000 } & \$ 38,500 \\\hline\end{array}$$ What would a horizontal analysis report show with respect to current liabilities?

A) 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

Question 18

A summary of significant accounting policies and explanations of specific items on the financial statements will be given in:

A) the balance sheet.
B) the income statement.
C) notes to financial statements.
D) the report of independent registered public accounting firm.

Question 19

The audit report attests to the fairness of the presentation of the financial statements.

Question 20

Which of the following types of financial statement analysis would be used to see how sales revenue of a company has changed from one year to the next?

A) vertical analysis of balance sheet
B) horizontal analysis of income statement
C) horizontal analysis of balance sheet
D) vertical analysis of income statement

Question 21

Data for Nobell Inc. follow:
Prepare a horizontal analysis of the comparative income statement of Nobell Inc. Round percentage changes to one decimal place. Please use a multiple step income statement.

Question 22

Donald Corp. reported the following revenues and net income amounts.
Calculate Donald's trend analysis for revenues and cost of goods sold. Use 2013 as the base year, and round to the nearest percent.

Question 23

The following is summary of information presented on the financial statements of a company on December 31, 2015. $$\begin{array} { | l | r | r | } \hline \text { Account } & { \mathbf { 2 0 1 5 } } & \mathbf { 2 0 1 4 } \\\hline \text { Current Assets } & \$ 82,000 & \$ 70,000 \\\hline \text { Accounts Receivable } & 60,000 & 68,000 \\\hline \text { Merchandise Inventory } & 62,000 & 53,000 \\\hline \text { Current Liabilities } & 52,000 & 46,000 \\\hline \text { Long-term Liabilities } & 39,000 & 45,000 \\\hline \text { Common Stock } & 70,000 & 50,000 \\\hline \text { Retained Earnings } & 65,000 & 40,000 \\\hline\end{array}$$ What would a horizontal analysis report show with respect to long-term liabilities?

A) long-term liabilities decreased by $30,000
B) long-term liabilities decreased by 40%
C) long-term liabilities decreased by 13.33%
D) long-term liabilities decreased by $10,000

Question 24

The following is summary of information presented on the financial statements of a company on December 31, 2015. $$\begin{array} { | l | r | r | } \hline \text { Nccount } & { \mathbf { 2 0 1 5 } } & { \mathbf { 2 0 1 4 } } \\\hline \text { Net Sales Revenue } & \$ 600,000 & \$ 500,000 \\\hline \text { Cost of Goods Sold } & \underline { 450,000 } & \underline { 400,000 } \\\hline \text { Gross Profit } & \$ 150,000 & \$ 100,000 \\\hline \text { Selling Expenses } & \underline { 50,000 } & \underline { 50,000 } \\\hline \text { Net income before income taxexpense } & \$ 100,000 & \$ 50,000 \\\hline \text { Income taxexpense } & \underline { 35,000 } & \underline { 18,000 } \\\hline \text { Net Income } & \$ 65,000 & \$ 32,000 \\\hline\end{array}$$ What would a horizontal analysis report show with respect to net sales revenue?

A) a 20% increase in net sales revenue
B) a 120% decrease in net sales revenue
C) a decrease of $ 50,000 in net sales revenue
D) an increase of $50,000 in net sales revenue

Question 25

Data for Nobell Inc. is as follows:
Assets
Current Assets:
Liabilities
Stockholders' Equity
Prepare a horizontal analysis of the comparative balance sheet of Nobell Inc. Round percentage changes to one decimal place.

Question 26

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

Question 27

Data for Atlantis Inc. is given below:
Assets
Current Assets:
Liabilities
Stockholders' Equity
Prepare a horizontal analysis of the comparative balance sheet of Atlantis Inc. Round percentage changes to one decimal place.

Question 28

An analysis of a financial statement that reveals the relationship of each statement item to its base amount, which is the 100% figure, is known as vertical analysis.

Question 29

Atlantis Inc. reported the following data: $$\begin{array} { | l r r r c | } \hline & & { \text { Increase(Decrease) } } \\\text { (in millions) } & 2015 & 2014 & \text { Amount } & \text { Percentage } \\\text { Assets } & & & \\\text { Current assets: } & & & \\\text { Cash } & \$ 10,000 & \$ 7,200 & \$ 2,800 & 38.9 \% \\\text { Accounts receivable, net } & 15,600 & 16,800 & ( 1,200 ) & ( 7.1 ) \% \\\text { Merchandise Inventory } & 38,000 & 31,000 & 7,000 & 22.6 \% \\\text { Total current assets } & 63,600 & 55,000 & 8,600 & 15.6 \% \\\text { Property, plant and equipment, net } & 195,000 & 168,000 & 27,000 & 16.1 \% \\\text { Other long-term assets } & 15,000 & 27,100 & ( 12,100 ) & ( 44.6 \% ) \\\text { Total assets } & \$ 273,600 & \$ 250,100 & \$ 23,500 & 9.4 \% \\\hline\end{array}$$ $\begin{array}{c}\begin{array}{lll}\text {Liabilities}\\ \text {Current liabilities:}\\ \text {Accounts payable}\\ \text {Other current liabilities}\\ \text {Total current liabilities}\\ \text {Long-term notes payable}\\ \text {Total liabilities}\\ \text {Stockholders' Equity}\\ \text {Common stock}\\ \text {Paid-in capital in excess of par}\\ \text {Retained earnings}\\ \text {Total stockholders'equity}\\ \text {Total liabilities and stockholders' equity}\end{array}\begin{array}{r}\\\\\$ 8,500 \\1,400 \\\hline 9,900 \\54,000 \\\hline \$ 63,900 \\\\\$ 12,000 \\149,000 \\48,700 \\\hline \$ 209,700 \\\hline \$ 273,600 \\\hline\end{array}\begin{array}{r}\\\\\$ 7,300 \\3,900 \\ \hline11,200 \\30,000 \\\hline \$ 41,200 \\\\\$ 12,000 \\149,000 \\47,900 \\\hline\$ 208,900 \\\hline \$ 250,100 \\\hline\end{array}\begin{array}{r}\\\\\$ 1,200 \\(2,500) \\\hline(1,300) \\24,000 \\\hline \$ 22,700 \\\\\$ 0 \\0 \\800 \\\hline \$ 800 \\\hline \$ 23,500 \\\hline\end{array}\begin{array}{c}\\\\16.4 \% \\(64.1 \%) \\\hline(11.6 \%) \\80.0 \% \\\hline 55.1 \% \\\\0.0 \% \\0.0 \% \\1.7 \% \\\hline 0.4 \% \\\hline 9.4 \%\\\hline \end{array}\end{array}$
The horizontal report shows that the amount of total liabilities has:

A) increased by $22,700.
B) increased by $2,500.
C) decreased by $2,500.
D) increased by $24,000.

Question 30

Vertical analysis involves comparing each figure in the financial statements with a corresponding figure of the previous year.

Question 31

In a vertical analysis of the balance sheet, each line item is shown as a percentage of shareholders' equity.

Question 32

Atlantis Inc. provides the following historical data:
Prepare the trend analysis report Use 2011 as the base year, and round answers to the nearest percent.

Question 33

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

Question 34

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

Question 35

Donald Corp. reported the following on its comparative income statement:
Prepare a horizontal analysis of revenues and cost of goods sold, both in dollar amounts and in percentages, for 2016 and 2017. Round your percentage answers to two decimal places.

Question 36

The trend analysis report of Doppler Inc. is given below: $$\begin{array} { | l | r | r | r | r | r | } \hline \text { In millions) } & 2017 & 2016 & 2015 & 2014 & 2013 \\\hline \text { Net income } & \$ 650 & \$ 602 & \$ 456 & \$ 403 & \$ 398 \\\hline \text { Trend percentages } & 163 & 151 & 115 & 101 & 100 \\\hline\end{array}$$ Which of the following is a correct conclusion from the above analysis?

A) Net income for the year 2015 has increased by 115% over that for the year 2013.
B) Net income for the year 2015 has decreased by 15% over that for the year 2013.
C) Net income for the year 2015 has decreased by 115% over that for the year 2013
D) Net income for the year 2015 has increased by 15% over that for the year 2013.

Question 37

Benchmarking is the practice of comparing a company with other leading companies.

Question 38

The trend analysis report of Doppler Inc. is given below: $$\begin{array} { | l | r | r | r | r | r | } \hline \text { In millions) } & 2017 & 2016 & 2015 & 2014 & 2013 \\\hline \text { Net income } & \$ 650 & \$ 602 & \$ 456 & \$ 403 & \$ 398 \\\hline \text { Trend percentages } & 163 & 151 & 115 & 101 & 100 \\\hline\end{array}$$ Which of the following is a correct conclusion from the above analysis?

A) Net income for the year 2016 is 151% of that for the year 2013.
B) Net income for the year 2016 is 151% of previous year.
C) Net income for the year 2016 decreased by 151% from 2015.
D) Net income for the year 2017 increased by 163% from 2016.

Question 39

Data for Atlantis Inc. follow:
Expenses:
Prepare a horizontal analysis of the comparative income statement of Atlantis Inc. Round percentage changes to one decimal place. Use a multiple step format for the income statement.

Question 40

Atlantis Inc. reported the following data: The horizontal analysis report shows that the cost of goods sold has:

A) increased by 29.2%.
B) decreased by 29.2%.
C) increased by 53.2%.
D) decreased by 53.2%

Question 41

Working capital measures the ability to meet long-term obligations with current assets.

Question 42

A common-size statement reports only percentages that appear in a:

A) horizontal analysis report.
B) financial statement.
C) vertical analysis report.
D) ratio analysis report.

Question 43

Acid-test ratio helps to measure a company's ability to pay all its current liabilities if they came due immediately.

Question 44

Atlantis Inc. has the following data:
Assets
Liabilities
Stockholders' Equity
Perform a vertical analysis of Atlantis's balance sheet for each year. Round your percentage answers to one decimal place.

Question 45

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

A) vertical analysis
B) horizontal analysis
C) ratio analysis
D) analysis of internal control system

Question 46

Prepare the vertical analysis report of the balance sheet data given below: Round off the percentages to two decimal places
Assets
Current Assets:
Liabilities
Current Liabilities:
Stockholders' Equity

Question 47

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 48

Prepare a comparative common-size income statement for Nobell Inc. using the 2015 and 2014 data. Round off the percentages to one decimal place.
Operating Expenses:
Other Revenues and (Expenses):

Question 49

Shelcal Inc. provides the following data for the year 2015: $$\begin{array} { | l | r | } \hline \text { Sales Revenue } & \$ 400,000 \\\hline \text { Sales Returns and Allowances } & 1,200 \\\hline & \\\hline \text { Sales Discounts } & 800 \\\hline \text { Net Sales Revenue } & \$ 398,000 \\\hline\end{array}$$ On vertical analysis report, cost of goods sold as a percentage of net sales will amount to:

A) 59.42%
B) 61.15%
C) 63.48%
D) 64.07%

Question 50

A high current ratio indicates that current liabilities are more than current assets.

Question 51

Prepare a vertical analysis report of the income statement shown below. Round off the percentages to two decimal places.
Operating Expenses:
Other Revenues and (Expenses):

Question 52

The vertical analysis statement of Nobell Inc. is as below: The figure 16.5% shown for net income in 2015 signifies that:

A) net income is 16.5% of net sales revenues.
B) net income is increased by 16.5% over the previous year.
C) net income is 16.5% of gross profit.
D) net income is equal to 16.5 times of the income before income tax.

Question 53

The current ratio is calculated as the total current assets divided by the total current liabilities.

Question 54

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 55

The vertical analysis statement of Nobell Inc. is as below: The figure 47.0% shown for gross profit in 2016 signifies that:

A) gross profit is equal to 47.0% of net income.
B) gross profit is increased by 47.0% over the previous year.
C) gross profit is 47.0% of net sales revenue.
D) gross profit is 47.0% of cost of goods sold.

Question 56

Olivera Inc. provides the following data for the year 2015: $$\begin{array} { | l | r | } \hline \text { Sales Revenue } & \$ 625,000 \\\hline \text { Sales Returns and Allowances } & 20,000 \\\hline & \\\hline \text { Sales Discounts } & 5,000 \\\hline \text { Net Sales Revenue } & \$ 600,000 \\\hline\end{array}$$ On vertical analysis report, gross profit as a percentage of net sales will be:

A) 35.9%
B) 41.67%
C) 56.1%
D) 44.1%

Question 57

Data for Martin Corp and Tortoize Inc. as follows:
Prepare a comparative common-size income statement for Martin Corp and Tortoize Inc. for the year ending December 31, 2016. Round off the percentages to two decimal places. Use a multiple step format for the income statement.

Question 58

The cash ratio helps to determine a company's ability to meet its short-term obligations using cash and cash equivalents.

Question 59

The merchandise inventory turnover ratio measures how profitably a company sells its average level of merchandise inventory during a year.

Question 60

To calculate the acid-test ratio, merchandise inventory and prepaid expenses are ignored.

Question 61

The net income of a company for the year ended was $500,000. The company has no preferred stock. Common stockholders' equity was $1,000,000 at the beginning of the year and $2,000,000 at the end of the year. Calculate the return on common stockholders' equity.

A) 18.75%
B) 20.00%
C) 21.43%
D) 33.33%

Question 62

The debt ratio is the ratio of total debt divided by total equity.

Question 63

Days' sales in receivables measures the return on average receivables using credit sales.

Question 64

The asset turnover rate is a way to evaluate how well a company can pay its short-term liabilities.

Question 65

The accounts receivable turnover is an indicator of the ability of a company to collect cash from its credit customers.

Question 66

The times-interest-earned ratio measures the number of times that operating income can pay interest expense.

Question 67

The times-interest-earned ratio is also known as interest-coverage ratio.

Question 68

Rate of return on assets measures how efficiently the assets are used to earn a profit.

Question 69

The price/earnings ratio indicates the:

A) dividend yield of the company.
B) market price of $1 of earnings.
C) proportion of total assets financed by debt.
D) ease of selling merchandise inventory.

Question 70

The gross profit percentage is an indicator of how well a company is positioned to pay off its short-term liabilities.

Question 71

The dividend payout ratio indicates the amount of the dividend as a proportion of a share's market price.

Question 72

The price/earnings ratio shows the market price of $1 of earnings.

Question 73

A corporation has 2,000 shares, 10% preferred stock of $50 par, and 6,000 shares of common stock outstanding. The net income for the year is $250,000. Calculate earnings per share.

A) $50
B) $40
C) $42
D) $125

Question 74

The debt to equity ratio shows the proportion of total liabilities relative to total equity.

Question 75

The ratio of the market price of a share of stock to the dividends paid per share is called the earnings per share.

Question 76

Days' sales in inventory is a ratio measure that shows how quickly a company can collect its receivables.

Question 77

Rate of return on common stockholders' equity shows how much income is earned for each $1 invested by the common shareholders.

Question 78

The current ratio is a key indicator of a company's ability to pay current liabilities.

Question 79

As per FASB guidelines, earnings per share should appear on the face of the income statement.

Question 80

Which of the following items is a measure of a company's ability to collect receivables?

A) inventory turnover ratio
B) current ratio
C) day's sales in receivables
D) account receivable balance