3/15/2017 Wiley CMA Test Bank Part 2

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Question 1:
(2A1-LS02)

A common-size statement is helpful:

for determining the next investment the company should make.
for considering whether to buy or sell assets.
in comparing companies of different sizes.
for figuring out how assets are allocated.

A common-size statement shows each major section of the financial statement valued at
100%, with its elements as percentages of the total, and is helpful when comparing
companies of different sizes and when making comparisons from one year to another
within the same company.

Question 2:
(2A1-AT04)

Gordon has had the following financial results for the last four years.

Which one of the following is the most likely conclusion you can draw from this information?
Gordon should consider raising prices because the cost of goods sold (COGS) has gone
up faster than sales.
Gordon should seek additional outlets for its goods to increase profitable sales.
Customers continue to see Gordon's products as a good value for the price.
The sales growth may have been caused by inflation, not more effective marketing.

Over the four-year time span shown for this problem, sales have increased by 12%, which is
calculated as:

Change in sales = (Sales, year 4 − Sales, year 1)/(Sales, year 1)

Change in sales = ($1,400,000 − $1,250,000)/$1,250,000
Change in sales = $150,000/$1,250,000 = 0.12 or 12%

During this same time period, cost of goods sold has increased by 13.3%, which is
calculated as:

Change in COGS = (COGS, year 4 − COGS, year 1)/(COGS, year 1)

Change in COGS = ($850,000 − $750,000)/$750,000 = $100,000/$750,000 = 0.133 or 13.3%

These changes have resulted in Gordon's gross profit percentage (gross profit as a
percentage of sales) dropping from 40% in Year 1 to 39.3% in Year 4.

Gross profit percentage = Sales / Gross Profit

Gross profit percentage, Year 1 = $500,000/$1,250,000 = 0.4 or 40%
Gross profit percentage, Year 4 = $550,000/$1,400,000 = 0.393 or 39.3%

In order to compensate for the decrease in the gross profit percentage, Gordon will have to
consider raising prices as well as reducing its product costs.

Question 3:
(2A1-LS01)

Which of the following statements is true regarding common-size statements?

Common-size statements indexed over two years for two companies, with both

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3/15/2017 Wiley CMA Test Bank Part 2

showing a 10% increase in profits, show that both companies would make equally
attractive investments.
All of the other three answers are correct.
Common-size statements can be used to compare companies of different sizes.
Horizontal common-size statements can be made only for companies with at least ten
years of operational data.

Common-size statements showing a 10% increase in profits for two companies do not
alone indicate that both are equally attractive investments. One of the companies may
have shown an increase in profits from $10 to $11, while the other may have shown an
increase in profits from $1,000,000 to $1,100,000. Horizontal common-size statements do
not require ten years of data.

Question 4:
(2A1-AT03)

When preparing common-size statements, items on the Balance Sheet are generally stated
as a percentage of __________ and items on the Income Statement are generally stated as a
percentage of __________.
total assets; net income.
total shareholders' equity; net income.
total shareholders' equity; net sales.
total assets; net sales.

Common-size balance sheets express all assets, liabilities, and equities as a percent of the
balance sheet footing (total assets). Common-size income statements express all sales
adjustments, expenses, gains, losses, other revenues, and taxes as a percent of sales.

Question 5:
(2A1-AT05)

The controller of OmniCorp asked a financial analyst to calculate common size financial
statements for the past four years. The controller is most likely looking for which of the
following?
How the company is earning its profits.
The growth rate for sales.
Trends in expenses as a percentage of sales.
How efficiently the company is using assets.

Common size financial statements look at each element in the statement as a percentage
of another total amount. Common size income statements show expenses as a percent of
sales, while common size balance sheets show assets, liabilities, and equities as a percent
of total assets. A series of common size income statements will show trends in expenses as
a percentage of sales.

Question 6:
(2A1-AT01)

Gordon has had the following financial results for the last four years.

Gordon has analyzed these results using vertical common-size analysis to determine trends.
The performance of Gordon can best be characterized by which one of these statements?
The common-size gross profit percentage has decreased as a result of an increasing
common-size trend in cost of goods sold.
The increased trend in the common-size gross profit percentage is the result of both the
increasing trend in sales and the decreasing trend in cost of goods sold.
The common-size trend in cost of goods sold is decreasing which is resulting in an
increasing trend in the common-size gross profit percentage.
The common-size trend in sales is increasing and is resulting in an increasing trend in
the common-size gross profit margin.

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3/15/2017 Wiley CMA Test Bank Part 2

The table below shows that the common-size gross profit percentage has decreased as a
result of an increasing common-size trend in cost of goods sold.

Question 7:
(2A1-CQ01)

Gordon has had the following financial results for the last four years.

Gordon has analyzed these results using vertical common-size analysis to determine trends.
The performance of Gordon can best be characterized by which one of the following
statements?

The common-size trend in sales is increasing and is resulting in an increasing trend in

the common-size gross profit margin.
The increased trend in the common-size gross profit percentage is the result of both the
increasing trend in sales and the decreasing trend in cost of goods sold.
The common-size gross profit percentage has decreased as a result of an increasing
common-size trend in cost of goods sold.
The common-size trend in cost of goods sold is decreasing which is resulting in an
increasing trend in the common-size gross profit percentage.

Gross profit percentage is calculated as:

Gross profit percentage = (gross profit) / (sales)

Gross profit percentage in year 1 = $500,000 / $1,250,000 = 40%
Gross profit percentage in year 2 = $515,000 / $1,300,000 = 39.6%
Gross profit percentage in year 3 = $534,000 / $1,359,000 = 39.3%
Gross profit percentage in year 4 = $550,000 / $1,400,000 = 39.3%

The decrease in gross profit percentage is caused by an increasing common-size (percent

of sales) trend in cost of goods sold.

Question 8:
(2A1-AT02)

In assessing the financial prospects for a firm, financial analysts use various techniques. An
example of vertical, common-size analysis is:
a comparison in financial form between two or more firms in different industries.
a comparison in financial ratio form between two or more firms in the same industry.
advertising expense is 2 percent of sales.
an assessment of the relative stability of a firm's level of vertical integration.

Vertical analysis looks at all items in the income statement (sales adjustments, expenses,
gains, losses, other revenues, and taxes) and will include a column which shows these
items as a percent of sales. This approach allows the analyst to compare the income
statements of different size companies, since the comparison will be done on a percentage
basis, rather than on an absolute dollar basis.

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