CHAPTER 14

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TRUE-FALSE STATEMENTS
1. Intracompany comparisons of the same financial statement items can
often detectchanges in financial relationships and significant trends
2. Calculating financial ratios is a financial reporting requirement under IFRS
3. Measures of a company's liquidity are concerned with the frequency and
amounts ofdividend payments
4. Analysis of financial statements is enhanced with the use of comparative data.
5. Comparisons of company data with industry averages can provide some insight into
thecompany's relative position in the industry.
6. Vertical and horizontal analyses are concerned with the format used to prepare
financialstatements
7. Horizontal, vertical, and circular analyses are the most common tools of
financialstatement analysis
8. Horizontal analysis is a technique for evaluating a financial statement item in the
currentyear compared to other items in the current year.
9. Another name for trend analysis is horizontal analysis
10. If a company has sales revenue of $110 in 2016 and $154 in 2017, the
percentage increase in sales revenue from 2016 to 2017 is 140%.
11. In horizontal analysis, if an item has a negative amount in the base year, and a
positiveamount in the following year, no percentage change for that item can be
computed
12. Common size analysis expresses each item within a financial statement in terms of
apercent of a base amount.
13. Vertical analysis is a more sophisticated analytical tool than horizontal analysis
14. Vertical analysis is useful in making comparisons of companies of different sizes.
15. Meaningful analysis of financial statements will include either horizontal or
verticalanalysis, but not both.
16. Using vertical analysis of the income statement, a company's net income as a
percentageof net sales is 10%; therefore, the cost of goods sold as a percentage of net
sales must be90%.
Analysis
17. In the vertical analysis of the income statement, each item is generally
stated as apercentage of net income.
18. A ratio can be expressed as a percentage, a rate, or a proportion.
19. A solvency ratio measures the income or operating success of an enterprise for a
given period of time.
20. The current ratio is a measure of all the ratios calculated for the current year.
21. Inventory turnover measures the number of times on average the inventory
was sold during the period.
22. Profitability ratios are frequently used as a basis for evaluating management's
operating effectiveness.
23. The rate of return on total assets will be greater than the rate of return
on ordinary shareholders' equity if the company has been successful in trading on the
equity at a gain.
24. From a creditor's point of view, the higher the debt to total assets ratio, the lower the
riskthat the company may be unable to pay its obligations.
25. A current ratio of 1.2 to 1 indicates that a company's current assets exceed its
currentliabilities.
26. Using borrowed money to increase the rate of return on ordinary shareholders'
equity iscalled "trading on the equity."
27. When the disposal of a significant component occurs, the income statement should
reportboth income from continuing operations and income (loss) from discontinued
operations.
28. Companies report most changes in accounting principles under other income and
expense.
29. Comprehensive income includes all changes in equity during a period except those
resulting from investments by shareholders and distributions to shareholders.
31. The three basic tools of analysis are horizontal analysis, vertical
analysis, and ratioanalysis.
32. A percentage change can be computed only if the base amount is zero or
positive.Ans: F,
33. In vertical analysis, the base amount in an income statement is usually net
sales.Ans: T, LO:
34. Profitability ratios measure the ability of the enterprise to survive over a long period
oftime.
35. The days in inventory is computed by multiplying inventory turnover by 365.Ans: F,
LO: 5, Bloom
36. Pro forma income usually excludes items that the company thinks are unusual
ornonrecurring.
MULTIPLE CHOICE QUESTIONS

37. Which one of the following is primarily interested in the liquidity of a company?
a. Government agencies
b. Shareholders
c. Long-term creditors
d. Short-term creditors
Ans: d
38. Which one of the following is not a characteristic generally evaluated in analyzing
financial statements?
a. Liquidity
b. Profitability
c. Marketability
d. Solvency
Ans: c
39. In analyzing the financial statements of a company, a single item on the financial
statements
a. should be reported in bold-face type.
b. is more meaningful if compared to other financial information.
c. is significant only if it is large.
d. should be accompanied by a footnote.
Ans: b
40. Short-term creditors are usually most interested in evaluating
a. solvency.
b. liquidity.
c. marketability.
d. profitability
Ans: b
41. Long-term creditors are usually most interested in evaluating
a. liquidity and solvency.
b. solvency and marketability.
c. liquidity and profitability.
d. profitability and solvency.
Ans: d
42. Shareholders are most interested in evaluating
a. liquidity and solvency.
b. profitability and solvency.
c. liquidity and profitability.
d. marketability and solvency.
Ans: b
43. A shareholder is interested in the ability of a firm to
a. pay consistent dividends.
b. appreciate in share price.
c. survive over a long period.
d. All of these answer choices are correct.
Ans: d
44. Comparisons of financial data made within a company are called
a. intracompany comparisons.
b. interior comparisons.
c. intercompany comparisons.
d. intramural comparisons.
Ans: a
45. A technique for evaluating financial statements that expresses the relationship
among selected items of financial statement data is
a. common size analysis.
b. horizontal analysis.
c. ratio analysis.
d. vertical analysis.
Ans: c
46. 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
Ans: b
47. In analyzing financial statements, horizontal analysis is a
a. requirement.
b. tool.
c. principle.
d. theory.
Ans: b
48. Horizontal analysis is also called
a. linear analysis.
b. vertical analysis.
c. trend analysis.
d. common size analysis.
Ans: c

49. Vertical analysis is also known as

a. perpendicular analysis.
b. common size analysis.
c. trend analysis.
d. straight-line analysis.
Ans: b

50. In ratio analysis, the ratios are never expressed as a

a. rate.
b. variable.
c. percentage.
d. simple proportion.
Ans: b

51. The formula for horizontal analysis of changes since the base period is the current
year amount
a. divided by the base year amount.
b. minus the base year amount divided by the base year amount.
c. minus the base year amount divided by the current year amount.
d. plus the base year amount divided by the base year amount.
Ans: b

52. Horizontal analysis evaluates a series of financial statement data over a period of
time
a. that has been arranged from the highest number to the lowest number.
b. that has been arranged from the lowest number to the highest number.
c. to determine which items are in error.
d. to determine the amount and/or percentage increase or decrease that has taken
place.
Ans: d

53. Horizontal analysis evaluates financial statement data

a. within a period of time.
b. over a period of time.
c. on a certain date.
d. as it may appear in the future.
Ans: b

54. Assume the following sales data for a company:

2019 €1,600,000
2018 1,280,000
2017 1,120,000
2016 1,000,000
If 2016 is the base year, what is the percentage increase in sales from 2016 to 2018?
a. 60%
b. 128%
c. 28%
d. 78%
Ans: c,

55. Comparative statements of financial position are usually prepared for

a. one year.
b. two years.
c. three years.
d. four years.
Ans: b
56. Horizontal analysis is appropriately performed
a. only on the income statement.
b. only on the statement of financial position.
c. only on the statement of retained earnings.
d. on all three of the major financial statements.
Ans: d

57. A horizontal analysis performed on a statement of retained earnings would not show
a percentage change in
a. dividends declared.
b. net income.
c. expenses.
d. beginning retained earnings
Ans: c,

58. Under which of the following cases may a percentage change be computed?
a. The trend of the balances is decreasing but all balances are positive.
b. There is no balance in the base year.
c. There is a positive balance in the base year and a negative balance in the
subsequent year.
d. There is a negative balance in the base year and a positive balance in the
subsequent year.
Ans: a

59. Assume the following sales data for a company:

2018 €945,000
2017 877,500
2016 675,000
If 2016 is the base year, what is the percentage increase in sales from 2016 to 2017?
a. 77%
b. 30%
c. 40%
d. 71%
Ans: b,

60. Assume the following cost of goods sold data for a company:
2018 €1,704,000
2017 1,400,000
2016 1,200,000
If 2016 is the base year, what is the percentage increase in cost of goods sold from
2016 to 2018?
a. 70%
b. 42%
c. 86%
d. 117%