**ACC/206 Accounting Principles II Week 10 Quiz – Strayer**

** ACC 206 Week 10 Quiz**

**CHAP****T****E****R** **1****8**

**FINANCIALSTATEMENT** **A****N****A****L****YSIS**

**TRUE-FALSESTATEMENTS**

1. Intracompany comparisons of the same financial statement items can often detect changes in financial relationships and significant trends.

2. Calculating financial ratios is a financial reporting requirement under generally accepted accounting principles.

3. Measures of a company's liquidity are concerned with the frequency and amounts of dividend 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 the company's relative position in the industry.

6. Vertical and horizontal analyses are concerned with the format used to prepare financial statements.

7. Horizontal, vertical, and circular analyses are the most common tools of financial statement analysis.

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

9. Another name for trend analysis is horizontal analysis.

10. If a company has sales of $110 in 2008 and $154 in 2009, the percentage increase in sales from 2008 to 2009 is 140%.

11. 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.

12. Common size analysis expresses each item within a financial statement in terms of a percent of a base amount.

13. Vertical analysis is a more sophisticated analytical tool than horizontal analysis.

14. Vertical analysis is useful in making comparisonsof companies of different sizes.

15. Meaningful analysis of financial statements will include either horizontal or vertical analysis, but not both.

16. Using vertical analysis of the income statement, a company's net income as a percentage of net sales is 10%; therefore, the cost of goods sold as a percentage of sales must be 90%.

17. In the vertical analysis of the income statement, each item is generally stated as a percentage 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 the 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 common stockholders' 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 total debt to total assets ratio, the lower the risk that 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 current liabilities.

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

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

28. An event or transaction should be classified as an extraordinary item if it is unusual in nature or if it occurs infrequently.

29. Variations among companies in the application of generally accepted accounting principles may reduce quality of earnings.

30. Pro forma income usually excludes items that the company thinks are unusual or nonrecurring.

**Additional True-False Questions**

31. The three basic tools of analysis are horizontal analysis, vertical analysis, and ratio analysis.

32. A percentage change can be computed only if the base amount is zero or positive.

33. In vertical analysis, the base amount in an income statement is usually net sales.

34. Profitability ratios measure the ability of the enterprise to survive over a long period of time.

35. The days in inventory is computed by multiplying inventory turnover by 365.

36. Extraordinary items are reported net of applicable taxes in a separate section of the income statement.

**MULTIPLECHOICE** **QUESTIONS**

37. Which one of the following is primarily interested in the liquidity of a company? a. Federal government

b. Stockholders

c. Long-term creditors d. Short-term creditors

38. Which one of the following is *not* a characteristic generally evaluated in analyzing financial statements?

a. Liquidity

b. Profitability c. Marketability d. Solvency

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.

40. Short-term creditors are usually most interested in evaluating a. solvency.

b. liquidity.

c. marketability. d. profitability.

41. Long-term creditors are usually most interested in evaluating a. liquidity and solvency.

b. solvency and marketability. c. liquidity and profitability.

d. profitabilityand solvency.

42. Stockholders are most interested in evaluating a. liquidity and solvency.

b. profitabilityand solvency. c. liquidity and profitability.

d. marketability and solvency.

FinancialStatement Analysis **18** **-** **7**

43. A stockholder 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.

44. Comparisons of financial data made within a company are called a. intracompanycomparisons.

b. interior comparisons.

c. intercompanycomparisons. d. intramural comparisons.

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.

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

47. In analyzing financial statements, horizontal analysis is a a. requirement.

b. tool.

c. principle. d. theory.

48. Horizontal analysis is also called a. linear analysis.

b. vertical analysis. c. trend analysis.

d. common size analysis.

49. Vertical analysis is also known as a. perpendicular analysis.

b. common size analysis. c. trend analysis.

d. straight-line analysis.

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

b. negative figure. c. percentage.

d. simple proportion.

**18** **-** **8** ** **

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.

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.

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.

54. Assume the following sales data for a company:

2010 $1,000,000 2009 900,000 2008 750,000 2007 600,000

If 2007 is the base year, what is the percentage increase in sales from 2007 to 2009? a. 100%

b. 150% c. 50% d. 66.7%

55. Comparative balance sheets are usually prepared for a. one year.

b. two years. c. three years. d. four years.

56. Horizontal analysis is appropriately performed a. only on the income statement.

b. only on the balance sheet.

c. only on the statement of retained earnings. d. on all three of these statements.

57. A horizontal analysis performed on a statement of retained earnings would *not* show a percentage change in

a. dividends paid. b. net income.

c. expenses.

d. beginning retained earnings.

FinancialStatement Analysis **18** **-** **9**

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.

59. Assume the following sales data for a company:

2009 $945,000 2008 780,000 2007 650,000

If 2007 is the base year, what is the percentage increase in sales from 2007 to 2008? a. 25%

b. 20% c. 125% d. 143%

60. Assume the following cost of goods sold data for a company:

2009 $1,500,000 2008 1,200,000 2007 900,000

If 2007 is the base year, what is the percentage increase in cost of goods sold from 2007 to 2009?

a. 167% b. 67% c. 60% d. 40%

Use the following information for questions 61–62:

Moon Beam, Inc. has the following income statement (in millions):

MOON BEAM, INC. IncomeStatement

For the Year Ended December 31, 2008

Net Sales $180 Cost of Goods Sold 120 Gross Profit 60 OperatingExpenses 33 Net Income $ 27

61. Using vertical analysis, what percentage is assigned to Cost of Goods Sold? a. 67%

b. 33% c. 100%

d. None of the above

**18** **-** **10** ** **

62. Using vertical analysis, what percentage is assigned to Net Income? a. 100%

b. 85% c. 15%

d. None of the above

63. Vertical analysis is also called a. common size analysis.

b. horizontal analysis. c. ratio analysis.

d. trend analysis.

64. Vertical analysis is a technique which expresses each item within a financial statement a. in dollars and cents.

b. in terms of a percentage of the item in the previous year. c. in terms of a percent of a base amount.

d. starting with the highest value down to the lowest value.

65. In common size analysis,

a. a base amount is required. b. a base amount is optional.

c. the same base is used across all financial statements analyzed.

d. the results of the horizontal analysis are necessary inputs for performing the analysis.

66. In performing a vertical analysis, the base for prepaid expenses is a. total current assets.

b. total assets.

c. total liabilities and stockholders' equity. d. prepaid expenses.

67. In performing a vertical analysis, the base for sales revenues on the income statement is a. net sales.

b. sales.

c. net income.

d. cost of goods available for sale.

68. In performing a vertical analysis, the base for sales returns and allowances is a. sales.

b. sales discounts. c. net sales.

d. total revenues.

69. In performing a vertical analysis, the base for cost of goods sold is a. total selling expenses.

b. net sales.

c. total revenues. d. total expenses.

FinancialStatement Analysis **18** **-** **11**

70. Each of the following is a liquidity ratio *except* the a. acid-test ratio.

b. current ratio.

c. debt to total assets ratio. d. inventory turnover.

*Item #:*268