Assignment 2 - Financial Statement Analysis

WESTMEAD INTERNATIONAL SCHOOL
Batangas City
Financial Statement Analysis
True or False
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 2001 and $143 in 2002, the
percentage increase in sales from 2001 to 2002 is 130%.
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 comparisons of 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 15%; therefore, the cost of
goods sold as a percentage of sales must be 85%.
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 as 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. All companies, regardless of size, should have a current ratio of

at least 2:1.
27. Prepaid expenses are excluded from the calculation of the acid-
test ratio.
28. Receivables turnover provides information about the number of

accounts turned over to a collection agency for collection.
29. Using borrowed money to increase the rate of return on common

stockholders' equity is called "trading on the equity."
30. Diversification in American industry limits the usefulness of

financial analysis.
Multiple Choice
1. Which one of the following is not a characteristic generally

evaluated in analyzing financial statements?
a. Liquidity
b. Profitability
c. Marketability
d. Solvency
2. 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.
3. Short-term creditors are usually most interested in evaluating

a. solvency.
b. liquidity.
c. marketability.
d. profitability.
4. 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.
5. Stockholders are most interested in evaluating

a. liquidity and solvency.
b. profitability and solvency.
c. liquidity and profitability.
d. marketability and solvency.
6. 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.
7. Comparisons of financial data made within a company are called

a. intracompany comparisons.
b. interior comparisons.
c. intercompany comparisons.
d. intramural comparisons.
8. 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
9. In analyzing financial statements, horizontal analysis is a

a. requirement.
b. tool.
c. principle.
d. theory.
10. Horizontal analysis is also called

a. linear analysis.
b. vertical analysis.
c. trend analysis.
d. common size analysis.
11. Vertical analysis is also known as

a. perpendicular analysis.
b. common size analysis.
c. trend analysis.
d. straight-line analysis.
12. In ratio analysis, the ratios are never expressed as a

a. rate.
b. negative figure.
c. percentage.
d. simple proportion.
13. 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.
14. 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.
15. Assume the following sales data for a company:

2003 $1,200,000
2002 960,000
2001 840,000
2000 600,000
If 2000 is the base year, what is the percentage increase in sales
from 2000 to 2002?
a. 100%
b. 160%
c. 70%
d. 62.5%
16. Comparative balance sheets are usually prepared for

a. one year.
b. two years.
c. three years.
d. four years.
17. 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.
18. 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.
19. 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.
20. 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.
21. In common size analysis,

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.
22. 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.
23. 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.
24. In performing a vertical analysis, the base for sales returns and
allowances is
a. sales.
b. sales discounts.
c. net sales.
d. total revenues.
25. 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.
26. A ratio calculated in the analysis of financial statements

a. expresses a mathematical relationship between two numbers.
b. shows the percentage increase from one year to another.
c. restates all items on a financial statement in terms of dollars
of the same purchasing power.
d. is meaningful only if the numerator is greater than the
denominator.
27. A liquidity ratio measures the

a. income or operating success of an enterprise over a period of
time.
b. ability of the enterprise to survive over a long period of time.
c. short-term ability of the enterprise to pay its maturing
obligations and to meet unexpected needs for cash.
d. number of times interest is earned.
28. The current ratio is

a. calculated by dividing current liabilities by current assets.
b. used to evaluate a company's liquidity and short-term debt
paying ability.
c. used to evaluate a company's solvency and long-term debt paying
ability.
d. calculated by subtracting current liabilities from current
assets.
29. The acid-test (quick) ratio

a. is used to quickly determine a company's solvency and long-term
debt paying ability.
b. relates cash, marketable securities, and net receivables to
current liabilities.
c. is calculated by taking one item from the income statement and
one item from the balance sheet.
d. is the same as the current ratio except it is rounded to the
nearest whole percent.
30. Walker Clothing Store had a balance in the Accounts Receivable

account of $390,000 at the beginning of the year and a balance of
$410,000 at the end of the year. Net credit sales during the year
amounted to $4,000,000. The average collection period of the
receivables in terms of days was
a. 30 days.
b. 365 days.
c. 73 days.
d. 37 days.
31. Parr Hardware Store had net credit sales of $6,500,000 and cost of
goods sold of $5,000,000 for the year. The Accounts Receivable
balances at the beginning and end of the year were $600,000 and
$700,000, respectively. The receivables turnover was
a. 7.7 times.
b. 10.8 times.
c. 9.3 times.
d. 10 times.
Use the following information for questions 32–33.
Waters Department Store had net credit sales of $16,000,000 and cost of
goods sold of $12,000,000 for the year. The average inventory for the
year amounted to $2,000,000.
32. Inventory turnover for the year is

a. 8 times.
b. 14 times.
c. 6 times.
d. 4 times.
33. The average number of days to sell the inventory during the year
was
a. 91 days.
b. 61 days.
c. 46 days.
d. 26 days.
34. Which one of the following would not be considered a liquidity

ratio?
a. Current ratio
b. Inventory turnover
c. Quick ratio
d. Return on assets
35. Asset turnover measures

a. how often a company replaces its assets.
b. how efficiently a company uses its assets to generate sales.
c. the portion of the assets that have been financed by creditors.
d. the overall rate of return on assets.
“A dream doesn't become reality through magic; it takes sweat,

determination, and hard work. Believe you can and you're half way there.”
Prepared by:
Robert John R. Perez, CPA, MBA

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WESTMEAD INTERNATIONAL SCHOOL

Financial Statement Analysis

1. Intracompany comparisons of the same financial statement items can

2. Calculating financial ratios is a financial reporting requirement

3. Measures of a company's liquidity are concerned with the frequency

4. Analysis of financial statements is enhanced with the use of

5. Comparisons of company data with industry averages can provide some

7. Horizontal, vertical, and circular analyses are the most common

8. Horizontal analysis is a technique for evaluating a financial

9. Another name for trend analysis is horizontal analysis.

11. In horizontal analysis, if an item has a negative amount in the

12. Common size analysis expresses each item within a financial

13. Vertical analysis is a more sophisticated analytical tool than

14. Vertical analysis is useful in making comparisons of companies of

15. Meaningful analysis of financial statements will include either

16. Using vertical analysis of the income statement, a company's net

17. In the vertical analysis of the income statement, each item is

18. A ratio can be expressed as a percentage, a rate, or as a

22. Profitability ratios are frequently used as a basis for evaluating

25. A current ratio of 1.2 to 1 indicates that a company's current

26. All companies, regardless of size, should have a current ratio of

28. Receivables turnover provides information about the number of

29. Using borrowed money to increase the rate of return on common

30. Diversification in American industry limits the usefulness of

1. Which one of the following is not a characteristic generally

2. In analyzing the financial statements of a company, a single item

3. Short-term creditors are usually most interested in evaluating

4. Long-term creditors are usually most interested in evaluating

5. Stockholders are most interested in evaluating

6. A stockholder is interested in the ability of a firm to

7. Comparisons of financial data made within a company are called

8. Which one of the following is not a tool in financial statement

9. In analyzing financial statements, horizontal analysis is a

10. Horizontal analysis is also called

11. Vertical analysis is also known as

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

13. Horizontal analysis evaluates a series of financial statement data

14. Horizontal analysis evaluates financial statement data

15. Assume the following sales data for a company:

16. Comparative balance sheets are usually prepared for

17. Horizontal analysis is appropriately performed

18. A horizontal analysis performed on a statement of retained earnings

19. Under which of the following cases may a percentage change be

20. Vertical analysis is a technique which expresses each item within

21. In common size analysis,

22. In performing a vertical analysis, the base for prepaid expenses

23. In performing a vertical analysis, the base for sales revenues on

26. A ratio calculated in the analysis of financial statements

27. A liquidity ratio measures the

28. The current ratio is

29. The acid-test (quick) ratio

30. Walker Clothing Store had a balance in the Accounts Receivable

Use the following information for questions 32–33.

32. Inventory turnover for the year is

34. Which one of the following would not be considered a liquidity

35. Asset turnover measures

“A dream doesn't become reality through magic; it takes sweat,

Robert John R. Perez, CPA, MBA

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