FINANCIAL STATEMENT ANALYSIS

1. In analyzing financial statements, horizontal analysis is a

a. requirement.
b. tool.
c. principle.
d. theory.

2. Horizontal analysis is also known as

a. linear analysis.
b. vertical analysis.
c. trend analysis.
d. common size analysis.

3. Under which of the following cases may a percentage change be computed?

a. The trend of the amounts is decreasing but all amounts are positive.
b. There is no amount in the base year.
c. There is a negative amount in the base year and a negative amount in the
subsequent year.
d. There is a negative amount in the base year and a positive amount in the
subsequent year.

4. Horizontal analysis is a technique for evaluating 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.

5. Horizontal analysis of comparative financial statements includes the

a. development of common size statements
b. calculation of liquidity ratios.
c. calculation of dollar amount changes and percentage changes from the
previous to the current year.
d. evaluation of financial statement data that expresses each item in a financial
statement as a percentage of a base amount.

6. Horizontal analysis is a technique for evaluating 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.

7. If year one equals $700, year two equals $742, and year three equals $770, the
percentage to be assigned for year three in a trend analysis, assuming that year
one is the base year, is
a. 110%.
b. 106%.
c. 91%.
d. 100%.

8. If year one equals $800, year two equals $840, and year three equals $896, the
percentage to be assigned for year three in a trend analysis, assuming that year
1 is the base year, is
a. 100%.
b. 89%.
c. 105%.
d. 112%.

9. Assume the following sales data for a company:

2005 $1,000,000
2004 900,000
2003 750,000
2002 600,000
If 2002 is the base year, what is the percentage increase in sales from 2002 to
2003?
a. 125%
b. 167%
c. 25%
d. 20%

10. If year one equals $900, year two equals $940, and year three equals $996, the
percentage to be assigned for year one in a trend analysis, assuming that year 1
is the base year, is
a. 100%
b. 89%
c. 105%
d. 112%

11. In horizontal or trend analysis, each item is expressed as a percentage of the

a. retained earnings figure.
b. total assets figure.
c. net income figure.
d. base year figure.

12. Assume the following sales data for a company:

2005 $1,000,000
2004 945,000
2003 875,000
2002 700,000
If 2002 is the base year, what is the percentage increase in sales from 2002 to
2003?
a. 25%
b. 20%
c. 125%
d. 143%

13. Comparative balance sheets are usually prepared for

a. one year.
b. two years.
c. three years.
d. four years.

14. Vertical analysis is also known as

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

15. In a common size balance sheet the 100 percent figure is

a. total current assets.
b. total property, plant and equipment.
c. total liabilities.
d. total assets.

16. In a common size financial statement, which of the following is given a

percentage of 100 percent?
a. Total liabilities
b. Net income
c. Total assets
d. Costs of goods sold

17. In a common size income statement, the 100% figure is

a. net income.
b. cost of goods sold.
c. gross profit.
d. net sales.

18. A balance sheet that displays only component percentages is called a ________
balance sheet.
a. condensed
b. common size
c. comparative
d. trendy

19. Vertical analysis is a technique that expresses each item in a financial statement
a. in dollars and cents.
b. as a percent of the item in the previous year.
c. as a percent of a base amount.
d. starting with the highest value down to the lowest value.

20. In vertical 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.

21. The best way to study the relationship of the components within a financial
statement is to prepare
a. common size statements.
b. a trend analysis.
c. profitabiltiy analysis.
d. ratio analysis.

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

a. total current assets.
b. total assets.
c. total liabilities.
d. prepaid expenses in a previous year.

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. Which one of the following is not a characteristic generally evaluated in ratio
analysis?
a. Liquidity
b. Profitability
c. Marketability
d. Solvency

27. Ratios are most useful in identifying

a. trends.
b. differences.
c. causes.
d. relationships.

28. Short-term creditors are usually most interested in assessing

a. solvency.
b. liquidity.
c. marketability.
d. profitability.

29. A common measure of liquidity is

a. return on assets.
b. receivable turnover.
c. profit margin.
d. debt to equity.

30. A common measure of profitability is

a. the acid test or quick ratio.
b. current cash debt coverage ratio.
c. return on common stockholders’ equity ratio.
d. debt to total assets.

31. Winter Clothing Store had a balance in the Accounts Receivable account of
$780,000 at the beginning of the year and a balance of $820,000 at the end of
the year. Net credit sales during the year amounted to $5,840,000. The
receivable turnover ratio was
a. 7.1 times.
b. 7.3 times.
c. 7.5 times.
d. 7 times.

32. Pine Hardware Store had net credit sales of $3,900,000 and cost of goods sold
of $3,000,000 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 ratio was
a. 5.6 times.
b. 6.5 times.
c. 4.6 times.
d. 6 times.

33. Summer Clothing Store had a balance in the Accounts Receivable account of
$820,000 at the beginning of the year and a balance of $880,000 at the end of
the year. Net credit sales during the year amounted to $5,940,000. The
receivable turnover ratio was
a. 7.2 times.
b. 7 times.
c. 6.9 times.
d. 6.8 times.

34. Summer Clothing Store had a balance in the Accounts Receivable account of
$780,000 at the beginning of the year and a balance of $820,000 at the end of
the year. Net credit sales during the year amounted to $3,360,000. The average
collection period of the receivables in terms of days was
a. 50 days.
b. 86.9 days.
c. 365 days.
d. 55.4 days.

35. Axel Hardware Store had net credit sales of $4,200,000 and cost of goods sold of
$3,000,000 for the year. The Accounts Receivable balances at the beginning and
end of the year were $650,000 and $750,000, respectively. The receivables
turnover ratio was
a. 6.5 times.
b. 6.0 times.
c. 5.6 times.
d. 6 times.
Use the following information for questions 36-37.

The Winslow Department Store had net credit sales of $13,000,000 and cost of goods
sold of $10,000,000 for the year. The average inventory for the year amounted to
$2,500,000.

36. The inventory turnover ratio for the year is

a. 4 times.
b. 7 times.
c. 3 times.
d. 2 times.

37. The average days in inventory during the year was approximately
a. 183 days.
b. 122 days.
c. 91 days.
d. 52 days.

Use the following information for questions 38-39.

The Barkley Department Store had net credit sales of $9,000,000 and cost of goods sold
of $6,000,000 for the year. The average inventory for the year amounted to $2,500,000.

38. The inventory turnover ratio for the year is

a. 3.6 times.
b. 3.2 times.
c. 3.0 times.
d. 2.4 times.

39. The average days in inventory during the year was approximately
a. 101 days.
b. 114 days.
c. 122 days.
d. 152 days.

Use the following information for questions 40-41.

Banner Corporation had net income of $250,000 and paid dividends to common
stockholders of $50,000 in 2005. The weighted average number of shares outstanding in
2005 was 50,000 shares. Banner Corporation's common stock is selling for $50 per
share on the New York Stock Exchange.

40. Banner Corporation's price-earnings ratio is

a. 2 times.
b. 8 times.
c. 10 times.
d. 5 times.

41. Banner Corporation's payout ratio for 2005 is

a. $5 per share.
b. 25%.
c. 20%.
d. 12.5%.

42. Gifford Company reported the following on its income statement:

Income before income taxes $420,000
Income tax expense 120,000
Net income $300,000
An analysis of the income statement revealed that interest expense was $80,000.
Gifford Company's times interest earned was
a. 8 times.
b. 5.25 times.
c. 6.25 times.
d. 5 times.
43. If a company has an current ratio of 1.2:1, what respective effects will the
borrowing of cash by short-term debt and collection of accounts receivable have
on the ratio?
Short-term Borrowing Collection of Receivable
a. Increase No effect
b. Increase Increase
c. Decrease No effect
d. Decrease Decrease

44. A company has a receivables turnover ratio of 10. The average net receivables
during the period are $400,000. What is the amount of net credit sales for the
period?
a. $40,000
b. $4,000,000
c. $480,000
d. Cannot be determined from the information given

45. If the average collection period is 55 days, what is the receivables turnover?
a. 6.64 times
b. 7.30 times
c. 3.65 times
d. None of the above

46. A company has an average inventory on hand of $60,000 and its average days in
inventory is 29.2 days. What is the cost of goods sold?
a. $750,000
b. $1,752,000
c. $1,680,000
d. $876,000

47. Net sales are $1,500,000, beginning total assets are $700,000, and the asset
turnover is 3.0. What is the ending total asset balance?
a. $500,000
b. $300,000
c. $700,000
d. $400,000

48. A company has a receivables turnover ratio of 10. The average net receivables
during the period are $400,000. What is the amount of net credit sales for the
period?
a. $40,000
b. $4,000,000
c. $480,000
d. Cannot be determined from the information given

49. If the average collection period is 55 days, what is the receivables turnover?
a. 6.64 times
b. 7.30 times
c. 3.65 times
d. None of the above

50. Sano Corporation reported net income $24,000; net sales $400,000; and
average assets $600,000 for 2005. What is the 2005 profit margin?
a. 6%
b. 12%
c. 40%
d. 200%