Financial Accounting: IFRS, 11e, GE
Harrison/Horngren/Thomas/Tietz/Suwardy
Test Item File
Chapter 12: Financial Statement Analysis
12.1-1 Horizontal analysis highlights changes in financial statement balances over time.
12.1-2 The best way to analyze a company is by examining the financial data for only one year.
12.1-3 Trend percentages are generally computed only for income statement items.
12.1-4 It is generally considered more useful to know the absolute dollar amount of change in financial
statement amounts from year to year than to know the percentage change.
12.1-5 Trend analysis can only be performed for income statement items.
12.1-6 When performing a trend analysis, the base year is generally the most recent year.
12.1-7 The percentage change in financial statement balances is computed by dividing the dollar amount
change from the base (earlier) period to the later period amount by the base period dollar amount.
12.1-8 The study of percentage changes in comparative financial statements is:
A) benchmarking.
B) vertical analysis.
C) horizontal analysis.
D) common-size statements.
12.1-9 Horizontal analysis focuses on:
A) the balance sheet only.
B) percentage changes in comparative financial statements.
C) the change in key financial statement ratios over a certain time frame.
D) the changes in individual financial statement amounts as a percentage of some related total.
12.1-10 The percentage change in any individual item shown on comparative financial statements is
calculated by dividing the dollar amount of the change from the base period to the current period
by:
A) the base-period amount.
B) the amount shown for the current period.
C) the average of the amounts shown for the base and the current periods.
D) none of the above.
12.1-11 The analysis of percentage changes in comparative statements is known as:
A) benchmarking analysis.
B) horizontal analysis.
C) vertical analysis.
D) economic value added analysis.
12.1-12 Trend analysis is most closely related to:
A) horizontal analysis.
B) economic value added analysis.
C) vertical analysis.
D) benchmarking.
12.1-13 A form of horizontal analysis that indicates the direction a business is taking is:
A) trend percentages.
B) economic value added analysis.
C) vertical analysis.
D) benchmarking.
12.1-14 When preparing a trend analysis, a trend percent is computed as:
A) current year divided by base year.
B) dollar change in item divided by base year.
C) base year divided by current year.
D) dollar change in item divided by current year.
12.1-15 Computing a percentage change in horizontal analysis requires two steps. The first step is
compute the dollar amount of the change from the base period to the next period and the second
step is to:
A) divide the dollar amount of the change by the current period amount.
B) multiply the dollar amount of the change by the current period amount.
C) divide the dollar amount of the change by the base-period amount.
D) multiply the dollar amount of the change by the base-period amount.
12.1-16 When computing trend percentages:
A) the base year is always equal to 100%.
B) the base year is always the latest year.
C) the current year is always equal to 100%.
D) both B and C are correct.
12.1-17 When computing trend percentages:
A) the base year is generally the earliest year.
B) the base year is always the latest year.
C) the base year is always equal to 100%.
D) both A and C are correct.
12.1-18 A company reported $155,000 of income for year 1; $180,000 for year 2; and $200,000 for year
3. The percentage change in net income from year 1 to year 3 is computed as:
A) $45,000 / $155,000.
B) $20,000 / $155,000.
C) $45,000 / $200,000.
D) $25,000 / $200,000.
12.1-19 A company reported $65,000 of income for year 1; $70,000 for year 2; and $80,000 for year 3.
The percentage change in net income from year 2 to year 3 is:
A) 14.29%.
B) 12.50%.
C) 7.15%.
D) 38.46%.
12.1-20 Accounts Receivable was $45,000 at the beginning of the year and $55,000 at the end of the year.
The percentage change and direction of change for the year was a:
A) 22% decrease.
B) 22% increase.
C) 18% increase.
D) 18% decrease.
12.1-21 Cost of goods sold for the current year was $170,000. Last year’s cost of goods sold was
$190,000. The percentage change and direction of change for the current year was a:
A) 11.7% increase.
B) 10.5% decrease.
C) 10.5% increase.
D) 11.7% decrease.
12.1-22 Assume that the balance in Retained Earnings at the end of year is $100,000, and that it decreased
by 15% during the year. The balance in Retained Earnings at the beginning of the year was
closest to:
A) $120,000.
B) $117,647.
C) $115,000.
D) $ 85,000.
12.1-23 Assume that the Inventory balance at the end of the year is $125,000, and that it has increased by 5%
during the year. The Inventory balance at the beginning of the year was closest to:
A) $119,048.
B) $131,579.
C) $131,250.
D) $118,750.
12.1-24 Given the following data for total sales:
20X4
$55,000
20X5
$65,000
20X6
$85,000
20X7
$100,000
A table showing trend percentages for 2008-2011, respectively, using 20X4 as the base year,
would show for 20X5-20X7:
A) 18%, 3%, and 8%.
B) 15%, 26%, and 15%.
C) 118%, 155%, and 182%.
D) 65%, 85%, and 100%.
12.1-25 Which of the following expresses current cost of goods sold in terms of a base year?
A) Vertical analysis
B) Horizontal analysis
C) Trend analysis
D) Ratio analysis
12.1-26 Horizontal analysis evaluates financial data:
A) for one year.
B) for the future.
C) over a period of time.
D) none of the above.
12.1-27 Which of the following would be most likely to reveal that cost of goods sold increased by a
specific dollar amount during the year?
A) Ratio analysis
B) Trend analysis
C) Vertical analysis
D) Horizontal analysis
12.2-1 The gross margin percent is a form of horizontal analysis.
12.2-2 When performing vertical analysis of a balance sheet, net income is usually used as the base.
12.2-3 The relationship of each individual asset as a percentage of total assets is an example of
horizontal analysis.
12.2-4 Vertical analysis compares an item on the financial statement to a specified base.
12.2-5 When performing vertical analysis, each financial statement item is shown as a percentage of the
base amount.
12.2-6 Which of the following is typically used as the base in a vertical analysis of an income statement?
A) Net sales
B) Net income
C) Gross sales
D) Cash
12.2-7 Which of the following is typically used as the base in a vertical analysis of a balance sheet?
A) Net income
B) Gross sales
C) Cash
D) Total assets
12.2-8 Expressing current operating income as a percentage of current net sales is an example of:
A) horizontal analysis.
B) economic value added.
C) ratio analysis.
D) vertical analysis.
12.2-9 A vertical analysis is primarily concerned with:
A) the change in key financial statement ratios over a specified period of time.
B) the dollar amount of the change in various financial statement amounts from year to year.
C) percentage changes in the balances shown in comparative financial statements.
D) individual financial statement items expressed as a percentage of a base (which represents
100%).
12.2-10 A financial statement showing each item on the statement as a percentage of one key item on the
statement, called the base, is referred to as:
A) common-size statement.
B) trend analysis.
C) horizontal analysis.
D) benchmarking.
12.2-11 Anacortes Corporation reports the following data:
$285,000
180,000
$105,000
In a vertical analysis, the gross profit percentage is closest to:
A) 37%.
B) 271%.
C) 158%.
D) 63%.
12.2-12 Given the following data:
$115,000
955,000
1,650,000
In a vertical analysis, cash would be expressed as:
A) 830%.
B) 1435%.
C) 12%.
D) 7%.
12.2-13 Given the following data:
Current liabilities
$250,000
Noncurrent liabilities
885,000
Shareholders’ equity
595,000
In a vertical analysis, noncurrent liabilities would be expressed as:
A) 354.00%.
B) 67.23%.
C) 148.74%.
D) 51.16%.
12.2-14 Given the following data:
Net sales
$115,000
Cost of goods sold
85,000
Gross profit
$30,000
If net sales decreases by 10%, and cost of goods sold increases by 15%, gross profit would:
A) increase by 25%.
B) decrease by 25%.
C) decrease by 81%.
D) increase by 81%.
12.2-15 If the assets shown on a balance sheet are subjected to vertical analysis (using total assets as the
base), a decrease in the figure for noncurrent assets from 55% to 40% would always mean that:
A) the dollar amount of current assets has decreased.
B) total noncurrent assets have decreased as a percentage of total assets.
C) both A and B are correct.
D) neither A nor B are correct.
12.2-16 If a balance sheet is subjected to vertical analysis which shows that current assets (using total
assets as the base) have increased from 36% to 53%, this would always mean that:
A) the dollar amount of total assets has decreased.
B) the dollar amount of total assets has increased.
C) the dollar amount of current assets has increased.
D) current assets have increased as a percentage of total assets.
12.3-17 Benchmarking is the process of comparing a company to a standard set by one or more other
companies, with a view toward improvement.
12.2-18 A common-size statement is probably more useful than a horizontal analysis when comparing
different companies.
12.3-19 Common-size financial statements are particularly valuable for identifying company strengths.
12.3-20 Of the items listed below, the one most helpful in the comparison of different size companies is:
A) comparison of their net incomes.
B) horizontal analysis.
C) preparation of common-size financial statements.
D) comparison of their working capital balances.
12.3-21 On a common-size income statement, each item is expressed as a percentage of:
A) gross margin.
B) operating income.
C) total revenues.
D) net income.
12.3-22 On a common-size balance sheet each item is expressed as a percentage of:
A) shareholders’ equity.
B) share capital.
C) ordinary shares outstanding.
D) total assets.
12.3-23 Common-size financial statements represent a form of:
A) trend analysis.
B) horizontal analysis.
C) vertical analysis.
D) ratio analysis.
12.3-24 When using common-size financial statements to evaluate the operating results of two different
companies, the gross margin of Company A is expressed as a percentage of:
A) Company B’s gross margin.
B) the total gross margins of Companies A and B.
C) Company A’s sales.
D) a common standard for both Company A and Company B.
12.3-25 Arnold Company’s return on sales for the most recent year was 6%. Arnold Company would like
to achieve a return on sales of 8% to match those of the current industry leader. This comparison
is an example of:
A) intercompany analysis.
B) benchmarking.
C) analytical goal setting.
D) detail analysis.
12.4-1 A firm’s ability to pay current liabilities can be evaluated using working capital, the current ratio,
and the debt ratio.
12.4-2 Working capital is computed as total assets minus total liabilities.
12.4-3 A ratio expresses the relationship of one number to another number.
12.4-4 The acid-test ratio reflects the company’s percentage of assets financed with debt.
12.4-5 A low inventory turnover may indicate that a company is experiencing difficulty selling its
inventory.
12.4-6 A company in the grocery store business should have a higher inventory turnover than a company
in the automobile sales industry.
12.4-7 A high current ratio means that a company’s current assets represent a relatively large portion of
total assets.
12.4-8 If two companies have the same dollar amount of working capital, they will be in the same
financial position.
12.4-9 A rising debt ratio is a positive sign because it indicates creditors are willing to increase amounts
loaned to the company.
12.4-10 The rate of return on net sales shows the percentage of each sales dollar earned as net income.
12.4-11 Financial leverage exists when a company earns more income on borrowed money than the
related interest expense on the money.
12.4-12 A high times-interest-earned ratio indicates difficulty in paying interest.
12.4-13 Earnings per ordinary share measures the market value of one ordinary share.
12.4-14 To be truly useful, financial ratios should be analyzed over a period of years to consider all
relevant factors.
12.4-15 After the ratios are computed, managers must analyze the results to determine what caused the
ratio to increase or decrease.