Accounting, 9e (Horngren)
Chapter 15 Financial Statement Analysis
Learning Objective 15-1
1) Investors and creditors generally evaluate a company by using one year’s data.
2) Horizontal analysis compares each item in the income statement to the net sales amount.
3) Benchmarking is the comparison of a company’s current year results with an earlier year‘s performance.
4) If an analyst wishes to see how gross profit of a company has changed from one year to the next, vertical analysis
would be the best approach.
5) If an analyst wishes to see how operating expenses of a company have changed from one year to the next, using a
horizontal analysis would be the best approach.
6) The net income for a company was $540,000 this year and $630,000 last year. Net income decreased by 17%.
7) Which of the following BEST describes horizontal analysis?
A) Comparing figures year to year
B) Showing each figure as a percentage of some other amount, such as total assets
C) Comparing a company’s financial figures with other companies that are leaders
D) Calculating key ratios to evaluate performance
8) Which of the following BEST describes trend analysis?
A) Calculating key ratios to evaluate performance
B) Showing each figure as a percentage of some other amount, such as total assets
C) Comparing a company’s financial figures with other companies that are leaders
D) Showing each year’s figures as a percentage of amounts for a base year
9) If an analyst wishes to see how sales revenue of a company has changed from one year to the next, which of the
following types of financial statement analysis would be used?
A) Vertical analysis
B) Horizontal analysis
C) Ratio analysis
D) Common-size financial statement analysis
10) A company reported the following amounts of net income:
2011 $18,000
2012 $24,000
2013 $26,000
Which of the following is the percentage change in net income from 2012 to 2013?
A) 2.00%
B) 10.00%
C) 8.33%
D) 7.69%
11) A company reported the following amounts of net income:
2011 $18,000
2012 $24,000
2013 $26,000
Which of the following is the percentage change in net income from 2011 to 2012?
A) 33.33%
B) 8.33%
C) 10.00%
D) 30.00%
12) The following is a summary of information presented on the financial statements of The Cake Company on
December 31, 2014.
Account 2014 2013
Current assets $ 65,000 $ 50,000
Accounts receivable 80,000 75,000
Merchandise inventory 50,000 40,000
Current liabilities 75,000 50,000
Long-term liabilities 30,000 50,000
Common stock 50,000 40,000
Retained earnings 40,000 25,000
Net sales revenue $525,000 $500,000
Cost of goods sold 400,000 395,000
Gross profit $125,000 $105,000
Selling and general expenses 45,000 50,000
Net income before income tax expense $ 80,000 $ 55,000
Income tax expense 24,000 16,500
Net income $ 56,000 $ 38,500
What would a horizontal analysis report with respect to current liabilities?
A) That current liabilities are 38.46% of total capital
B) A 50.00% increase in current liabilities
C) A current ratio of .87
D) A 33.33% increase in current liabilities
13) The following is a summary of information presented on the financial statements of The Cake Company on
December 31, 2014.
Account 2014 2013
Current assets $ 65,000 $ 50,000
Accounts receivable 80,000 75,000
Merchandise inventory 50,000 40,000
Current liabilities 75,000 50,000
Long-term liabilities 30,000 50,000
Common stock 50,000 40,000
Retained earnings 40,000 25,000
Net sales revenue $525,000 $500,000
Cost of goods sold 400,000 395,000
Gross profit $125,000 $105,000
Selling and general expenses 45,000 50,000
Net income before income tax expense $ 80,000 $ 55,000
Income tax expense 24,000 16,500
Net income $ 56,000 $ 38,500
What would horizontal analysis report with respect to net income before income tax expense and net income?
A) That both net income before income tax expense and net income are 45.45% of net sales revenue
B) A $25,000 increase in both net income before income tax expense and net income
C) A 45.45% increase in both net income before income tax expense and net income
D) A 145% increase in both net income before income tax expense and net income
14) The following is a summary of information presented on the financial statements of The Cake Company on
December 31, 2014.
Account 2014 2013
Current assets $ 65,000 $ 50,000
Accounts receivable 80,000 75,000
Merchandise inventory 50,000 40,000
Current liabilities 75,000 50,000
Long-term liabilities 30,000 50,000
Common stock 50,000 40,000
Retained earnings 40,000 25,000
Net sales revenue $525,000 $500,000
Cost of goods sold 400,000 395,000
Gross profit $125,000 $105,000
Selling and general expenses 45,000 50,000
Net income before income tax expense $ 80,000 $ 55,000
Income tax expense 24,000 16,500
Net income $ 56,000 $ 38,500
What would horizontal analysis report with respect to long-term liabilities?
A) That long-term liabilities decreased by $30,000
B) That long-term liabilities decreased by 40%
C) That long-term liabilities decreased by 60%
D) That long-term liabilities decreased by 67%
15) The following is a summary of information presented on the financial statements of The Cake Company on
December 31, 2014.
Account 2014 2013
Current assets $ 65,000 $ 50,000
Accounts receivable 80,000 75,000
Merchandise inventory 50,000 40,000
Current liabilities 75,000 50,000
Long-term liabilities 30,000 50,000
Common stock 50,000 40,000
Retained earnings 40,000 25,000
Net sales revenue $525,000 $500,000
Cost of goods sold 400,000 395,000
Gross profit $125,000 $105,000
Selling and general expenses 45,000 50,000
Net income before income tax expense $ 80,000 $ 55,000
Income tax expense 24,000 16,500
Net income $ 56,000 $ 38,500
What would horizontal analysis report with respect to selling and general expenses?
A) An 11.11% increase in selling and general expenses
B) That selling and general expenses are 10.00% of net sales revenue
C) A 10.00% decrease in selling and general expenses
D) That selling and general expenses are 8.57% of net sales revenue
16) The following is a summary of information presented on the financial statements of The Cake Company on
December 31, 2014.
Account 2014 2013
Current assets $ 65,000 $ 50,000
Accounts receivable 80,000 75,000
Merchandise inventory 50,000 40,000
Current liabilities 75,000 50,000
Long-term liabilities 30,000 50,000
Common stock (2007: 5,000 shares; 2006: 4,000 shares) 50,000 40,000
Retained earnings 40,000 25,000
Net sales revenue $525,000 $500,000
Cost of goods sold 400,000 395,000
Gross profit $125,000 $105,000
Selling and general expenses 45,000 50,000
Net income before income tax expense $ 80,000 $ 55,000
Income tax expense 24,000 16,500
Net income $ 56,000 $ 38,500
What would horizontal analysis report with respect to net sales revenue?
A) A 5% increase in net sales revenue
B) A dividend yield of $8.20
C) That cost of goods sold is 79.19% of net sales revenue
D) An accounts receivable turnover of 7.24 times
17) The following is a summary of information presented on the financial statements of The Cake Company on
December 31, 2014.
Account 2014 2013
Current assets $ 65,000 $ 50,000
Accounts receivable 80,000 75,000
Merchandise inventory 50,000 40,000
Current liabilities 75,000 50,000
Long-term liabilities 30,000 50,000
Common stock 50,000 40,000
Retained earnings 40,000 25,000
Net sales revenue $525,000 $500,000
Cost of goods sold 400,000 395,000
Gross profit $125,000 $105,000
Selling and general expenses 45,000 50,000
Net income before income tax expense $ 80,000 $ 55,000
Income tax expense 24,000 16,500
Net income $ 56,000 $ 38,500
What would a horizontal analysis report with respect to current assets?
A) An inventory turnover of 8 times
B) A 30% increase in current assets
C) A current ratio of .87
D) Current assets that are 33.33% of total assets
18) The following data on Alpha Products, Inc. is available.
Alpha Products, Inc
Comparative Balance Sheet
December 31, 2013 and December 31, 2014
2014 2013
Assets:
Cash $ 45,100 $ 48,500
Accounts receivable, net 59,800 101,500
Merchandise inventory 150,900 171,600
Property, plant and equipment, net 710,500 808,800
Total assets $966,300 $1,130,400
Liabilities and stockholders’ equity
Accounts payable $108,200 $ 151,600
Notes payable (current) 70,000 70,000
Bonds payable 154,000 280,000
Common stock, $10 par 420,000 420,000
Retained earnings 214,100 208,800
Total liabilities and stockholders’ equity $966,300 $1,130,400
What was the percent increase or decrease in net property, plant and equipment from 2013 to 2014?
A) 12.2% decrease
B) 12.2% increase
C) 13.8% increase
D) 13.8% decrease
19) Please refer to the following trend analysis of Pathways Company:
2015 2014 2013 2012 2011 2010
Net sales $4,970 $4,500 $3,980 $3,270 $4,750 $4,400
Percentages 113.0% 102.3% 90.5% 74.3% 108.0% 100.0%
Which of the following is a correct conclusion from the above analysis?
A) Net sales in 2013 were equal to 90.5% of year 2012 net sales.
B) Net sales in 2013 were up 90.5% over the previous year.
C) Net sales in 2013 were equal to 90.5% of 2010 net sales.
D) Net sales in 2013 were down 90.5% from year 2010.
20) Please refer to the following trend analysis of Pathways Company:
2015 2014 2013 2012 2011 2010
Net sales $4,970 $4,500 $3,980 $3,270 $4,750 $4,400
Percentages 113.0% 102.3% 90.5% 74.3% 108.0% 100.0%
Which of the following is a correct conclusion from the above analysis?
A) Net sales in 2014 were equal 102.3% of net sales for the previous year.
B) Net sales in 2014 were up 2.3% over the previous year.
C) Net sales in 2014 were 2.3% higher than 2010 net sales.
D) Net sales in 2014 were down 90.5% from year 2010.
21) La Paz Company reported the following data:
(Dollar amounts in millions) 2014 2013 Amount of Increase (Decrease)
Percentage
Revenues $6,355 $4,920 $1,435 29.2%
Cost of revenues 3,370 2,200 1,170 53.2%
Gross profit 2,985 2,720 265 9.7%
Operating expenses:
Sales and marketing expense 675 580 95 16.4%
General and administrative expense 410 425 (15) -3.5%
Research and development expense 470 390 80 20.5%
Other expense 400 695 (295) -42.4%
Total operating expenses $1,955 $2,090 $(135) -6.5%
Income before income tax $1,030 $ 630 $ 400 63.5%
Income tax expense 230 210 20 9.5%
Net income (loss) $ 800 $ 420 $ 380 90.5%
Which of the following statements is an accurate conclusion about the 2014 results, based on the above data?
A) Revenues fell and expenses rose over the 2-year period, resulting in a drop in net income.
B) Net income improved, despite a rise in operating expenses.
C) Gross profit declined over two years, resulting in a drop in net income.
D) The increase in net income resulted primarily from an increase in gross profit coupled with a decrease in
operating expenses.
22) La Paz Company reported the following information
BALANCE SHEET
(Dollar amounts in millions) 2014 2013 Amount of Increase (Decrease)
Percentage
Assets
Current assets:
Cash $ 10,000 $ 7,200 $ 2,800 38.9%
Accounts receivable, net 15,600 16,800 (1,200) -7.1%
Inventory 38,000 31,000 7,000 22.6%
Total current assets 63,600 55,000 8,600 15.6%
Property, plant and equipment, net 195,000 168,000 27,000 16.1%
Other long-term assets 15,000 27,100 (12,100) -44.6%
Total assets $273,600 $250,100 $23,500 9.4%
Liabilities
Current liabilities:
Accounts payable $ 8,500 $ 7,300 $ 1,200 16.4%
Other current liabilities 1,400 3,900 (2,500) -64.1%
Total current liabilities 9,900 11,200 (1,300) -11.6%
Long-term notes payable 54,000 30,000 24,000 80.0%
Total liabilities $ 63,900 $ 41,200 $22,700 55.1%
Stockholders’ Equity
Common stock $ 12,000 $ 12,000 $ 0 0.0%
Paid-in capital in excess of par 149,000 149,000 0 0.0%
Retained earnings 48,700 47,900 800 1.7%
Total stockholders’ equity $209,700 $208,900 $800 0.4%
Total liabilities and stockholders’
equity $273,600 $250,100 $23,500 9.4%
Which of the following statements is an accurate conclusion about 2014 balances, based on the above data?
A) Although assets grew by over 9%, there was very little rise in stockholders’ equity.
B) Total assets dropped slightly in 2014, but there was a significant reduction in total liabilities.
C) The increase in long-term liabilities was offset nearly dollar for dollar by a decrease in current liabilities.
D) The nearly 45% decrease in other long-term assets contributed to an overall decline in total assets.
23) Portofino Company provides the following comparative income statement data. Please complete a horizontal
analysis using the format shown here:
(Dollar amounts in millions) 2014 2013 Amount of Increase (Decrease)
Percentage
Revenues $6,355 $4,920
Cost of revenues 3,370 2,200
Gross Profit 2,985 2,720
Operating expenses:
Sales and marketing expense 675 580
General and administrative expense 410 425
Research and development expense 470 390
Other expense 400 695
Total operating expenses $1,955 $2,090
Income before income tax $1,030 $ 630
Income tax expense 230 210
Net income (loss) $ 800 $ 420
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24) Portofino Company provides the following comparative balance sheet data. Please complete a horizontal
analysis using the format shown here:
BALANCE SHEET
(Dollar amounts in millions) 2014 2013 Amount of Increase (Decrease)
Percentage
Assets
Current assets:
Cash $10,000 $7,200
Accounts receivable, net 15,600 16,800
Inventory 38,000 31,000
Total current assets 63,600 55,000
Property, plant and equipment, net 195,000 168,000
Other long-term assets 15,000 27,100
Total assets $273,600 $250,100
Liabilities
Current liabilities:
Accounts payable $8,500 $7,300
Other current liabilities 1,400 3,900
Total current liabilities 9,900 11,200
Long-term notes payable 54,000 30,000
Total liabilities $63,900 $41,200
Stockholders’ Equity
Common stock $12,000 $12,000
Paid-in capital in excess of par 149,000 149,000
Retained earnings 48,700 47,900
Total stockholders’ equity $209,700 $208,900
Total liabilities and stockholders’
equity $273,600 $250,100
25) Perform a horizontal analysis of the following company’s balance sheet. Include both the amount and the
percentage of change for each account.
Account 2011 2010 Change Amount Change Percent
Current assets $121,000 $100,000
Accounts receivable 117,000 125,000
Merchandise inventory 70,000 85,000
Current liabilities 63,500 50,000
Long-term liabilities 100,000 100,000
Common stock 50,000 50,000
Retained earnings 94,500 110,000
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26) Perform a horizontal analysis of the following company’s income statement. Include both the amount and the
percentage of change for each account.
Account 2011 2010 Change Amount Change Percent
Net sales revenue $557,000 $500,000
Cost of goods sold 400,000 395,000
Gross profit 157,000 105,000
Selling and general expenses 70,000 50,000
Net income before income tax 87,000 55,000
Income tax expense 24,000 16,500
Net income $ 63,000 $ 38,500
27) Pathways Company provides the following historical data:
2015 2014 2013 2012 2011 2010
Net sales $4,970 $4,500 $3,980 $3,270 $4,750 $4,400
Using the year 2010 as a base year, provide a trend analysis using the following format:
2015 2014 2013 2012 2011 2010
Net sales $4,970 $4,500 $3,980 $3,270 $4,750 $4,400
Percentages
Learning Objective 15-2
1) If an analyst wishes to see how a company’s net income as a percentage of net sales has changed from one year to
the next, a vertical analysis would be the most appropriate approach.
2) If an analyst wishes to see a company’s current assets as a percentage of total assets, a vertical analysis would be
the best approach.
3) In a vertical analysis of the income statement, each line item is shown as a percentage of net income.
4) In a vertical analysis of the income statement, each line item is shown as a percentage of gross profit.
5) Vertical analysis is used with the income statement, but not with the balance sheet.
6) Which of the following is the definition of vertical analysis?
A) Vertical analysis is the practice of comparing a company with other companies that are leaders.
B) Vertical analysis is the analysis in which percentages are computed by selecting a base year as 100% and
expressing amounts for following years as a percentage of the base amount.
C) Vertical analysis is the study of percentage changes in comparative financial statements.
D) Vertical analysis is the analysis of a financial statement that reveals the relationship of each statement item to a
specified base, which is the 100% figure.
7) Which of the following is the base amount when performing vertical analysis of an income statement?
A) Total expenses
B) Net sales
C) Sales revenue
D) Gross profit
8) Which of the following is the base amount when performing vertical analysis of a balance sheet?
A) Total assets
B) Total cash and cash equivalents
C) Net income
D) Gross profit
9) If an analyst wishes to see how a company’s operating expenses as a percentage of net sales have changed from
one year to the next, which of the following types of financial statement analysis would be used?
A) Vertical analysis
B) Horizontal analysis
C) Ratio analysis
D) Common-size financial statement analysis
10) Please refer to the vertical analysis of income statement data shown below:
(Dollar amounts in millions) 2014 2013
Amount % of Total Amount % of Total
Revenues $6,355 100.0% $4,920 100.0%
Cost of revenues 3,370 53.0% 2,200 44.7%
Gross profit $2,985 47.0% $2,720 55.3%
Operating expenses:
Sales and marketing expense $ 675 10.6% $ 580 11.8%
General and administrative expense 410 6.5% 425 8.6%
Research and development expense 470 7.4% 390 7.9%
Other expense 400 6.3% 695 14.1%
Total operating expenses $1,955 30.8% $2,090 42.5%
Income before income tax $1,030 16.2% $ 630 12.8%
Income tax expense 230 3.6% 210 4.3%
Net income (loss) $ 800 12.6% $ 420 8.5%
The figure 47.0% shown for Gross profit in 2014 signifies that:
A) in 2014, gross profit is equal to 47% of net income.
B) in 2014, gross profit is up 47% versus the previous year.
C) in 2014, gross profit is 47% of net sales revenue.
D) in 2014, gross profit is 47% of cost of revenues.