CHAPTER 14

FINANCIAL STATEMENT ANALYSIS

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY

Item

LO

BT

Item

LO

BT

Item

LO

BT

Item

LO

BT

Item

LO

BT

True-False Statements

1.

1

C

9.

3

K

17.

4

K

25.

5

C

sg33.

4

K

2.

1

K

10.

3

AP

18.

5

K

26.

5

C

sg34.

5

K

3.

1

K

11.

3

C

19.

5

K

27.

6

K

sg35.

5

K

4.

1

K

12.

4

K

20.

5

K

28.

6

K

sg36.

6

K

5.

1

K

13.

4

C

21.

5

K

29.

7

K

6.

2

K

14.

4

C

22.

5

C

30.

7

K

7.

2

K

15.

4

C

23.

5

C

sg31.

2

K

8.

3

K

16.

4

C

24.

5

C

sg32.

3

K

Multiple Choice Questions

37.

1

K

66.

4

C

95.

5

C

124.

5

AP

153.

6

AP

38.

1

K

67.

4

C

96.

5

AP

125.

5

AP

154.

6

C

39.

1

C

68.

4

C

97.

5

C

126.

5

AP

155.

6

K

40.

1

C

69.

4

C

98.

5

C

127.

5

AP

156.

6

K

41.

1

C

70.

5

C

99.

5

K

128.

5

AP

157.

6

K

42.

1

C

71.

5

C

100.

5

C

129.

5

AP

158.

6

C

43.

1

C

72.

5

K

101.

5

AP

130.

5

AP

159.

6

K

44.

1

K

73.

5

K

102.

5

AP

131.

5

AP

160.

7

C

45.

2

K

74.

5

K

103.

5

C

132.

5

AP

sg161.

1

K

46.

2

K

75.

5

AP

104.

5

K

133.

5

AP

sg162.

1

K

47.

2

K

76.

5

AP

105.

5

AP

134.

5

AP

sg163.

3

AN

48.

3

K

77.

5

AP

106.

5

C

135.

5

AP

st164.

4

K

49.

4

K

78.

5

AP

107.

5

C

136.

5

AP

sg165.

4

K

50.

5

K

79.

5

K

108.

5

AP

137.

5

AP

sg166.

5

K

51.

3

K

80.

5

C

109.

5

K

138.

5

AP

sg167.

5

K

52.

3

K

81.

5

C

110.

5

C

139.

5

AP

sg168.

5

K

53.

3

K

82.

5

K

111.

5

K

140.

5

AP

sg169.

5

K

54.

3

AP

83.

5

AP

112.

5

K

141.

5

AP

sg170.

6

K

55.

3

K

84.

5

AP

113.

5

K

142.

5

AP

sg171.

6

AP

56.

3

C

85.

5

AP

114.

5

AP

143.

5

AP

sg172.

6

K

57.

3

C

86.

5

C

115.

5

AP

144.

5

AP

173.

8

K

58.

3

C

87.

5

K

116.

5

AP

145.

6

AN

174.

8

K

59.

3

AP

88.

5

AP

117.

5

AP

146.

6

C

175.

8

K

60.

3

AP

89.

5

K

118.

5

AP

147.

6

AP

176.

8

K

61.

4

AP

90.

5

C

119.

5

AP

148.

6

AP

177.

8

K

62.

4

AP

91.

5

C

120.

5

AP

149.

6

AP

178.

8

K

63.

4

K

92.

5

C

121.

5

AP

150.

6

K

179.

8

K

64.

4

K

93.

5

C

122.

5

AP

151.

6

K

180.

8

K

65.

4

C

94.

5

C

123.

5

AP

152.

6

AP

sg This question also appears in the Study Guide.

st This question also appears in a self-test at the student companion website.

Test Bank for Financial Accounting, Ninth Edition

FOR INSTRUCTOR USE ONLY

14 - 2

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY

Brief Exercises

181.

3

AP

184.

3

AP

187.

5

K

190.

5

AP

182.

3

AP

185.

4

AP

188.

5

AP

191.

6

AP

183.

3

AN

186.

4

AP

189.

5

AP

Exercises

192.

3

AP

199.

3,4

AP

206.

5

AP

213.

5

AP

220.

6

AP

193.

3

AP

200.

4

AP

207.

5

AP

214.

5

AP

221.

6

AP

194.

3

AP

201.

4

AN

208.

5

AP

215.

5

AP

222.

6

AP

195.

3

AN

202.

5

AP

209.

5

AP

216.

5

AN

196.

3,4

AP

203.

5

AP

210.

5

AP

217.

6

AP

197.

3,4

AP

204.

5

AP

211.

5

E

218.

6

AP

198.

3,4

AP

205.

5

AP

212.

5

AN

219.

6

AP

Completion Statements

223.

1

K

226.

5

K

229.

5

AP

232.

5

K

235.

6

K

224.

3

K

227.

5

K

230.

5

K

233.

6

K

225.

4

K

228.

5

AP

231.

5

K

234.

6

K

Matching Statements

236.

5

AN

237.

2

K

Short-Answer Essay

238.

1

K

240.

2

K

242.

6

K

244.

1

S

239.

1

K

241.

7

K

243.

7

K

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Learning Objective 1

1.

TF

4.

TF

38.

MC

41.

MC

44.

MC

215.

C

244.

SA

2.

TF

5.

TF

39.

MC

42.

MC

161.

MC

238.

SA

3.

TF

37.

MC

40.

MC

43.

MC

162.

MC

239.

SA

Learning Objective 2

6.

TF

31.

TF

46.

MC

240.

SA

7.

TF

45.

MC

47.

MC

237.

MA

Learning Objective 3

8.

TF

48/51.

MC

56.

MC

163.

MC

192.

Ex

197.

Ex

9.

TF

52.

MC

57.

MC

181.

BE

193.

Ex

198.

MC

10.

TF

53.

MC

58.

MC

182.

BE

194.

Ex

199.

MC

11.

TF

54.

MC

59.

MC

183.

BE

195.

Ex

224.

C

32.

TF

55.

MC

60.

MC

184.

BE

196.

Ex

Learning Objective 4

12.

TF

16.

TF

62.

MC

66.

MC

164.

MC

196.

Ex

200.

Ex

13.

TF

17.

TF

63.

MC

67.

MC

165.

MC

197.

Ex

201.

Ex

14.

TF

33/49.

TF

64.

MC

68.

MC

185.

BE

198.

MC

225.

C

15.

TF

61.

MC

65.

MC

69.

MC

186.

BE

199.

MC

Note: TF = True-False BE = Brief Exercise C = Completion

MC = Multiple Choice Ex = Exercise

Financial Statement Analysis

FOR INSTRUCTOR USE ONLY

14 - 3

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Learning Objective 5

18.

TF

76.

MC

93.

MC

110.

MC

127.

MC

144.

MC

210.

Ex

19.

TF

77.

MC

94.

MC

111.

MC

128.

MC

166.

MC

211.

Ex

20.

TF

78.

MC

95.

MC

112.

MC

129.

MC

167.

MC

212.

Ex

21.

TF

79.

MC

96.

MC

113.

MC

130.

MC

168.

MC

213.

Ex

22.

TF

80.

MC

97.

MC

114.

MC

131.

MC

169.

MC

214.

Ex

23.

TF

81.

MC

98.

MC

115.

MC

132.

MC

187.

BE

215.

Ex

24.

TF

82.

MC

99.

MC

116.

MC

133.

MC

188.

BE

216.

Ex

25.

TF

83.

MC

100.

MC

117.

MC

134.

MC

189.

BE

226.

C

26.

TF

84.

MC

101.

MC

118.

MC

135.

MC

190.

BE

227.

C

34.

TF

85.

MC

102.

MC

119.

MC

136.

MC

202.

Ex

228.

C

35./50.

TF

86.

MC

103.

MC

120.

MC

137.

MC

203.

Ex

229.

C

70.

MC

87.

MC

104.

MC

121.

MC

138.

MC

204.

Ex

230.

C

71.

MC

88.

MC

105.

MC

122.

MC

139.

MC

205.

Ex

231.

C

72.

MC

89.

MC

106.

MC

123.

MC

140.

MC

206.

Ex

232.

C

73.

MC

90.

MC

107.

MC

124.

MC

141.

MC

207.

Ex

236.

MA

74.

MC

91.

MC

108.

MC

125.

MC

142.

MC

208.

Ex

75.

MC

92.

MC

109.

MC

126.

MC

143.

MC

209.

Ex

Learning Objective 6

27.

TF

147.

MC

152.

MC

157.

MC

172.

MC

220.

Ex

235.

C

28.

TF

148.

MC

153.

MC

158.

MC

191.

BE

221.

Ex

242.

SA

36.

TF

149.

MC

154.

MC

159.

MC

217.

Ex

222.

Ex

45.

MC

150.

MC

155.

MC

170.

MC

218.

Ex

233.

C

46.

MC

151.

MC

156.

MC

171.

MC

219.

Ex

234.

C

Learning Objective 7

29.

TF

30.

TF

160.

MC

241.

SA

243.

SA

Learning Objective 8

173.

MC

175.

MC

177.

MC

179.

MC

174.

MC

176.

MC

178.

MC

180.

MC

Note: TF = True-False BE = Brief Exercise C = Completion

MC = Multiple Choice Ex = Exercise

CHAPTER LEARNING OBJECTIVES

1. Discuss the need for comparative analysis. There are three bases of comparison: (1)

Intracompany, which compares an item or financial relationship with other data within a

company; (2) Industry, which compares company data with industry averages; (3)

Intercompany, which compares an item or financial relationship of a company with data of one

or more competing companies.

2. Identify the tools of financial statement analysis. Financial statements can be analyzed

horizontally, vertically, and with ratios.

3. Explain and apply horizontal analysis. Horizontal analysis is a technique for evaluating a

series of data over a period of time to determine the increase or decrease that has taken

place, expressed as either an amount or a percentage.

Test Bank for Financial Accounting, Ninth Edition

14 - 4

4. Describe and apply vertical analysis. Vertical analysis is a technique that expresses each

item within a financial statement in terms of a percentage of a relevant total or a base amount.

5. Identify and compute ratios used in analyzing a firm's liquidity, profitability, and

solvency. The formula and purpose of each ratio is presented in Illustration 14–27.

6. Understand the concept of earning power, and how irregular items are presented.

Earning power refers to a company’s ability to sustain its profits from operations. “Irregular

items”—discontinued operations and extraordinary items—are presented net of tax below

income from continuing operations to highlight their unusual nature.

7. Understand the concept of quality of earnings. A high quality of earnings provides full and

transparent information that will not confuse or mislead users of financial statements. Issues

related to quality of earnings are (1) alternative accounting methods, (2) pro forma income,

and (3) improper recognition.

TRUE-FALSE STATEMENTS

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.

Financial Statement Analysis

14 - 5

9. Another name for trend analysis is horizontal analysis.

10. If a company has sales of $110 in 2013 and $154 in 2014, the percentage increase in

sales from 2013 to 2014 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 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 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.

Test Bank for Financial Accounting, Ninth Edition

14 - 6

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 component 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.

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.

Financial Statement Analysis

14 - 7

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.

Answers to True-False Statements

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

MULTIPLE CHOICE 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.

Test Bank for Financial Accounting, Ninth Edition

14 - 8

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. profitability and solvency.

42. Stockholders are most interested in evaluating

a. liquidity and solvency.

b. profitability and solvency.

c. liquidity and profitability.

d. marketability and solvency.

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 answer choices are correct.

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

a. intracompany comparisons.

b. interior comparisons.

c. intercompany comparisons.

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.

Financial Statement Analysis

14 - 9

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.

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.

Test Bank for Financial Accounting, Ninth Edition

14 - 10

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:

2016 $1,050,000

2015 950,000

2014 800,000

2013 650,000

If 2013 is the base year, what is the percentage increase in sales from 2013 to 2015?

a. 100%

b. 61.5%

c. 46.2%

d. 68.4%

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.

Financial Statement Analysis

14 - 11

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.

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:

2016 $945,000

2015 877,500

2014 675,000

If 2014 is the base year, what is the percentage increase in sales from 2014 to 2015?

a. 76.9%

b. 30%

c. 40%

d. 71.4%

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

2016 $1,704,000

2015 1,400,000

2014 1,200,000

If 2014 is the base year, what is the percentage increase in cost of goods sold from 2014

to 2016?

a. 70.4%

b. 42%

c. 85.7%

d. 117%

Test Bank for Financial Accounting, Ninth Edition

14 - 12

61. Saira, Inc. has the following income statement (in millions):

SAIRA, INC.

Income Statement

For the Year Ended December 31, 2014

Net Sales $300

Cost of Goods Sold 180

Gross Profit 120

Operating Expenses 45

Net Income $75

Using vertical analysis, what percentage is assigned to Cost of Goods Sold?

a. 40%

b. 60%

c. 100%

d. None of these answer choices are correct.

62. Saira, Inc. has the following income statement (in millions):

SAIRA, INC.

Income Statement

For the Year Ended December 31, 2014

Net Sales $300

Cost of Goods Sold 180

Gross Profit 120

Operating Expenses 45

Net Income $75

Using vertical analysis, what percentage is assigned to Net Income?

a. 625%

b. 40%

c. 25%

d. None of these answer choices are correct.

63. Vertical analysis is also called

a. common size analysis.

b. horizontal analysis.

c. ratio analysis.

d. trend analysis.

Financial Statement Analysis

14 - 13

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.

70. Each of the following is a liquidity ratio except the

a. acid-test ratio.

b. current ratio.

c. debt to assets ratio.

d. inventory turnover.

Test Bank for Financial Accounting, Ninth Edition

14 - 14

71. 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.

72. 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.

73. 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.

74. The acid-test (quick) ratio

a. is used to quickly determine a company's solvency and long-term debt paying ability.

b. relates cash, short-term investments, 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.

75. Blaney Clothing Store had a balance in the Accounts Receivable account of $437,500 at

the beginning of the year and a balance of $500,000 at the end of the year. Net credit

sales during the year amounted to $3,000,000. The average collection period of the

receivables in terms of days was

a. 53.2 days.

b. 365 days.

c. 60.1 days.

d. 57 days.