College Accounting, 12e (Slater)
Chapter 22 Analyzing Financial Statements
22.1 Learning Objective 22-1
1) A statement comparing data from two or more consecutive periods is called a:
A) comparative balance sheet.
B) comparative income statement.
C) common-size statement.
D) both A and B.
2) In a comparative balance sheet, the ending Cash for 2012 was $315,000 and is $270,000 for 2013. The net
increase or decrease from 2012 to 2013 is:
A) 86.0%.
B) 14.3%.
C) 26.4%.
D) 16.7%.
3) To find the percent of increase or decrease of an item in a comparative balance sheet you use the
formula: % change = amount of change/base (old year).
22.2 Learning Objective 22-2
1) Comparative reports in which each item is expressed as a percentage of a base amount without dollar
amounts are called:
A) comparative financial statements.
B) common-size statements.
C) cash flow analysis.
D) horizontal analysis.
2) For vertical analysis purposes, a base item on a balance sheet is:
A) total assets.
B) total equity.
C) total liabilities.
D) net equity.
3) For vertical analysis purposes, the base item on an income statement is:
A) net income.
B) net sales.
C) total expenses.
D) total sales.
4) Statements that are often used to compare similar businesses are called:
A) comparative analysis.
B) vertical analysis.
C) horizontal analysis.
D) common-size statements.
5) A common-size comparative statement shows:
A) percents.
B) dollar increases/decreases.
C) whole dollar amounts.
D) None of the above.
6) If Cash is $2,345 in 20X2 and $3,671 in 20X1, what is the percent of increase or (decrease) from 20X1 to
20X2?
A) 56.55%
B) (56.55%)
C) 36.12%
D) (36.12%)
7) If total assets are $6,000, what is the vertical analysis for Cash when it has a balance of $2,400?
A) 40%
B) 60%
C) 250%
D) 25%
8) For trend analysis to work correctly, the accountant uses the:
A) beginning percentage.
B) base year.
C) common-size statement.
D) horizontal analysis.
9) Which analysis deals with the percentage of changes in certain items over several years?
A) Vertical analysis
B) Ratio analysis
C) Trend analysis
D) Common-size statement
10) The revenue of Carol’s Environmental Services for Years 1, 2, and 3 are $40,000, $60,000 and $80,000,
respectively. Year 1 is the base year. The trend percentage for Year 2 is:
A) 50%.
B) 150%.
C) 200%.
D) 133%.
11) The sales of Mary’s Services for Years 1, 2, and 3 are $25,000, $45,000, $60,000, respectively. The trend
percentage for Year 3 is:
A) 42%.
B) 240%.
C) 140%.
D) 58%.
12) Net income was $45,000 in Year 1 and $60,000 in Year 2. The percentage increase in net income was:
A) 33.33%.
B) 133.33%.
C) (25%).
D) (33.33).
13) What was the percentage of decrease in the Accounts Receivable account if the receivables were
$80,000 in Year 1, and $60,000 in Year 2?
A) (25%)
B) 33.33%
C) (33.33%)
D) 25%
14) In a common-size income statement, selling expenses are 55%. This means that they are 55% of:
A) net income.
B) net sales.
C) gross profit.
D) net profit.
15) If Cara’s Piano sales increased from $40,000 to $60,000 and its cost of goods sold increased from
$20,000 to $40,000, then vertical analysis based on sales would show the following for cost of goods sold
(rounded to the nearest percent):
A) 40% and 20%.
B) 10% and 30%.
C) 50% and 67%.
D) 67% and 40%.
16) An expression of the amount of each item in a statement shown as a percentage of some designated
total for purposes of comparison is called:
A) horizontal analysis.
B) earnings per share analysis.
C) return on total assets.
D) vertical analysis.
17) If current assets were $100,000 in 20x7 and $88,000 in 20×8, what was the amount of increase or
decrease? (round to nearest percent):
A) The percentage increase is 13.64%.
B) The percentage decrease is 12%.
C) The percentage decrease is 13.64%.
D) The percentage increase is 12%.
18) If Rick’s sales increased from $40,000 to $80,000 and its cost of goods sold increased from $30,000 to
$50,000, then vertical analysis based on sales would show the following for cost of goods sold for the two
periods:
A) 75% and 62.5%.
B) 62.5% and 75%
C) 133.33% and 160%
D) 160% and 133.33%.
19) If Rick’s sales decreased from $90,000 (year 1) to $45,000 (year 2) and its cost of goods sold decreased
from $30,000 (year 1) to $20,000 (year 2), then vertical analysis based on sales would show the following
decreases for cost of goods sold for the two periods:
A) 33.33% and 44.44%.
B) 44.44% and 33.33%.
C) 300% and 225%.
D) None of the above.
20) A type of analysis that compares each item with the same item in other periods is called horizontal
analysis.
21) A form of analysis in which each item on a report is shown as a percent of net sales is called a vertical
analysis of the income statement.
22) Common-size statements are used to compare companies of different sizes.
23) Common-size statements deal with the percentage of change in a certain item over several years.
24) Using just a base year and one additional year is not sufficient to do a long-term trend analysis of
accounts.
25) An accountant is completing a trend analysis for a company by comparing sales for years 2003
through 2013. The base year for the calculations is 2013.
26) Complete the horizontal analysis of Soopy’s Used Cars. (Round all percentages to the nearest tenth of
a percent.)
2013 2012 Amount Percent
of Change of Change
Current Assets $ 75,000 $ 60,000
Plant and Equipment 225,000 200,000
Total Assets $300,000 $260,000
Current Liabilities $ 30,000 $ 35,000
Long-term Liabilities 80,000 70,000
Common Stock 100,000 100,000
Retained Earnings 90,000 55,000
Total Liabilities and
Stockholders’ Equity $300,000 $260,000
27) Meranda Flower Corporation needs to develop a trend analysis for its sales and gross profit for the
past three years to make decisions for the future. Compute the trend percentages with the information
below and place your answers in the spaces provided.
Year 3 Year 2 Year 1
Net sales $1,600 $1,100 $ 800
Gross profit 750 400 250
Net sales trend percentages ________ ________ ________
Gross profit trend percentages ________ ________ ________
28) From the following, complete the common-size income statement for Isaiah’s Sporting Goods using
net sales as the base. (Round to nearest tenth of a percent.)
Amount Percent
Net Sales $750,000 ________
Cost of Goods Sold 650,000 ________
Gross Profit on Sales 100,000 ________
Operating Expenses 60,000 ________
Net Income 40,000 ________
29) From the following balance sheet for Bricks Corporation, compute the common-size balance sheet
amounts. (Round all percentages to nearest tenth of a percent.)
Amount Percent
Current Assets $ 40,000 ________
Plant and Equipment 360,000 ________
Total Assets $400,000 ________
Current Liabilities $ 100,000 ________
Long-term Liabilities 180,000 ________
Common Stock 80,000 ________
Retained Earnings 40,000 ________
Total Liabilities and
Stockholders’ Equity $400,000 ________
30) Complete the following horizontal analysis comparative income statements of Websters Corporation.
Websters Corporation
Comparative Income Statements
For the Years Ended December 31, Years 1 and 2
Amt. of Percent of
Year 2 Year 1 Change Change
Net Sales $75,000 $50,000 ________ ________
Expenses:
Cost of Goods Sold $36,000 $30,000 ________ ________
Operating Expense 17,000 9,000 ________ ________
Interest Expense 2,500 1,800 ________ ________
Income Tax Expense 1,900 1,400 ________ ________
Total Expenses $57,400 $42,200 ________ ________
Net Income $17,600 $ 7,800 ________ ________
31) Define two types of comparative income statements and compare the information provided by them.
22.3 Learning Objective 22-3
1) Liquidity ratios measure:
A) how effectively a company is using its equity.
B) how effectively a company is using its liabilities.
C) a company’s ability to pay shareholders.
D) a company’s ability to pay off short-term debts.
2) Debt management ratios measure:
A) how effectively a company is using its cash.
B) how well a company is using debt versus equity position.
C) a company’s ability to earn profit.
D) a company’s ability to meet payable obligations.
3) Profitability ratios measure:
A) a company’s ability to earn profits.
B) a company’s ability to meet short-term obligations.
C) how well a company is using debt versus equity.
D) how effectively a company is using its assets.
4) The current ratio is:
A) quick assets divided by current liabilities.
B) assets divided by liabilities.
C) current assets divided by current liabilities.
D) net sales divided by current liabilities.
5) The current ratio determines the ability of a company to:
A) pay off all payables.
B) pay off current payables.
C) manage its ability to earn profit.
D) use its equity.
6) The current ratio for a company with current assets of $70,000, current liabilities of $50,000, total assets
of $150,000, and net sales of $80,000, would be:
A) 1.4.
B) 0.714.
C) 3.0.
D) 0.875.
7) Smith Company has the following account balances:
Cash
$100,000
Accounts Receivable
30,000
Merchandise Inventory
250,000
Equipment
400,000
Accounts Payable
50,000
Bonds Payable
300,000
Calculate Smith Company’s current ratio.
A) 8.0:1
B) 7.6:1
C) 2.2:
D) 1.1:
8) Which statement below best describes the quick (acid test) ratio?
A) The acid test ratio considers only the most liquid assets: cash, accounts receivable, and temporary
investments.
B) The current ratio includes only the assets most easily converted into cash.
C) The acid test adds merchandise inventory and prepaid expenses in the computation of current assets.
D) None of these answers are correct.
9) An acid test (quick) ratio of 0.75 to 1 would indicate:
A) a ratio that would not allow a company to pay off all current liabilities with quick assets.
B) for every $1 of short-term debt there is $0.75 of quick assets to meet short-term obligations.
C) for every $1 of current assets there is $0.75 of short-term debt.
D) Both A and B are correct.
10) A company has $56,000 in cash, $12,000 in accounts receivable, $25,000 in temporary investments and
$100,000 in merchandise inventory. The company has $60,000 in current liabilities. The company’s acid
test (quick) ratio is:
A) 3.217.
B) 1.550.
C) 1.133.
D) 0.933.
11) With a beginning Accounts Receivable balance of $20,000, an ending balance of $26,000, and net credit
sales of $408,000, compute accounts receivable turnover ratio.
A) 0.05
B) 20.4
C) 17.7
D) 68
12) Chuck Company has a beginning Accounts Receivable balance of $65,000 and an ending balance of
$60,000. Net credit sales are $250,000. The company’s accounts receivable turnover ratio is:
A) 3.846.
B) 4.167.
C) 4.000.
D) None of the above.
13) With a beginning Accounts Receivable balance of $70,000, an ending balance of $140,000, and net
credit sales of $800,000, compute accounts receivable turnover ratio (rounded to the nearest tenth):
A) 7.6.
B) 11.4.
C) 5.7.
D) 3.8.
14) The ratio that indicates how many days it takes to turn accounts receivable into cash is the:
A) accounts receivable turnover ratio.
B) average turnover ratio.
C) average collection period.
D) quick assets turnover ratio.
15) Carla‘s Fashions has an average collection period of 30 days. You could infer that Carla’s Fashions:
A) bills her customers monthly.
B) bills her customers quarterly.
C) has an accounts receivable turnover of approximately 12.
D) Both A and C can be inferred.
16) If the average collection period is 35 days, this means:
A) from the date of purchase to the date of payment is 35 days.
B) from the date of sale to the date of receipt of payment is 35 days.
C) from the date of discount to the date of receipt of payment is 35 days.
D) None of these answers are correct.
17) The inventory turnover ratio calculates:
A) how many times the inventory turns over in one period.
B) number of times inventory is purchased in one period.
C) the dollar amount of change in inventory in one period.
D) None of these answers are correct.
18) If beginning and ending inventories are $20,000 and $30,000, respectively, and cost of goods sold is
$400,000, what is the inventory turnover ratio?
A) 18
B) 16
C) 15.5
D) 15
19) If beginning and ending inventories are $100,000 and 150,000, respectively, and the cost of goods sold
is $450,000, what is the inventory turnover ratio?
A) 4.50
B) 3.00
C) 3.60
D) 0.28
20) If management wishes to determine the average degree of delinquency of the charge customers, they
could use the:
A) rate of return on total assets.
B) rate of return on common stockholders’ equity.
C) accounts receivable turnover.
D) quick (acid test) ratio.
21) If management wishes to know the ability to pay off the upcoming debts of a business, they could use
the:
A) debt to total assets.
B) current ratio
C) inventory turnover ratio.
D) times interest earned.
22) If management wishes to evaluate how effectively the assets of a business are being used, they could
use the:
A) asset turnover.
B) rate of return on common stockholders’ equity.
C) acid test ratio.
D) debt to total stockholders’ equity.
23) If management wishes to evaluate the ability of a business to provide funding to cover the operating
expenses, they could use the:
A) rate of return on total assets.
B) rate of return on common stockholders’ equity.
C) gross profit rate.
D) times interest earned.
24) If management wishes to measure how effectively the assets were used in generating a profit, they
could use the:
A) rate of return on total assets.
B) rate of return on common stockholders’ equity.
C) return on sales.
D) times interest earned.
25) If management wishes to know how long it takes to collect from a charge customer, they could use
the:
A) rate of return on total assets.
B) average collection period.
C) acid test ratio.
D) current ratio.
26) If management wishes to evaluate the amount of assets which were financed by creditors, they could
use the:
A) debt to total assets.
B) rate of return on common stockholders’ equity.
C) debt to total liabilities.
D) times interest earned.
27) If management wishes to know how well the inventory is moving for a business, they could use the:
A) accounts receivable turnover.
B) inventory turnover.
C) acid test ratio.
D) current ratio.