Financial accounting 9e harrison chapter 13 test bank

Answer: TRUE Diff: 2 LO: 13-1 AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5 Trend analysis using income statement data is widely used for predicting the fu

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Financial Accounting, 9e (Harrison/Horngren/Thomas)

Chapter 13 Financial Statement Analysis

AICPA Bus Persp: Strategic/Critical Thinking

AICPA Functional: Measurement

2) The best way to analyze a company is by examining the financial data for several years

Answer: TRUE

Diff: 1

LO: 13-1

3) Trend percentages are computed only for balance sheet items

Answer: FALSE

Diff: 1

LO: 13-1

4) It is generally considered more useful to know the percentage change in financial statement amounts from year to year than to know the absolute dollar amount

Answer: TRUE

Diff: 2

LO: 13-1

5) Trend analysis using income statement data is widely used for predicting the future

Answer: TRUE

Diff: 2

LO: 13-1

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6) Horizontal analysis compares financial statement items in the current period with other items in the current period.

Answer: FALSE

Diff: 2

LO: 13-1

7) The percentage change in financial statement balances is computed by dividing the dollar amount of the most recent period by the base period dollar amount

Answer: FALSE

Diff: 2

LO: 13-1

8) Horizontal analysis and trend analysis are synonymous

Answer: TRUE

Diff: 1

LO: 13-1

9) If a company has sales of $250 in 2010 and $225 in 2011, the percentage increase from 2010 to 2011 is 10%

Answer: TRUE

Diff: 2

LO: 13-1

10) If a company has sales of $150 in 2010 and $225 in 2011, the percentage change from 2010 to 2011 is 50%

Answer: TRUE

Diff: 2

LO: 13-1

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11) Period to period percentage change in comparative financial statements is often called:

12) The primary focus of horizontal analysis is:

A) percentage changes in comparative financial statements

B) the balance sheet only

C) the changes in individual financial statement amounts as a percentage of some related total

D) the change in key financial statement ratios over a certain time frame

Answer: A

Diff: 2

LO: 13-1

13) 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 amount shown for the current period

B) the base-period amount

C) the average of the amounts shown for the base and the current periods

D) the amount estimated for the future period

Answer: B

Diff: 2

LO: 13-1

14) The analysis of percentage changes in comparative statements is known as:

A) economic value added analysis

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15) Horizontal analysis is most closely related to:

16) A form of horizontal analysis that indicates the direction a business is taking is:A) benchmarking

B) economic value added analysis

17) The horizontal analysis formula 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 current year amount

D) added to the base year amount divided by the base year amount

Answer: B

Diff: 2

LO: 13-1

18) Horizontal analysis of financial statements is an:

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19) When computing trend percentages:

A) the current year is always equal to 100%

B) the base year is always the latest year

C) the base year is always equal to 100%

D) the base year is equal to the current year plus the previous year divided by two

Answer: C

Diff: 2

LO: 13-1

20) Horizontal analysis is performed on:

A) only the income statement

B) only the balance sheet

C) only the statement of retained earnings

D) the income statement, the balance sheet, and the statement of retained earnings

Answer: D

Diff: 2

LO: 13-1

21) When performing a horizontal analysis on a statement of retained earnings, which would NOT show

a percentage change value?

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2) When performing vertical analysis of an income statement, net income is usually used as the base.Answer: FALSE

Diff: 2

LO: 13-2

3) The relationship of each individual asset as a percentage of total assets is an example of vertical analysis

Answer: TRUE

Diff: 2

LO: 13-2

4) Vertical analysis compares an item on the financial statement to the same item in a prior period.Answer: FALSE

Diff: 2

LO: 13-2

5) When performing a vertical analysis of the income statement, each item is stated as a percentage of net income

Answer: FALSE

Diff: 1

LO: 13-2

6) Vertical analysis is concerned with the format used to prepare financial statements

Answer: FALSE

Diff: 1

LO: 13-2

7) A company's net income as a percentage of sales is 15% Using vertical analysis, the cost of goods sold

as a percentage of sales must be 85%

Answer: FALSE

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8) Vertical analysis is a less sophisticated analysis tool than horizontal analysis.

Answer: FALSE

Diff: 1

LO: 13-2

9) Matrix analysis expresses each item on a financial statement in terms of a percent of a base amount.Answer: FALSE

Diff: 1

LO: 13-2

10) A thorough analysis of financial statements will include either horizontal or vertical analysis, but not both

Answer: FALSE

Diff: 1

LO: 13-2

11) Which of the following is typically used as the base in a vertical analysis of an income statement?A) Cash

12) Which of the following is typically used as the base in a vertical analysis of a balance sheet?

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13) Expressing cash and cash equivalents as a percentage of total assets is an example of:

14) A vertical analysis is primarily concerned with:

A) the dollar amount of the change in various financial statement amounts from year to year.B) individual financial statement items expressed as a percentage of a base (which represents 100%).C) percentage changes in the balances shown in comparative financial statements

D) the change in key financial statement ratios over a specified period of time

Answer: B

Diff: 2

LO: 13-2

15) Tech Support Corporation reports the following data:

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16) Common-size analysis is also known as:

17) In vertical analysis:

A) a base amount is optional

B) a base amount is required

C) comparative statements are optional

D) comparative statements are required

Answer: B

Diff: 2

LO: 13-2

18) A financial statement item expressed as a percentage of a base amount is a result of:A) horizontal analysis

19) In performing a vertical analysis, the base for cash is:

A) total liabilities and stockholders' equity

B) total assets

C) total cash and cash equivalents

D) total current assets

Answer: B

Diff: 2

LO: 13-2

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20) In performing a vertical analysis, the base for interest expense is:

21) Given the following data:

LO: 13-2

22) In performing a vertical analysis, the base for sales returns and allowances is:A) sales discounts

AICPA Functional: Reporting

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23) In performing a vertical analysis, the base for cost of goods sold is:

25) If a balance sheet is subjected to vertical analysis which shows that current assets (using total assets as the base) have increased from 42% to 56%, this would always mean that:

A) current assets have increased as a percentage of total assets

B) the dollar amount of total assets has increased

C) the dollar amount of total assets has decreased

D) the dollar amount of current assets has increased

Answer: A

Diff: 2

LO: 13-2

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28) If the assets shown on a balance sheet are subjected to vertical analysis (using total assets as the base),

an increase in the figure for current assets from 56% to 60% would always mean that:

A) the dollar amount of noncurrent assets has increased

B) the dollar amount of total assets has increased

C) total current assets have increased as a percentage of total assets

D) the dollar amount of current assets has increased

Answer: C

Diff: 2

LO: 13-2

29) Prepare a vertical analysis for Winkler Corporation using the information shown below (round percentages to the nearest one-tenth percent):

AICPA Bus Persp: Legal/Regulatory

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30) Prepare a vertical analysis for Crestwood Corporation's balance sheet to determine the component percentages of its assets, liabilities, and stockholders' equity Round percentages to the nearest one-tenth percent.

Answer:

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31) Prepare a vertical analysis for Westwood Corporation by completing the right column of the followingbalance sheet with the appropriate percentages Round percentages to the nearest one-tenth percent.

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Answer:

Diff: 2

LO: 13-2

AICPA Bus Persp: Legal/Regulatory

13.3 Learning Objective 13-3

1) Common-size financial statements report only dollar amounts

Answer: FALSE

Diff: 2

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2) Benchmarking is the process of comparing a company to standards set by the leading company in the industry.

Answer: FALSE

Diff: 2

LO: 13-3

3) A common-size statement is less effective than a horizontal analysis when comparing companies.Answer: FALSE

Diff: 2

LO: 13-3

4) Common-size financial statements are particularly valuable for identifying areas for improvements.Answer: TRUE

Diff: 2

LO: 13-3

5) To perform vertical analysis, financial statements must first be converted to common-size format.Answer: TRUE

Diff: 2

LO: 13-3

6) Which of the following would be most helpful in the comparison of different size companies?

A) Horizontal analysis

B) Comparison of their net incomes

C) Comparison of their working capital balances

D) Preparation of common-size financial statements

Answer: D

Diff: 2

LO: 13-3

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7) A financial statement that shows each item as a percentage of one key item on the statement is referred

8) On a common-size balance sheet each item is expressed as a percentage of:

9) On a common-size balance sheet, income taxes payable is expressed as a percentage of:

10) Benchmarking financial statements represents a form of:

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11) When benchmarking financial statements of two key competitors, the gross margin of Company A is expressed as a percentage of:

A) the total gross margins of Companies A and B

B) Company B's gross margin

C) a common standard for both Company A and Company B

D) Company A's sales

Answer: D

Diff: 2

LO: 13-3

12) Walton Company's return on sales for the most recent year was 5% The industry leader reports a return on sales of 7% The comparison of each company's return on sales is an example of:

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13) Computer City, Inc.'s comparative income statement is shown below:

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2) The statement of cash flows is helpful for spotting weaknesses as well as gauging success

Answer: TRUE

Diff: 2

LO: 13-4

3) On the statement of cash flows of a healthy company, net cash from operating activities is generally lessthan net income

Answer: FALSE

Diff: 2

LO: 13-4

4) If the sale of plant assets is a company's major source of cash, it may be a sign of financial difficulty.Answer: TRUE

Diff: 2

LO: 13-4

5) On the statement of cash flows of a healthy company, net cash from operating activities generally exceeds net income because of the reduction for depreciation

Answer: FALSE

Diff: 2

LO: 13-4

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