Ch15: Financial Statement Analysis

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Ch15: Financial Statement Analysis

• In the horizontal analysis of financial statements, the base year can be the immediately preceding period, or it can be a

period further in the past.

• True
• Fals

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ANSWER: True

• A primary purpose of the vertical analysis of financial statements is to observe and assess trends over a three-year

period.

• True
• Fals

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ANSWER: Fals

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• Common-size analysis expresses each item in a financial statement as a percent of a base amount.
• True
• Fals

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ANSWER: True

• In the vertical analysis of an income statement, cost of goods sold is represented by 100%.
• True
• Fals

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ANSWER: Fals

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• In the vertical analysis of a balance sheet, total liabilities are represented by 100%.
• True
• Fals

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ANSWER: Fals

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• In the vertical analysis of a balance sheet, the base for current liabilities is total liabilities.
• True
• Fals

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ANSWER: Fals

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• The use of the common-size analysis of financial statements makes the comparison of different-sized firms meaningful

because percentages eliminate the effects of size.

• True
• Fals

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Ch15: Financial Statement Analysis

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ANSWER: True

• Two major forms of common-size analysis are horizontal analysis and vertical analysis.
• True
• Fals

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ANSWER: True

• Horizontal analysis involves comparing two or more years of financial data for a single company.
• True
• Fals

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ANSWER: True

• Common-size analysis is used to assess and compare companies of similar size and operations.
• True
• Fals

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ANSWER: Fals

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• The increase in the cost of goods sold by 25% from Year 1 to Year 2 is an example of horizontal analysis.
• True
• Fals

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ANSWER: True

• For meaningful analysis, ratios should be compared with a standard.
• True
• Fals

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ANSWER: True

• Companies in the same industry may use different accounting methods, diminishing the usefulness of some industrial

averages.

• True
• Fals

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ANSWER: True

• Small sample sizes for an industrial report rarely cause a comparability problem in using standards.
• True
• Fals

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Ch15: Financial Statement Analysis

ANSWER: Fals

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• Labor markets can impact industrial statistics and standards.
• True
• Fals

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ANSWER: True

• Industrial statistics should be taken as absolute norms as far as standards for comparability.
• True
• Fals

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ANSWER: Fals

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• Terms of sale can produce statistical variations among companies within the same industry.
• True
• Fals

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ANSWER: True

• A number of online sources contain competitive information on individual company's ratios.
• True
• Fals

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ANSWER: True

• Industrial figures, standards, and statistics should be used with much care because they are not a good reference point

for comparing companies.

• True
• Fals

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ANSWER: Fals

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• Liquidity ratios measure the ability of a company to meet its current obligations.
• True
• Fals

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ANSWER: True

• The current ratio is a measure of the ability of a company to pay its short-term liabilities out of short-term assets.
• True
• Fals

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Ch15: Financial Statement Analysis

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ANSWER: True

• The inventory turnover ratio measures the number of days the average accounts receivable balance is outstanding

before being converted into cash.

• True
• Fals

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ANSWER: Fals

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• Inventory turnover is a measure of liquidity that assesses the speed at which a company converts its inventory into

cash.

• True
• Fals

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ANSWER: True

• The quick ratio should be larger than the current ratio.
• True
• Fals

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ANSWER: Fals

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• All debt is considered in the computation of the quick ratio.
• True
• Fals

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ANSWER: Fals

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• A short-term note receivable would be included when computing the quick ratio.
• True
• Fals

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ANSWER: True

• The inventory turnover ratio for Jill's Market is 120 times per year, and Scott's Market is 128 times per year.

Therefore, based on the given information, Scott's Market is more effective than Jill's Market in managing inventory.

• True
• Fals

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ANSWER: True

• Profitability ratios assess a company's ability to meet its long- and short-term obligations.

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