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ACC 557 WK 11 Chapter 14 Quiz

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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.

9. Another name for trend analysis is horizontal analysis.

10. If a company has sales of $110 in 2012 and $154 in 2013, the percentage increase in sales from 2012 to 2013 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.

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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.

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 segment 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.

34. The three basic tools of analysis are horizontal analysis, vertical analysis, and ratio analysis.

35. A percentage change can be computed only if the base amount is zero or positive.

36. In vertical analysis, the base amount in an income statement is usually net sales.

37. Profitability ratios measure the ability of the enterprise to survive over a long period of time.

38. The days in inventory is computed by multiplying inventory turnover by 365.

39. Extraordinary items are reported net of applicable taxes in a separate section of the income statement.

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