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Week 11 Quiz 10:
Chapter 14
TRUE-FALSE STATEMENTS
1. Intracompany comparisons of the same financial statement items
can often detect changes in financial relationships and significant trends.
Ans: LO: 1, Bloom: C,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting,
AICPA PC: None, IMA: Performance Measurement
2. Calculating financial ratios is a financial reporting
requirement under generally accepted accounting principles.
Ans: LO: 1, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting,
AICPA PC: None, IMA: Performance Measurement
3. Measures of a company's liquidity are concerned with the
frequency and amounts of dividend payments.
Ans: LO: 1, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting,
AICPA PC: None, IMA: Performance Measurement
4. Analysis of financial statements is enhanced with the use of
comparative data.
Ans: LO: 1, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting,
AICPA PC: None, IMA: Performance Measurement
5. Comparisons of company data with industry averages can provide
some insight into the company's relative position in the industry.
Ans: LO: 1, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN:
Reporting, AICPA PC: None, IMA: Performance Measurement
6. Vertical and horizontal analyses are concerned with the format
used to prepare financial statements.
Ans: LO: 2, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting,
AICPA PC: None, IMA: Reporting
7. Horizontal, vertical, and circular analyses are the most common
tools of financial statement analysis.
Ans: LO: 2, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting,
AICPA PC: None, IMA: Reporting
8. Horizontal analysis is a technique for evaluating a financial
statement item in the current year with other items in the current year.
Ans: LO: 3, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting,
AICPA PC: None, IMA: Performance Measurement
9. Another name for trend analysis is horizontal analysis.
Ans: LO: 3, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting,
AICPA PC: None, IMA: Performance Measurement
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%.
Ans: LO: 3, Bloom: AP,
Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN:
Measurement, AICPA PC: Problem Solving, IMA: Performance Measurement
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.
Ans: LO: 3, Bloom: C,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting,
AICPA PC: None, IMA: Performance Measurement
12. Common size analysis expresses each item within a financial
statement in terms of a percent of a base amount.
Ans: LO: 4, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting,
AICPA PC: None, IMA: Performance Measurement
13. Vertical analysis is a more sophisticated analytical tool than
horizontal analysis.
Ans: LO: 4, Bloom: C,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting,
AICPA PC: None, IMA: Performance Measurement
14. Vertical analysis is useful in making comparisons of companies
of different sizes.
Ans: LO: 4, Bloom: C,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting,
AICPA PC: None, IMA: Performance Measurement
15. Meaningful analysis of financial statements will include either
horizontal or vertical analysis, but not both.
Ans: LO: 4, Bloom: C,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting,
AICPA PC: None, IMA: Performance Measurement
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%.
Ans: LO: 4, Bloom: C,
Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN:
Measurement, AICPA PC: Problem Solving, IMA: Performance Measurement
17. In the vertical analysis of the income statement, each item is
generally stated as a percentage of net income.
Ans: LO: 4, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting,
AICPA PC: None, IMA: Performance Measurement
18. A ratio can be expressed as a percentage, a rate, or a
proportion.
Ans: LO: 5, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting,
AICPA PC: None, IMA: Performance Measurement
19. A solvency ratio measures the income or operating success of an
enterprise for a given period of time.
Ans: LO: 5, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting,
AICPA PC: None, IMA: Performance Measurement
20. The current ratio is a measure of all the ratios calculated for
the current year.
Ans: LO: 5, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting,
AICPA PC: None, IMA: Performance Measurement
21. Inventory turnover measures the number of times on the average
the inventory was sold during the period.
Ans: LO: 5, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting,
AICPA PC: None, IMA: Performance Measurement
22. Profitability ratios are frequently used as a basis for evaluating
management's operating effectiveness.
Ans: LO: 5, Bloom: C,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting,
AICPA PC: None, IMA: Performance Measurement
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.
Ans: LO: 5, Bloom: C,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting,
AICPA PC: None, IMA: Performance Measurement
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.
Ans: LO: 5, Bloom: C,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Risk Analysis,
AICPA PC: None, IMA: Investment Decisions
25. A current ratio of 1.2 to 1 indicates that a company's current
assets exceed its current liabilities.
Ans: LO: 5, Bloom: C,
Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN:
Measurement, AICPA PC: Problem Solving, IMA: Performance Measurement
26. Using borrowed money to increase the rate of return on common
stockholders' equity is called "trading on the equity."
Ans: LO: 5, Bloom: C,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting,
AICPA PC: None, IMA: Business Economics
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.
Ans: LO: 6, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: Communcations, AICPA BB: Legal/Regulatory,
AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
28. An event or transaction should be classified as an extraordinary
item if it is unusual in nature or if it occurs infrequently.
Ans: LO: 6, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Reporting, AICPA PC: None, IMA: Reporting
29. Variations among companies in the application of generally
accepted accounting principles may reduce quality of earnings.
Ans: LO: 7, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Reporting, AICPA PC: None, IMA: Reporting
30. Pro forma income usually excludes items that the company thinks are
unusual or nonrecurring.
Ans: LO: 7, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: Communcations, AICPA BB: Legal/Regulatory,
AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
31. The
three basic tools of analysis are horizontal analysis, vertical analysis, and
ratio analysis.
Ans: LO: 2, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA
FN: Reporting, AICPA PC: None, IMA: Reporting
32. A
percentage change can be computed only if the base amount is zero or positive.
Ans: LO: 3, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Reporting, AICPA PC: None, IMA: Reporting
33. In
vertical analysis, the base amount in an income statement is usually net sales.
Ans: LO: 4, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Reporting, AICPA PC: None, IMA: Reporting
34. Profitability
ratios measure the ability of the enterprise to survive over a long period of
time.
Ans: LO: 5, Bloom: K, Difficulty:
Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting,
AICPA PC: None, IMA: Reporting
35. The
days in inventory is computed by multiplying inventory turnover by 365.
Ans: LO: 5, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Reporting, AICPA PC: None, IMA: Reporting
36. Extraordinary
items are reported net of applicable taxes in a separate section of the income
statement.
Ans: LO: 6, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Reporting, AICPA PC: None, IMA: Reporting
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
Ans: LO: 1, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN:
Risk Analysis, AICPA PC: None, IMA: Business Economics
38. Which one of the following is not a characteristic generally evaluated
in analyzing financial statements?
a. Liquidity
b. Profitability
c. Marketability
d. Solvency
Ans: LO: 1, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Risk Analysis, AICPA PC: None, IMA: Business Economics
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.
Ans: LO: 1, Bloom: C,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Risk Analysis, AICPA PC: None, IMA: Business Economics
40. Short-term creditors are usually most interested in evaluating
a. solvency.
b. liquidity.
c. marketability.
d. profitability.
Ans: LO: 1, Bloom: C,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Risk Analysis, AICPA PC: None, IMA: Business Economics
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.
Ans: LO: 1, Bloom: C,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Risk Analysis, AICPA PC: None, IMA: Business Economics
42. Stockholders are most interested in evaluating
a. liquidity and
solvency.
b. profitability
and solvency.
c. liquidity and
profitability.
d. marketability
and solvency.
Ans: LO: 1, Bloom: C,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Risk Analysis, AICPA PC: None, IMA: Business Economics
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.
Ans: LO: 1, Bloom: C,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Risk Analysis, AICPA PC: None, IMA: Business Economics
44. Comparisons of financial data made within a company are called
a. intracompany
comparisons.
b. interior
comparisons.
c. intercompany
comparisons.
d. intramural
comparisons.
Ans: LO: 1, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN:
Reporting, AICPA PC: None, IMA: Business Economics
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.
Ans: LO: 2, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Reporting, AICPA PC: None, IMA: Business Economics
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
Ans: LO: 2, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Reporting, AICPA PC: None, IMA: Business Economics
47. In analyzing financial statements, horizontal analysis is a
a. requirement.
b. tool.
c. principle.
d. theory.
Ans: LO: 2, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Reporting, AICPA PC: None, IMA: Business Economics
48. Horizontal analysis is also called
a. linear
analysis.
b. vertical
analysis.
c. trend
analysis.
d. common size
analysis.
Ans: LO: 2, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Reporting, AICPA PC: None, IMA: Business Economics
49. Vertical analysis is also known as
a. perpendicular
analysis.
b. common size
analysis.
c. trend
analysis.
d. straight-line
analysis.
Ans: LO: 2, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Reporting, AICPA PC: None, IMA: Business Economics
50. In ratio analysis, the ratios are never expressed as a
a. rate.
b. negative
figure.
c. percentage.
d. simple
proportion.
Ans: LO: 2, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Reporting, AICPA PC: None, IMA: Business Economics
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.
Ans: LO: 3, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Reporting, AICPA PC: None, IMA: Business Economics
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.
Ans: LO: 3, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Reporting, AICPA PC: None, IMA: Business Economics
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.
Ans: LO: 3, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Reporting, AICPA PC: None, IMA: Business Economics
54. Assume the following sales data for a company:
2014 $1,050,000
2013 950,000
2012 800,000
2011 550,000
If 2011 is the
base year, what is the percentage increase in sales from 2011 to 2013?
a. 100%
b. 90.9%
c. 72.7%
d. 52.4%
Ans: LO: 3, Bloom: AP,
Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA
FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
55. Comparative balance sheets are usually prepared for
a. one year.
b. two years.
c. three years.
d. four years.
Ans: LO: 3, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Reporting, AICPA PC: None, IMA: Reporting
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.
Ans: LO: 3, Bloom: C,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Reporting, AICPA PC: None, IMA: Business Economics
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.
Ans: LO: 3, Bloom: C,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Reporting, AICPA PC: None, IMA: Business Economics
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.
Ans: LO: 3, Bloom: C,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN:
Reporting, AICPA PC: None, IMA: Business Economics
59. Assume the following sales data for a company:
2014 $945,000
2013 877,500
2012 650,000
If 2012 is the base year, what
is the percentage increase in sales from 2012 to 2013?
a. 24%
b. 35%
c. 76%
d. 135%
Ans: LO: 3, Bloom: AP,
Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN:
Reporting, AICPA PC: Problem Solving, IMA: Business Economics
60. Assume
the following cost of goods sold data for a company:
2014 $1,680,000
2013 1,400,000
2012 1,200,000
If 2012 is the
base year, what is the percentage increase in cost of goods sold from 2012 to
2014?
a. 140%
b. 40%
c. 23%
d. 17%
Ans: LO: 3, Bloom: AP,
Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA
FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
61. Darius,
Inc. has the following income statement (in millions):
DARIUS, INC.
Income Statement
For the Year Ended December 31,
2013
Net Sales $300
Cost of Goods
Sold 120
Gross Profit 180
Operating
Expenses 44
Net Income $136
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