FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 13: Financial Statement Analysis Available Online in the Connect Library

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 1

Multiple Choice

Review LaterAdd Note

Review Later

Which of the following statements about financial statement analysis is incorrect?

A) In horizontal percentage analysis, an item from the financial statements is expressed as a percentage of the same item from a previous year's financial statements.
B) The reason behind a financial statement ratio or percentage analysis result is usually self evident and does not require further study or analysis.
C) Horizontal analysis for several years can be done by choosing one year as a base year and calculating increases or decreases in relation to that year.
D) Vertical analysis compares two or more financial statement items within the same time perioD.Although ratios are easy to calculate and provide useful insights into business operations, when interpreting analytical results, users should consider limitations resulting from differing industry characteristics, differing economic conditions, and the fundamental accounting principles used to produce reported financial information. Horizontal analysis is the study of the behavior of individual financial statement items over several accounting periods. The analysis of a given item may focus on trends in the absolute dollar amount of the item or trends in percentages. When performing vertical analysis on an income statement, each item on the income statement is divided by sales. All items are presented as a percentage of sales. When performing vertical analysis on the balance sheet, each item on the balance sheet is divided by total assets. All items are presented as a percentage of total assets.

E) B) and D)
F) B) and C)

Correct Answer

verified

Show Answer

Question 2

Essay

Review LaterAdd Note

Review Later

Comparative income statements for Purcell Company are provided below: Required: Perform a horizontal analysis of Purcell Company's income statement by computing horizontal percentages for each item.

Correct Answer

verified

Show Answer

Question 3

Short Answer

Review LaterAdd Note

Indicate whether each of the following statements about financial statement analysis is true or false. _____ a) Working capital is a measure of the amount of current assets a company would have left after paying its current liabilities. _____ b) If a transaction causes a company's working capital to increase, the transaction caused the company to become less liquid. _____ c) Interpretation of a company's working capital can be difficult because it is an absolute amount. _____ d) The quick ratio is a less conservative variation of the current ratio. _____ e) The quick ratio is usually calculated by using the following equation: cash + receivables + current marketable securities + prepaid expense/current liabilities

The following income statement was prepared by Cohen Company for 2012: Required: Perform vertical analysis for Cohen Company's 2012 income statement.

Keller Company paid its sales employees $1,200 in sales commissions. What impact will this transaction have on working capital?

Monte Company reported the following operating results for 2011 and 2012: Required: Express each income statement component for each year as a percentage of sales.

As of December 31, 2012, Grove Corporation had a current ratio of 1.29, quick ratio of 1.05, and working capital of $18,000. The company uses a perpetual inventory system and sells merchandise for more than it cost. On January 1, 2012 Grove issued common stock for $10,000 cash. Which of the following statement is true?

Roanoke Company collected $500 on account. What impact will this transaction have on the firm's current ratio?

Describe the factors involved in communicating useful financial information.

Short-term creditors are usually most interested in assessing:

Indicate whether each of the following statements about financial statement analysis is true or false. _____ a) The value of a corporation's price-earnings ratio indicates how optimistic investors are about a company's growth potential. _____ b) The dividend yield ratio indicates the percentage of a company's net income that it paid out in dividends. _____ c) Comparing financial statement ratios of companies in different industries can give misleading results. _____ d) Changes in general economic conditions (such as rate of inflation) can cause the values for a company's financial statement ratios to change from one year to the next. _____ e) Conservatism produces a positive bias in a company's financial statements and thus in the ratios calculated from the financial statements.

Two ratios that provide insight on the relationship between credit sales and receivables are:

Select the incorrect statement regarding the analysis of absolute amounts of various accounts reported on the financial statements.

Indicate whether each of the following statements about financial statement analysis is true or false. _____ a) The ratio, plant assets to long-term liabilities, is a measure of a company's ability to obtain additional long-term financing. _____ b) Generally, a company's current assets should be purchased using long-term financing such as bonds payable. _____ c) Ratios that measure a company's profitability provide some measure of the effectiveness of the company's management. _____ d) Net margin indicates the amount remaining from each sales dollar after cost of goods sold has been subtracted out. _____ e) Net margin is also sometimes called the return on sales ratio.

A careless accountant splattered spaghetti sauce on Kite Company's balance sheet. The balance sheet with its missing amounts is provided below: Kite Company's working capital is $138,000. Required: Compute the missing amounts. Record your answers in the following table:

Leslie Company had a current ratio of 3:1 at the end of 2011. The asset section of the company's balance sheet is provided below: Required: 1) Compute Leslie Company's end-of-year working capital. 2) Compute the company's quick (acid-test) ratio. 3) The company has a debt agreement with its bank that authorizes the bank to call in its loan to the company if the company's current ratio falls below 3:1 as of the last day of any month during the term of the loan. During January 2012, the company engaged in the three following transactions: (a) Collected $100,000 on account; (b) Purchased inventory on account, $50,000 (c) Paid accounts payable, $60,000 Will the company be in default after completing these transactions? Justify your answer.

As of December 31, 2012, Grove Corporation had a current ratio of 1.29, quick ratio of 1.05, and working capital of $18,000. The company uses a perpetual inventory system and sells merchandise for more than it cost. On January 1, 2012, Grove paid $3,600 on accounts payable. Which of the following statements is incorrect?

Jones Company's current ratio is higher than the average for its industry, while its quick ratio is below the industry average. One possible interpretation for these results is that Jones carries more inventory than most companies in its industry.

Various ratios are computed to assess different aspects of a company's financial condition and/or strength. Required: In the table below, indicate which aspect of financial condition each specified ratio is designed to assess:

Net income divided by sales is the formula for which of these analytical measures?