Accounting: Balance Sheet and Financial Statements Essay

1. The percentage analysis of increases and decreases in individual items in comparative financial statements is called a. vertical analysis
b. solvency analysis
c. profitability analysis
d. horizontal analysis

2. Which of the following below generally is the most useful in analyzing companies of different sizes a. comparative statements
b. common-sized financial statements
c. price-level accounting
d. audit report

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3. The percent of fixed assets to total assets is an example of e. vertical analysis
f. solvency analysis
g. profitability analysis
h. horizontal analysis
.
4. An analysis in which all the components of an income statement are expressed as a percentage of net sales is called i. vertical analysis
j. horizontal analysis
k. liquidity analysis
l. common-size analysis

5. A balance sheet that displays only component percentages is called m. trend balance sheet
n. comparative balance sheet
o. condensed balance sheet
p. common-sized balance sheet

6. One reason that a common-size statement is a useful tool in financial analysis is that it enables the user to q.

judge the relative potential of two companies of similar size in different industries r.
determine which companies in a single industry are of the same value s. determine which companies in a single industry are of the same size t. make a better comparison of two companies of different sizes in the same industry

7. Under which of the following cases may a percentage change be computed? u. There is no amount in the base year.
v. There is a negative amount in the base year and a negative amount in the subsequent year. w. The trend of the amounts is decreasing but all amounts are positive. x. There is a negative amount in the base year and a positive amount in the subsequent year.

8. In a common size balance sheet, the 100% figure is:
y. total property, plant and equipment
z. total current assets
{. total liabilities
|. total assets

9. Horizontal analysis is a technique for evaluating financial statement data }. for one period of time
~. over a period of time
. on a certain date
. as it may appear in the future

10. Horizontal analysis of comparative financial statements includes the . development of common size statements
. calculation of liquidity ratios
. calculation of dollar amount changes and percentage changes from the previous to the current year . evaluation of financial statement data

11. In horizontal analysis, each item is expressed as a percentage of the . base year figure
. retained earnings figure
. total assets figure
. net income figure

12. The ability of a business to pay its debts as they come due and to earn a reasonable amount of income is referred to as . solvency and leverage
. solvency and profitability
. solvency and liquidity
. solvency and equity

Accounts payable$ 30,000
Accounts receivable65,000
Accrued liabilities7,000
Cash20,000
Intangible assets40,000
Inventory72,000
Long-term investments100,000
Long-term liabilities75,000
Marketable securities36,000
Notes payable (short-term)20,000
Property, plant, and equipment625,000
Prepaid expenses2,000

13. Based on the above data, what is the amount of quick assets? . $163,000
. $195,000
. $121,000
. $56,000

14. Based on the above data, what is the amount of working capital? . $238,000
. $138,000
. $178,000
. $64,000

15. Based on the above data, what is the quick ratio, rounded to one decimal point? . 2.4
. 3.4
. 2.1
. 1.5

16. Which of the following is a measure of the liquid position of a corporation? . earnings per share
. inventory turnover
. current ratio
. number of times interest charges earned

17. Which of the following is not included in the computation of the quick ratio? . inventory
. marketable securities
. accounts receivable
. cash

18. The numerator used to calculate accounts receivable turnover is . total sales
. net sales
. accounts receivable at year-end
. average accounts receivable

19. An acceleration in the collection of receivables will tend to cause the accounts receivable turnover to . decrease
. remain the same
. either increase or decrease
. increase

20. Which of the following ratios provides a solvency measure that shows the margin of safety of noteholders or bondholders and also gives an indication of the potential ability of the business to borrow additional funds on a long-term basis? . ratio of fixed assets to long-term liabilities

. ratio of net sales to assets
. number of days’ sales in receivables
. rate earned on stockholders’ equity

21. The number of times interest expense is earned is computed as . net income plus interest expense, divided by interest expense . income before income tax plus interest expense, divided by interest expense . net income divided by interest expense

. income before income tax divided by interest expense

22. The current ratio is
. used to evaluate a company’s liquidity and short-term debt paying ability . is a solvency measure that indicated the margin of safety of a noteholder or bondholder . calculated by dividing current liabilities by current assets . calculated by subtracting current liabilities from current assets

23. The tendency of the rate earned on stockholders’ equity to vary disproportionately from the rate earned on total assets is sometimes referred to as . leverage
. solvency
. yield
. quick assets

24. The particular analytical measures chosen to analyze a company may be influenced by all of the following except: . industry type
. capital structure
. diversity of business operations
. product quality or service effectiveness

25. Which one of the following is not a characteristic generally evaluated in ratio analysis? . liquidity
. profitability
. solvency
. marketability

26. Short-term creditors are typically most interested in assessing . marketability
. profitability
. operating results
. solvency

27. A common measure of liquidity is
. ratio of net sales to assets
. dividends per share of common stock
. receivable turnover
. profit margin

28. A company that is leveraged is one that
. contains debt financing
. contains equity financing
. has a high current ratio
. has a high earnings per share

29. Percentage analyses, ratios, turnovers, and other measures of financial position and operating results are . a substitute for sound judgment
. useful analytical measures
. enough information for analysis, industry information is not needed . unnecessary for analysis, but reaction is better

30. The purpose of an audit is to
. determine whether or not a company is a good investment. . render an opinion on the fairness of the statements. . determine whether or not a company complies with income tax regulations. . determine whether or not a company is a good credit risk.

MATCHING

Match each ratio to its use. Items may be used more than once.

a.| To assess the profitability of the assets.|
b.| To assess the effectiveness in the use of assets.|
c.| To indicate the ability to meet currently maturing obligations.| d.| To indicate the margin of safety to creditors.|
e.| To indicate instant debt-paying ability.|
f.| To assess the profitability of the investment by common stockholders.| g.| To indicate future earnings prospects.|
h.| To indicate the extent to which earnings are being distributed to common stockholders.|

1.Price-Earnings (P/E) Ratio
2.Working Capital
3.Rate Earned on Total Assets
4.Ratio of Liabilities to Stockholders’ Equity
5.Quick Ratio
6.Rate Earned on Common Stockholders’ Equity
7.Current Ratio
8.Ratio of Net Sales to Assets
9.Dividends per Share
10.Earnings per Share (EPS) on Common Stock

Match each item with its definition.

a.| Discontinued Operations|
b.| Extraordinary Items|
c.| Change from one generally accepted accounting principle to another | d.| Horizontal analysis|
e.| Vertical analysis |
f.| Common-sized financial statements|
g.| Current position analysis|
h.| Profitability analysis|

11.A percentage analysis of increases and decreases in related items in comparative financial statements.
12.Something that is both unusual and infrequent.
13.An analysis of a company’s ability to pay its current liabilities.
14.The percentage analysis of the relationship of each component in a financial statement to a total within the statement.
15.Occurs when a company abandons a segment.
16.Focuses on a company’s ability to generate net income
17.Useful for comparing one company to another or a company with industry averages
18.This requires a restatement of prior period financial statements.

EXERCISE/OTHER

1.Why would you or why wouldn’t you compare an organization like Ford Motor Company to the local car dealer “Johnson City Ford/Lincoln/Mercury” in vertical and horizontal analysis?

2.What is a major advantage of using percentages rather than dollar changes in doing horizontal and vertical analysis?

3.For Garrison Corporation, the working capital at the end of the current year is $10,000 more than the working capital at the end of the preceding year, reported as follows: | Current year| Preceding year|

Current assets:| | |
Cash, marketable securities, and receivables| $80,000| $84,000| Inventories| 120,000| 66,000|
Total current assets| $200,000| $150,000|
Current liabilities| 100,000| 60,000|
Working capital| $100,000| $90,000|

Required:
Has the current position improved? Explain.

4.Why would you compare or not compare Coca-Cola and Pepsi-Cola (PepsiCo) as companies to each other?

5.Define solvency and profitability. How are they alike?

6.What information is generally included in the Management Discussion and Analysis (MD&A) section of a corporate annual report?

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