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FS Analysis

FS Analysis

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08/17/2013

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FINANCIAL STATEMENT ANALYSIS
TRUE-FALSE STATEMENTS
1.Earning power refers to a company’s ability to sustain its profits from operations.2.When the disposal of a significant segment occurs, the income statement should reportboth income from continuing operations and income (loss) from discontinued operations.3.An event or transaction should be classified as an extraordinary item if it is unusual innature or if it occurs infrequently.4.If a firm has only one change in accounting principle over several years, it would beclassified on the income statement as an extraordinary item.5.A change in accounting principle occurs when the principle used in the current year isdifferent from the one used by competitors in the current year.6.Comprehensive income includes all changes in stockholdersequity during a periodexcept those resulting from investments by stockholders and distributions to stockholders.7.Intracompany comparisons of the same financial statement items are often useful todetect changes in financial relationships and significant trends.8.Comparisons of company data with industry averages provide information about acompany's relative position within the industry.9.Horizontal, vertical, and circular analyses are the basic tools of financial statementanalysis.10.Horizontal analysis is a technique for evaluating a financial statement item in the currentyear with other items in the current year.11.Another name for horizontal analysis is trend analysis.12.If a company has sales of $110 in 2001 and $154 in 2002, the percentage increase insales from 2001 to 2002 is 140%.13.In horizontal analysis, if an item has a negative amount in the base year, and a positiveamount in the following year, no percentage change for that item can be computed.14.Vertical analysis is a technique for evaluating a series of financial statement data over aperiod of time to determine the increase (decrease) that has taken place.15.Common size analysis expresses each item in a financial statement as a percent of abase amount.16.In the vertical analysis of a balance sheet, the base for current liabilities is total liabilities.17.Vertical analysis is useful in making comparisons of companies of different sizes.18.Using vertical analysis of the income statement, a company's net income as a percentage
 
Test Bank for Managerial Accounting, Second Edition
of net sales is 15%; therefore, the cost of goods sold as a percentage of sales must be85%.19.In the vertical analysis of an income statement, each item is generally stated as apercentage of net income.20.Liquidity ratios measure the ability of the enterprise to survive over a long period of time.21.A solvency ratio measures the income or operating success of an enterprise for a givenperiod of time.22.The current ratio is a measure of all the ratios calculated for the current year.23.Inventory turnover measures the number of times on the average the inventory was soldduring the period.24.Profitability ratios are frequently used as a basis for evaluating management's operatingeffectiveness.25.The return on assets ratio 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.26.An advantage of the current and acid-test ratios is they use year-end balances of currentasset and current liability accounts.27.From a creditor's point of view, the higher the total debt to total assets ratio, the lower therisk that the company may be unable to pay its obligations.28.A current ratio of 1.2 to 1 indicates that a company's assets exceed its current liabilities.29.Using borrowed money to increase the rate of return on common stockholders' equity iscalled "trading on the equity."30.Diversification in American industry limits the usefulness of financial analysis.
Answers to True-False Statements
ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.
1.T6.T11.T16.F21.F26.F2.T7.T12.F17.T22.F27.F3.F8.T13.T18.F23.T28.T4.F9.F14.F19.F24.T29.T5.F10.F15.T20.F25.F30.T
13-2
 
Financial Statement Analysis
13-3
MULTIPLE CHOICE QUESTIONS
31.The discontinued operations section of the income statement refers toa.discontinuance of a product line.b.the income or loss on products that have been completed and sold.c.obsolete equipment and discontinued inventory items.d.the disposal of a significant segment of a business.32.Which one of the following would be classified as an extraordinary item?a.Expropriation of property by a foreign governmentb.Losses attributed to a labor strikec.Write-down of inventoriesd.Gains or losses from sales of equipment33.When a change in accounting principle occurs,a.all prior years' financial statements should be changed to reflect the newly adoptedprinciple.b.the new principle should be used in reporting the results of operations of the currentyear.c.the cumulative effect of the change in principle should be reflected on the incomestatement as of the beginning of the next year.d.the cumulative effect of the change in accounting principle should be classified as anextraordinary item on the income statement.34.If an item meets one (but not both) of the criteria for an extraordinary item, ita.only needs to be disclosed in the footnotes of the financial statements.b.may be treated as sales revenue (if it is a gain) and as an operating expense (if it is aloss).c.is reported as an "other revenue or gain" or "other expense and loss," net of tax.d.is reported at its gross amount as an "other revenue or gain" or "other expense or loss."35.The order of presentation of nontypical items that may appear on the income statement isa.Extraordinary items, Discontinued operations, Change in accounting principle.b.Discontinued operations, Extraordinary items, Change in accounting principle.c.Change in accounting principle, Discontinued operations, Extraordinary items.d.Change in accounting principle, Extraordinary items, Discontinued operations.36.In analyzing the financial statements of a company, a single item on the financialstatementsa.should be reported in boldface type.b.must be compared with other financial data to provide more information.c.is significant only if it is large.d.should be accompanied by a footnote.37.Comparisons of financial data made within a company are calleda.intracompany comparisons.b.interior comparisons.c.intercompany comparisons.d.intramural comparisons.

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