Chapter 14— Financial Statement Analysis

TRUE/FALSE

1. If comparative balance sheets indicate no liability for bonds payable on the preceding year and a
liability of $500,000 on the current year, the increase of $500,000 can be stated as a 100% increase.

ANS: F DIF: Easy OBJ: 14-01

NAT: AACSB Analytic | AICPA FN-Measurement

2. Financial statements showing the current year's financial data in one column and preceding years'
financial data in other columns are called horizontal statements.

ANS: F DIF: Easy OBJ: 14-01

NAT: AACSB Analytic | AICPA FN-Measurement

3. Comparable financial statements are designed to compare the financial statements of two or more
corporations.

ANS: F DIF: Easy OBJ: 14-01

NAT: AACSB Analytic | AICPA FN-Measurement

4. The comparison of the financial data of a single company for two or more years is called horizontal
analysis.

ANS: T DIF: Easy OBJ: 14-01

NAT: AACSB Analytic | AICPA FN-Measurement

5. Examining relationships among data in the company's financial statements can provide knowledge
that can not be gained from just looking at individual items in the statements.

ANS: T DIF: Easy OBJ: 14-01

NAT: AACSB Reflective Thinking | AICPA BB-Critical Thinking

6. In horizontal analysis, the current year is the base year.

ANS: F DIF: Easy OBJ: 14-01

NAT: AACSB Analytic | AICPA FN-Measurement

7. On a common-size income statement, all items are stated as a percent of total assets or equities at
year-end.

ANS: F DIF: Easy OBJ: 14-01

NAT: AACSB Analytic | AICPA FN-Measurement

8. The percentage analysis of increases and decreases in corresponding items in comparative financial
statements is referred to as horizontal analysis.

ANS: T DIF: Easy OBJ: 14-01

NAT: AACSB Analytic | AICPA FN-Measurement

9. Horizontal analysis may compare three or more statements and the earliest year could be used as
the base year.

ANS: T DIF: Easy OBJ: 14-01

NAT: AACSB Analytic | AICPA FN-Measurement

10. A 15% change in sales will result in a 15% change in net income.

ANS: F DIF: Easy OBJ: 14-01

NAT: AACSB Analytic | AICPA FN-Measurement

11. A financial statement showing each item on the statement as a percentage of one key item on the
statement is called common-sized financial statements.

ANS: T DIF: Easy OBJ: 14-01

NAT: AACSB Analytic | AICPA FN-Measurement

12. The relationship of each asset item as a percent of total assets is an example of vertical analysis.

ANS: T DIF: Easy OBJ: 14-01

NAT: AACSB Analytic | AICPA FN-Measurement

13. Statements in which all items are expressed in relative terms are called common-size statements.

ANS: T DIF: Easy OBJ: 14-01

NAT: AACSB Analytic | AICPA FN-Measurement

14. The relationship of 115 to 100 can be expressed as 1.15, 1.15:1, or 115%.

ANS: T DIF: Easy OBJ: 14-01

NAT: AACSB Analytic | AICPA FN-Measurement

15. Vertical analysis refers to comparing the financial statements of a single company for several years.

ANS: F DIF: Easy OBJ: 14-01

NAT: AACSB Analytic | AICPA FN-Measurement

16. In a common size income statement, net sales are represented by 100%.

ANS: T DIF: Easy OBJ: 14-01

NAT: AACSB Analytic | AICPA FN-Measurement

17. In a common size income statement, each item is expressed as a percentage of net income.

ANS: F DIF: Easy OBJ: 14-01

NAT: AACSB Analytic | AICPA FN-Measurement

18. In the vertical analysis of a balance sheet, the base for current liabilities is total liabilities.

ANS: F DIF: Easy OBJ: 14-01

NAT: AACSB Analytic | AICPA FN-Measurement

19. 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: F DIF: Easy OBJ: 14-01

NAT: AACSB Analytic | AICPA FN-Measurement

20. In the vertical analysis of an income statement, each item is generally stated as a percentage of total
assets.

ANS: F DIF: Easy OBJ: 14-01

NAT: AACSB Analytic | AICPA FN-Measurement