Chapter 12 - Accounting

Both Alpha Corporation and Beta Corporation operate in the same industry. Alpha's return on assets is 4 percentage points higher than Beta. However, Alpha's return on equity is over 9 percentage points higher than Beta. Which of the following helps explain this?

Alpha has a higher debt to equity ratio than Beta.

Which of these are the same as horizontal analysis?

Time-series analysis Trend analysis

We use horizontal analysis to _____.

analyze trends in financial statement data for a company over time

_____ measures sales volume in relation to the investment in assets.

asset turnover

Why is the acid-test ratio considered to be a more conservative measure of liquidity than the current ratio?

because it eliminates current assets such as inventories and prepaid expenses

Vertical analysis is also commonly known as ---- size analysis.

common size

A low current ratio indicates that a company has sufficient current assets to pay current liabilities as they become due.

false

Trend analysis and time-series analysis refer to ---- analysis.

horizontal

To analyze changes in a company's net income over the last 10 years, you should perform a ______. Multiple choice question.

horizontal analysis

To analyze changes in a company's sales over the last 5 years, you should perform a ______.

horizontal analysis

Mark wants to determine whether a specific company has become more profitable over time. Mark should compare the company's performance to: Multiple choice question.

its prior years' performance

Which of the following is the denominator in the formula used to calculate the percentage increase or decrease of an item in horizontal analysis?

prior - year amount

When comparing the financial statements of two different companies, a financial analyst would use which two categories of ratios?

profitability ratios risk ratios

In vertical analysis of the income statement, we usually express each income statement item as a percentage of:

sales

A low receivables turnover ratio could be due to any of the following except _____.

the company hires an outside agency to expedite the collection of accounts that have been outstanding for an extended period of time

To calculate a year-to-year percentage change in any financial statement line item, you should take ______, then divide by the prior year's amount, and finally multiply the result by 100.

the current year's financial statement amount minus the prior year's amount

To calculate a year-to-year percentage change in any financial statement line item such as sales, you should take the current year's amount, subtract the prior year's amount, then divide by ______, and finally multiply the result by 100.

the prior year's amount

to calculate a year-to-year percentage change in any financial statement line item such as sales, you should take the current year's amount, subtract the prior year's amount, then divide by ______, and finally multiply the result by 100. Multiple choice question.

the prior years amount

A high inventory turnover ratio indicates all of following except _____.

there are no inventory shortages

Common types of analysis that help assess a specific company's performance include comparisons:

to the same industry between companies over time

A common-size balance sheet presents each line item as a percentage of---- ----- .

total assets

A common-size balance sheet will list each line item as a percentage of

total assets

In vertical analysis of the balance sheet, we usually express each balance sheet item as a percentage of

total assets

A country recently allowed foreign companies to operate in an industry, which was previously open only to domestic producers. Gross profit ratios are more likely to decline in this industry in the future. Group starts

true

A vertical analysis is best used to make comparisons between multiple companies.

true

Risk ratios and profitability ratios represent common ratios used for analysis.

true

Using horizontal analysis, it is important to look at both the amount of change and the percentage change.

true

Common-size analysis is another term used for a ____ analysis

vertical

______ analysis identifies the relative contribution made by each financial statement line item. Multiple choice question.

vertical

______ analysis is a technique that expresses each financial statement amount as a percentage of another amount on the same financial statement. Multiple choice question.

vertical

______ analysis identifies the relative contribution made by each financial statement line item.

vertical analysis