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Week 5 - Study Plan Chapter 9
1. Describe the usefulness of financial statements and methods of analysis.
Problem #5 - Incorrect
_____ is the ability of a company to pay its debts as they become due over a long period of time.
a. Profitability
b. Liquidity
c. Solvency
d. Turnover
Feedback
Incorrect. The income statement and statement of cash flows provide useful information on the
ability of the company to generate cash to pay periodic interest and loans at maturity.
Problem #19 - Incorrect
_____ is the ability to convert assets to cash.
a. Liquidity
b. Solvency
c. Factoring
d. Profitability
Feedback
Incorrect. The ability to convert assets to cash is a means of evaluating a company's capacity to
pay its short-term debt.
2. Describe and illustrate global analysis of financial statements.
Problem #7 - Incorrect
The comparative income statement of Lexiplex Company is as shown below. Identify the
financial statement analysis method used by Lexiplex.
Lexiplex Company
Comparative Income Statement
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Week 5 - Study Plan Chapter 9
For the Years Ended December 31, 2017 and 2016
2017 2016
Amount Percent Amount Percent
Sales 150,000 100.0% 120,000 100.0%
Cost of goods sold (85,000) 56.7% (78,000) 65.0%
Gross profit 65,000 43.3% 42,000 35.0%
Selling expenses (29,000) 19.3% (18,900) 15.8%
Administrative expenses (15,000) 10.0% (12,000) 10.0%
Total operating expenses 44,000 29.3% 30,900 25.8%
Income from operations 21,000 14.0% 11,100 9.3%
Other expenses (2,500) 1.7% (900) 0.8%
Income before income tax 18,500 12.3% 10,200 8.5%
Income tax expense (7,500) 5.0% (6,000) 5.0%
Net income 11,000 7.3% 4,200 3.5%
a. Common-sized statements
b. Horizontal analysis
c. Component analysis
d. Vertical analysis
Feedback
Incorrect. Global analysis computes changes in amounts, percentages of amounts, and percentage
changes in amounts for each financial statement. In a vertical analysis of the income statement,
each item is stated as a percent of sales.
Problem #10 - Incorrect
The schedule showing the current assets section of Topaz Company for the years ended
December 31, 2017 and December 31, 2016 is provided below. Calculate the percentage change
in total current assets using horizontal analysis method. (Round the answer to one decimal
place.)
Topaz Company
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Week 5 - Study Plan Chapter 9
Comparative Schedule of Current Assets
December 31, 2017 and 2016
Dec. 31, 2017 Dec. 31, 2016
Cash $ 85,000 $ 73,000
Inventories 102,000 110,000
Accounts receivable (net) 10,200 9,800
Total current assets $197,200 $192,800
a. (4.1)%
b. (7.3)%
c. 2.3%
d. 16.4%
Feedback
Incorrect. In horizontal analysis, each item on the most recent statement is compared with the
related item on one or more earlier statements. Total current assets (2017) = $85,000 + $102,000
+ $10,200 = $197,200
Total current assets (2016) = $73,000 + $110,000 + $9,800 = $192,800
Percentage change in current assets = ($197,200 – $192,800) ÷ $192, 800 = 2.3%
Problem #11 - Incorrect
Which of the following analysis methods is useful for comparing one company with another or
for comparing a company with industry averages?
a. Common-sized statement
b. Horizontal analysis
c. Rationing metrics
d. Vertical analysis
Feedback
Incorrect. In the analysis method that is useful for comparing one company with another, all
items are expressed as percentages with no dollar amounts shown.
Problem #15 - Correct
Week 5 - Study Plan Chapter 9
1. Describe the usefulness of financial statements and methods of analysis.
Problem #5 - Incorrect
_____ is the ability of a company to pay its debts as they become due over a long period of time.
a. Profitability
b. Liquidity
c. Solvency
d. Turnover
Feedback
Incorrect. The income statement and statement of cash flows provide useful information on the
ability of the company to generate cash to pay periodic interest and loans at maturity.
Problem #19 - Incorrect
_____ is the ability to convert assets to cash.
a. Liquidity
b. Solvency
c. Factoring
d. Profitability
Feedback
Incorrect. The ability to convert assets to cash is a means of evaluating a company's capacity to
pay its short-term debt.
2. Describe and illustrate global analysis of financial statements.
Problem #7 - Incorrect
The comparative income statement of Lexiplex Company is as shown below. Identify the
financial statement analysis method used by Lexiplex.
Lexiplex Company
Comparative Income Statement
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Week 5 - Study Plan Chapter 9
For the Years Ended December 31, 2017 and 2016
2017 2016
Amount Percent Amount Percent
Sales 150,000 100.0% 120,000 100.0%
Cost of goods sold (85,000) 56.7% (78,000) 65.0%
Gross profit 65,000 43.3% 42,000 35.0%
Selling expenses (29,000) 19.3% (18,900) 15.8%
Administrative expenses (15,000) 10.0% (12,000) 10.0%
Total operating expenses 44,000 29.3% 30,900 25.8%
Income from operations 21,000 14.0% 11,100 9.3%
Other expenses (2,500) 1.7% (900) 0.8%
Income before income tax 18,500 12.3% 10,200 8.5%
Income tax expense (7,500) 5.0% (6,000) 5.0%
Net income 11,000 7.3% 4,200 3.5%
a. Common-sized statements
b. Horizontal analysis
c. Component analysis
d. Vertical analysis
Feedback
Incorrect. Global analysis computes changes in amounts, percentages of amounts, and percentage
changes in amounts for each financial statement. In a vertical analysis of the income statement,
each item is stated as a percent of sales.
Problem #10 - Incorrect
The schedule showing the current assets section of Topaz Company for the years ended
December 31, 2017 and December 31, 2016 is provided below. Calculate the percentage change
in total current assets using horizontal analysis method. (Round the answer to one decimal
place.)
Topaz Company
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Week 5 - Study Plan Chapter 9
Comparative Schedule of Current Assets
December 31, 2017 and 2016
Dec. 31, 2017 Dec. 31, 2016
Cash $ 85,000 $ 73,000
Inventories 102,000 110,000
Accounts receivable (net) 10,200 9,800
Total current assets $197,200 $192,800
a. (4.1)%
b. (7.3)%
c. 2.3%
d. 16.4%
Feedback
Incorrect. In horizontal analysis, each item on the most recent statement is compared with the
related item on one or more earlier statements. Total current assets (2017) = $85,000 + $102,000
+ $10,200 = $197,200
Total current assets (2016) = $73,000 + $110,000 + $9,800 = $192,800
Percentage change in current assets = ($197,200 – $192,800) ÷ $192, 800 = 2.3%
Problem #11 - Incorrect
Which of the following analysis methods is useful for comparing one company with another or
for comparing a company with industry averages?
a. Common-sized statement
b. Horizontal analysis
c. Rationing metrics
d. Vertical analysis
Feedback
Incorrect. In the analysis method that is useful for comparing one company with another, all
items are expressed as percentages with no dollar amounts shown.
Problem #15 - Correct
