97. Indicate whether each of the following statements is true or false.
_____ a) Financial statement ratios permit comparisons over time and among different companies.
_____ b) Knowledge of financial statement analysis techniques is useful to stockholders and creditors but not to the managers of a business.
_____ c) The primary objective of accounting is to provide information that is stable over time.
_____ d) Current accounting principles indicate that financial statements should be prepared to meet information needs of those who have a reasonably informed knowledge of business.
_____ e) Financial statements are aimed at the information needs of stockholders only.
a) T b) F c) F d) T e) F
a) This is true.Ratio analysis involves studying various relationships between different items reported in a set of financial statements.
b) This is false. Knowledge of financial statement techniques is useful to managers of a business.
c) This is false.The primary objective of accounting is to provide information useful for decision making.
d) This is true. Current reporting standards target users that have a reasonably informed knowledge of business, though that level of sophistication is difficult to define.
e) This is false. Users of financial statement information include managers, creditors, stockholders, potential investors, and regulatory agencies.
98. Indicate whether each of the following statements is true or false.
_____ a) Some forms of financial statement analysis involve identifying changes in the same item for the same company over a period of time.
_____ b) Some forms of financial statement analysis involve comparing operations of different companies in the same industry.
_____ c) Vertical analysis is also called trend analysis.
_____ d) Horizontal analysis refers to studying the behavior of individual financial statement items over several periods.
_____ e) Horizontal analysis could be done using changes in the absolute dollar amount of an item or trends in percentages.
a) T b) T c) F d) T e) T
a) This is true. Horizontal analysis studies the behavior of individual financial statement items over a period of time.
b) This is true.Financial statement analysis should focus primarily on isolating information useful for
c) This is false. Horizontal analysis is also called trend analysis.
d) This is true.Horizontal analysis studies the behavior of individual financial statement items over several accounting period such as quarters or years.
e) This is true. Horizontal analysis may focus on trends in the absolute dollar amount of the item or trends in percentages.
99. Indicate whether each of the following statements about financial statement analysis is true or false.
_____ a) Comparing percentages derived from financial statement analysis has the drawback of varying materiality levels.
_____ b) The materiality of accounting information refers to whether it is viewed as favorable (good news) or unfavorable (bad news).
_____ c) Companies are exempt from accounting for immaterial items in compliance with generally accepted accounting principles.
_____ d) To judge the materiality of an absolute financial statement amount, one must consider the size of the company reporting it.
_____ e) Meaningful comparisons between two companies generally should be made using percentage analysis or ratio analysis, not absolute amounts.
a) F b) F c) T d) T e) T
a) This is false. Percentage analysis sidesteps the materiality problems of comparing different size companies by measuring changes in percentages rather than absolute amounts.
b) This is false. The materiality of information refers to its relative importance. An item is considered material if knowledge of it would influence the decision of a reasonably informed user.
c) This is true. Generally accepted accounting principles permit companies to account for immaterial items in the most convenient way, regardless of technical accounting rules. For example, companies may expense, rather than capitalize and depreciate, relatively inexpensive
d) This is true. It is difficult to judge the materiality of an absolute financial statement amount without considering the size of the company reporting it.
e) This is true. Percentage analysis involves computing the percentage relationship between two amounts. In horizontal percentage analysis, a financial statement item is expressed as a percentage of the previous balance for the same item. Percentage analysis sidesteps the materiality problems of comparing different size companies by measuring changes in percentages rather than absolute amounts.
100. Indicate whether each of the following statements about financial statement analysis is true or false.
_____ a) In vertical percentage analysis, an item from the financial statements is expressed as a percentage of the same item from a previous year's financial statements.
_____ b) The reason behind a financial statement ratio or percentage analysis result is usually self-evident and does not require further study or analysis.
_____ c) Horizontal analysis for several years can be done by choosing one year as a base year and calculating increases or decreases in relation to that year.
_____ d) Vertical analysis compares two or more financial statement items within the same time period.
_____ e) One form of horizontal analysis is the preparation of common size financial statements.
a) F b) F c) T d) T e) F
a) This is false. When performing horizontal percentage analysis, not vertical analysis, a financial statement item is expressed as a percentage of the previous balance for the same item.
b) This is false. Whether basing their analyses on absolute amounts, percentages, or ratios, users must avoid drawing overly simplistic conclusions about the reasons for the results. Numerical relationships flag conditions requiring further study. Recall that a change that appears favorable on the surface may not necessarily be a good sign. Users must evaluate the underlying reasons for the change.
c) This is true. When comparing more than two periods, analysts use either of two basic approaches: (1) choosing one base year from which to calculate all increases or decreases or (2) calculating each period’s percentage change from the preceding figure.
d) This is true. Vertical analysis of an income statement (also called a common size income statement) involves converting each income statement component to a percentage of sales, or each item on the balance sheet as a percentage of total assets.
e) This is false. Vertical analysis of an income statement (also called a common size income statement) involves converting each income statement component to a percentage of sales.