Q: A company’s net sales revenue increased from $$500,000 in 2022 to 600$$,000 in 2023. What is the percentage increase using horizontal analysis?

$$\frac{600,000 - 500,000}{500,000} \times 100 = 20\%$$

Question 1

Which of the following best describes horizontal analysis in financial statement analysis?

Accepted Answer

It studies percentage changes in line items from comparative financial statements over different periods.

Question 2

A company’s net sales revenue increased from $$500,000 in 2022 to 600$$,000 in 2023. What is the percentage increase using horizontal analysis?

Accepted Answer

$$\frac{600,000 - 500,000}{500,000} 	imes 100 = 20\%$$

Question 3

Which of the following is a primary purpose of vertical analysis?

Accepted Answer

To compare different companies by expressing each item as a percentage of a base amount.

Question 4

If a company’s total current assets are $$120,000 and total current liabilities are 80$$,000, what is the current ratio?

Accepted Answer

$$\frac{120,000}{80,000} = 1.5$$

Question 5

Which ratio best measures a company’s ability to pay all its current liabilities if they come due immediately?

Accepted Answer

Acid-test (quick) ratio

Question 6

A company has cash of $$10,000, marketable securities of 5$$,000, and current liabilities of $20,000. What is the cash ratio?

Accepted Answer

$$\frac{10,000 + 5,000}{20,000} = 0.75$$

Question 7

Which of the following ratios would be most useful in evaluating how efficiently a company collects its receivables?

Accepted Answer

Accounts receivable turnover ratio

Question 8

A company’s cost of goods sold is $$400,000 and average inventory is 50$$,000. What is the inventory turnover ratio?

Accepted Answer

$$\frac{400,000}{50,000} = 8$$

Question 9

If a company’s net income is $$90,000 and net sales are 600$$,000, what is the profit margin ratio?

Accepted Answer

$$\frac{90,000}{600,000} = 0.15 or$$ $$15\%$$

Question 10

Which of the following best describes the debt to equity ratio?

Accepted Answer

It measures the proportion of total liabilities relative to total equity.

Question 11

A company has total liabilities of $$300,000 and total assets of 1$$,000,000. What is the debt ratio?

Accepted Answer

$$\frac{300,000}{1,000,000} = 0.3 or$$ $$30\%$$

Question 12

Which ratio would an investor most likely use to evaluate the market price of a company’s stock relative to its earnings?

Accepted Answer

Price/earnings (P/E) ratio

Question 13

A company’s net income is $$120,000, it has 10,000 shares of common stock outstanding, and paid dividends of 1.50 $$per share. What is the earnings per share (EPS)?

Accepted Answer

$$\frac{120,000}{10,000} = 12$$

Question 14

If a company’s market price per share is $$50 and its earnings per share is 5$$, what is the price/earnings (P/E) ratio?

Accepted Answer

$$\frac{50}{5} = 10$$

Question 15

Which of the following is a red flag that may indicate financial trouble in a company’s financial statements?

Accepted Answer

Buildup of merchandise inventories

Question 16

A company’s gross profit is $$200,000 and net sales are 800$$,000. What is the gross profit percentage?

Accepted Answer

$$\frac{200,000}{800,000} = 0.25 or$$ $$25\%$$

Question 17

Which of the following best describes benchmarking in financial statement analysis?

Accepted Answer

Comparing a company’s financial performance to a key competitor or industry average.

Question 18

A company’s net income is $$50,000, total assets are 400$$,000, and total equity is $200,000. What is the rate of return on total assets?

Accepted Answer

$$\frac{50,000}{400,000} = 0.125 or$$ $$12.5\%$$

Question 19

Which of the following is NOT a purpose of ratio analysis?

Accepted Answer

Evaluating the company’s compliance with tax laws

Chapter 15: Financial Statement Analysis – Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards