Chapter 13 Test Bank

Financial Accounting, 9e (Harrison/Horngren/Thomas)
Chapter 13 Financial Statement Analysis

13.1 Learning Objective 13-1
1) Vertical analysis highlights changes in financial statement balances from period to period.
Answer: FALSE
Diff: 1
LO: 13-1
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
2) The best way to analyze a company is by examining the financial data for several years.
Answer: TRUE
Diff: 1
LO: 13-1
3) Trend percentages are computed only for balance sheet items.
Answer: FALSE
Diff: 1
LO: 13-1
4) It is generally considered more useful to know the percentage change in financial statement amounts
from year to year than to know the absolute dollar amount.
Answer: TRUE
Diff: 2
LO: 13-1
5) Trend analysis using income statement data is widely used for predicting the future.
Answer: TRUE
Diff: 2
LO: 13-1
1
Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall
6) Horizontal analysis compares financial statement items in the current period with other items in the
current period.
Answer: FALSE
Diff: 2
LO: 13-1
7) The percentage change in financial statement balances is computed by dividing the dollar amount of
the most recent period by the base period dollar amount.
Answer: FALSE
Diff: 2
LO: 13-1
8) Horizontal analysis and trend analysis are synonymous.
Answer: TRUE
Diff: 1
LO: 13-1
9) If a company has sales of $250 in 2010 and $225 in 2011, the percentage increase from 2010 to 2011 is
10%.
Answer: TRUE
Diff: 2
LO: 13-1
10) If a company has sales of $150 in 2010 and $225 in 2011, the percentage change from 2010 to 2011 is
50%.
Answer: TRUE
Diff: 2
LO: 13-1
2
11) Period to period percentage change in comparative financial statements is often called:
A) benchmarking.
B) horizontal analysis.
C) vertical analysis.
D) common-size statements.
Answer: B
Diff: 2
LO: 13-1
12) The primary focus of horizontal analysis is:
A) percentage changes in comparative financial statements.
B) the balance sheet only.
C) the changes in individual financial statement amounts as a percentage of some related total.
D) the change in key financial statement ratios over a certain time frame.
Answer: A
Diff: 2
LO: 13-1
13) The percentage change in any individual item shown on comparative financial statements is calculated
by dividing the dollar amount of the change from the base period to the current period by:
A) the amount shown for the current period.
B) the base-period amount.
C) the average of the amounts shown for the base and the current periods.
D) the amount estimated for the future period.
Answer: B
Diff: 2
LO: 13-1
14) The analysis of percentage changes in comparative statements is known as:
A) economic value added analysis.
B) vertical analysis.
C) horizontal analysis.
D) benchmarking analysis.
Answer: C
Diff: 2
LO: 13-1
3
15) Horizontal analysis is most closely related to:

A) trend analysis.
B) economic value added analysis.
D) benchmarking.
Answer: A
Diff: 2
LO: 13-1
16) A form of horizontal analysis that indicates the direction a business is taking is:
A) benchmarking.
B) economic value added analysis.
D) trend percentages.
Answer: D
Diff: 2
LO: 13-1
17) The horizontal analysis formula is the current year amount:
A) divided by the base year amount.
B) minus the base year amount divided by the base year amount.
C) minus the base year amount divided by current year amount.
D) added to the base year amount divided by the base year amount.
Answer: B
Diff: 2
LO: 13-1
18) Horizontal analysis of financial statements is an:
A) analysis tool.
B) analysis theory
C) analysis principle.
D) analysis requirement.
Answer: A
Diff: 2
LO: 13-1
4
19) When computing trend percentages:

A) the current year is always equal to 100%.
B) the base year is always the latest year.
C) the base year is always equal to 100%.
D) the base year is equal to the current year plus the previous year divided by two.
Answer: C
Diff: 2
LO: 13-1
20) Horizontal analysis is performed on:
A) only the income statement.
B) only the balance sheet.
C) only the statement of retained earnings
D) the income statement, the balance sheet, and the statement of retained earnings.
Answer: D
Diff: 2
LO: 13-1
21) When performing a horizontal analysis on a statement of retained earnings, which would NOT show
a percentage change value?
A) Dividends paid
B) Net income
C) Expenses
D) Beginning balance of retained earnings
Answer: C
Diff: 2
LO: 13-1

1) When comparing companies of different sizes, vertical analysis would be a useful tool.
Answer: TRUE
Diff: 1
LO: 13-2
5
2) When performing vertical analysis of an income statement, net income is usually used as the base.
Answer: FALSE
Diff: 2
LO: 13-2
3) The relationship of each individual asset as a percentage of total assets is an example of vertical
analysis.
Answer: TRUE
Diff: 2
LO: 13-2
4) Vertical analysis compares an item on the financial statement to the same item in a prior period.
Answer: FALSE
Diff: 2
LO: 13-2
5) When performing a vertical analysis of the income statement, each item is stated as a percentage of net
income.
Answer: FALSE
Diff: 1
LO: 13-2
6) Vertical analysis is concerned with the format used to prepare financial statements.
Answer: FALSE
Diff: 1
LO: 13-2
7) A company's net income as a percentage of sales is 15%. Using vertical analysis, the cost of goods sold
as a percentage of sales must be 85%.
Answer: FALSE
Diff: 1
LO: 13-2
6
8) Vertical analysis is a less sophisticated analysis tool than horizontal analysis.

Answer: FALSE
Diff: 1
LO: 13-2
9) Matrix analysis expresses each item on a financial statement in terms of a percent of a base amount.
Answer: FALSE
Diff: 1
LO: 13-2
10) A thorough analysis of financial statements will include either horizontal or vertical analysis, but not
both.
Answer: FALSE
Diff: 1
LO: 13-2
11) Which of the following is typically used as the base in a vertical analysis of an income statement?
A) Cash
B) Inventory
C) Net income
D) Net sales
Answer: D
Diff: 2
LO: 13-2
12) Which of the following is typically used as the base in a vertical analysis of a balance sheet?
A) Total liabilities
B) Cash
C) Total assets
D) Gross sales
Answer: C
Diff: 1
LO: 13-2
7
13) Expressing cash and cash equivalents as a percentage of total assets is an example of:
A) horizontal analysis.
B) economic value added.
C) ratio analysis.
D) vertical analysis.
Answer: D
Diff: 2
LO: 13-2
14) A vertical analysis is primarily concerned with:
A) the dollar amount of the change in various financial statement amounts from year to year.
B) individual financial statement items expressed as a percentage of a base (which represents 100%).
C) percentage changes in the balances shown in comparative financial statements.
D) the change in key financial statement ratios over a specified period of time.
Answer: B
Diff: 2
LO: 13-2
15) Tech Support Corporation reports the following data:
Net sales
Cost of goods sold
Gross profit
$275,000
175,000
$100,000
In a vertical analysis, the gross profit percentage is closest to:

A) 63%.
B) 57%.
C) 157%.
D) 36%.
Answer: D
Explanation: D) 100,000/275,000 = 36.3636% rounded to 36%
Diff: 2
LO: 13-2
8
16) Common-size analysis is also known as:

A) Trend analysis.
B) Ratio analysis.
C) Vertical analysis.
D) Matrix analysis.
Answer: C
Diff: 2
LO: 13-2
17) In vertical analysis:
A) a base amount is optional.
B) a base amount is required.
C) comparative statements are optional.
D) comparative statements are required.
Answer: B
Diff: 2
LO: 13-2
18) A financial statement item expressed as a percentage of a base amount is a result of:
B) ratio analysis.
D) comparative analysis.
Answer: C
Diff: 2
LO: 13-2
19) In performing a vertical analysis, the base for cash is:
A) total liabilities and stockholders' equity.
B) total assets.
C) total cash and cash equivalents.
D) total current assets.
Answer: B
Diff: 2
LO: 13-2
9
20) In performing a vertical analysis, the base for interest expense is:
A) net sales.
B) total operating expenses.
C) net income.
D) interest income.
Answer: A
Diff: 2
LO: 13-2
21) Given the following data:
Current liabilities
Noncurrent liabilities
Stockholders' equity
$450,000
650,000
500,000
In vertical analysis, current liabilities would be expressed as:

A) 356%.
B) 90%.
C) 111%.
D) 28%.
Answer: D
Explanation: D) 450,000/(450,000 + 650,000 + 500,000) = 450,000/1,600,000 = 28%
Diff: 2
LO: 13-2
22) In performing a vertical analysis, the base for sales returns and allowances is:
A) sales discounts.
B) sales.
C) gross profit.
D) net sales.
Answer: D
Diff: 2
LO: 13-2
AICPA Functional: Reporting
10
23) In performing a vertical analysis, the base for cost of goods sold is:
A) net sales.
B) total revenues.
C) total expenses.
D) gross profit.
Answer: A
Diff: 2
LO: 13-2
Cash
Current assets
Total assets
$225,000
970,000
2,105,000
In a vertical analysis, cash would be expressed as:

A) 935%.
B) 217%.
C) 46%.
D) 11%.
Answer: D
Explanation: D) 225,000/2,105,000 = 10.7% rounded to 11%
Diff: 2
LO: 13-2
25) If a balance sheet is subjected to vertical analysis which shows that current assets (using total assets as
the base) have increased from 42% to 56%, this would always mean that:
A) current assets have increased as a percentage of total assets.
B) the dollar amount of total assets has increased.
C) the dollar amount of total assets has decreased.
D) the dollar amount of current assets has increased.
Answer: A
Diff: 2
LO: 13-2
11

Net sales
Cost of goods sold
Gross profit
200,000
120,000
80,000
In a vertical analysis, cost of goods sold would be expressed as:

A) 166%.
B) 40%.
C) 60%.
D) 250%.
Answer: C
Explanation: C) 120,000/200,000 = 60%
Diff: 2
LO: 13-2
Net sales
Cost of goods sold
Gross profit
Operating expenses
Net income
200,000
120,000
$80,000
44,000
36,000
In a vertical analysis, net income would be expressed as:

A) 18%.
B) 45%.
C) 30%.
D) 82%.
Answer: A
Explanation: A) 36,000/200,000 = 18%
Diff: 2
LO: 13-2
12
28) If the assets shown on a balance sheet are subjected to vertical analysis (using total assets as the base),
an increase in the figure for current assets from 56% to 60% would always mean that:
A) the dollar amount of noncurrent assets has increased.
B) the dollar amount of total assets has increased.
C) total current assets have increased as a percentage of total assets.
D) the dollar amount of current assets has increased.
Answer: C
Diff: 2
LO: 13-2
29) Prepare a vertical analysis for Winkler Corporation using the information shown below (round
percentages to the nearest one-tenth percent):
Sales
Cost of goods sold
Gross profit
Operating expenses
Net income
2012
$450,000
200,000
250,000
118,000
132,000
Answer:
Sales
Cost of goods sold
Gross profit
Operating expenses
Net income
2012
$450,000
200,000
250,000
118,000
132,000
Percent
100%
44.4%
55.6%
26.2%
29.3%
Diff: 2
LO: 13-2
AICPA Bus Persp: Legal/Regulatory
13
30) Prepare a vertical analysis for Crestwood Corporation's balance sheet to determine the component
percentages of its assets, liabilities, and stockholders' equity. Round percentages to the nearest one-tenth
percent.
Answer:
Diff: 2
LO: 13-2
14
31) Prepare a vertical analysis for Westwood Corporation by completing the right column of the following
balance sheet with the appropriate percentages. Round percentages to the nearest one-tenth percent.
15
Answer:
Diff: 2
LO: 13-2

1) Common-size financial statements report only dollar amounts.
Answer: FALSE
Diff: 2
LO: 13-3
16
2) Benchmarking is the process of comparing a company to standards set by the leading company in the
industry.
Answer: FALSE
Diff: 2
LO: 13-3
3) A common-size statement is less effective than a horizontal analysis when comparing companies.
Answer: FALSE
Diff: 2
LO: 13-3
4) Common-size financial statements are particularly valuable for identifying areas for improvements.
Answer: TRUE
Diff: 2
LO: 13-3
5) To perform vertical analysis, financial statements must first be converted to common-size format.
Answer: TRUE
Diff: 2
LO: 13-3
6) Which of the following would be most helpful in the comparison of different size companies?
A) Horizontal analysis
B) Comparison of their net incomes
C) Comparison of their working capital balances
D) Preparation of common-size financial statements
Answer: D
Diff: 2
LO: 13-3
17
7) A financial statement that shows each item as a percentage of one key item on the statement is referred
to as:
A) benchmarking.
B) common-size statement.
C) horizontal analysis.
D) statement of cash flows.
Answer: B
Diff: 2
LO: 13-3
8) On a common-size balance sheet each item is expressed as a percentage of:
A) current assets.
B) operating income.
C) total assets.
D) net income.
Answer: C
Diff: 2
LO: 13-3
9) On a common-size balance sheet, income taxes payable is expressed as a percentage of:
A) Current liabilities.
B) Stockholders' equity.
C) Total assets.
D) Total liabilities.
Answer: C
Diff: 2
LO: 13-3
10) Benchmarking financial statements represents a form of:
B) vertical analysis.
C) gross profit analysis.
D) trend analysis.
Answer: B
Diff: 2
LO: 13-3
18
11) When benchmarking financial statements of two key competitors, the gross margin of Company A is
expressed as a percentage of:
A) the total gross margins of Companies A and B.
B) Company B's gross margin.
C) a common standard for both Company A and Company B.
D) Company A's sales.
Answer: D
Diff: 2
LO: 13-3
12) Walton Company's return on sales for the most recent year was 5%. The industry leader reports a
return on sales of 7%. The comparison of each company's return on sales is an example of:
A) benchmarking.
B) gross margin analysis.
C) detail analysis.
D) intercompany analysis.
Answer: A
Diff: 3
LO: 13-3
19
13) Computer City, Inc.'s comparative income statement is shown below:
Required:
Prepare a common-size income statement for 2012 and 2011 showing the percentages for each item listed
above. Round percentages to one-tenth percent.
Answer:
Calculations:
Diff: 2
LO: 13-3
20

1) As another analytical tool, analysts rely on the statement of cash flows as a predictor of eventual
success for a given company.
Answer: TRUE
Diff: 2
LO: 13-4
2) The statement of cash flows is helpful for spotting weaknesses as well as gauging success.
Answer: TRUE
Diff: 2
LO: 13-4
3) On the statement of cash flows of a healthy company, net cash from operating activities is generally less
than net income.
Answer: FALSE
Diff: 2
LO: 13-4
4) If the sale of plant assets is a company's major source of cash, it may be a sign of financial difficulty.
Answer: TRUE
Diff: 2
LO: 13-4
5) On the statement of cash flows of a healthy company, net cash from operating activities generally
exceeds net income because of the reduction for depreciation.
Answer: FALSE
Diff: 2
LO: 13-4
6) In the statement of cash flows, depreciation and amortization are considered a use of funds.
Answer: FALSE
Diff: 2
LO: 13-4
21

22
7) In the statement of cash flows, sales of marketable securities are considered an operating activity.
Answer: FALSE
Diff: 2
LO: 13-4
8) In the statement of cash flows, purchases of fixed assets are considered to be investing activities.
Answer: TRUE
Diff: 2
LO: 13-4
9) In the statement of cash flows, more purchases of long-term assets than sales of long-term assets are
considered a sign of a healthy company.
Answer: TRUE
Diff: 2
LO: 13-4
10) In the statement of cash flows, an increase in new borrowing, exceeding the payoff of long-term debt,
is a sign of weakness.
Answer: TRUE
Diff: 2
LO: 13-4
11) When analyzing the statement of cash flows, which of the following statement are true?
A) Cash has no effect on the success of the company.
B) Cash is ignored when analyzing a company.
C) An excess of cash is the sign of a healthy company.
D) A company with a large cash balance is ensured success.
Answer: C
Diff: 2
LO: 13-4
23
12) Analyzing the statement of cash flows may help analysts determine the financial health of a company.
Which of the following signs below is a NOT indicator of a financially healthy company?
A) The company's operations are a major source (not a use) of cash.
B) The company's operations are a major use (not a source) of cash.
C) The company's investing activities include more purchases than sales of long-term assets.
D) The company's financing activities are not dominated by borrowing.
Answer: B
Diff: 2
LO: 13-4
13) On a statement of cash flows of a struggling company, net income would ordinarily be:
A) less than depreciation expense.
B) more than depreciation expense.
C) greater than cash provided by operating activities.
D) more than cash provided by operating activities.
Answer: C
Diff: 2
LO: 13-4
14) On a statement of cash flows, which is considered an operating activity?
A) Sale of securities
B) Purchase of fixed assets
C) Purchase of securities
D) Depreciation
Answer: D
Diff: 2
LO: 13-4
15) On a statement of cash flows, which is considered an investing activity?
A) Depreciation
B) Increase in inventory
C) Sale of securities
D) Repayment of debt
Answer: C
Diff: 2
LO: 13-4
24
16) Purchases of fixed assets is a sign of:

A) a struggling company.
B) reinvestment in the company.
C) a shortage of cash.
D) a decrease in inventory.
Answer: B
Diff: 2
LO: 13-4
17) On a statement of cash flows, an increase or decrease in inventory is considered:
A) an operating activity.
B) an investing activity.
C) a financing activity.
D) an investing or financing activity.
Answer: A
Diff: 2
LO: 13-4
18) On a statement of cash flows, repayment of long-term debt is considered:
A) an operating activity.
B) an investing activity.
C) a financing activity.
D) a change in operating assets and liabilities.
Answer: C
Diff: 2
LO: 13-4
19) On a statement of cash flows, which of the following are signs of a healthy company?
A) Investing activities include more sales of long-term assets than purchases.
B) Financing activities are dominated by borrowing.
C) Operating activities are the major source of cash.
D) Operating activities provide less cash than net income.
Answer: C
Diff: 2
LO: 13-4
25
20) On a statement of cash flows, which is NOT considered an operating activity?

A) Depreciation
B) Net income
C) Increase in inventory
D) Repayment of long-term debt
Answer: D
Diff: 2
LO: 13-4
21) On a statement of cash flows, which is NOT considered a financing activity?
A) Deferred income tax
B) Proceeds from long-term debt
C) Repayment of long-term debt
D) Foreign currency effect on cash
Answer: A
Diff: 2
LO: 13-4

1) A firm's ability to pay current liabilities can be evaluated using working capital and the current ratio.
Answer: TRUE
Diff: 2
LO: 13-5
2) A company's debt ratio is computed as total assets minus total liabilities.
Answer: FALSE
Diff: 1
LO: 13-5
3) A ratio analysis, horizontal analysis, and vertical analysis are all financial analysis tools.
Answer: TRUE
Diff: 1
LO: 13-5
26
4) The acid-test ratio reflects the company's percentage of total assets financed with total debt.
Answer: FALSE
Diff: 1
LO: 13-5
5) A high inventory turnover may indicate that a company is experiencing difficulty selling its inventory.
Answer: FALSE
Diff: 2
LO: 13-5
6) A ratio can be expressed as a proportion, a rate, or a percent.
Answer: TRUE
Diff: 1
LO: 13-5
7) A profitability ratio measures the income or operating success of a company for a given period of time.
Answer: TRUE
Diff: 2
LO: 13-5
8) The larger the working capital, the better the ability to pay debts.
Answer: TRUE
Diff: 2
LO: 13-5
9) Cash, short-term investments and net current receivables are all components of the acid-test ratio.
Answer: TRUE
Diff: 2
LO: 13-5
10) Inventory turnover is calculated by dividing the cost of goods sold by the average receivables.
Answer: FALSE
Diff: 2
LO: 13-5
27

11) Ratios that test liquidity include all of the following EXCEPT:
A) acid-test ratio.
B) current ratio.
C) debt to total assets.
D) inventory turnover.
Answer: C
Diff: 2
LO: 13-5
12) To compute operating income (profit) percentage, divide:
A) sales by cost of goods sold.
B) gross profit by net sales.
C) net income by stockholders' equity.
D) operating income by net sales.
Answer: D
Diff: 2
LO: 13-5
13) A measure of a company's ability to collect cash from credit customers is the:
A) accounts receivable turnover.
B) earnings per share.
C) inventory turnover.
D) acid-test ratio.
Answer: A
Diff: 2
LO: 13-5
14) Kaufman's Department Store had net sales of $20 million and cost of goods sold of $14 million for the
year. The average inventory for the year was $4 million. What was the average number of days in
inventory?
A) 46
B) 104
C) 92
D) 52
Answer: C
Diff: 2
LO: 13-5
28
29
15) Depots Clothing Store had an accounts receivable balance of $420,000 at the beginning of the year and
a year-end balance of $510,000. Net sales for the year totaled $2,100,000. The average collection period of
the receivables was:
A) 162 days.
B) 41 days.
C) 51 days.
D) 81 days.
Answer: D
Diff: 2
LO: 13-5
16) The ratio that provides an estimate of the number of days, on average, that it takes for customers to
pay their account is the:
A) days' sales in receivables
B) current ratio.
C) accounts receivable turnover.
D) acid-test ratio.
Answer: A
Diff: 2
LO: 13-5
17) The ratio that measures a company's success in using its assets to earn income for the persons who
finance the business is the:
A) leverage.
B) rate of return on total assets.
C) debt ratio.
D) times-interest-earned ratio.
Answer: B
Diff: 2
LO: 13-5
18) The ratio that measures the number of times that operating income can cover interest expense is the:
A) leverage.
B) rate of return on total assets.
C) debt ratio.
D) times-interest-earned ratio.
Answer: D
Diff: 1
LO: 13-5
30
19) The amount of a company's net income earned for each share of its outstanding common stock is
termed the:
A) return on equity.
B) price/earnings ratio.
C) earnings per share.
D) dividend yield.
Answer: C
Diff: 2
LO: 13-5

1) Economic value added (EVA) can be computed as net income minus interest expense minus capital
charge.
Answer: FALSE
Diff: 2
LO: 13-6
2) The cost of capital is a weighted average of the returns demanded by the company's stockholders and
lenders.
Answer: TRUE
Diff: 2
LO: 13-6
3) Economic value added is a measure of change in corporation's total assets.
Answer: FALSE
Diff: 2
LO: 13-6
4) Usually new companies have a lower cost of capital.
Answer: FALSE
Diff: 2
LO: 13-6
31
5) If a corporation's economic value added is negative, stockholders will probably be displeased with the
company.
Answer: TRUE
Diff: 2
LO: 13-6
6) Cost of capital varies with a company's market value of its common stock.
Answer: FALSE
Diff: 2
LO: 13-6
7) If a corporation's cash flows are consistently lower than net income, it could be a sign of a cash shortage
in the future.
Answer: TRUE
Diff: 2
LO: 13-6
8) When determining economic value added (EVA), capital charge is the amount that stockholders expect
to pay per share of common stock.
Answer: FALSE
Diff: 2
LO: 13-6
9) A positive economic value added (EVA) suggests an increase in stockholders wealth.
Answer: TRUE
Diff: 2
LO: 13-6
10) An efficient capital market is one in which market prices are above stated cost.
Answer: FALSE
Diff: 2
LO: 13-6
32
11) In an efficient market, an investor's search for "underpriced" stock will be unsuccessful unless the
investor has knowledge of confidential information.
Answer: TRUE
Diff: 2
LO: 13-6
12) The cost of capital is defined as the:
A) sum of liabilities and stockholders' equity accounts.
B) weighted average of the returns demanded by the company's stockholders and lenders.
C) rate of return demanded by stockholders times the rate of return demanded by lenders.
D) rate of return demanded by the stockholders divided by the rate of return demanded by lenders.
Answer: B
Diff: 2
LO: 13-6
13) Economic value added (EVA) is computed as:
A) net income + long-term debt + interest expense.
B) net income + interest expense - capital charge.
C) net income - interest expense + capital charge.
D) net income - long-term debt + interest expense.
Answer: B
Diff: 2
LO: 13-6
14) Which of the following combines the concepts of accounting income and corporate finance to measure
whether the company's operations have increased stockholder wealth?
A) Gross profit margin
B) Earnings per share
C) Economic value added
D) Price/earnings ratio
Answer: C
Diff: 2
LO: 13-6
33
15) If economic value added (EVA) is negative:

A) stockholders' wealth has decreased.
B) stockholders' wealth has increased.
C) stockholders' wealth has stayed the same.
D) stockholders' earnings per share have increased.
Answer: A
Diff: 2
LO: 13-6
16) The cost of capital:
A) is lower for a start-up company since it is untested.
B) can be obtained from the financial statements.
C) is the same for all companies.
D) is higher for a start-up company since it is untested.
Answer: D
Diff: 2
LO: 13-6
17) Cash flow from operations that are consistently lower than net income may imply that:
A) a dividend has not been issued in a long time.
B) the common stock should be split.
C) the company may be facing a cash shortage.
D) working capital has decreased.
Answer: C
Diff: 2
LO: 13-6
18) Capital charge is computed as:
A) Cost of capital - Notes payable - Loans payable - Long-term debt - Stockholders' equity.
B) (Notes payable + Loans payable + Long-term debt + Stockholders' equity) Cost of capital.
C) Cost of capital + Notes payable + Loans payable + Long-term debt + Stockholders' equity.
D) (Notes payable + Loans payable + Long-term debt) (Stockholders' equity + Cost of capital).
Answer: B
Diff: 2
LO: 13-6
34
19) If ABC Corporation's debt ratio is higher than its major competitors, ABC may:
A) purchase treasury stock.
B) sell treasury stock.
C) invest in another company.
D) be unable to pay its debts.
Answer: D
Diff: 2
LO: 13-6
20) Red flags in financial statement analysis can include all of the following EXCEPT:
A) a debt ratio higher than average.
B) a slowdown in inventory turnover.
C) sales increasing while receivables decrease.
D) increase in income from continuing operations.
Answer: D
Diff: 2
LO: 13-6
35

Chapter 13 Test Bank

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Financial Accounting, 9e (Harrison/Horngren/Thomas)

Chapter 13 Financial Statement Analysis

15) Horizontal analysis is most closely related to:

19) When computing trend percentages:

13.2 Learning Objective 13-2

8) Vertical analysis is a less sophisticated analysis tool than horizontal analysis.

In a vertical analysis, the gross profit percentage is closest to:

16) Common-size analysis is also known as:

In vertical analysis, current liabilities would be expressed as:

In a vertical analysis, cash would be expressed as:

26) Given the following data:

In a vertical analysis, cost of goods sold would be expressed as:

In a vertical analysis, net income would be expressed as:

13.3 Learning Objective 13-3

13) Computer City, Inc.'s comparative income statement is shown below:

AICPA Functional: Measurement

13.4 Learning Objective 13-4

AICPA Bus Persp: Strategic/Critical Thinking

16) Purchases of fixed assets is a sign of:

20) On a statement of cash flows, which is NOT considered an operating activity?

13.5 Learning Objective 13-5

AICPA Functional: Measurement

13.6 Learning Objective 13-6

15) If economic value added (EVA) is negative:

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