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## ANALYSIS OF MULTIPLE-CHOICE TYPE QUESTIONS

1. Question

(L.O. 3) The Goodings Corporation reported sales of \$80,000 in 2012, \$96,000 in 2013, and \$112,000 in 2014. In a trend analysis for these years, where 2012 is used as the base year, the respective sales percentages would be:

1. 100%; 120%; 137%
2. 100%; 120%; 117%
3. 100%; 120%; 140%
4. 80%; 96%; 112%.

Explanation: Trend analysis is a type of horizontal analysis that is prepared for more than two years. In horizontal analysis, a base year (2012 in this case) is selected. Each item being analyzed is then divided by the amount reported for the base year for the same item. Thus, \$80,000 is the 100% figure, \$96,000 divided by \$80,000 = 120%, and \$112,000 divided by \$80,000 = 140%. (Solution = c.)

2. Question

(L.O. 4) An analyst is examining an income statement that shows only percentages; all items are expressed in terms of a percentage of net sales. This type of analysis is often called:

1. common-size analysis.
2. horizontal analysis.
3. comparative analysis.
4. multiple-step analysis.

Explanation: Vertical analysis, sometimes referred to as common-size analysis, is a technique for evaluating financial statement data that expresses each item within a financial statement in terms of a percent of a base amount. For an income statement, net sales is used as the base amount. (Solution = a.)

3. Question

(L.O. 4) The base figure used for vertical analysis of the income statement is:

1. net income.
2. gross profit.
3. income before income taxes.
4. net sales revenue.

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