Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

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.