Chapter 17 Financial Analysis
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Questions and Answers

What type of analysis compares a company's current year financial statement to prior years?

  • Ratio Analysis
  • Vertical Analysis
  • Horizontal Analysis (correct)
  • Intercompany Analysis

    • Which of the following is NOT a primary tool used for evaluating financial data?

  • Comparative Analysis
  • Vertical Analysis
  • Trend Analysis (correct)
  • Ratio Analysis

    • Comparing a company's financial data to industry averages is an example of what type of analysis?

  • Intercompany Analysis (correct)
  • Vertical Analysis
  • Horizontal Analysis
  • Intracompany Analysis

    • Which analysis technique assesses financial data based on its percentage of a total amount?

    <p>Vertical Analysis (B)</p> Signup and view all the answers

    What does the expression of the relationship among selected financial data within the same period represent?

    <p>Ratio Analysis (B)</p> Signup and view all the answers

    In addition to financial statements, which other information should be reviewed to gain a deeper understanding of a company?

    <p>Industry reports and news (B)</p> Signup and view all the answers

    Which type of analysis allows for comparison of a company's current year financial statement to prior years?

    <p>Horizontal Analysis (D)</p> Signup and view all the answers

    Analyzing a company's financial data against competing companies is an example of what type of analysis?

    <p>Intercompany Analysis (D)</p> Signup and view all the answers

    What is the primary objective of horizontal analysis?

    <p>To compare a company's financial performance over time. (A)</p> Signup and view all the answers

    What is the formula for calculating the horizontal percentage change for a specific period?

    <p>(Current year amount - Base year amount) / Base year amount * 100% (C)</p> Signup and view all the answers

    Which of the following is NOT a benefit of performing horizontal analysis?

    <p>Predicting future financial performance with certainty. (A)</p> Signup and view all the answers

    In horizontal analysis, what is the 'base-period amount'?

    <p>The amount from the earliest financial period being compared. (A)</p> Signup and view all the answers

    Suppose a company's sales revenue increased by 5% from the previous year. Which of the following is TRUE?

    <p>The horizontal percentage change for sales revenue is 5%. (D)</p> Signup and view all the answers

    What is the purpose of comparing a company's financial data to industry averages in horizontal analysis?

    <p>To identify potential areas for improvement or weakness in the context of the industry. (B)</p> Signup and view all the answers

    Which of the following financial statements can be subject to horizontal analysis?

    <p>All of the above (D)</p> Signup and view all the answers

    Why is horizontal analysis particularly helpful for identifying long-term trends?

    <p>It reveals changes in a company's financial performance over a prolonged period. (A)</p> Signup and view all the answers

    When performing financial statement analysis, which of the following factors should be considered?

    <p>Alternative accounting principles used by different companies (A), The quality of information disclosed by companies (B), Economic factors affecting the company and its industry (C)</p> Signup and view all the answers

    What is a potential limitation of using alternative accounting principles when performing financial statement analysis?

    <p>It can make it difficult to compare financial statements across different companies (B)</p> Signup and view all the answers

    Why is it important to assess other comprehensive income during financial statement analysis?

    <p>It helps to understand the full picture of a company's financial performance beyond just net income. (C)</p> Signup and view all the answers

    What is the significance of considering the quality of information when performing financial statement analysis?

    <p>High-quality information improves the accuracy and reliability of financial analysis. (C)</p> Signup and view all the answers

    How do irregular items (e.g., discontinued operations) influence financial statement analysis?

    <p>They should be excluded from the analysis to provide a more accurate picture of ongoing operations. (C)</p> Signup and view all the answers

    In what circumstance can losses pose a challenge in calculating and interpreting ratios?

    <p>Losses can prevent the calculation of certain ratios due to zero or negative values. (B)</p> Signup and view all the answers

    What is the main purpose of applying financial statement analysis?

    <p>To evaluate a company's financial performance and position. (C)</p> Signup and view all the answers

    Which of the following is NOT a tool used in financial statement analysis?

    <p>Trend analysis (B)</p> Signup and view all the answers

    What is the gross profit amount reported in the income statement?

    <p>$322 (A)</p> Signup and view all the answers

    What was the income tax expense reported?

    <p>$31 (A)</p> Signup and view all the answers

    Which analysis method focuses on comparing financial data across multiple periods?

    <p>Horizontal analysis (A)</p> Signup and view all the answers

    What was the total assets amount reported for the year 2013?

    <p>$4,750,000 (C)</p> Signup and view all the answers

    What percentage of the total assets was represented by current assets in 2014?

    <p>36% (C)</p> Signup and view all the answers

    What was the change in goodwill from 2013 to 2014?

    <p>$10,000 decrease (A), $10,000 decrease (D)</p> Signup and view all the answers

    What was the profit before income tax amount reported?

    <p>$104 (C)</p> Signup and view all the answers

    Which type of analysis is used to evaluate a company's financial ratios related to liquidity?

    <p>Ratio analysis (C)</p> Signup and view all the answers

    What is the primary objective of vertical analysis in financial statements?

    <p>To express financial statement data as a percentage of a base amount (C)</p> Signup and view all the answers

    Which base amount is commonly used for vertical analysis of the balance sheet?

    <p>Total liabilities and shareholders' equity (C)</p> Signup and view all the answers

    Which of the following is NOT a common use of vertical analysis?

    <p>Conducting price-to-earnings ratio analysis (B)</p> Signup and view all the answers

    In vertical analysis of an income statement, what is the base amount used to express other items as percentages?

    <p>Net sales (C)</p> Signup and view all the answers

    What is a key advantage of vertical analysis for comparisons among companies?

    <p>It allows comparison of companies of different sizes on a common scale. (C)</p> Signup and view all the answers

    How does vertical analysis assist in intracompany comparisons?

    <p>It provides insights into the financial structure and efficiency over time. (B)</p> Signup and view all the answers

    When performing vertical analysis, how is each item represented?

    <p>As a percentage of a defined base amount (C)</p> Signup and view all the answers

    Which of the following is a limitation of vertical analysis?

    <p>It does not consider external economic factors. (C)</p> Signup and view all the answers

    What do liquidity ratios primarily measure?

    <p>Short-term ability to meet obligations and unexpected cash needs (B)</p> Signup and view all the answers

    Which of the following is not a type of ratio analysis?

    <p>Comparative ratios (D)</p> Signup and view all the answers

    Which company will be analyzed for liquidity ratios in the group activity?

    <p>Waterloo Brewing (C), Molson Coors (D)</p> Signup and view all the answers

    What is the primary focus of solvency ratios?

    <p>Evaluate long-term financial viability (B)</p> Signup and view all the answers

    What activity will Group 2 be responsible for according to the group activity?

    <p>Calculating solvency ratios (D)</p> Signup and view all the answers

    What is the expected outcome from calculating financial ratios in the group activity?

    <p>Deciding which company is performing better based on financial ratios (C)</p> Signup and view all the answers

    Which of the following statements is true about profitability ratios?

    <p>They evaluate operating success over a defined timeframe. (B)</p> Signup and view all the answers

    Which of the following is an essential success criterion for understanding financial analysis?

    <p>Identifying the need for and tools of financial statement analysis (A)</p> Signup and view all the answers

    Study Notes

    Kahoot!

    • Kahoot! is a learning platform.

    Principles of Financial Accounting

    • The document is from a chapter on financial statement analysis.
    • It is part of a Canadian edition of a textbook (Principles of Financial Accounting).
    • Authors include Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow, and Atkins.

    Learning Goals

    • Analyze a company's financial status using horizontal and vertical analysis.
    • Analyze a company's financial status using financial ratios.
    • Contrast annual reports of publicly traded corporations.

    Financial Statement Analysis

    • Basics of financial statement analysis include comparative analysis and tools of analysis.
    • Tools of analysis include horizontal and vertical analysis.
    • Horizontal analysis evaluates data over time.
    • Vertical analysis expresses data as a percentage of a total amount.
    • Ratio analysis analyzes relationships among financial data.

    Chapter 17: Success Criteria

    • Learning objectives:
      • Understanding financial statement analysis and its tools.
      • Applying horizontal analysis.
      • Applying vertical analysis.
      • Using ratios to analyze liquidity.
      • Using ratios to analyze solvency.
      • Using ratios to analyze profitability.

    Basics of Financial Statement Analysis

    • Comparing financial information can be done intracompany (comparing current and prior years) or intercompany (comparing to competitors).
    • Industry averages can also be used for comparison.
    • Important to analyze both financial and non-financial information.

    Tools of Analysis

    • Horizontal analysis evaluates data trends over time.
    • Vertical analysis expresses data as a percentage of a base amount (e.g., total assets or net sales for balance sheets and income statements respectively).
    • Ratio analysis finds relationships between different financial data points.

    Textbook Questions (BE17-1)

    No details given.

    Textbook Questions (BE17-2)

    No details given.

    Group Assignments

    • Group assignments for different financial ratio types(liquidity, solvency, and profitability ratios).

    Textbook Questions (BE17-3)

    No details given, but the questions involve cash, accounts receivable, inventory and prepaid expenses.

    Textbook Questions (BE17-4)

    No details given, but the questions involve cash, accounts receivable, inventory and prepaid expenses.

    Textbook Questions (BE17-5a)

    No details given, but the questions involve current assets, property, plant, and equipment and goodwill.

    Textbook Questions (BE17-5b)

    No details given, but the questions involve current assets, property, plant, and equipment, and goodwill.

    Textbook Questions (BE17-6)

    No details given, but the questions involve an income statement.

    Vertical Analysis (Common Size Analysis)

    • Expresses financial data as a percentage of a base amount (base amount is always 100%).
    • Useful for intracompany and intercompany comparisons.
    • Balance sheets often use total assets as the base, while income statements use net sales.

    Vertical Analysis: Balance Sheet

    • Shows the percentage breakdown of different balance sheet items as a percentage of total assets (or similar base amount).
    • Provides insights into the composition of assets, liabilities, and equity.

    Vertical Analysis: Income Statement

    • Shows the percentage breakdown of different income statement items as a percentage of net sales (or similar base amount).
    • Highlights the proportion of different revenue and expense components.

    Limitations of Financial Analysis

    • Alternative accounting standards (like IFRS versus ASPE) reduce comparability.
    • Some income items (like other comprehensive income) may be omitted from the analysis as they can be not easily quantifiable.
    • Quality of reports is essential (transparency/full information).
    • Economic events (like discontinued operations) can affect ratios, creating analytical difficulties.

    Ratio Analysis: Liquidity Ratios

    • Formulae and purposes of several liquidity ratios are provided (current ratio, acid-test, receivables turnover, collection period, inventory turnover, days’ sales in inventory, operating cycle).
    • Desired results for each ratio are detailed.

    Ratio Analysis: Solvency Ratios

    • Formulae and purposes of solvency ratios are provided (debt to total assets, interest coverage, free cash flow).
    • Desired results for each ratio are detailed.
    • Ratios measure a company's long-term viability and ability to meet its obligations.

    Ratio Analysis: Profitability Ratios

    • Formulae and purposes of various profitability ratios are provided (gross profit margin, profit margin, asset turnover, return on assets, returns on equity, earnings per share, price-earnings ratio, and payout ratio).

    Chapter 17: Success Criteria (repeated)

    • Learning objectives in previous sections are repeated.

    Group Activity

    • Students will be divided into groups focused on liquidity ratios, solvency ratios, profitability ratios.

    Group Activity (continued)

    • Groups will explain different types of financial ratios, discuss their meaning, and complete textbook questions. Students must analyze Molson Coors and Waterloo Brewing annual reports for this assignment.

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    Chapter 17 Textbook PDF

    Description

    Test your knowledge of financial analysis techniques and concepts with this quiz. You'll explore various types of analyses, including horizontal and vertical analysis, as well as comparisons with industry averages. Refresh your understanding of evaluating financial data and its significance in business performance.

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