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Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition by Donald E. Kieso, Paul D. Kimmel, Jerry J. Weygandt

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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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