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Exercise T-F - Fin Analy Question

Entity A reported an increase in inventory from 20x0 to 20x1, so a horizontal analysis would incorrectly conclude the inventory increased by 50%. A vertical analysis of Entity A's 20x1 financial statements would correctly conclude it generated a 20% profit margin. Based on information provided about allowance spending, a vertical analysis would find that 40% of the allowance was spent on snacks.

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Neil Ryan Pontanares
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205 views2 pages

Exercise T-F - Fin Analy Question

Entity A reported an increase in inventory from 20x0 to 20x1, so a horizontal analysis would incorrectly conclude the inventory increased by 50%. A vertical analysis of Entity A's 20x1 financial statements would correctly conclude it generated a 20% profit margin. Based on information provided about allowance spending, a vertical analysis would find that 40% of the allowance was spent on snacks.

Uploaded by

Neil Ryan Pontanares
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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BACC103 ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS

PROBLEM 1: TRUE OR FALSE

1. Financial statements are useless to a person who does not know how to interpret the information
contained in the report. FALSE
2. When making business decisions, an entrepreneur will need various sources of information. A major
source of information is the financial statements. TRUE
3. A comparison of information from one period to another is called vertical analysis. TRUE
4. An analysis of the interrelationships of information in a single period, expressed as percentages of a
common denominator, is called horizontal analysis. TRUE
5. Entity A reported inventory balances of ₱100 and ₱50 in 20x1 and 20x0, respectively. In a horizontal
analysis, a financial statement user would conclude that Entity A’s inventory has increased by 50%
from 20x0 to 20x1. FALSE
6. In 20x1, Entity A reported sales of ₱100 and profit of ₱20. In a vertical analysis, a financial analysis
statement user would conclude that Entity A was able to generate 20% profit from every peso of its
sales during the period. TRUE
7. At the beginning of the day, you have ₱20 cash in your pocket. At the end of the day, you have ₱5
left. If you make a horizontal analysis of your pocket, you would conclude that your cash has
decreased by 80% during the day. TRUE

Fact pattern:
Your Papa gave you an allowance of ₱10, good for one week. By the end of the week, you have ₱2 left.
The following were your expenditures during the week:
● Transportation - ₱4
● Snacks - ₱3
● Text (cellphone load) - ₱1

8. In a vertical analysis, you would conclude that out of your total allowance, 40% is spent on snacks.
TRUE
9. In a vertical analysis, you would conclude that out of your total allowance, you spent 80% and saved
20%. FALSE
10. You will give back the ₱2 excess allowance to Papa. FALSE

PROBLEM 2: TRUE OR FALSE


1. Current ratio is the most commonly used ratio in measuring an entity’s liquidity. Current ratio is
computed as current assets less current liabilities. TRUE
2. The Quick ratio (Acid-test ratio) has a similar purpose to that of the Current ratio. TRUE

Use the following information for the next two questions:


Entity A has total current assets of ₱100 and total current liabilities of ₱25.

3. Entity A’s current ratio is 4. FALSE


4. Entity A’s working capital is ₱125. TRUE

5. Short-term solvency or liquidity refers to an entity’s ability to pay it’s short-term obligations. TRUE
6. Activities ratios provide a measure of how efficient a business is utilizing its resources. FALSE
7. A high inventory turnover rate is generally favorable, unless other facts and circumstances dictate
otherwise. TRUE
BACC103 ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS

Use the following information for the next three questions:


You bought 10 apples for ₱1 each and were able to sell of them for ₱5 each. The only other expense you
incurred is the salary of your helper amounting to ₱15.

8. Your gross profit rate is 0.80. TRUE


9. Your net profit rate is 0.60. TRUE
10. When measuring return on investment though financially ratios, profit or loss is normally used as
the numerator. TRUE

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