Fundamentals of Accountancy, Business, and Management 2 Pretest

What is the primary purpose of financial statement (FS) analysis?

• Preparing audit report

• Determine tax obligations

• Calculating employee salaries

• Evaluating risks and performance of a business

Answer explanation

The primary purpose of financial statement analysis is to evaluate the risks and performance of a business. This helps stakeholders make informed decisions regarding investments and management.

Which of the following is NOT one of the three kinds of FS analysis techniques?

• Cash Flow Analysis

• Financial Ratios

• Horizontal Analysis

• Vertical Analysis

Answer explanation

Cash Flow Analysis is not one of the three primary FS analysis techniques, which are Financial Ratios, Horizontal Analysis, and Vertical Analysis. The other three focus on different aspects of financial statements.

What does horizontal analysis evaluate?

• Financial data of one year

• Financial data over a period of time

• Market Share

• Profitability Ratio

Answer explanation

Horizontal analysis evaluates financial data over a period of time, allowing for comparison of financial performance across multiple periods. This helps identify trends and changes in financial metrics.

How does horizontal analysis differ from vertical analysis?

• Horizontal analysis only uses financial ratios.

• Horizontal analysis is not a recognized method.

• Horizontal analysis focuses on one point in time.

• Horizontal analysis evaluates financial data over time, while vertical analysis assesses data within a single period.

Answer explanation

Horizontal analysis evaluates financial data over time, allowing for trend analysis, while vertical analysis focuses on the relationship of items within a single period, providing a snapshot of financial performance.

What is meant by the term 'peso change' in horizontal analysis?

• The increase in stock prices

• The total sales revenue for the year

• The total expenses for the current period

• The difference in financial balances between current and prior years

Answer explanation

The term 'peso change' in horizontal analysis refers to the difference in financial balances between current and prior years, allowing for comparison of performance over time.

If a company's total revenue was P150,000 in Year 1 and P180,000 in Year 2, what is the peso change?

• P30,000

• P150,000

• P180,000

• P350,000

Answer explanation

The peso change is calculated by subtracting Year 1 revenue from Year 2 revenue: P180,000 - P150,000 = P30,000. Therefore, the correct answer is P30,000.

Given the following balances: Year 1: P220,000 and Year 2: P264,000, calculate the percentage change.

• 15%

• 20%

• 30%

• 25%

Answer explanation

To calculate the percentage change, use the formula: ((New Value - Old Value) / Old Value) * 100. Here, ((P264,000 - P220,000) / P220,000) * 100 = 20%. Thus, the correct answer is 20%.

When comparing horizontal analysis results of two companies within the same industry, which might NOT account for differences in their performance?

• Salaries of employees

• Changes to government regulations

• Differences in management strategies

• External economic factors such as market demand

Answer explanation

Salaries of employees may vary but do not directly impact the comparative performance metrics in horizontal analysis. In contrast, management strategies, regulations, and economic factors can significantly influence performance outcomes.

How effective is horizontal analysis compared to vertical analysis in assessing a company's financial trend over multiple periods?

• Equally effective, as both analyze financial data

• Not applicable, as they serve different purposes

• More effective, as it evaluates performance through time

• Less effective, as it doesn't give insights on individual period performance

Answer explanation

Horizontal analysis is more effective as it evaluates performance over time, allowing for trend identification across multiple periods, unlike vertical analysis which focuses on a single period's data.

If you were to create a financial statement for a new fictional company for two consecutive years, which two analyses would you perform to determine its financial trends?

• Vertical Analysis and Trend Analysis

• Horizontal Analysis and Vertical Analysis

• Horizontal Analysis and SWOT Analysis

• Financial Ratios and Cash Flow Analysis

Answer explanation

Horizontal Analysis compares financial data over time, revealing trends, while Vertical Analysis assesses each item as a percentage of a base figure, providing insight into the structure of financial statements. Together, they effectively analyze trends.