FINANCIAL REPORTING AND ANALYSIS

TRUE OR FALSE EXPLANATION NOT NEEDED

1. A common-size income statement expresses each item on the balance sheet as a percentage of total assets.

2. Current assets are those assets expected to be converted into cash within one year or an operating cycle, whichever is longer.

3. The three cost flow assumptions most frequently used in the U.S. are FIFO, LIFO, and average cost.

4. Gross profit is the difference between sales and all operating expenses.

5. The common size income statement expresses each income statement item as a percentage of total sales or revenues.

6. The income statement comes in two basic formats, the multiple-step, and the single-step versions; however, for analysis purposes, the multi-step version should be used.

7. Operating profit margin is impacted by sales and all operating expenses except cost of goods sold.

8. Goodwill arises when one company acquires another company for a price in excess of the fair market value of the net identifiable assets.

9. Companies that are paid in advance for services or products record a liability on the receipt of cash in an account titled Prepaid expenses.

10. A capital lease affects both the balance sheet and the income statement.

11. If the companys sales and net accounts receivable are both increasing but the AFDA value is decreasing, this is an indication of the companys improvement in collection policy.

12. In volatile industries, such as high technology, gross profit margin may increase or decrease significantly each year.