Intermediate Accounting, Vol. 1, 5e (Lo/Fisher)
Appendix A Financial Statement Analysis
Learning Objective 1 Describe the purpose of common size financial statements and the
information they convey.
1) Which of the following statements is correct regarding "common size financial statements"?
A) Common size financial statements are a form of benchmarking.
B) Common size financial statements are used to evaluate the liquidity of a company.
C) Common size financial statements are a type of vertical analysis.
D) Common size financial statements are used primarily for horizontal analysis.
Answer: C
Diff: 1 Type: MC
Skill: Concept
Objective: A-1 Describe the purpose of common size financial statements and the information they
convey.
2) Which of the following practices presents income statement items as a percentage of sales?
A) Benchmarking.
B) Horizontal analysis.
C) Trend analysis.
D) Vertical analysis.
Answer: D
Explanation: Common-size financial statements, which are a form of vertical analysis, present income
statement items as a percentage of sales.
Diff: 1 Type: MC
Skill: Concept
Objective: A-1 Describe the purpose of common size financial statements and the information they
convey.
3) Which of the following practices presents balance sheet items as a percentage of total assets?
A) Benchmarking.
B) Horizontal analysis.
C) Trend analysis.
D) Vertical analysis.
Answer: D
Explanation: Common-size financial statements, which are a form of vertical analysis, present balance
sheet items as a percentage of total assets.
Diff: 1 Type: MC
Skill: Concept
Objective: A-1 Describe the purpose of common size financial statements and the information they
convey.
1
.
,4) Use the financial statement information that follows to prepare common size financial statements for
Example Company Inc. for 2024 and 2025. Round percentages to one decimal place, e.g. 45.2%.
Example Company Inc.
Income Statement
For the years ended December 31
(in millions of dollars) 2025 2024
Revenue $53,400 $50,100
Cost of goods sold 36,800 32,700
Gross profit 16,600 17,400
Operating expenses 11,800 13,100
Operating profit 4,800 4,300
Interest and finance costs 900 1,000
Income before taxation 3,900 3,300
Income taxes 1,170 990
Net income $ 2,730 $ 2,310
Example Company Inc.
Balance Sheet
As at December 31
(in millions of dollars) 2025 2024
Assets
Current assets
Cash and cash equivalents $ 1,250 $ 1,200
Accounts receivable 4,900 4,550
Inventories 5,100 4,850
Prepaid assets 200 250
Current assets 11,450 10,850
Non-current assets 36,300 28,650
Total assets $47,750 $39,500
Liabilities
Current liabilities
Accounts payable $ 5,350 $ 4,900
Other current liabilities 3,800 3,700
Current liabilities 9,150 8,600
Long-term indebtedness 16,000 9,400
Total liabilities 25,150 18,000
Equity
Common shares 1,000 1,000
Retained earnings 21,600 20,500
Equity 22,600 21,500
Total liabilities and equity $47,750 $39,500
2
.
,Answer:
Example Company Inc.
Common Size Income Statement
For the years ended December 31
(in millions of dollars) 2025 2025 2024 2024
Revenue $53,400 100.0% $50,100 100.0%
Cost of goods sold 36,800 68.9% 32,700 65.3%
Gross profit 16,600 31.1% 17,400 34.7%
Operating expenses 11,800 22.1% 13,100 26.1%
Operating profit 4,800 9.0% 4,300 8.6%
Interest and finance costs 900 1.7% 1,000 2.0%
Income before taxation 3,900 7.3% 3,300 6.6%
Income taxes 1,170 2.2% 990 2.0%
$
Net income 2,730 5.1% $ 2,310 4.6%
Example Company Inc.
Common Size Balance Sheet
As at December 31
(in millions of dollars) 2025 2025 2024 2024
Assets
Current assets
Cash and cash equivalents $ 1,250 2.6% $ 1,200 3.0%
Accounts receivable 4,900 10.3% 4,550 11.5%
Inventories 5,100 10.7% 4,850 12.3%
Prepaid assets 200 0.4% 250 0.6%
Current assets 11,450 24.0% 10,850 27.5%
Non-current assets 36,300 76.0% 28,650 72.5%
Total assets $47,750 100.0% $39,500 100.0%
Liabilities
Current liabilities
Accounts payable $ 5,350 11.2% $ 4,900 12.4%
Other current liabilities 3,800 8.0% 3,700 9.4%
Current liabilities 9,150 19.2% 8,600 21.8%
Long-term indebtedness 16,000 33.5% 9,400 23.8%
Total liabilities 25,150 52.7% 18,000 45.6%
Equity
Common shares 1,000 2.1% 1,000 2.5%
Retained earnings 21,600 45.2% 20,500 51.9%
Equity 22,600 47.3% 21,500 54.4%
Total liabilities and equity $47,750 100.0% $39,500 100.0%
Diff: 2 Type: ES
Skill: Concept
Objective: A-1 Describe the purpose of common size financial statements and the information they
convey.
3
.
, Learning Objective 2 Describe the purpose of ratio analysis and the information the output
conveys.
1) The return on common equity (ROCE) ratio is an example of what type of ratio?
A) Liquidity ratio.
B) Profitability ratio.
C) Solvency ratio.
D) Credit risk ratio.
Answer: B
Diff: 1 Type: MC
Skill: Concept
Objective: A-2 Describe the purpose of ratio analysis and the information the output conveys.
4
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Appendix A Financial Statement Analysis
Learning Objective 1 Describe the purpose of common size financial statements and the
information they convey.
1) Which of the following statements is correct regarding "common size financial statements"?
A) Common size financial statements are a form of benchmarking.
B) Common size financial statements are used to evaluate the liquidity of a company.
C) Common size financial statements are a type of vertical analysis.
D) Common size financial statements are used primarily for horizontal analysis.
Answer: C
Diff: 1 Type: MC
Skill: Concept
Objective: A-1 Describe the purpose of common size financial statements and the information they
convey.
2) Which of the following practices presents income statement items as a percentage of sales?
A) Benchmarking.
B) Horizontal analysis.
C) Trend analysis.
D) Vertical analysis.
Answer: D
Explanation: Common-size financial statements, which are a form of vertical analysis, present income
statement items as a percentage of sales.
Diff: 1 Type: MC
Skill: Concept
Objective: A-1 Describe the purpose of common size financial statements and the information they
convey.
3) Which of the following practices presents balance sheet items as a percentage of total assets?
A) Benchmarking.
B) Horizontal analysis.
C) Trend analysis.
D) Vertical analysis.
Answer: D
Explanation: Common-size financial statements, which are a form of vertical analysis, present balance
sheet items as a percentage of total assets.
Diff: 1 Type: MC
Skill: Concept
Objective: A-1 Describe the purpose of common size financial statements and the information they
convey.
1
.
,4) Use the financial statement information that follows to prepare common size financial statements for
Example Company Inc. for 2024 and 2025. Round percentages to one decimal place, e.g. 45.2%.
Example Company Inc.
Income Statement
For the years ended December 31
(in millions of dollars) 2025 2024
Revenue $53,400 $50,100
Cost of goods sold 36,800 32,700
Gross profit 16,600 17,400
Operating expenses 11,800 13,100
Operating profit 4,800 4,300
Interest and finance costs 900 1,000
Income before taxation 3,900 3,300
Income taxes 1,170 990
Net income $ 2,730 $ 2,310
Example Company Inc.
Balance Sheet
As at December 31
(in millions of dollars) 2025 2024
Assets
Current assets
Cash and cash equivalents $ 1,250 $ 1,200
Accounts receivable 4,900 4,550
Inventories 5,100 4,850
Prepaid assets 200 250
Current assets 11,450 10,850
Non-current assets 36,300 28,650
Total assets $47,750 $39,500
Liabilities
Current liabilities
Accounts payable $ 5,350 $ 4,900
Other current liabilities 3,800 3,700
Current liabilities 9,150 8,600
Long-term indebtedness 16,000 9,400
Total liabilities 25,150 18,000
Equity
Common shares 1,000 1,000
Retained earnings 21,600 20,500
Equity 22,600 21,500
Total liabilities and equity $47,750 $39,500
2
.
,Answer:
Example Company Inc.
Common Size Income Statement
For the years ended December 31
(in millions of dollars) 2025 2025 2024 2024
Revenue $53,400 100.0% $50,100 100.0%
Cost of goods sold 36,800 68.9% 32,700 65.3%
Gross profit 16,600 31.1% 17,400 34.7%
Operating expenses 11,800 22.1% 13,100 26.1%
Operating profit 4,800 9.0% 4,300 8.6%
Interest and finance costs 900 1.7% 1,000 2.0%
Income before taxation 3,900 7.3% 3,300 6.6%
Income taxes 1,170 2.2% 990 2.0%
$
Net income 2,730 5.1% $ 2,310 4.6%
Example Company Inc.
Common Size Balance Sheet
As at December 31
(in millions of dollars) 2025 2025 2024 2024
Assets
Current assets
Cash and cash equivalents $ 1,250 2.6% $ 1,200 3.0%
Accounts receivable 4,900 10.3% 4,550 11.5%
Inventories 5,100 10.7% 4,850 12.3%
Prepaid assets 200 0.4% 250 0.6%
Current assets 11,450 24.0% 10,850 27.5%
Non-current assets 36,300 76.0% 28,650 72.5%
Total assets $47,750 100.0% $39,500 100.0%
Liabilities
Current liabilities
Accounts payable $ 5,350 11.2% $ 4,900 12.4%
Other current liabilities 3,800 8.0% 3,700 9.4%
Current liabilities 9,150 19.2% 8,600 21.8%
Long-term indebtedness 16,000 33.5% 9,400 23.8%
Total liabilities 25,150 52.7% 18,000 45.6%
Equity
Common shares 1,000 2.1% 1,000 2.5%
Retained earnings 21,600 45.2% 20,500 51.9%
Equity 22,600 47.3% 21,500 54.4%
Total liabilities and equity $47,750 100.0% $39,500 100.0%
Diff: 2 Type: ES
Skill: Concept
Objective: A-1 Describe the purpose of common size financial statements and the information they
convey.
3
.
, Learning Objective 2 Describe the purpose of ratio analysis and the information the output
conveys.
1) The return on common equity (ROCE) ratio is an example of what type of ratio?
A) Liquidity ratio.
B) Profitability ratio.
C) Solvency ratio.
D) Credit risk ratio.
Answer: B
Diff: 1 Type: MC
Skill: Concept
Objective: A-2 Describe the purpose of ratio analysis and the information the output conveys.
4
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