True or False: 1. Vertical analysis always involves comparing financial statemen

Question

True or False:

1. Vertical analysis always involves comparing financial statement elements over a span of time.

2. Financial ratio analysis is a form of horizontal analysis in that comparisons are made between different accounts in the same set of financial statements.

3. A limitation of financial statement analysis stems from the discretion of management to choose accounting procedures that cast the best light on the firm's performance.

4. Solvency ratios are used to analyze the long-term debt-paying ability and the composition of the financing structure of the firm.

5. If product costs are misclassified as selling costs, the cost per unit will be understated.

Explanation / Answer

1. False, Horizontal analysis compare financial statement elements over a span of time. Vetical analysis express each item of Balance Sheet as a percentage of Total Assets and Income statement of Net sales.

2. True, Financial ratio analysis is a form of horizontal analysis in that comparisons are made between different accounts in the same set of financial statements.

3. True,  A limitation of financial statement analysis stems from the discretion of management to choose accounting procedures that cast the best light on the firm's performance

4. True, Solvency Ratio focus on the ability of the firm to pay the long term liabilities and also show the composition of financing structure of the firm.

5. True, If product costs are misclassified as selling costs, the cost per unit will be understated.

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