Question

1 The percentage of sales method assumes that all corresponding financial statement variables will increase by the percentage amount.

True or False

2 What is the main reason for using accounting information in financial statement analysis?

Multiple Choice

• Accounting information matches the timing of cash inflows and outflows.

• Accounting numbers accurately reflect a company' s financial position.

• Accounting information is relevant and can be easily compared.

• Market value information is difficult to obtain on a consistent basis.

• Market value information is inaccurately measured.

3 Given the following information, calculate the ROE. Sales = $350,000; Net Income = $50,000; Total assets = $500,000; D/E = 1.5

Answer 1

Answers-

Q 1)

The statement is True.
The percentage of sales method is a financial forecasting method that businesses use to predict their sales growth on an annual basis by percentage amount.

Q 2)

The correct Option is Accounting numbers accurately reflect a company' s financial position.

The accrual basis of accounting accurately reflects the company's financial position and results of operations.

The other options are not the main reasons and are incorrect for using accounting information is financial statement analysis.

Accounting information does not match the timing of cash flows.
Market information is easy to obtain and can be accurately measured.

Q 3)

Given
Sales = $ 350000
Net Income = $ 50000
Total assets = $ 500000
D/E = 1.5

Return on Equity (ROE) = Net income / Equity

Assets = liabilities + Equity

Liabilities = debt
D = 1.5 E
Debt + Equity = Total asssts
1.5 E + E = Total assets
2.5 E = Total assets
2.5 E = $ 500000

E = $ 500000 / 2.5
E = $ 200000

Therefore Equity = $ 200000

ROE = Net income / Equity = 50000 / $ 200000 = 0.25 = 25 %

Therefore ROE = 25 %