Indicate Whether Each of the Following Statements About Financial Statement

question 2

Short Answer

Indicate whether each of the following statements about financial statement analysis is true or false.
1. Vertical analysis of a company's balance sheet is useful in assessing its liquidity.
2. Common size financial statements are a form of vertical analysis, but the common size statements for two or more years may usefully be compared.
3. Vertical analysis of a balance sheet involves converting each component to a percentage of stockholders' equity.
4. Small percentage changes resulting from vertical analysis may still represent large dollar amounts; therefore, changes in both absolute dollar amounts and percentages should be examined.
5. A common size income statement is prepared by converting each component to a percentage of net income.

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Definitions:

Working Capital

Working capital, rephrased from net working capital, indicates the liquidity available to a business for day-to-day operations, calculated as current assets minus current liabilities.

Net Working Capital

A measure of a company's short-term financial health, calculated as current assets minus current liabilities.

Inventory

The raw materials, work-in-process products, and finished goods that are considered a part of a business's assets that are ready or will be ready for sale.

After-Tax Salvage Value

The net value of an asset after it has been disposed of and all related taxes have been paid.