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Exam 13: Analysis of Financial Statements

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Question 21

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Financial reporting refers to:

A) The application of analytical tools to general-purpose financial statements.
B) The communication of financial information useful for decision making.
C) General-purpose financial statements only.
D) Ratio analysis only.
E) Profitability.

F) A) and C)
G) C) and E)

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Question 22

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Ratios may be expressed as (1) ________, (2) ________, or (3) ________.

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percentages; rates; ...

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Question 23

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Express the following income statement information in common-size percentages (round to nearest whole percent). Comment on the results. $\begin{array}{c} \text {Haans Corp.}\\ \text {Comparative Income Statements}\\ \text {For Years Ended December 31,2018 and 2017}\\\begin{array}{|l|}\hline\\\hline \text {Sales}\\\hline \text {Cost of goods sold}\\\hline \text {Grossprofit}\\\hline \text {Selling expenses}\\\hline \text {Administrative expenses}\\\hline \text {Net income}\\\hline\end{array}\begin{array}{r|}\hline2018\\\hline\$1,2000,000\\\hline\underline{804,000}\\\hline\$\quad396,000\\\hline132,000\\\hline\underline{180,000}\\\hline\underline{\$\quad84,000}\\\hline\end{array}\begin{array}{r|}\hline2017\\\hline\$ 1,000,000 \\\hline 650,000 \\\hline\$ \quad 350,000 \\\hline 120,000 \\\hline \underline{150,000} \\\hline\underline{\$ \quad 80000}\\\hline \end{array}\end{array}$

Refer to the following selected financial information from McCormik, LLC. Compute the company's accounts receivable turnover for Year 2. $\begin{array} { | l | r | r | } \hline & \text { Year 2 } & { \text { Year 1 } } \\\hline \text { Cash } & \$ 37,500 & 36,850 \\\hline \text { Short-term investments } & 90,000 & 90,000 \\\hline \text { Accounts receivable, net } & 85,500 & 86,250 \\\hline \text { Merchandise inventory } & 121,000 & 117,000 \\\hline \text { Prepaid expenses } & 12,100 & 13,500 \\\hline \text { Plant assets } & 388,000 & 392,000 \\\text { Accounts payable } & 113,400 & 111.750 \\\hline \text { Net sales } & 711,000 & 706,00 \\\hline \text { Cost of goods sold } & 390,000 & 385,500 \\\hline\end{array}$

Information from a manufacturing company's current year income statement follows. Calculate the company's (a) profit margin ratio, (b) gross margin ratio, and (c) times interest earned. $\begin{array} { | l | l | } \hline \text { Sales } & \$ 850,000 \\\hline \text { Cost of goods sold } & 455,000 \\\hline \text { Gross profit } & \$ 395,000 \\\hline \text { Operating expenses } & 260,000 \\\hline \text { Operating income } & \$ 135,000 \\\hline \text { Interest expense } & 32,000 \\\hline \text { Income before taxes } & \$ 103,000 \\\hline \text { Income taxes expense } & 12,400 \\\hline \text { Net income } & \$ 90,600 \\\hline\end{array}$

A corporation reported cash of $14,000 and total assets of $178,300 on its balance sheet. Its common-size percent for cash equals:

Zhang Company reported Cost of goods sold of $835,000 and ending Inventory of $41,750. The Days' sales in inventory (rounded to whole days) is:

A trend percent, or index number, is calculated by dividing the analysis period amount by the base period amount and multiplying the result by 100.

Use the financial data shown below to calculate the following ratios for the current year: (a) Current ratio. (b) Acid-test ratio. (c) Accounts receivable turnover. (d) Days' sales uncollected. (e) Inventory turnover. (f) Days' sales in inventory. Income statement data Sales (all on credit)………………………………… $650,000 Cost of goods sold…………………………………. 425,000 Income before taxes……………………………….. 78,000 Net income………………………………………… 54,600 $\begin{array} { | l | l | l | } \hline & \begin{array} { l } \text { Ending } \\\text { Balances }\end{array} & \begin{array} { l } \text { Beginning } \\\text { Balances }\end{array} \\\hline \text { Cash } & \$ 19,500 & \$ 15,000 \\\hline \text { Accounts receivable (net) } & 65,000 & 60,000 \\\hline \text { Inventory } & 71,500 & 64,500 \\\hline \text { Plant and equipment (net) } & 195,000 & 183,900 \\\hline \text { Total assets } & \underline{\$ 351,000} &\underline{ \$ 323,400 }\\\hline \text { Current liabilities } & \$ 62,400 & \$ 52,700 \\\hline \text { Long-term notes payable } & 97,500 & 100,000 \\\hline\end{array}$

One purpose of financial statement analysis for internal users is to provide strategic information to improve company efficiency and effectiveness in providing products and services.

Yeats Corporation's sales in Year 1 were $396,000 and in Year 2 were $380,000. Using Year 1 as the base year, the percent change for Year 2 compared to the base year is:

The following current year information is available from a manufacturing company: $\begin{array} {| l | c | } \hline\text { Sales } & \$ 740,000 \\\hline \text { Gross profit on sales } & 276,000 \\\hline \text { Operating income } & 64,000 \\\hline \text { Income before taxes } & 44,000 \\\hline \text { Net income } & 33,600 \\\hline \text { Accounts Receivable, beginning-year } & 58,000 \\\hline \text { Accounts Receivable, end-of-year } & 72,000 \\\hline\end{array}$ Calculate the company's accounts receivable turnover and its days' sales uncollected.

The return on total assets can be calculated as profit margin times total asset turnover.

A company reported net income of $78,000 and had 15,000 common shares outstanding throughout the current year. At year-end, the price per share of the company's stock was $49.40. What is the company's year-end price-earnings ratio?

Carducci Corporation reported Net sales of $3.6 million and average Total assets of $1.1 million. The Total asset turnover is:

Internal users of accounting information make the strategic and operating decisions of a company.

Describe the purpose of horizontal financial statement analysis and how it is applied.

A company's calendar-year financial data are shown below. The company had total assets of $339,000 and total equity of $144,400 for the prior year. No additional shares of common stock were issued during the year. The December 31 market price per share is $49.50. Cash dividends of $19,500 were paid during the year. Calculate the following ratios for the company: (a) debt ratio (b) equity ratio (c) debt-to-equity ratio (d) times interest earned (e) total asset turnover $\begin{array}{c}\begin{array}{|l|}\hline \text {Net sales}\\\hline \text {Cost of goods sold}\\ \hline \text {Grossprofit}\\\hline \text {Operating expenses}\\ \hline \text {Operating income}\\\hline \text {Interest expense}\\ \hline \text {Income before taxes}\\\hline \text {Income taxes}\\\hline \text {Net income}\\ \hline \\\hline \\\hline \\\hline \text {Cash}\\ \hline \text {Accounts receivable (net)}\\\hline \text {Inventory}\\\hline \text {Plant assets (net)}\\\hline \text {Total assets}\\\hline \\\hline \text {Current liabilities}\\\hline \text {Long-term notes payable}\\\hline \text {Common stock, \$ 5 par value}\\\hline \text {Retained earnings}\\\hline \text {Total liabilities and equity}\\\hline \end{array}\begin{array}{l|}\hline\$ 650,000 \\\hline422,500 \\\hline \$ 227,500\\\hline 140,500 \\\hline \$ \quad 87,000 \\\hline 9,100 \\\hline \$ \quad 77,900 \\\hline 23,400 \\\hline \$ \quad 54,500 \\\hline\\ \hline \text {Ending}\\\hline \text {Balances}\\\hline\$ 19,500\\\hline65,000\\\hline71,500\\\hline\underline{195,000} \\\hline\underline{\$ 351,000}\\\\\hline 74,100 \\\hline97,500\\\hline65,000 \\\hline114,400\\\hline\underline{\$ 351,000}\\\hline \end{array}\end{array}$

External users of accounting information manage and operate the company.

________ ratios include the price-earnings ratio and dividend yield.