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Exam 17: Analysis of Financial Statements

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Question 1

Multiple Choice

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The building blocks of financial statement analysis do not include:

A) Profitability.
B) Solvency.
C) External analyst services.
D) Market prospects.
E) Liquidity and efficiency.

F) A) and D)
G) A) and C)

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Question 2

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Match each of the following formulas with the appropriate terms.

Premises

Responses

Net income - Preferred dividends Average common stockholders' equity

Days' sales in inventory

(Accounts receivable * 365)/Net sales

Dividend yield

Total liabilities/Total assets

Total asset turnover

Income before interest expense and income taxes/Interest expense

Inventory turnover

Annual cash dividends per share/Market price per share

Return on common stockholders' equity

(Net sales - Cost of goods sold)/Net sales

Gross margin ratio

Cost of goods sold/Average inventory

Days' sales uncollected

______Net sales/Average total assets

Profit margin ratio

Net income/Net sales

Times interest earned

(Ending inventory * 365)/Cost of goods sold

Debt ratio

Premises

Net income - Preferred dividends Average common stockholders' equity

(Accounts receivable * 365)/Net sales

Total liabilities/Total assets

Income before interest expense and income taxes/Interest expense

Annual cash dividends per share/Market price per share

(Net sales - Cost of goods sold)/Net sales

Cost of goods sold/Average inventory

______Net sales/Average total assets

Net income/Net sales

(Ending inventory * 365)/Cost of goods sold

Responses

Days' sales in inventory

Dividend yield

Total asset turnover

Inventory turnover

Return on common stockholders' equity

Gross margin ratio

Days' sales uncollected

Profit margin ratio

Times interest earned

Debt ratio

Show Answer

Correct Answer

Premises

Responses

Net income - Preferred dividends Average common stockholders' equity

(Accounts receivable * 365)/Net sales

Total liabilities/Total assets

Income before interest expense and income taxes/Interest expense

Annual cash dividends per share/Market price per share

(Net sales - Cost of goods sold)/Net sales

Cost of goods sold/Average inventory

______Net sales/Average total assets

Net income/Net sales

(Ending inventory * 365)/Cost of goods sold

Premises

Net income - Preferred dividends Average common stockholders' equity

(Accounts receivable * 365)/Net sales

Total liabilities/Total assets

Income before interest expense and income taxes/Interest expense

Annual cash dividends per share/Market price per share

(Net sales - Cost of goods sold)/Net sales

Cost of goods sold/Average inventory

______Net sales/Average total assets

Net income/Net sales

(Ending inventory * 365)/Cost of goods sold

Responses

Question 3

True/False

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Horizontal analysis is the comparison of a company's financial condition and performance to a base amount.

A common focus of financial statement users in evaluating a company's performance and financial condition includes evaluating its (1) ________, (2) ________, and (3) ________.

Selected balances from a company's financial statements are shown below. Calculate the following ratios for 2018: (a) accounts receivable turnover (b) inventory turnover (c) days' sales uncollected (d) days' sales in inventory (d) profit margin. (e) return on total assets. $\begin{array} { l | l | l | l } & \text { Dec. 31. } & \text { Dec. 31. } & \text { For the } \\\hline \text { Accounts receivable } & 2018 & \underline { 2017 } & \text { Year 2018 } \\\hline \text { Merchandise inventory } & \$ 27,000 & \$ 24,000 & \\\hline \text { Total assets } & 25,000 & 20,000 & \\\hline \text { Accounts payable } & 296,000 & 244,000 & \\\hline \text { Salaries payable } & 26,000 & 32,000 & \\\hline \text { Sales (all on credit) } & 3,000 & 4,400 & \\\hline \text { Cost af goods sold } & & & \$ 312,000 \\\hline \text { Salaries expense } & & & 165,600 \\\hline \text { Other expenses } & & & 48,000 \\\hline \text { Net income } & & & 75,000 \\\hline\end{array}$

Financial reporting refers to:

Zhang Company reported Cost of goods sold of $835,000, beginning Inventory of $37,200 and ending Inventory of $46,300. The average Inventory amount is:

When a negative amount is in the base period and a positive amount is in the analysis period (or vice versa), a meaningful percent change cannot be calculated.

A company with a low inventory turnover requires a smaller investment in inventory than one producing the same sales with a higher turnover.

In order to be classified as an extraordinary gain or loss, the item must be both (1) ____________ and (2) ________.

The use of debt is sometimes described as financial leverage because debt can have the effect of increasing the return on equity.

Industry standards for financial statement analysis:

Graphical analysis of the balance sheet can be useful in assessing sources of financing.

A good financial statement analysis report usually includes the following six sections: (1)________, (2) ________, (3) ________, (4) ________ (5) ________, and (6) ________.

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

A corporation reports the following year-end balance sheet data. Calculate the following ratios: (a) working capital (b) acid-test ratio (c) current ratio (d) debt ratio (e) equity ratio (f) debt-to-equity ratio Cash……………………….. $ 50,000 Current liabilities $ 64,000 Accounts receivable………. 35,000 Long-term liabilities………. 72,000 Inventory………………….. 60,000 Common stock…………….. 100,000 Equipment………………… 140,000 Retained earnings…………. 49,000 Total assets……………….. $285,000 Total liabilities and equity $285,000

A company paid cash dividends on its preferred stock of $40,000 in the current year when its net income was $120,000 and its average common stockholders' equity was $640,000. What is the company's return on common stockholders' equity?

Match the following terms to the appropriate definitions.

Comparative calendar year financial data for a company are shown below. Calculate the following ratios for 2018: (a) return on total assets (b) return on common stockholders' equity. $\begin{array} { l | l | l } \hline & { 2018 } & { 2017 } \\\text { Sales } & \$ 720,000 & \$ 607,500 \\\hline \text { Gross profit } & 270,000 & 224,800 \\\hline \text { Income before taxes } & 79,200 & 78,700 \\\hline \text { Net income } & 51,200 & 51,700\\\hline & & \\\hline & { 2018 } & { 2017 } \\ \hline \text { Liabilities } & \$ 493,500 & \$ 452,500 \\\hline \text { Common stock (\$12 par) } & 180,000 & 180,000 \\\hline \text { Contributed capital in excess of par } & 135,000 & 135,000 \\\hline \text { Retained earnings } & \underline{204,000} & 177,300 \\\hline \text { Total liabilities and equity } & \$ 1,012,500 & \$ 944,800\\\hline\end{array}$

The measurement of key relationships between financial statement items is known as ________.