MAS FS Analysis 40pages

FINANCIAL STATEMENT ANALYSIS
TRUE-FALSE STATEMENTS
1. Earning power refers to a companys ability to sustain its profits from operations.
2. When the disposal of a significant segment occurs, the income statement should report both income
from continuing operations and income (loss) from discontinued operations.
3. n e!ent or transaction should be classified as an e"traordinary item if it is unusual in nature or if it
occurs infre#uently.
$. %f a firm has only one change in accounting principle o!er se!eral years, it would be classified on
the income statement as an e"traordinary item.
&. change in accounting principle occurs when the principle used in the current year is different
from the one used by competitors in the current year.
'. (omprehensi!e income includes all changes in stoc)holders e#uity during a period e"cept those
resulting from in!estments by stoc)holders and distributions to stoc)holders.
*. %ntracompany comparisons of the same financial statement items are often useful to detect changes
in financial relationships and significant trends.
+. (omparisons of company data with industry a!erages pro!ide information about a company,s
relati!e position within the industry.
-. .ori/ontal, !ertical, and circular analyses are the basic tools of financial statement analysis.
10. .ori/ontal analysis is a techni#ue for e!aluating a financial statement item in the current year with
other items in the current year.
11. nother name for hori/ontal analysis is trend analysis.
12. %f a company has sales of 1110 in 2001 and 11&$ in 2002, the percentage increase in sales from
2001 to 2002 is 1$02.
13. %n hori/ontal analysis, if an item has a negati!e amount in the base year, and a positi!e amount in
the following year, no percentage change for that item can be computed.
1$. 3ertical analysis is a techni#ue for e!aluating a series of financial statement data o!er a period of
time to determine the increase (decrease) that has ta)en place.
1&. (ommon si/e analysis e"presses each item in a financial statement as a percent of a base amount.
1'. %n the !ertical analysis of a balance sheet, the base for current liabilities is total liabilities.
1*. 3ertical analysis is useful in ma)ing comparisons of companies of different si/es.
1+. 4sing !ertical analysis of the income statement, a company,s net income as a percentage of net
sales is 1&25 therefore, the cost of goods sold as a percentage of sales must be +&2.
1-. %n the !ertical analysis of an income statement, each item is generally stated as a percentage of net
Financial Statement Analysis 13-
income.
20. 6i#uidity ratios measure the ability of the enterprise to sur!i!e o!er a long period of time.
21. sol!ency ratio measures the income or operating success of an enterprise for a gi!en period of
time.
22. 7he current ratio is a measure of all the ratios calculated for the current year.
23. %n!entory turno!er measures the number of times on the a!erage the in!entory was sold during the
period.
2$. 8rofitability ratios are fre#uently used as a basis for e!aluating management,s operating
effecti!eness.
2&. 7he return on assets ratio will be greater than the rate of return on common stoc)holders, e#uity if
the company has been successful in trading on the e#uity at a gain.
2'. n ad!antage of the current and acid9test ratios is they use year9end balances of current asset and
current liability accounts.
2*. :rom a creditor,s point of !iew, the higher the total debt to total assets ratio, the lower the ris) that
the company may be unable to pay its obligations.
2+. current ratio of 1.2 to 1 indicates that a company,s assets e"ceed its current liabilities.
2-. 4sing borrowed money to increase the rate of return on common stoc)holders, e#uity is called
;trading on the e#uity.;
30. <i!ersification in merican industry limits the usefulness of financial analysis.
Answers to True-False Statements
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. T 6. T 11. T 16. F 21. F 26. F
2. T 7. T 12. F 17. T 22. F 27. F
3. F 8. T 13. T 18. F 23. T 28. T
4. F 9. F 14. F 19. F 24. T 29. T
5. F 10. F 15. T 20. F 25. F 30. T
=467%86E (.>%(E ?4E@7%>A@
31. 7he discontinued operations section of the income statement refers to
a. discontinuance of a product line.
b. the income or loss on products that ha!e been completed and sold.
c. obsolete e#uipment and discontinued in!entory items.
d. the disposal of a significant segment of a business.
32. Which one of the following would be classified as an e"traordinary itemB
a. E"propriation of property by a foreign go!ernment
b. 6osses attributed to a labor stri)e
c. Write9down of in!entories
d. Cains or losses from sales of e#uipment
33. When a change in accounting principle occurs,
a. all prior years, financial statements should be changed to reflect the newly adopted principle.
b. the new principle should be used in reporting the results of operations of the current year.
c. the cumulati!e effect of the change in principle should be reflected on the income statement as
of the beginning of the ne"t year.
d. the cumulati!e effect of the change in accounting principle should be classified as an
e"traordinary item on the income statement.
3$. %f an item meets one (but not both) of the criteria for an e"traordinary item, it
a. only needs to be disclosed in the footnotes of the financial statements.
b. may be treated as sales re!enue (if it is a gain) and as an operating e"pense (if it is a loss).
c. is reported as an ;other re!enue or gain; or ;other e"pense and loss,; net of ta".
d. is reported at its gross amount as an ;other re!enue or gain; or ;other e"pense or loss.;
3&. 7he order of presentation of nontypical items that may appear on the income statement is
a. E"traordinary items, <iscontinued operations, (hange in accounting principle.
b. <iscontinued operations, E"traordinary items, (hange in accounting principle.
c. (hange in accounting principle, <iscontinued operations, E"traordinary items.
d. (hange in accounting principle, E"traordinary items, <iscontinued operations.
3'. %n analy/ing the financial statements of a company, a single item on the financial statements
a. should be reported in boldface type.
b. must be compared with other financial data to pro!ide more information.
c. is significant only if it is large.
d. should be accompanied by a footnote.
3*. (omparisons of financial data made within a company are called
a. intracompany comparisons.
b. interior comparisons.
c. intercompany comparisons.
d. intramural comparisons.
Test Bank or Mana!er"al A##ount"n!$ Se#on% E%"t"on
3+. Which one of the following is not a tool in financial statement analysisB
a. .ori/ontal analysis
b. (ircular analysis
c. 3ertical analysis
d. Datio analysis
3- %n analy/ing financial statements, hori/ontal analysis is a
a. re#uirement.
b. tool.
c. principle.
d. theory.
$0. .ori/ontal analysis is also )nown as
a. linear analysis.
b. !ertical analysis.
c. trend analysis.
d. common si/e analysis.
$1. 4nder which of the following cases may a percentage change be computedB
a. 7he trend of the amounts is decreasing but all amounts are positi!e.
b. 7here is no amount in the base year.
c. 7here is a negati!e amount in the base year and a negati!e amount in the subse#uent year.
d. 7here is a negati!e amount in the base year and a positi!e amount in the subse#uent year.
$2. .ori/ontal analysis is a techni#ue for e!aluating a series of financial statement data o!er a period
of time
a. that has been arranged from the highest number to the lowest number.
b. that has been arranged from the lowest number to the highest number.
c. to determine which items are in error.
d. to determine the amount andEor percentage increase or decrease that has ta)en place.
$3. .ori/ontal analysis is a techni#ue for e!aluating financial statement data
a. within a period of time.
b. o!er a period of time.
c. on a certain date.
d. as it may appear in the future.
$$. ssume the following sales data for a companyF
2003 11,+00,000
2002 1,&00,000
2001 1,000,000
%f 2001 is the base year, what is the percentage increase in sales from 2001 to 2003B
a. 1002
b. 1+02
c. +02
d. &&.&2
13-&
$&. (omparati!e balance sheets are usually prepared for
a. one year.
b. two years.
c. three years.
d. four years.
$'. 3ertical analysis is also )nown as
a. perpendicular analysis.
b. common si/e analysis.
c. trend analysis.
d. straight9line analysis.
$*. 3ertical analysis is a techni#ue that e"presses each item in a financial statement
a. in dollars and cents.
b. as a percent of the item in the pre!ious year.
c. as a percent of a base amount.
d. starting with the highest !alue down to the lowest !alue.
$+. %n !ertical analysis,
a. a base amount is re#uired.
b. a base amount is optional.
c. the same base is used across all financial statements analy/ed.
d. the results of the hori/ontal analysis are necessary inputs for performing the analysis.
$-. %n performing a !ertical analysis, the base for prepaid e"penses is
a. total current assets.
b. total assets.
c. total liabilities.
d. prepaid e"penses in a pre!ious year.
&0. %n performing a !ertical analysis, the base for sales re!enues on the income statement is
a. net sales.
b. sales.
c. net income.
d. cost of goods a!ailable for sale.
&1. %n performing a !ertical analysis, the base for sales returns and allowances is
a. sales.
b. sales discounts.
c. net sales.
d. total re!enues.
&2. %n performing a !ertical analysis, the base for cost of goods sold is
a. total selling e"penses.
b. net sales.
c. total re!enues.
d. total e"penses.
&3. Which one of the following is not a characteristic generally e!aluated in ratio analysisB
a. 6i#uidity
b. 8rofitability
c. =ar)etability
d. @ol!ency
&$. @hort9term creditors are usually most interested in assessing
a. sol!ency.
b. li#uidity.
c. mar)etability.
d. profitability.
&&. 6ong9term creditors are usually most interested in e!aluating
a. li#uidity.
b. mar)etability.
c. profitability.
d. sol!ency.
&'. @toc)holders are most interested in e!aluating
a. li#uidity.
b. sol!ency.
c. profitability.
d. mar)etability.
&*. %n ratio analysis, the ratios are ne!er e"pressed as a
a. rate.
b. logarithm.
c. percentage.
d. simple proportion.
&+. 7he current ratio is
a. calculated by di!iding current liabilities by current assets.
b. used to e!aluate a company,s li#uidity and short9term debt paying ability.
c. used to e!aluate a company,s sol!ency and long9term debt paying ability.
d. calculated by subtracting current liabilities from current assets.
&-. 7he acid9test or #uic) ratio
a. is used to #uic)ly determine a company,s sol!ency and long9term debt paying ability.
b. relates cash, short9term in!estments, and net recei!ables to current liabilities.
c. is calculated by ta)ing one item from the income statement and one item from the balance
sheet.
d. is the same as the current ratio e"cept it is rounded to the nearest whole percent.
'0. Winter (lothing @tore had a balance in the ccounts Decei!able account of 13-0,000 at the
beginning of the year and a balance of 1$10,000 at the end of the year. Aet credit sales during the
year amounted to 1$,000,000. 7he a!erage collection period of the recei!ables in terms of days was
a. 30 days.
b. 3'& days.
c. *3 days.
d. 3* days.
'1. 8ine .ardware @tore had net credit sales of 1',&00,000 and cost of goods sold of 1&,000,000 for
the year. 7he ccounts Decei!able balances at the beginning and end of the year were 1'00,000
and 1*00,000, respecti!ely. 7he recei!ables turno!er was
a. *.* times.
b. 10.+ times.
c. -.3 times.
d. 10 times.
4se the following information for #uestions '29'3.
13-'
Winslow <epartment @tore had net credit sales of 11',000,000 and cost of goods sold of 112,000,000 for
the year. 7he a!erage in!entory for the year amounted to 12,000,000.
'2. %n!entory turno!er for the year is
a. + times.
b. 1$ times.
c. ' times.
d. $ times.
'3. 7he a!erage days in in!entory during the year was
a. -1 days.
b. '1 days.
c. $' days.
d. 2' days.
'$. Which one of the following would not be considered a li#uidity ratioB
a. (urrent ratio
b. %n!entory turno!er
c. ?uic) ratio
d. Deturn on assets
'&. sset turno!er measures
a. how often a company replaces its assets.
b. how efficiently a company uses its assets to generate sales.
c. the portion of the assets that ha!e been financed by creditors.
d. the o!erall rate of return on assets.
''. 7he profit margin ratio is calculated by di!iding
a. sales by cost of goods sold.
b. gross profit by net sales.
c. net income by stoc)holders, e#uity.
d. net income by net sales.
4se the following information for #uestions '*9'+.
7erry (orporation had net income of 1200,000 and paid di!idends to common stoc)holders of 1$0,000 in
2002. 7he weighted a!erage number of shares outstanding in 2002 was &0,000 shares. 7erry (orporation,s
common stoc) is selling for 1'0 per share on the Aew Gor) @toc) E"change.
'*. 7erry (orporation,s price9earnings ratio is
a. 3.+ times.
b. 1& times.
c. 1+.+ times.
d. ' times.
'+. 7erry (orporation,s payout ratio for 2002 is
a. 1$ per share.
b. 2&2.
c. 202.
d. 12.&2.
'-. Crand (ompany reported the following on its income statementF
%ncome before income ta"es 1$00,000
%ncome ta" e"pense 100,000
Aet income 1300,000
n analysis of the income statement re!ealed that interest e"pense was 1100,000. Crand
(ompany,s times interest earned was
a. & times.
b. $ times.
c. 3.& times.
d. 3 times.
*0. 7he debt to total assets ratio measures
a. the company,s profitability.
b. whether interest can be paid on debt in the current year.
c. the proportion of interest paid relati!e to di!idends paid.
d. the percentage of the total assets pro!ided by creditors.
*1. 7rading on the e#uity (le!erage) refers to the
a. amount of wor)ing capital.
b. amount of capital pro!ided by owners.
c. use of borrowed money to increase the return to owners.
d. number of times interest is earned.
*2. 7he current assets of Hey (ompany are 11&0,000. 7he current liabilities are 1100,000. 7he current
ratio e"pressed as a proportion is
a. 1&02.
b. 1.&F1
c. .'*F1
d. 11&0,000 I 1100,000.
*3. 7he acid9test ratio is also referred to as the
a. short run ratio.
b. #uic) ratio.
c. wor)ing capital ratio.
d. contemporary ratio.
*$. wea)ness of the current ratio is
a. the difficulty of the calculation.
b. that it doesn,t ta)e into account the composition of the current assets.
c. that it is rarely used by sophisticated analysts.
d. that it can be e"pressed as a percentage, as a rate, or as a proportion.
*&. supplier to a company would be most interested in the
a. asset turno!er ratio.
b. profit margin ratio.
c. current ratio.
d. earnings per share.
13-(
*'. Which one of the following ratios would not li)ely be used by a short9term creditor in
e!aluating whether to sell on credit to a companyB
a. (urrent ratio
b. cid9test ratio
c. sset turno!er
d. Decei!ables turno!er
**. Datios are used as tools in financial analysis
a. instead of hori/ontal and !ertical analyses.
b. because they can pro!ide information that may not be apparent from inspection of the
indi!idual components of a particular ratio.
c. because e!en single ratios by themsel!es are #uite meaningful.
d. because they are prescribed by C8.
*+. 7he ratios that are used to determine a company,s short9term debt paying ability are
a. asset turno!er, times interest earned, current ratio, and recei!ables turno!er.
b. times interest earned, in!entory turno!er, current ratio, and recei!ables turno!er.
c. times interest earned, acid9test ratio, current ratio, and in!entory turno!er.
d. current ratio, acid9test ratio, recei!ables turno!er, and in!entory turno!er.
79. Tyner Company ha !250"000 o# c$rrent assets an !90"000 o# c$rrent lia%ilities %e#ore
%orro&in' !60"000 #rom the %an( &ith a 3)month note paya%le. *hat e##ect i the
%orro&in' transaction ha+e on Tyner Company,s c$rrent ratio-
a. 7he ratio remained unchanged.
b. 7he change in the current ratio cannot be determined.
c. 7he ratio decreased.
d. 7he ratio increased.
+0. li#uidity ratio measures the
a. income or operating success of an enterprise o!er a period of time.
b. ability of the enterprise to sur!i!e o!er a long period of time.
c. short9term ability of the enterprise to pay its maturing obligations and to
meet une"pected needs for cash.
d. number of times interest is earned.
+1. %f e#ual amounts are added to the numerator and the denominator of the current
ratio, the ratio will always
a. increase.
b. decrease.
c. stay the same.
d. e#ual /ero.
+2. 7he acid9test ratio
a. is a #uic) calculation of an appro"imation of the current ratio.
b. does not include all current liabilities in the calculation.
c. does not include in!entory as part of the numerator.
d. does include prepaid e"penses as part of the numerator.
+3. %f a company has an acid9test ratio of 1.2F1, what respecti!e effects will the
borrowing of cash by short9term debt and collection of accounts recei!able ha!e on the ratioB
@hort9term Jorrowing(ollection of Decei!able
a. %ncrease Ao effect
b. %ncrease %ncrease
c. <ecrease Ao effect
d. <ecrease <ecrease
+$. company has a recei!ables turno!er of 10 times. 7he a!erage net recei!ables
during the period are 1300,000. What is the amount of net credit sales for the periodB
a. 130,000.
b. 13,000,000.
c. 13'0,000.
d. (annot be determined from the information gi!en.
+&. %f the a!erage collection period is 30 days, what is the recei!ables turno!erB
a. 11.1 times
b. 12.2 times
c. '.1 times
d. Aone of these
+'. general rule to use in assessing the a!erage collection period is
a. that it should not e"ceed 30 days.
b. it can be any length as long as the customer continues to buy merchandise.
c. that it should not greatly e"ceed the discount period.
d. that it should not greatly e"ceed the credit term period.
+*. %n!entory turno!er is calculated by di!iding
a. cost of goods sold by the ending in!entory.
b. cost of goods sold by the beginning in!entory.
c. cost of goods sold by the a!erage in!entory.
d. a!erage in!entory by cost of goods sold.
++. company has an a!erage in!entory on hand of 1$0,000 and its a!erage days in
in!entory is *3 days. What is the cost of goods soldB
a. 1200,000.
b. 12,-20,000.
c. 1$00,000.
d. 11,$'0,000.
+-. successful grocery store would probably ha!e
a. a low in!entory turno!er.
b. a high in!entory turno!er.
c. /ero profit margin.
d. low !olume.
-0. n aircraft company would most li)ely ha!e
13-1)
a. a high in!entory turno!er.
b. a low profit margin.
c. high !olume.
d. a low in!entory turno!er.
-1. Aet sales are 1',000,000, beginning total assets are 12,+00,000, and the asset
turno!er is 3.0. What is the ending total asset balanceB
a. 12,000,000.
b. 11,200,000.
c. 12,+00,000.
d. 11,'00,000.
-2. 7he numerator of the times interest earned ratio is
a. income before income ta"es.
b. net income.
c. net income K interest e"pense.
d. net income K interest e"pense K income ta"es.
-3. 7he return on common stoc)holders e#uity ratio is computed by di!iding net
income
a. by a!erage common stoc)holders e#uity.
b. by ending common stoc)holders e#uity.
c. minus preferred stoc) di!idends by a!erage common stoc)holders e#uity.
d. minus preferred stoc) di!idends by ending common stoc)holders e#uity.
-$. 7he return on assets ratio is affected by the
a. asset turno!er ratio.
b. debt to total assets ratio.
c. profit margin ratio.
d. asset turno!er and profit margin ratios.
-&. =easures of the short9term ability of the enterprise to pay its maturing obligations
are
a. li#uidity ratios.
b. mar)etability ratios.
c. profitability ratios.
d. sol!ency ratios.
-'. measure of a companys immediate short9term li#uidity is the
a. current ratio.
b. current cash debt co!erage ratio.
c. cash debt co!erage ratio.
d. acid9test ratio.
-*. 7he ratio that indicates a companys degree of financial le!erage is the
a. cash debt co!erage ratio.
b. debt to total assets ratio.
c. free cash flow ratio.
d. times interest earned ratio.
-+. Earnings per share is computed by di!iding net income
a. by a!erage common shares outstanding.
b. by ending common shares outstanding.
13-1*
c. less preferred stoc) di!idends by a!erage common shares outstanding.
d. less preferred stoc) di!idends by ending common shares outstanding.
--. measure of how efficiently a company uses its assets to generate sales is the
a. return on assets ratio.
b. profit margin ratio.
c. cash return on sales ratio.
d. asset turno!er ratio.
100. limitation in calculating ratios in financial statement analysis is that
a. it re#uires a calculator.
b. no one other than management would be interested in them.
c. some account balances may reflect atypical data at year end.
d. they seldom identify problem areas in a company.
101. Which of the following is not a limitation of financial statement analysisB
a. 7he cost basis
b. 7he use of estimates
c. 7he di!ersification of firms
d. 7he a!ailability of information
102. 7he use of alternati!e accounting methods
a. is not a problem in ratio analysis because the footnotes disclose the method
used.
b. may be a problem in ratio analysis e!en if disclosed.
c. is not a problem in ratio analysis since e!entually all methods will lead to
the same end.
d. is only a problem in ratio analysis with respect to in!entory.
103. 7raditional financial statements are based on
a. unadLusted cost.
b. price9le!el adLusted cost.
c. the lower of cost or price9le!el adLusted historical cost.
d. fair mar)et !alue.
10$. Estimates are used in financial statements in determining all of the following e"cept
a. contingent losses.
b. cost of goods sold.
c. periodic depreciation.
d. warranty costs.
10&. %n addition to differences in in!entory costing methods, differences also e"ist in reporting
all of the following e"cept
a. amorti/ation.
b. depletion.
c. depreciation.
d. warranty costs.
13-1&
nswers to =ultiple (hoice ?uestions
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
31. 42. 53. c 64. 75. c 86. 97. %
32. a 43. % 54. % 65. % 76. c 87. c 98. c
33. % 44. c 55. 66. 77. % 88. a 99.
34. 45. % 56. c 67. % 78. 89. % 100. c
35. % 46. % 57. % 68. c 79. c 90. 101.
36. % 47. c 58. % 69. a 80. c 91. % 102. %
37. a 48. a 59. % 70. 81. % 92. 103. a
38. % 49. % 60. 71. c 82. c 93. c 104. %
39. % 50. a 61. 72. % 83. c 94. 105.
40. c 51. c 62. c 73. % 84. % 95. a
41. a 52. % 63. % 74. % 85. % 96.
E+ERCISES
E,. 1)'
.nicate &hether the #ollo&in' items &o$l %e reporte as an orinary or an e/traorinary item in
0artley Corporation,s income statement.
(a) 6oss attributable to labor stri)e.
(b) Cain on sale of fi"ed assets.
(c) 6oss from fire. .artley is a chemical company.
(d) 6oss from sale of mar)etable securities.
(e) E"propriation of property by a foreign go!ernment.
(f) 6oss from tornado damage. .artley (orporation is located in the =idwest,s tornado alley.
(g) 6oss from go!ernment condemnation of property through a newly enacted law.
Solut"on 1)' 16)9 min.2
1a2 orinary 1e2
e/traorinary
(b) ordinary (f) ordinary
(c) ordinary (g) e"traordinary
(d) ordinary
E,. 1)-
Stiner Company has income #rom contin$in' operations o# !480"000 #or the year ene
3ecem%er 31" 2002. .t also has the #ollo&in' items 1%e#ore consierin' income ta/es24
(1) n e"traordinary fire loss of 11+0,000.
(2) gain of 1120,000 on the discontinuance of a maLor segment.
(3) cumulati!e effect of a change in accounting principle that resulted in an increase in prior
years, depreciation of 1*0,000.
ssume all items are subLect to income ta"es at a 302 ta" rate.
Instructions
8repare an income statement, beginning with income from continuing operations.
Solut"on 1)- 110)15 min.2
@7%AED (>=8AG
8artial %ncome @tatement
:or the Gear Ended <ecember 31, 2002
.ncome #rom contin$in' operations
!480"000
<iscontinued operations
Cain on discontinued segment, net of 13',000 income ta"es
+$,000
%ncome before e"traordinary item and cumulati!e effect of change in
accounting principle &'$,000
E"traordinary item
:ire loss, net of 1&$,000 ta" sa!ing (12',000)
(umulati!e effect of change in accounting principle
Effect on prior years of change in depreciation method, net of
121,000 income ta" sa!ing ($-,000)
Aet income 13+-,000
E,. 1)(
(omparati!e information ta)en from the Walters (ompany financial statements is shown belowF
2002 2001
(a) Aotes recei!able 1 20,000 1 909
(b) ccounts recei!able 1+2,000 1$0,000
(c) Detained earnings 30,000 ($0,000)
(d) %ncome ta"es payable $&,000 20,000
(e) @ales -00,000 *&0,000
(f) >perating e"penses 1*0,000 200,000
%nstructions
4sing hori/ontal analysis, show the percentage change from 2001 to 2002 with 2001 as the base
year.
Solut"on 1)( 18)12 min.2
(a) Jase year is /ero. Aot possible to compute.
(b) 1$2,000 I 11$0,000 M 302 increase
(c) Jase year is negati!e. Aot possible to compute.
13-1'
(d) 12&,000 I 120,000 M 12&2 increase
(e) 11&0,000 I 1*&0,000 M 202 increase
(f) 130,000 I 1200,000 M 1&2 decrease
E,. 1).
(line (orporation had net income of 12,000,000 in 2001. 4sing 2001 as the base year, net income
decreased by *02 in 2002 and increased by 1*&2 in 2003.
%nstructions
(ompute the net income reported by (line (orporation for 2002 and 2003.
Solut"on 1). 16)9 min.2
2002F N I 12,000,000 M *02
N M 12,000,000 O .*0 M 11,$00,000
7he decrease is 11,$00,0005 therefore net income for 2002 is 1'00,000.
2003F N I 12,000,000 M 1*&2
N M 12,000,000 O 1.*&
N M 13,&00,000
7he net income for 2003 is 1&,&00,000 (12,000,000 K 13,&00,000).
E,. 11)
7he following items were ta)en from the financial statements of @malley, %nc., o!er a four9year
periodF
%tem 2003 2002 2001 2000
Aet @ales 1+00,000 1'&0,000 1'00,000 1&00,000
(ost of Coods @old &+0,000 $'0,000 $20,000 $00,000
Cross 8rofit 1220,000 11-0,000 11+0,000 1100,000
%nstructions
4sing hori/ontal analysis and 2000 as the base year, compute the trend percentages for net sales,
cost of goods sold, and gross profit. E"plain whether the trends are fa!orable or unfa!orable for
each item.
Solut"on 11) 110)15 min.2
%tem 2003 2002 2001 2000
Aet @ales 1'02 1302 1202 1002
(ost of Coods @old 1$&2 11&2 10&2 1002
Cross 8rofit 2202 1-02 1+02 1002
7he trend in net sales is increasing and fa!orable. 7he cost of goods sold trend is increasing which
could be unfa!orable, but the sales are increasing each year at a faster pace than cost of goods
sold. 7his is apparent by e"amining the gross profit percentages, which show a fa!orable,
increasing trend.
13-1(
E". 111
7he comparati!e balance sheet of Crider (ompany appears belowF
CD%<ED (>=8AG
(omparati!e Jalance @heet
<ecember 31,
ssets 2003 2002
(urrent assets 1 3'0 1300
8lant assets '$0 &00
7otal assets 11,000 1+00
6iabilities and stoc)holders, e#uity
(urrent liabilities 1 1&0 1120
6ong9term debt 2$0 1'0
(ommon stoc) 3&0 2+0
Detained earnings 2'0 2$0
7otal liabilities and stoc)holders, e#uity 11,000 1+00
%nstructions
(a) 4sing hori/ontal analysis, show the percentage change for each balance sheet item using
2002 as a base year.
(b) 4sing !ertical analysis, prepare a common si/e comparati!e balance sheet.
Solut"on 111 114)19 min.2
CD%<ED (>=8AG
<ecember 31,
(b) (b) (a)
ssets 2003 8ercent 2002 8ercent 8ercent
(urrent assets 1 3'0 3'2 1300 3+2 202
8lant assets '$0 '$ &00 '2 2+2
7otal assets 11,000 1002 1+00 1002 2&2
(urrent liabilities 1 1&0 1&2 1120 1&2 2&2
6ong9term debt 2$0 2$ 1'0 20 &02
Common stoc( 350 35
280 35
255
Detained earnings 2'0 2' 2$0 30 302
7otal liabilities and stoc)holders, e#uity 11,000 1002 1+00 1002 2&2
Test Bank or Mana!er"al A##ount"n!$ Se#on% E%"t"on 13-*)
E". 112
4sing the following selected items from the comparati!e balance sheet of bbott (ompany,
illustrate hori/ontal and !ertical analysis.
<ecember 31, 2003 <ecember 31, 2002
ccounts Decei!able 1 +$0,000 1 '00,000
%n!entory -*&,000 *+0,000
7otal ssets $,000,000 2,&00,000
Solut"on 11* 110)15 min.2
.>D%P>A76 A6G@%@
ccounts Decei!able 1$02 1002
%n!entory 12&2 1002
7otal ssets 1'02 1002
3ED7%(6 A6G@%@
ccounts Decei!able 21.02 2$.02
%n!entory 2$.$2 31.22
7otal ssets 1002 1002
E,. 113
7he following information was ta)en from the financial statements of 6ar)in (ompanyF
2003 2002
Cross profit on sales 1-00,000 1+$0,000
%ncome before income ta"es 2+0,000 230,000
Aet income 2$0,000 21',000
Aet income as a percentage of net sales +2 -2
Instru#t"ons
(a) (ompute the net sales for each year.
(b) (ompute the cost of goods sold in dollars and as a percentage of net sales for each year.
(c) (ompute operating e"penses in dollars and as a percentage of net sales for each year.
(%ncome ta"es are not operating e"penses).
Test Bank or Mana!er"al A##ount"n!$ Se#on% E%"t"on 13-**
@olution 113 (1291& min.)
(a) 7o calculate net sales di!ide the net income by the percentage of net income to net sales.
2003 2002
Aet @ales 12$0,000 I +2 M 13,000,000 121',000 I -2 M 12,$00,000
(b) 4sing the net sales information from (a) and the gross profits gi!en, it is possible to calculate
the cost of goods sold.
2003 2002
Aet @ales 13,000,000 12,$00,000
6essF Cross profit -00,000 +$0,000
(ost of goods sold 12,100,000 11,&'0,000
2 of net sales *02 '&2
(c) 2003 2002
Cross profit 1-00,000 1+$0,000
6essF %ncome before income ta"es 2+0,000 230,000
>perating E"penses 1'20,000 1'10,000
2 of net sales 20.*2 2&.$2
E,. 11&
@elected information from the comparati!e financial statements of :ryman (ompany for the year
ended <ecember 31, appears belowF
2002 2001
ccounts recei!able (net) 1 1+0,000 1200,000
%n!entory 1$0,000 1'0,000
7otal assets 1,200,000 +00,000
(urrent liabilities 1$0,000 110,000
6ong9term debt $00,000 300,000
Aet credit sales 1,330,000 *00,000
(ost of goods sold -00,000 &30,000
%nterest e"pense &0,000 2&,000
%ncome ta" e"pense '0,000 2-,000
Aet income 1&0,000 +&,000
Aet cash pro!ided by operating acti!ities 220,000 13&,000
%nstructions
nswer the following #uestions relating to the year ended <ecember 31, 2002. @how computa9
tions.
1. 7he in!entory turno!er ratio for 2002 is QQQQQQQQQQ.
2. 7he times interest earned ratio in 2002 is QQQQQQQQQQ.
3. 7he debt to total assets ratio for 2002 is QQQQQQQQQQ.
$. 7he recei!ables turno!er ratio for 2002 is QQQQQQQQQQ.
&. 7he return on assets ratio for 2002 is QQQQQQQQQQ.
'. 7he cash return on sales ratio for 2002 is QQQQQQQQQQ.
*. 7he current cash debt co!erage ratio for 2002 is QQQQQQQQQQ.
Solut"on 11& 112)19 min.2
1-00,000
1. 7he in!entory turno!er ratio for 2002 is ' times. RRRRRRRRRRRR M '
times.
(11$0,000 K 11'0,000) I 2
2. 7he times interest earned ratio in 2002 is &.2 times.
!150"000 6 !60"000 6 !50"000
RRRRRRRRRRRRRR M &.2 times.
1&0,000
!140"000 6 !400"000
3. 7he debt to total assets ratio for 2002 is $&2. RRRRRRRRRR M $&2.
!1"200"000
!1"330"000
$. 7he recei!ables turno!er ratio for 2002 is * times. RRRRRRRRRRRR M *
times.
(11+0,000 K 1200,000) I 2
&. 7he return on assets ratio for 2002 is 1&2.
!150"000
1!1"200"000 6 !800"0002 2
M 1&2
'. 7he cash return on sales ratio for 2002 is 1'.&2.
!1"330"000
!220"000
M 1'.&2
*. 7he current cash debt co!erage ratio for 2002 is 1.*' times.
2 !140"0002 6 1!110"000
!220"000
M 1.*' times.
E,. 11/
7he comparati!e balance sheet for Sohnson @toll (ompany is gi!en belowF
S>.A@>A @7>66 (>=8AG
<ecember 31,
RRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRR
RRRR
ssets 2003 2002
(ash 1 30,000 1 $&,000
ccounts recei!able (net) -*,&00 -0,000
%n!entory -0,000 *&,000
8lant assets (net) 300,000 2*0,000
13-*&
7otal assets 1&1*,&00 1$+0,000
6iabilities and @toc)holders, E#uity
ccounts payable 1 *&,000 1 -0,000
=ortgage payable (+2) 1&0,000 1&0,000
(ommon stoc), 110 par 210,000 1+0,000
Detained earnings +2,&00 '0,000
7otal liabilities and stoc)holders, e#uity 1&1*,&00 1$+0,000
E,. 11/ 1cont.2
dditional information for 2003F
1. %ncome before interest e"pense and income ta"es was 11'+,000.
2. @ales on account were 1--0,000. @ales returns and allowances amounted to 1&,'2&.
3. (ost of goods sold was 1'*',&00.
$. Aet cash pro!ided by operating acti!ities was 11+&,'2&.
&. %nterest e"pense totaled 112,000.
%nstructions
(ompute the following ratios at <ecember 31, 2003F
a. (urrent ratio
b. cid9test ratio
c. (urrent cash debt co!erage ratio
d. Decei!ables turno!er ratio
e. !erage collection period
f. %n!entory turno!er
g. !erage days in in!entory
h. <ebt to total assets ratio
i. 7imes interest earned
L. (ash debt co!erage ratio
Solut"on 11/ 115)20 min.2
a. (urrent ratio M 121*,&00 I 1*&,000 M 2.-
b. cid9test ratio M 112*,000 I 1*&,000 M 1.*
11+&,'2&
c. (urrent cash debt co!erage ratio M RRRRRRRRRRR M 2.2&
(1*&,000 K 1-0,000) I 2
1-+$,3*&
d. Decei!ables turno!er ratio M RRRRRRRRRRR M 10.&
(1-*,&00 K 1-0,000) I 2
e. !erage collection period M 3'& I 10.& M 3& days
1'*',&00
f. %n!entory turno!er M RRRRRRRRRRR M +.2
(1-0,000 K 1*&,000) I 2
g. !erage days in in!entory M 3'& I +.2 M $$.& days
h. <ebt to total assets ratio M 122&,000 I 1&1*,&00 M .$3
i. 7imes interest earned M 11'+,000 I 112,000 M 1$
11+&,'2&
L. (ash debt co!erage ratio M RRRRRRRRRRRR M .+0
1!225"000 6 !240"0002 7 2
E,. 11'
7he financial statements of lbert (ompany appear belowF
6JED7 (>=8AG
<ecember 31,
RRRR
ssets 2002 2001
(ash 1 2&,000 1 $0,000
@hort9term in!estments 1&,000 '0,000
ccounts recei!able (net) &0,000 30,000
%n!entory &0,000 *0,000
8roperty, plant and e#uipment (net) 2'0,000 300,000
7otal assets 1$00,000 1&00,000
ccounts payable 1 20,000 1 30,000
@hort9term notes payable 30,000 -0,000
Jonds payable -0,000 1'0,000
(ommon stoc) 1&0,000 1&0,000
Detained earnings 110,000 *0,000
7otal liabilities and stoc)holders, e#uity 1$00,000 1&00,000
6JED7 (>=8AG
%ncome @tatement
Aet sales 1$00,000
(ost of goods sold 2$0,000
Cross profit 1'0,000
E"penses
%nterest e"pense 11+,000
@elling e"penses 2+,000
dministrati!e e"penses 2$,000
13-*'
7otal e"penses *0,000
%ncome before income ta"es -0,000
%ncome ta" e"pense 2*,000
Aet income 1 '3,000
dditional informationF
a. (ash di!idends of 123,000 were declared and paid in 2002.
b. Weighted9a!erage number of shares of common stoc) outstanding during 2002 was 30,000
shares.
c. =ar)et !alue of common stoc) on <ecember 31, 2002, was 121 per share.
d. Aet cash pro!ided by operating acti!ities for 2002 was 1'0,000.
E". 11' (cont.)
%nstructions
4sing the financial statements and additional information, compute the following ratios for lbert
(ompany for 2002. @how all computations.
(omputations
1. (urrent ratio QQQQQQQQQ.
2. Deturn on common stoc)holders, e#uity QQQQQQQQQ.
3. 8rice9earnings ratio QQQQQQQQQ.
$. cid9test ratio QQQQQQQQQ.
&. Decei!ables turno!er QQQQQQQQQ.
'. 7imes interest earned QQQQQQQQQ.
*. 8rofit margin ratio QQQQQQQQQ.
+. !erage days in in!entory QQQQQQQQQ.
-. 8ayout ratio QQQQQQQQQ.
10. Deturn on assets QQQQQQQQQ.
11. (ash return on sales ratio QQQQQQQQQ.
12. (ash debt co!erage ratio QQQQQQQQQ.
Solut"on 11' 115)20 min.2
11$0,000
1. (urrent ratio 2.+F1. RRRRR M 2.+
1&0,000
1'3,000
2. Deturn on common stoc)holders, e#uity 2'.+2. RRRR
RRRRRRRR M .2'+
(12&0,000 K 1220,000) I 2
1'3,000
3. 8rice9earnings ratio 10 times. E8@ M RRRR M 12.105
30,000
121
RRR M 10 times
12.10
1-0,000
$. cid9test ratio 1.+F1. RRRR M 1.+F1
1&0,000
13-*(
1$00,000
&. Decei!ables turno!er 10 times. RRRRRRRRRRR M 10
(1&0,000 K 130,000) I 2
Solut"on 11' 1cont.2
1'3,000 K 12*,000 K 11+,000
'. 7imes interest earned ' times.RRRRRRRRRRRRR M '
11+,000
1'3,000
*. 8rofit margin ratio 1&.+2. RRRR M .1&+
1$00,000
+. !erage days in in!entory -1.3 days. %n!entory turno!er M
!240"000
RRRRRRRRRRR M $
(1&0,000 K 1*0,000) I 2
3'& days
RRRR M -1.3
4
123,000
-. 8ayout ratio 3'.&2. RRRR M .3'&
1'3,000
1'3,000
10. Deturn on assets 1$2. RRRRRRRRRRRR M .1$
(1$00,000 K 1&00,000) I 2
11. (ash return on sales ratio 1&2.
!400"000
!60"000
M .1&
12. (ash debt co!erage ratio .2- times.
2 !140"0002 6 1!280"000
!60"000
M .2- times
E,. 11-
7he following ratios ha!e been computed for Dyder (ompany for 2002.
8rofit margin ratio 202
7imes interest earned ratio - times
Decei!able turno!er ratio 3 times
cid test ratio 2F1
(urrent ratio 3F1
<ebt to total assets ratio 202
7he 2002 financial statements for Dyder (ompany with missing information followsF
Test Bank or Mana!er"al A##ount"n!$ Se#on% E%"t"on 13-3)
E". 11* (cont.)
DG<ED (>=8AG
<ecember 31,
RRR
ssets 2002 2001
(ash 1 30,000 1 $&,000
@hort9term in!estments 10,000 2&,000
ccounts recei!able (net) B (') $0,000
%n!entory B (+) &0,000
8roperty, plant, and e#uipment (net) 200,000 1'0,000
7otal assets 1 B (-) 1320,000
ccounts payable 1 B (*) 1 30,000
@hort9term notes payable $0,000 3&,000
Jonds payable B (10) 20,000
(ommon stoc) 220,000 200,000
Detained earnings '0,000 3&,000
7otal liabilities and stoc)holders, e#uity 1 B (11) 1320,000
DG<ED (>=8AG
%ncome @tatement
RRR
Aet sales 11&0,000
(ost of goods sold *&,000
Cross profit *&,000
E"pensesF
<epreciation e"pense 1 B (&)
%nterest e"pense &,000
@elling e"penses +,000
dministrati!e e"penses 12,000
7otal e"penses B ($)
%ncome before income ta"es B (2)
%ncome ta" e"pense B (3)
Aet income 1 B (1)
%nstructions
4se the abo!e ratios and information from Dyder (ompany financial statements to fill in the
missing information on the financial statements. :ollow the se#uence indicated. @how
computations that support your answers.
@olution 11* (3&9$0 min.)
DG<ED (>=8AG
<ecember 31,
RRRR
ssets 2002 2001
(ash 1 30,000 1 $&,000
@hort9term in!estments 10,000 2&,000
ccounts recei!able (net) '0,000 (') $0,000
%n!entory &0,000 (+) &0,000
8roperty, plant, and e#uipment (net) 200,000 1'0,000
7otal assets 13&0,000 (-) 1320,000
ccounts payable 1 10,000 (*) 1 30,000
@hort9term notes payable $0,000 3&,000
Jonds payable 20,000 (10) 20,000
(ommon stoc) 220,000 200,000
Detained earnings '0,000 3&,000
7otal liabilities and stoc)holders, e#uity 13&0,000 (11) 1320,000
DG<ED (>=8AG
%ncome @tatement
RRRR
Aet sales 11&0,000
(ost of goods sold *&,000
Cross profit *&,000
E"penses
<epreciation e"pense 110,000 (&)
%nterest e"pense &,000
@elling e"penses +,000
dministrati!e e"penses 12,000
7otal e"penses 3&,000 ($)
%ncome before income ta"es $0,000 (2)
%ncome ta" e"pense 10,000 (3)
Aet income 1 30,000 (1)
(1) Aet income M 130,000 (11&0,000 O 202).
(2) %ncome before income ta"es M 1$0,000.
6et N M %ncome before income ta"es and interest e"pense.
N
RRR M - times5 N M 1$&,0005 1$&,000 T 1&,000 M 1$0,000.
&,000
13-3*
(3) %ncome ta" e"pense M 110,000 (1$0,000 T 130,000).
($) 7otal operating e"penses M 13&,000 (1*&,000 T 1$0,000).
(&) <epreciation e"pense M 110,000 U13&,000 T (1&,000 K 1+,000 K 112,000)V.
Solut"on 11- 1cont.2
(') ccounts recei!able (net) M 1'0,000.
6et N M !erage recei!ables.
11&0,000
RRRR M 3 times5 3N M 11&0,0005 N M 1&0,000.
N
6et G M ccounts recei!able at 12E31E02.
1$0,000 K G
RRRRRR M 1&0,0005 1$0,000 K G M 1100,0005 G M 1'0,000.
2
(*) ccounts payable M 110,000.
6et N M (urrent liabilities.
130,000 K 110,000 K 1'0,000
RRRRRRRRRRRRR M 25 2NM 1100,0005 N M 1&0,0005
N
1&0,000 T 1$0,000 M 110,000.
(+) %n!entory M 1&0,000
6et N M 7otal current assets
N
RRRR M 35 N M 11&0,0005 11&0,000 T (130,000 K 110,000 K 1'0,000) M 1&0,000.
1&0,000
(-) 7otal assets M 13&0,000 (130,000 K 110,000 K 1'0,000 K 1&0,000 K
1200,000)
(10) Jonds payable M 120,000
6et N M 7otal debt
N
RRRR M 2025 N M 1*0,0005 1*0,000 T (110,000 K 1$0,000) M 120,000.
13&0,000
(11) 7otal liabilities and stoc)holders, e#uity M 13&0,0005 same as total assetsRsee (-)
abo!e.
E". 11+
7he financial statements for Sac#uelines Dodeo Wear are gi!en belowF
S(?4E6%AE@ D><E> WED
<ecember 31,
RRR
ssets 2003 2002
C$rrent assets
(ash and short9term in!estments 1 &,0$0 1 $,-20
ccounts recei!able (net) 30,2$0 2+,-'0
%n!entory '0,$+0 &$,+00
Total c$rrent assets
95"760
88"680
8lant assets (net) 1&',2$0 1$+,200
7otal assets 12&2,000 123',++0
(urrent liabilities 1 $2,000 1 3+,'00
6ong9term liabilities '*,200 *2,000
(ommon stoc) 2&,000 2&,000
Detained earnings 11*,+00 101,2+0
7otal liabilities and stoc)holders, e#uity 12&2,000 123',++0
S(?4E6%AE@ D><E> WED
%ncome @tatement
8et sales !360"000
(ost of goods sold 2&2,000
Cross profit 10+,000
>perating e"penses (including 1*,200 interest and 1-,000 income ta"es) '+,$00
Aet income 1 3-,'00
Aet cash pro!ided by operating acti!ities totaled 1$',+00.
Instru#t"ons
(ompute the following ratios at <ecember 31, 2003F
a. Deturn on assets
b. 8rofit margin
c. sset turno!er
d. Cross profit rate
e. >perating e"penses to sales
f. (ash return on sales
13-3&
Solut"on 11( 132)16 min.2
13-,'00
a. Deturn on assets ratio M RRRRRRRRRRRR M 1'.22
(12&2,000 K 123',++0) I 2
b. 8rofit margin ratio M 13-,'00 I 13'0,000 M 112
13'0,000
c. sset turno!er ratio M RRRRRRRRRRRR M 1.$*
12&2,000 K 123',++0) I 2
d. Cross profit rate M 110+,00 I 13'0,000 M 302
e. >perating e"penses to sales ratio M 1'+,$00 I 13'0,000 M 1-2
f. (ash return on sales ratio M 1$',+00 I 13'0,000 M 132
E,. 11.
@elected data for =ary,s @tore appear below.
2002 2001
Aet sales 1+00,000 1&20,000
(ost of goods sold '00,000 3$&,000
%n!entory at end of year '&,000 +&,000
ccounts recei!able at end of year -0,000 *0,000
%nstructions
(ompute the following for 2002F
(a) Cross profit percentage.
(b) %n!entory turno!er.
(c) Decei!ables turno!er.
Solut"on 11. 16)10 min.2
(a) Cross profit M Aet @ales T (ost of goods sold
M 1+00,000 T 1'00,000
M 1200,000
Cross profit percentage M Cross profit I Aet sales
M 1200,000 I 1+00,000
M 2&2
(b) %n!entory turno!er M (ost of goods sold I !erage in!entory
M 1'00,000 I U(1'&,000 K 1+&,000) I 2V
M + times
(c) Decei!ables turno!er M Aet credit sales I !erage accounts recei!ables
M 1+00,000 I U(1-0,000 K 1*0,000) I 2V
M 1+00,000 I 1+0,000
M 10 times
E,. 1*)
Walbec) (orporation has issued common stoc) only. 7he company has been successful and has a
gross profit rate of 202. 7he information shown below was ta)en from the company,s financial
statements.
9e'innin' in+entory ! 482"000
8urchases $,+3',000
Ending in!entory B
!erage accounts recei!able +00,000
!erage common stoc)holders, e#uity 3,&00,000
@ales (all on credit) ',000,000
Aet income $20,000
Instructions
(ompute the followingF
1a2 :ecei+a%les t$rno+er an the a+era'e collection perio.
(b) 7he in!entory turno!er and the a!erage days in in!entory.
(c) Deturn on common stoc)holders, e#uity.
Solut"on 1*) 113)18 min.2
(a) (redit sales
Decei!ables turno!er M RRRRRRRRRRRRR
!erage accounts recei!able
M 1',000,000 I 1+00,000 M*.& times
3'& days
!erage collection period M RRRRRRRRRR
Decei!ables turno!er
;
365 7 7.5 times ; 48.7 ays
(b) %n!entory turno!er M (ost of goods sold I !erage in!entory
:irst calculate ending in!entory.
Jeginning %n!entory 1 $+2,000
13-3'
K 8urchases $,+3',000
T (ost of Coods @old ($,+00,000)W
Ending %n!entory 1 &1+,000
W@ince the gross profit ratio is 202, the cost of goods sold ratio is +02.
+02 O 1',000,000 (net sales) M 1$,+00,000.
Ending %n!entory M 1&1+,000 (per abo!e)
!erage %n!entory M (1$+2,000 K 1&1+,000) I 2 M 1&00,000
%n!entory 7urno!er M 1$,+00,000 I 1&00,000 M -.' times
<ays in %n!entory M 3'& days I -.' times M 3+ days
(c) Aet income
:et$rn on common stoc(holers, e<$ity ;
=================
!erage common stoc)holders, e#uity
; !420"000 7 !3"500"000 ; 125
E,. 1*1
Jradley (orporation had the following comparati!e current assets and current liabilitiesF
<ec. 31, 2002 <ec. 31, 2001
(urrent assets
(ash 1 '0,000 1 30,000
@hort9term in!estments $0,000 10,000
ccounts recei!able &&,000 -&,000
%n!entory 110,000 -0,000
8repaid e"penses 3&,000 20,000
7otal current assets 1300,000 12$&,000
(urrent liabilities
ccounts payable 11$0,000 1110,000
@alaries payable $0,000 30,000
%ncome ta" payable 20,000 1&,000
7otal current liabilities 1200,000 11&&,000
3$rin' 2002" creit sales an cost o# 'oos sol &ere !750"000 an !400"000" respecti+ely. 8et
cash pro+ie %y operatin' acti+ities #or 2002 &as !213"000.
Instructions
(ompute the following li#uidity measures for 2002F
1. (urrent ratio.
2. ?uic) ratio.
3. (urrent cash debt co!erage ratio.
$. Decei!ables turno!er.
&. %n!entory turno!er.
Solut"on 1*1 110)15 min.2
1. (urrent ratio M (urrent assets I (urrent liabilities
M 1300,000 I 1200,000 M1.&F1
(ash K @hort9term in!estments K ccounts recei!able
2. ?uic) ratio M RRRRRRRRRRRRRRRRRRRRRRRR
(urrent liabilities
!60"000 6 !40"000 6 !55"000
M RRRRRRRRRRRRR M .*+F1
1200,000
3. (urrent cash debt co!erage ratio M
s lia%ilitie c$rrent A+era'e
acti+ities operatin' %y pro+ie Cash
M
!177"500
!213"000
M 1.2 times
Aet credit sales
$. Decei!ables turno!er M RRRRRRRRRRRRR
!erage accounts recei!ables
!750"000
M RRRR M 10 times
1*&,000
Solut"on 1*1 1cont.2
(ost of goods sold
&. %n!entory turno!er M RRRRRRRRR
!erage in!entory
!400"000
M RRRR M $ times
1100,000
E,. 1**
@elected data from >,Jrien (ompany are presented belowF
Total assets !1"600"000
!erage assets1,*&0,000
Aet income 2$&,000
Aet sales 1,22&,000
!erage common stoc)holders, e#uity 1,000,000
Aet cash pro!ided by operating acti!ities 2-$,000
Instructions
(alculate the profitability ratios that can be computed from the abo!e information.
13-3(
Solut"on 1** 110)15 min.2
With the information pro!ided, the profitability ratios that can be calculated are as followsF
1. >ro#it mar'in ;
8et income 7 8et sales
M 12$&,000 I 11,22&,000 M 202
2. sset turno!er M Aet sales I !erage assets
M 11,22&,000 I 11,*&0,000 M *02
3. Deturn on assets M Aet income I !erage assets
M 12$&,000 I 11,*&0,000 M 1$2
Aet income
$. Deturn on common stoc)holders, e#uity M
RRRRRRRRRRRRRRRRR
!erage common stoc)holders, e#uity
;
!245"000 7 !1"000"000 ; 24.55
&. (ash return on sales M
8et cash #rom operations
8et sales
M 12-$,000 I 11,22&,000 M 2$2
E". 123
7he following data are ta)en from the financial statements of <uncan (ompanyF
2003 2002
=onthly a!erage accounts recei!able1 &20,000 1 &00,000
Aet sales on account &,200,000 $,&00,000
7erms for all sales are 2E10, nE30
Instru#t"ons
(a) (ompute the accounts recei!able turno!er and the a!erage collection period for both years.
(b) What conclusion can an analyst draw about the management of the accounts recei!ableB
Solut"on 1*3 18)12 min.2
(a) ccounts recei!able turno!er ratio. 2003 2002
1&,200,000 1$,&00,000
ccounts recei!able turno!er RRRRR RRRRR
&20,000 &00,000
10 times 9
times
3'& days 3'& days
!erage collection period RRRR RRRR
10 times - times
36.5 ays
40.6 ays
(b) 7he recei!ables are turning faster in 2003 than they did in 2002. 7here is still a problem
since the normal credit period is 30 days, and the a!erage collection period for both years
e"ceed this target. 7herefore, impro!ement in the management of the recei!ables would
appear to be desirable.
E,. 1*&
State the e##ect o# the #ollo&in' transactions on the c$rrent ratio. ?se increase" ecrease" or no
e##ect #or yo$r ans&er.
(a) (ollection of an accounts recei!able.
(b) <eclaration of cash di!idends.
(c) dditional stoc) is sold for cash.
(d) @toc) in!estments are purchased for cash.
(e) E#uipment is purchased for cash.
(f) %n!entory purchases are made for cash.
(g) ccounts payable are paid.
13-&)
Solut"on 1*& 17)11 min.2
(a) no effect (e) decrease
(b) decrease (f) no effect
(c) increase (g) increase
(d) no effect
E,. 1*/
7he balance sheet for :inley (orporation at the end of the current year indicates the followingF
Jonds payable, +2 1$,000,000
'2 8referred stoc), 1100 par 1,000,000
(ommon stoc), 110 par 2,000,000
%ncome before income ta"es was 1$+0,000 and income ta" e"pense for the current year amounted
to 11$$,000. (ash di!idends paid on common stoc) were 1300,000, and the common stoc) was
selling for 122 per share at the end of the year. 7here were no ownership changes during the year.
%nstructions
<etermine each of the followingF
(a) times that bond interest was earned.
(b) earnings per share for common stoc).
(c) price9earnings ratio.
Solut"on 1*/ 19)14 min.2
(a) %ncome before income ta"es and interest e"pense
7imes interest earned M RRRRRRRRRRRRRRRRRRRRRR
%nterest e"pense
1$+0,000 K 1320,000
M RRRRRRRRRR M 2.& times
1320,000
(b) Aet income T 8referred di!idends
Earnings per share M RRRRRRRRRRRRRRRRRRRRR
Weighted a!erage common shares outstanding
!336"000 @ !60"000
M RRRRRRRRR M 11.3+ per share
200"000 shares
(c) =ar)et price per share 122.00
8rice9earnings ratio M RRRRRRRRRR M RRR M 1&.-
Earnings per share 11.3+
E,. 1*'
7he income statement for 8ine (ompany for the year ended <ecember 31, 2002 appears below.
@ales 1'20,000
(ost of goods sold 3+0,000
Cross profit 2$0,000
E"penses 1-0,000W
Aet income 1 &0,000
W%ncludes 120,000 of interest e"pense and 122,000 of income ta" e"pense.
E,. 1*' 1cont.2
dditional informationF
1. (ommon stoc) outstanding on Sanuary 1, 2002 was &0,000 shares. >n Suly 1, 2002, 10,000
more shares were issued.
2. 7he mar)et price of 8ine,s stoc) was 11' at the end of 2002.
3. (ash di!idends of 130,000 were paid, 1',000 of which were paid to preferred stoc)holders.
%nstructions
(ompute the following ratios for 2002F
(a) earnings per share.
(b) price9earnings.
(c) times interest earned.
Solut"on 1*' 18)13 min.2
!50"000 @ !6"000
!44"000
1a2 Aarnin's per share ; ========== ;
==== ; !0.80
B50"000 6 110"000 7 22C
55"000
!16.00
1%2 >rice)earnin's ; === ;
20 times
0.+0
!50"000 6 !20"000 6 !22"000
1c2 Times interest earne ;============= ; 4.6 times
!20"000
13-&*
(>=86E7%>A @77E=EA7@
12*. <iscontinued operations refers to the disposal of a QQQQQQQQQQQQQQQQQQ of a business.
12+. 7he two criteria necessary for an item to be classified as an e"traordinary item are that the
transaction or e!ent must be (1) QQQQQQQQQQQQQQQ and (2) QQQQQQQQQQQQQQQQ.
12-. change in depreciation methods during the year would be classified as a change in
QQQQQQQQQQQQQQQQQQQQ.
130. QQQQQQQQQQQQQQ analysis, also called trend analysis, is a techni#ue for e!aluating a series of
financial statement data o!er a period of time.
131. E"pressing each item in a financial statement as a percent of a base amount is called
QQQQQQQQQQQQQQ analysis.
132. :or analysis of the financial statements, ratios can be classified into three typesF
(1)QQQQQQQQQQQQQ ratios, (2)QQQQQQQQQQQQQ ratios, and (3)QQQQQQQQQQQQQQ ratios.
133. 7he times interest earned ratio is calculated by di!iding QQQQQQQQQQQQQQQQQQQ before
QQQQQQQQQQQQQQQQQQ and QQQQQQQQQQQQQQQQQQ by interest e"pense.
13$. 7he ratios used in e!aluating a company,s li#uidity and short9term debt paying ability that
complement each other are the QQQQQQQQQQQQQQ ratio and the QQQQQQQQQQQQQQ ratio.
13&. 7he recei!ables turno!er ratio is calculated by di!iding QQQQQQQQQQQQQQQQ by a!erage
QQQQQQQQQQQQQQQQQQQ.
13'. %f the in!entory turno!er ratio is & times, and the a!erage in!entory was 1'00,000, the cost of
goods sold during the year was 1QQQQQQQQQQQQQQ and the a!erage days to sell the in!entory was
QQQQQQQQQQQQQQ days.
13*. .ansen (orporation had net income for the year of 1300,000 and a profit margin ratio of 2&2. %f
total a!erage assets were 1200,000, the asset turno!er ratio was QQQQQQQQQQQQ times.
13+. 7he QQQQQQQQQQQQQQ ratio measures the percentage of earnings distributed in the form of cash
di!idends.
13-. 7he lower the QQQQQQQQQQQQQQQ to QQQQQQQQQQQQQQQ ratio, the more e#uity ;buffer; is a!ailable
to the creditors if the company becomes insol!ent.
nswers to (ompletion @tatements
12*. significant segment 13$. current, acid9test (#uic))
12+. unusual in nature, infre#uent in occurrence 13&. net credit sales, net recei!ables
12-. accounting principle 13'. 3,000,000, *3
130. .ori/ontal 13*. '
131. !ertical (common si/e) 13+. payout
132. li#uidity, sol!ency, profitability (any order) 13-. debt, total assets
133. income, income ta"es, interest e"pense
MATC0IN1
Set 1
1$0. :or each of the ratios listed below, indicate by the appropriate code letter, whether it is a
li#uidity ratio, a profitability ratio, or a sol!ency ratio.
(odeF
6 M 6i#uidity ratio
8 M 8rofitability ratio
@ M @ol!ency ratio
QQQQ 1. (ash return on sales ratio
QQQQ 2. Deturn on assets ratio
QQQQ 3. Decei!ables turno!er ratio
QQQQ $. Earnings per share ratio
QQQQ &. 8ayout ratio
QQQQ '. (urrent cash debt co!erage ratio
QQQQ *. cid9test ratio
QQQQ +. <ebt to total assets ratio
QQQQ -. :ree cash flow
QQQQ 10. %n!entory turno!er ratio
Answers to Mat#2"n! Set 1
8 1. (ash return on sales ratio 6 '. (urrent
cash debt co!erage ratio
8 2. Deturn on assets ratio 6 *. cid9test ratio
6 3. Decei!ables turno!er ratio @ +. <ebt to
total assets ratio
8 $. Earnings per share ratio @ -. :ree
cash flow
8 &. 8ayout ratio 6 10. %n!entory turno!er ratio
13-&&
@et 2
1$1. =atch the ratios with the appropriate ratio computation by entering the appropriate letter in
the space pro!ided.
. (urrent ratio :. 7imes interest earned ratio
J. cid9test ratio C. %n!entory turno!er ratio
(. 8rofit margin ratio .. !erage collection period
<. sset turno!er ratio %. !erage days in in!entory
E. 8rice9earnings ratio S. 8ayout ratio
(ost of goods sold
QQQQ 1. RRRRRRRRR
!erage in!entory
Aet income
QQQQ 2. RRRRR
Aet sales
(ash di!idends
QQQQ 3. RRRRRRR
Aet income
Aet sales
QQQQ $. RRRRRRR
!erage assets
(urrent assets
QQQQ &. RRRRRRRR
(urrent liabilities
3'& days
QQQQ '. RRRRRRRRRR
Decei!ables turno!er
=ar)et price per share of stoc)
QQQQ *. RRRRRRRRRRRRRR
Earnings per share
3'& days
QQQQ +. RRRRRRRR
%n!entory turno!er
%ncome before income ta"es and interest e"pense
QQQQ -. RRRRRRRRRRRRRRRRRRRRRR
%nterest e"pense
(ash K @hort9term in!estments K Decei!ables (net)
QQQQ 10. RRRRRRRRRRRRRRRRRRRRRRR
(urrent liabilities
Answers to Mat#2"n! Set *
1. C '. .
2. ( *. E
3. S +. %
13-&'
$. < -. :
&. 10. J
S03RT-ANS4ER ESSAY 5UESTI3NS
S-A E 1&*
.ori/ontal and !ertical analyses are analytical tools fre#uently used to analy/e financial
statements. What type of information or insights can be obtained by using these two techni#uesB
E"plain how the output of hori/ontal analysis and !ertical analysis can be compared to industry
a!erages andEor competiti!e companies.
Solut"on 1&*
.ori/ontal analysis allows an analyst to de!elop a picture of current trends in a company,s
operations. 7he analyst can see whether the accounts are increasing or decreasing and how large
these changes actually are. 3ertical analysis allows an analyst to e!aluate financial statement
items within a single financial statement. 7his techni#ue helps the analyst to e!aluate the relati!e
si/e of the financial statement items and how the items relate to the financial statement as a whole.
n e"ample would be if current liabilities were a !ery large percentage of total liabilities and
stoc)holders, e#uity.
Joth techni#ues allow the company to e!aluate their performance and position relati!e to their
competitors and their industry as a whole. :or e"ample, the company could e!aluate their current
trend in sales and see how fa!orably their sales performance compared to the sales performance of
other companies in the industry. nother e"ample would be comparing the relati!e si/e of long9
term liabilities or retained earnings. 7his would show which companies ha!e ta)en on a large
amount of debt and which companies ha!e rein!ested earnings.
S-A E 1&3
7he use of estimates, cost, alternati!e accounting methods, the presence of atypical data, and
di!ersification of firms ha!e been cited as factors that limit the usefulness of financial statement
analysis. %dentify a ratio and e"plain how one or more of the limiting factors can affect the
usefulness of that ratio.
Solut"on 1&3
ny of the profitability ratios that in!ol!e net income will be affected by the method of
depreciation chosen. 7he use of an accelerated method, such as double9declining balance, will
result in higher depreciation costs in the early years and lower depreciation costs in the later years.
7hese costs will differ from the depreciation costs that would ha!e been incurred if the straight9
line method had been used. 7herefore, because of the different costs, net income will also be
different. 7hus, the choice of depreciation method affects net income, which in turn affects the
ratio.
Joth the acid9test ratio and the recei!ables turno!er ratio are affected by the estimate of
uncollectible accounts. 7he estimate will determine the amount of net recei!ables used to
calculate the ratio. high estimate will lower the net recei!ables and a low estimate will increase
the net recei!ables. 7hus, the accuracy of the estimate will ha!e a direct effect on the accuracy of
the ratio.
13-&(
@9 E 1$$ (Ethics)
trusted employee of Wilderness 7ours was caught in the act of embe//ling funds. .e confessed
to earlier embe//lements, but retracted the confession on the ad!ice of his attorney. >!er the
course of the most recent #uarter, it has been determined that 120,000 was embe//led.
Wilderness 7ours has suffered ad!erse publicity in the recent past because of serious inLury to fi!e
tourists that occurred during a two wee) ;Winter Wilds d!enture; tour. 7he company has
therefore decided to a!oid publicity and has agreed to drop all charges against the embe//ling
employee. %n return, the employee has agreed to a notation of ;7erminatedRAot to be Dehired; to
be appended to his personnel file.
De#uiredF
1. Who are the sta)eholders in the decision not to prosecuteB
2. Was it ethical for the company to decide not to prosecuteB E"plain.
Solut"on 1&&
1. 7he sta)eholders include
7he embe//ling employee
7he other employees
(ompany management
>ther companies who might hire the embe//ling employee
2. 7he company was certainly within its legal rights not to prosecute the embe//ling employee.
.owe!er, the decision not to prosecute may not be ethical. :irst, it does not ser!e public
Lustice. 7he embe//ling employee could find a Lob elsewhere, and harm someone else
financially. @econd, to the e"tent that other employees )now of the act and of the decision,
morale may be harmed. 7he decision is also not the best one for the employee. .a!ing ne!er
been forced to face the conse#uences of his dishonest acts, he is not deterred from (and may
e!en feel encouraged to) commit similar acts in the future. 7he one argument that would
support the premise that the decision was ethical is that the public disclosure would cause
harm greater than that caused by )eeping silent. E!en this argument lac)s force, because it
implies a lac) of moral courageousness.
S-A E 1&/ 1Comm$nication2
:ast E"press speciali/es in the transportation of medical e#uipment and laboratory specimens
o!ernight. 7he company has selected the following information from its most recent annual report
to be the subLect of an immediate press release.
7he financial statements are being released.
Aet income this year was 12.1 million. 6ast year,s net income had been 11.+ million.
7he current ratio has changed to 2F1 from last year,s 1.&F1
7he debtEtotal assets ratio has changed to $F& from last year,s 3F&
7he company e"panded its truc) fleet substantially by purchasing ten new deli!ery !ans.
7he company already had twel!e deli!ery !ans. 7he company is now the largest medical courier
in the mid9tlantic region.
De#uiredF
8repare a brief press release incorporating the information abo!e. %nclude all information. 7hin)
carefully which information (if any) is good news for the company, and which (if any) is bad
news.
Solut"on 1&/
:ast E"press released its financial statements today, disclosing a 1*2 increase in earnings, to 12.1
million from 11.+ million last year. 7he company also impro!ed its short9term li#uidity. %ts
current ratio impro!ed to 2F1 from last year,s 1.&F1. 8art of the impro!ed performance is no doubt
due to the addition of ten new deli!ery !ans to its fleet, allowing it to become the largest medical
courier in the mid9tlantic region. 7he purchase of the !ans, howe!er, caused the debtEtotal asset
ratio to decline. 7here are now 1$ of debt for e!ery 1& in assets, while last year, there were only
13 of debt to 1& in assets.
13-/)

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FINANCIAL STATEMENT ANALYSIS

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