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Exam 17: Analysis of Financial Statements

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Question 21

Multiple Choice

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A financial statement analysis report does not include:

A) Evidential matter.
B) Qualitative and quantitative key factors.
C) An analysis overview.
D) Inferences such as forecasts.
E) An auditor statement.

F) B) and D)
G) All of the above

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Question 22

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Internal users of financial information:

A) Are those individuals involved in managing and operating the company.
B) Are not directly involved in operating a company.
C) Include directors and customers.
D) Include suppliers, regulators, and the press.
E) Include shareholders and lenders.

F) A) and B)
G) D) and E)

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Question 23

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Refer to the following selected financial information from McCormik, LLC. Compute the company's acid-test ratio for Year 2. $\begin{array} { | l | r | r | } \hline & { \text { Year 2 } } & { \text { Year 1 } } \\\hline \text { Cash } & \$ 37,500 & 3 6 , 8 5 0 \\\hline \text { Short-term investments } & 90,000 & 90,000 \\\hline \text { Accounts receivable, net } & 85,500 & 86,250 \\\hline \text { Merchandise inventory } & 121,000 & 117,000 \\\hline \text { Prepaid expenses } & 12,100 & 13,500 \\\hline \text { Plant assets } & 388,000 & 392,000 \\\hline \text { Accounts payable } & 113,400 & 111.750 \\\hline \text { Net sales } & 711,000 & 706,000 \\\hline \text { Cost of goods sold } & 390,000 & 385,500 \\\hline\end{array}$

The evaluation of company performance and financial condition focuses solely on past performance.

Total asset turnover reflects a company's ability to use its assets to generate sales and is an important indication of operating efficiency.

A component of operating efficiency and profitability, calculated by expressing net income as a percent of net sales, is the:

Vertical analysis is a tool to evaluate individual financial statement items or groups of items in terms of a specific base amount.

Analysis of a single financial number is often of limited value.

The building blocks of financial statement analysis include (1) liquidity, (2) salability, (3) solvency, and (4) profitability.

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

The current ratio is calculated as current liabilities divided by current assets.

Refer to the following selected financial information from Shakley's Incorporated. Compute the company's profit margin for Year 2. $\begin{array} { | l | r | r | } \hline &{ \text { Year 2 } } & \text { Year 1 } \\\hline \text { Net sales } & \$ 478,500 & \$ 426,250 \\\hline \text { Cost of goods sold } & 276,300 & 250,120 \\\hline \text { Interest expense } & 9,700 & 10,700 \\\hline \text { Net income before tax } & 67,250 & 52,680 \\\hline \text { Net income after tax } & 46,050 & 39,900 \\\hline \text { Total assets } & 317,100 & 288,000 \\\hline \text { Total liabilities } & 181,400 & 167,300 \\\hline \text { Total equity } & 135,700 & 120,700 \\\hline\end{array}$

Market prospects are the ability to provide financial rewards sufficient to attract and retain financing.

External users of accounting information manage and operate the company.

The following selected financial information for a company was reported for the current year end. Calculate the following company ratios: (a) Accounts receivable turnover. (b) Inventory turnover. (c) Days' sales uncollected Accounts receivable, beginning-year……………. $170,000 $\begin{array}{llr} \text {Accounts receivable, year-end. } &190,000\\ \text {Merchandise inventory, beginning-year. } &80,000\\ \text { Merchandise inventory, year-end. } &60,000\\ \text { Cost of goods sold. } &580,000\\\end{array}$ $\begin{array}{llr} \text { Accounts receivable, year-end } &190,000\\ \text { Merchandise inventory, beginning-year. } &80,000\\ \text { Merchandise inventory, year-end. } &60,000\\ \text { Cost of goods sold.} &580,000\\\end{array}$ Credit sales………………………………………... 1,000,000

Horizontal analysis is used to reveal patterns in data covering successive periods.

Gains and losses that are neither unusual nor infrequent are reported as:

The gross margin ratio, return on total assets, and basic earnings per share are all ________ ratios.

Guidelines (rules-of-thumb) are general standards of comparison developed from:

Profitability is the ability to provide financial rewards sufficient to attract and retain financing.