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Exam 13: Financial Statement Analysis

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Question 71

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Indicate whether each of the following statements about financial statement analysis is true or false. The asset turnover ratio is calculated by dividing net income by average total assets.______ The asset turnover ratio is likely to be high in an industry in which operations require only a minimal investment in assets.______ Return on equity measures the wealth generated by the amount of assets invested in a business.______ A higher value for the return on investment ratio would generally indicate more effective company management.______ The use of financial leverage often causes a business's return on equity to be lower than its return on investment.______

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The asset turnover ratio is calculated b...

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Question 72

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The quick ratio,although similar to the current ratio,is more conservative.

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Question 73

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Sable Company is seeking a short-term loan from its local bank.The banker needs assurance that the company will be able to repay the loan.Describe three financial ratios the banker should consider including in the loan approval process.What information does each of your selected ratios provide?

Many companies have to monitor some of their financial statement ratios,such as the current ratio,due to debt covenants.Selected transactions are provided below for a company that uses a perpetual inventory system,sells its merchandise at a selling price that exceeds cost,and had a current ratio of 1.85 before the event occurred. Required: In the above table,indicate whether each transaction would increase (+),decrease (-),or not affect (0)the company's working capital and the current ratio.

You are considering an investment in Facebook stock and wish to assess the company's position in the stock market.All of the following ratios can be used except:

In terms of solvency,the higher the number of times interest is earned,the better.

For Perez Corporation,return on equity is substantially higher than return on investment.What does that tell you about the company?

Assume that you are considering purchasing some of a company's long-term bonds as an investment.Which of the company's financial statement ratios would you probably be most interested in?

A vertical analysis uses percentages to compare each of the parts of an individual statement to a key statement figure.For example,on an income statement each item would be shown as a percentage of net sales.

Starwood Corporation has current assets of $200,000,total current liabilities of $750,000,net credit sales of $1,300,000,beginning accounts receivable of $65,000,and ending accounts receivable of $69,000.What is Starwood's accounts receivable turnover?

A limitation of financial statement analysis stems from the discretion of management to choose accounting procedures that cast the best light on the firm's performance.

Two ratios that provide insight on the relationship between credit sales and receivables are:

Montana Company reported the following operating results for Year 1 and Year 2: $\begin{array}{|l|c|c|}\hline \text { Year } 1 & \text { Amount } &\% \text { of Sales }\\\hline \text { Sales } & 800,000 \\\hline \text { Cost of goods sold } & 440,000 \\\hline \begin{array}{c}\text { Gross margin } \\\end{array} & 360,000 \\\hline \text { Operating expenses } & 225,000 \\\hline \text { Income before taxes } & 135,000 \\\hline \text { Income taxes } & 40,000 \\\hline \text { Net income } & 95,000 \\\hline\end{array}$ $\begin{array}{|l|c|c|}\hline \text { Year } 2 & \text { Amount } &\% \text { of Sales }\\\hline \text { Sales } & 960,000 \\\hline \text { Cost of goods sold } & 635,000 \\\hline \text { Gross margin } & 325,000 \\\hline \text { Operating expenses } & 275,000 \\\hline \text { Income before taxes } & 50,000 \\\hline \text { Income taxes } & 15,000 \\\hline \text { Net income } & 35,000 \\\hline\end{array}$ Required: Express each income statement component for each year as a percentage of sales.Round your answer to one decimal place (i.e.,22.5%).

Knoell Company paid its sales employees $15,000 in sales commissions.What impact will this transaction have on the firm's working capital?

Short-term creditors are usually most interested in assessing:

Select the term from the list provided that best matches each of the following descriptions or definitions:

Indicate whether each of the following statements about financial statement analysis is true or false. Vertical analysis of a company's balance sheet is useful in assessing its liquidity.______ Common size financial statements are a form of vertical analysis,but the common size statements for two or more years may usefully be compared.______ Vertical analysis of a balance sheet involves converting each component to a percentage of stockholders' equity.______ 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.______ A common size income statement is prepared by converting each component to a percentage of net income.______

The following information applies to Markham Company: $\begin{array}{lr}\text { Assets }\\\text { Cash } & \$ 6,000 \\\text { Accounts receivable } & 13,000 \\\text { Inventory } & 16,000 \\\text { Plant and equipment, net } & 21,000 \\\text { Land } & \underline{ 19,000}\\\text { Total assets } & \underline{ \$ 75,000} \\\\\text { Liabilities and stockholders' equity }\\\text { Accounts payable } & \$, 000 \\\text { Salaries payable } & 10,000 \\\text { Bonds payable (due 2020) } & 12,000 \\\text { Capital stock, no par } & 23,000 \\\text { Retained earnings } & \underline{ 25,000 }\\\text { Total liabilities and stockholder's' equity } & \underline{ \$ 75,000}\end{array}$ Additional information: Net credit sales equal $220,000 and beginning accounts receivable were $11,000. Required: Compute Markham's: (a)Quick ratio (b)Current ratio (c)Working capital (d)Accounts receivable turnover (e)Average days to collect receivables Round your answers to two decimal places.

Indicate whether each of the following statements about financial statement analysis is true or false. The reason behind a financial statement ratio or percentage analysis result is usually self-evident and does not require further study or analysis.______ In horizontal percentage analysis,an item from the financial statements is expressed as a percentage of the same item from a previous year's financial statements.______ Horizontal analysis for several years can be done by choosing one year as a base year and calculating increases or decreases in relation to that year.______ One form of horizontal analysis is the preparation of common size financial statements.______ Vertical analysis compares two or more financial statement items within the same time period.______

Which ratios measure a company's long-term debt-paying ability and its financing structure?