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Exam 13: Financial Statement Analysis

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Question 1

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Describe the factors involved in communicating useful financial information.

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Answers will vary The primary factors involved in communicating useful information include the following: understanding who the users are, knowing for what purpose the information will be used, and understanding the process by which the information is analyzed. According to the FASB, financial statement information should be understandable to a person with a reasonable knowledge or one who has the capacity and willingness to achieve a reasonable knowledge of business. Financial statements are general purpose statements, meaning they are prepared for use by a wide variety of parties rather than being aimed at one specific group. Because of this, some disclosed information may be irrelevant to some users but vital to others. Finally, because of the many categories of users, the different levels of knowledge, the varying needs of users, and the general nature of financial statements, users must be prepared to apply a wide variety of analysis techniques to fully understand the information received.

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Indicate whether each of the following statements about financial statement analysis is true or false.Both dividends and earnings performance are indicators of the value of a company's stock.The most widely quoted measure of a company's earnings performance is return on equity.Earnings per share is calculated for a company's common stock.Investors need to understand that the value of a company's earnings per share is affected by its choices of accounting principles and assumptions.The book value per share measures the market value of a corporation's stock.

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Both dividends and earnings performance ...

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Question 3

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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.

Indicate whether each of the following statements about financial statement analysis is true or false.Working capital is a measure of the amount of current assets a company would have left after paying its current liabilities.If a transaction causes a company's working capital to increase, the transaction caused the company to become less liquid.Interpretation of a company's current ratio can be difficult because it is an absolute amount.The quick ratio is a more conservative variation of the current ratio.The quick ratio is usually calculated by using the following equation: cash + receivables + current marketable securities ÷ current liabilities.

You are considering an investment in Apple stock and wish to assess the firm's short-term debt-paying ability. All of the following ratios are used to assess liquidity except:

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

Various ratios are computed to assess different aspects of a company's financial condition and (or) strength.Required: In the table below, indicate which aspect of financial condition each specified ratio is designed to assess:

Which of the following statement is correct regarding the quick ratio?

Short-term creditors are usually most interested in assessing:

A careless accountant splattered spaghetti sauce on Kitchen Company's balance sheet. The balance sheet with its missing amounts is provided below: Kitchen Company's working capital is $138,000.Required: Compute the missing amounts. Record your answers in the following table: $\begin{array}{|c|c|}\hline \text { Assets } & \\\hline \text { Current Assets: } & \\\hline \text { Cash } & 32,200 \\\hline \text { Accounts receivable } & \text { (A) } \\\hline \text { Inventory } & 85,100 \\\hline \text { Prepaid expenses } & 13,800 \\\hline \text { Total current assets } & \text { (B) } \\\hline\\\hline \text { Long Term Assets: } & \\\hline \text { Building } & \text { (C) } \\\hline \text { Less: Accumulated depreciation } & 59,800 \\\hline \text { Total Long-term assets } & \$ 328,900 \\\hline \text { Total assets } & \text { (D) } \\\hline\end{array}$ $\begin{array}{|c|c|}\hline\text { Equities}\\\hline\text {Liabilities }\\\hline\text {Current liabilities: }\\\hline \text { Accounts payable } & \$ 16,100 \\\hline \text { Notes payable } & (\mathrm{E}) \\\hline \text { Income tax payable } & 18,400 \\\hline \text { Total current liabilities } & \$ 57,500 \\\hline \text { Mortgage payable } & (\mathrm{F}) \\\hline \text { Total Liabilities } & (\mathrm{G}) \\\hline \text { Stockholders' Equity: } & \\\hline \text { Common Stock } & 161,000 \\\hline \text { Retained Earnings } & \underline{195,900} \\\hline \text { Total Stockholders' Equity } & (H)\\\hline \text { Total Liabilities + Equity } & \underline{I} \\\hline\end{array}$ $\begin{array} { l }A.& F.\\B.&G.\\C.&H.\\D.&I.\\E.\end{array}$

Which of the following statements regarding the analysis of absolute amounts of various accounts reported on the financial statements is incorrect?

Indicate whether each of the following statements about financial statement analysis is true or false.Having too little inventory can hurt a company's profitability because of lost sales.Having too much inventory can hurt a company's profitability because of excess costs.Generally, a lower inventory turnover indicates that merchandise is being handled more efficiently.Average days to sell inventory is the number of times, on average, that inventory is replaced during the year.Values for the inventory turnover ratio vary widely among different industries.

Profitability ratios attempt to assess the company's ability to generate earnings.

All of the following are considered to be measures of a company's short-term debt-paying ability except:

Which of the following statements about financial statement analysis is incorrect?

The accounting concept or principle that is perhaps the greatest single culprit in distorting the results of financial statement analysis is the:

The Poole Company reported the following income for Year 2: What is the company's net margin (rounded to the nearest whole percent) ? $\begin{array}{|l|r|}\hline\text { Sales } & \$ 30,000 \\\hline \text { Cost of goods sold } & 8,000 \\\hline \text { Gross margin } & \$ 22,000 \\\hline \text { Selling and administrative expense } & 10,000 \\\hline \text { Operating income } & \$ 12,000 \\\hline\text { Interest expense } & 4,000 \\\hline \text { Income before taxes } & \$ 8,000 \\\hline \text { Income tax expense } & 2,500 \\\hline \text { Net income } & \$ 5,500\\\hline\end{array}$

Crawford Company's current ratio for Year 2 was 1.42, which was slightly above the current ratio for similar companies in its industry. Crawford's quick ratio for Year 2 was 0.68, which is substantially lower than for similar companies in its industry. What conclusion would you draw based on this information?

Benson Company received cash of $5,000,000 by issuing 20-year bonds payable. As a result of the this transaction, the company's current ratio will:

Long-term creditors are usually most interested in evaluating: