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Exam 14: Financial Statement Analysis

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Question 21

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Farr Company reported the following on its income statement: $\begin{array}{lr}\text { Income before income taxes } & \$ 400,000 \\\text { Income tax expense } & 100,000 \\\text { Net income } & \$ 300,000\end{array}$ An analysis of the income statement revealed that interest expense was $100,000.Farr Company's times interest earned was

A) 5 times.
B) 4 times.
C) 3.5 times.
D) 3 times.

E) A) and B)
F) A) and C)

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Question 22

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Blanco, Inc.has the following income statement (in millions) : $\begin{array}{c} \text { BLANCO, INC.}\\\text { Income Statement}\\\text { For the Year Ended December 31, 2011}\\\begin{array}{lr}\text { Net Sales } & \$ 200 \\\text { Cost of Goods Sold } & \underline{120} \\\text { Gross Profit } & 80 \\\text { Operating Expenses } & \underline{4 4} \\ \text { Net Income } &\underline{\underline{ \$ 36}}\end{array}\end{array}$ Using vertical analysis, what percentage is assigned to Cost of Goods Sold?

A) 60%
B) 40%
C) 100%
D) None of the above

E) A) and C)
F) A) and B)

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Question 23

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Long-term creditors are usually most interested in evaluating

In performing a vertical analysis, the base for prepaid expenses is

An aircraft company would most likely have

Horizontal analysis is also called

Profit margin is calculated by dividing

The ratios that are used to determine a company's short-term debt paying ability are

The following information pertains to Cheng Company.Assume that all statement of financial position amounts represent both average and ending balance figures.Assume that all sales were on credit.All amounts are in thousands except per share items. Assets $\begin{array}{lr}\text { Property, plant and equipment } & ¥ 215,000 \\\text { Inventory } & 25,000 \\\text { Accounts receivable (net) } & 30,000 \\\text { Cash and short-term investments } & 40,000 \\\hline \text { Total Assets } & ¥ 310,000\end{array}$ $\text { Equity and Liabilities }$ $\begin{array}{lr}\text { Shareholders' equity—ordinary } & ¥ 175,000 \\\text { Non-current liabilities } & 75,000 \\\text { Current liabilities } & 60,000 \\\quad \text { Total Equity and Liabilities } & ¥ 310,000\end{array}$ $\text { Income Statement }$ $\begin{array}{lr}\text { Sales } & ¥ 90,000 \\\text { Cost of goods sold } & 45,000 \\\text { Gross margin } & 45,000 \\\text { Operating expenses } & 25,000 \\\text { Net income } & ¥ 20,000\\\\\text { Number of ordinary shares } & 5,000 \\\text { Market price of ordinary shares } & \$ 22 \\\text { Dividends per share } & 1.00\end{array}$ What is the profit margin for Cheng?

Using borrowed money to increase the rate of return on ordinary shareholders' equity is called "trading on the equity."

Gold Clothing Store had a balance in the Accounts Receivable account of $£ 810,000$ at the beginning of the year and a balance of $£ 850,000$ at the end of the year. Net credit sales during the year amounted to $£ 6,640,000$ . The average collection period of the receivables in terms of days was

The following information pertains to Soho Company.Assume that all statement of financial position amounts represent both average and ending balance figures.Assume that all sales were on credit. $\text { Assets }$ $\begin{array}{lr}\text { Property, plant and equipment } & \$ 210,000 \\\text { Inventory } & 20,000 \\\text { Accounts receivable (net) } & 25,000 \\\text { Cash and short-term investments } & 45,000 \\\hline \text { Total Assets } & \$ 300,000\end{array}$ $\text { Equity and Liabilities }$ $\begin{array}{lr}\text { Shareholders' equity—ordinary } & \$ 160,000 \\\text { Non-current liabilities } & 90,000 \\\text { Current liabilities } & 50,000 \\\quad \text { Total Equity and Liabilities } & \$ 300,000\end{array}$ $\text { Income Statement }$ $\begin{array}{lr}\text { Sales } & \$ 120,000 \\\text { Cost of goods sold } & 66,000 \\\text { Gross margin } & 54,000 \\\text { Operating expenses } & 30,000 \\\text { Net income } & \$ 24,000\end{array}$ $\begin{array}{lr}\text { Number of shares of ordinary shares } & 6,000 \\\text { Market price of ordinary shares } & \$ 20 \\\text { Dividends per share } & .50\end{array}$ What is the price-earnings ratio for Soho?

Assume the following sales data for a company: $\begin{array} { l r } 2012 & \$ 945,000 \\2011 & 845,000 \\2010 & 650,000\end{array}$ If 2010 is the base year, what is the percentage increase in sales from 2010 to 2011?

Vertical analysis is also called

Which one of the following would not be considered a liquidity ratio?

Horizontal analysis is appropriately performed

Variations among companies in the application of IFRS may reduce quality of earnings.

Intracompany comparisons of the same financial statement items can often detect changes in financial relationships and significant trends.

In performing a vertical analysis, the base for cost of goods sold is

The three basic tools of analysis are horizontal analysis, vertical analysis, and ratio analysis.