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Exam 13: Analysis of Financial Statements

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Question 101

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The percent change of a comparative financial statement item is computed by subtracting the base period amount from the analysis period amount, dividing the result by the base period amount and multiplying that result by 100.

A) True
B) False

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Question 102

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To compute trend percentages the analyst should:

A) Select a base period, assign each item in the base period statement a weight of 100%, and then express financial numbers from other periods as a percent of their base period number.
B) Subtract the analysis period number from the base period number.
C) Subtract the base period amount from the analysis period amount, divide the result by the analysis period amount, then multiply that amount by 100.
D) Compare amounts across industries using Dun and Bradstreet.
E) Compare amounts to a competitor.

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

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Question 103

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Describe ratio analysis including its purpose, application, and interpretation.

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

If a company is comparing its financial condition or performance to a base amount, it is using vertical analysis.

Which of the following items is typically not included as a separate item after normal revenues and expenses?

Standards for comparison when interpreting financial statement analysis include competitor and industry performance data.

A company paid cash dividends on its preferred stock of $40,000 in the current year when its net income was $120,000 and its average common stockholders' equity was $640,000. What is the company's return on common stockholders' equity?

Financial analysis only refers to the communication of relevant financial information to decision makers.

Selected current year company information follows: $\begin{array} { | l | r | } \hline \text { Net income } & \$ 15,953 \\\hline \text { Net sales } & 712,855 \\\hline \text { Total liabilities, beginning-year } & 83,932 \\\hline \text { Total liabilities, end-of-year } & 103,201 \\\hline \text { Total stockholders' equity, beginning-year...... } & 198,935 \\\hline \text { Total stockholders' equity, end-of-year } & 121,851 \\\hline\end{array}$ The return on total assets is:

Standards for comparison are not generally necessary when making judgments about a company's performance.

Financial statement analysis applies analytical tools to financial statements and related data for making business decisions.

How long a company holds inventory before selling it can be measured by dividing cost of goods sold by the average inventory balance to determine the:

Efficiency refers to how productive a company is in using its assets, and is usually measured relative to how much revenue is generated from a certain level of assets.

Intra-company standards for financial statement analysis:

Financial information for Sigma Company is presented below. Calculate the following ratios for 2018: (a) Inventory turnover. (b) Accounts receivable turnover. (c) Return on total assets. (d) Times interest earned. (e) Total asset turnover. $\begin{array}{|l|l|l|} \hline & \underline{2018} & \underline{2017} \\\hline \text { Assets: } & & \\\hline \text { Cash } & \$ 18,00 & \$ 22,000 \\\hline \text { Marketable securities } & 25,000 & 0 \\\hline \text { Accounts receivable } & 38,000 & 42,000 \\\hline \text { Inventory } & 61,000 & 52,000 \\\hline \text { Prepaid insurance } & 6,000 & 9,000 \\\hline \text { Long-term investments } & 49,000 & 20,000 \\\hline \text { Plant assets, net } & 218,000 & 225,000 \\\hline \text { Total assets } & \$ 415,000 & \$ 370,000 \\\hline & & \\\hline \text { Net income after interest expense and taxes } & \$ 62,250 & \\\hline \text { Sales (all on credit)}&305,000 &\\\hline \text { Cost of goods sold } & 123,000 & \\\hline \text { Interest expense } & 15,600 & \\\hline \text { Income tax expense } &27,000&\\\hline\end{array}$

Selected current year end financial information for a company is presented below. Calculate the following company ratios: (a) Profit margin. (b) Total asset turnover. (c) Return on total assets. (d) Return on common stockholders' equity (assume the company has no preferred stock). Net income……………………………….. $ 325,000 Net sales………………………………….. 4,700,000 Total liabilities, beginning-year………….. 550,000 Total liabilities, end-of-year……………… 530,000 Total stockholders' equity, beginning-year. 760,000 Total stockholders' equity, end-of-year….. 745,000

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

If a company is comparing this year's financial performance to last year's financial performance, it is using horizontal analysis.

Working capital is computed as current liabilities minus current assets.