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Exam 13: Analysis of Financial Statements

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Question 31

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Ron Landscaping's income statement reports net income of $75,300, which includes deductions for interest expense of $11,500 and income taxes of $34,900. Its times interest earned is:

A) 10.6 times
B) 7.5 times
C) 4.0 times
D) 6.5 times
E) 0.15 times

F) A) and D)
G) A) and C)

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Question 32

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

A) True
B) False

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Question 33

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Dividing ending inventory by cost of goods sold and multiplying the result by 365 is the:

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

Intra-company analysis compares a company's current performance to its own prior performance.

Financial analysis does not include assessing future performance and risk because financial statements are based on past performance.

Intra-company analysis is based on comparisons with competitors.

A corporation reports the following year-end balance sheet data. The company's acid-test ratio equals: $\begin{array}{lrrr}\text { Cash } & \$ 40,000 & \text { Current liabilities } & \$ 5,000 \\\text { Accounts receivable } & 55,000 & \text { Long-term liabilities } & 35,000 \\\text { Inventory } & 60,000 & \text { Common stock } & 100,000 \\\text { Equipment } & 145,000 & \text { Retained earnings } & 90,000 \\\text { Total assets } & \$ 300,000 & \text { Total liabilities and equity } & \$ 300,000 \\\end{array}$

Calculate the percent increase or decrease for each of the following financial statement items: $\begin{array} { | l | r | r | } \hline & \text { Year 2 } & \text { Year 1 } \\\hline \text { Cash } & \$ 37,500 & \$ 30,000 \\\hline \text { Accounts receivable } & 63,000 & 52,500 \\\hline \text { Inventory } & 67,500 & 90,000 \\\hline \text { Accounts payable } & 35,100 & 27,000 \\\hline \text { Sales } & 187,500 & 150,000 \\\hline \text { Equipment } & 165,000 & 125,000 \\\hline\end{array}$

Quick assets (cash, short-term investments, and current receivables) divided by current liabilities is the:

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

A good financial statement analysis report often includes the following sections: executive summary, analysis overview, evidential matter, assumptions, key factors, and inferences.

Refer to the following selected financial information from Texas Electronics. Compute the company's days' sales in inventory for Year 2. (Use 365 days a year.) $\begin{array}{lrr}& \text { Year 2 } & \text { Year 1 } \\\text { Cash } & \$ 37,500 & \$ 36,850 \\\text { Short-term investments } & 90,000 & 90,000 \\\text { Accounts receivable, net } & 85,500 & 86,250 \\\text { Merchandise inventory } & 121,000 & 117,000 \\\text { Prepaid expenses } & 12,100& 13,500\\\text { Plant assets } & 388,000 & 392,000 \\\text { Accounts payable } & 113,400 & 111,750 \\\text { Net sales } & 711,000 & 706,000 \\\text { Cost of goods sold } & 390,000 & 385,500\end{array}$

Yeats Corporation's sales in Year 1 were $396,000 and in Year 2 were $380,000. Using Year 1 as the base year, the percent change for Year 2 compared to the base year is:

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

Refer to the following selected financial information from Troy Manufacturing. Compute the company's current ratio. $\begin{array}{lr}\text { Current Assets } & 306,450 \\\text { Plant assets } & 388,000 \\\text { Current Liabilities } & 107,800 \\\text { Net sales } & 676,000 \\\text { Net Income } & 75,000\end{array}$

Identify and explain the four building blocks of financial statement analysis.

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

Horizontal analysis is used to understand the relative importance of each financial statement item.

The background on a company, its industry, and its economic setting is usually included in which of the following sections of a financial statement analysis report?