Fraser 11th Edition Exam Questions

Chapter 1

True-False

1. A firm’s annual report contains only two pieces of information: the financial statements and the notes to the financialstatements.

2. The SEC regulates U.S. companies that issue securities to the public and requires the issuance of a prospectus for any new security offering.

3. The FASB has congressional authority to set accounting policies.

4. The European Union began requiring publicly traded companies to use U.S. GAAP in 2005.

5. External auditors are required to audit the internal control assessment of the company as well as the financial statements.

6. Congress passed the Sarbanes-Oxley Act of 2002 in hopes of ending future accounting scandals and renewing investor confidence in the marketplace.

7. The Management Discussion and Analysis is of potential interest to the analyst because it contains information that cannot be found in the financial data.

8. Information that is significant enough to make a difference in a decision is considered to be immaterial.

9. The time period assumption assumes a two year time frame with interim reporting occurring daily and weekly.

10. GAAP-based financial statements are prepared according to the accrual basis of accounting.

Fill in the Blank

1. The requiresall public companies to file a Form 10-K report annually.

2. A corporate annual report contains financial statements.

3. is responsible for the preparation of the financial statements, including the notes, and the attests to the fairness of the presentation.

4. The was passed in 2002 and was one of the most sweeping corporate reforms since the Securities Act of 1934.

5. The is a document used to solicit shareholder votes.

6. The Assumption is the assumed unit of measurement when preparing financial statements.

7. The cash basis of accounting recognizes when cash is received and recognizes when cash is paid.

8. The sharper and clearer the picture presented through the financial data and the closer that picture is to financial reality, the higher the financial statements and reported earnings.

9. One of the generally accepted accounting principles that provide the foundation for preparing financial statements is the principle.

10. Management exercises control over the budget level and timing of expenditures.

Multiple Choice

1. What information would not be found in a firm’s annual report?

a. Notes to the financial statements.

b. Financial Reporting Rulings.

c. Auditor’s report.

d. High and low stock prices.

2. Which agency requires the filing of Form 10-Ks, Form 10-Qs and Form 8-Ks?

a. FASB.

b. IASB.

c. SEC.

d. GAAP.

3. Which of the following statements is true?

a. Foreign firms registered with the SEC may file reports based on IFRS.

b. U.S. firms registered with the SEC may file reports based on IFRS.

c. The European Union requires firms to report based on GAAP.

d. Foreign firms registered with the SEC may file reports based on IFRS only if they reconcile all amounts to GAAP.

4. Which financial statement presents the results of operations?

a. Balance sheet.

b. Statement of financial position.

c. Income statement.

d. Statement of cash flows.

5. Which financial statement shows the assets, liabilities and stockholders’ equity of the firm on a particular date?

a. Statement of stockholders’ equity.

b. Statement of cash flows.

c. Earnings statement.

d. Balance sheet.

6. Which financial statement provides information about operating, financing and investing activities?

a. Statement of financial position.

b. Statement of cash flows.

c. Statement of stockholders’ equity.

d. Income statement.

7. What information can be found on a statement of stockholders’ equity?

a. A reconciliation of the cash account and the retained earnings account.

b. A reconciliation of the beginning and ending balances of all accounts that appears in the stockholders’ equity section of the balance sheet.

c. A reconciliation of the operating, investing and financing activities of a firm.

d. A reconciliation of net profit or loss and the cash account.

8. What basic financial statements can be found in a corporate annual report?

a. Balance sheet, income statement, statement of shareholders' equity, and statement of cash flows.

b. Balance sheet, auditor's report and income statement.

c. Earnings statement and statement of retained earnings.

d. Statement of cash flows and five-year summary of key financial data.

9. What is an unqualified audit report?

a. A report stating that the auditors are not qualified to report on a firm.

b. A report that states the financial statements are in violation of GAAP.

c. A report that states that departures from GAAP exist in the firm’s financial statements.

d. A report that states the financial statements are presented fairly, in all material respects, and are in conformity with GAAP.

10. What is a qualified report?

a. A report stating that the auditors are not qualified to report on a firm.

b. A report that states the financial statements are in violation of GAAP.

c. A report that states that departures from GAAP exist in the firm’s financial statements.

d. A report that states the financial statements are presented fairly, in all material respects, and are in conformity with GAAP.

11. What organization has the authority to register, inspect, and discipline auditors of all publicly owned companies?

a. Public Company Accounting Oversight Board.

b. SOX.

c. Congress.

d. FASB.

12. According to Section 302 of the Sarbanes-Oxley Act, who must certify the accuracy of the financial statements of a public company?

a. Public Company Accounting Oversight Board.

b. SEC.

c. External auditor.

d. CEO and CFO.

13. All of the following items should be discussed in the management discussion and analysis except for:

a. Anticipated changes in the mix and cost of financing resources.

b. The market value of all assets.

c. The internal and external sources of liquidity.

d. Unusual or infrequent transactions that affect income from continuing operations.

14. Which of the following is an internal source of liquidity?

a. Borrowing.

b. Sales of stock.

c. Gifts and donations.

d. Sales of products or services.

15. Which of the following is an external source of liquidity?

a. Sales of services.

b. Repurchase of stock.

c. Borrowing.

d. Sales of products.

16. Which of the following is not a condition that must be met for an item to be recorded as revenue?

a. Revenues must be earned.

b. The amount of the revenue must be measurable.

c. The revenue must be received in cash.

d. The costs of generating the revenue can be determined.

17. How are revenues and expenses recognized under the accrual basis of accounting?

a. Revenues are recognized when cash is received and expenses are recognized when cash is paid.

b. Revenues and expenses are recognized equally over a twelve month period.

c. Revenues and expenses are recognized based on the choices of management.

d. Revenues are recognized in the accounting period when the sale is made and expenses are recognized in the period in which they relate to the sale of the product.

18. In what industry would it be expected that companies would spend a significant amount on research and development activities?

a. Pharmaceutical.

b. Clothes retailer.

c. Groceries.

d. Wholesale distributor of computer parts.

19. Which of the following items is a discretionary expenditure?

a. Union wages.

b. Factory building to produce inventory.

c. Advertising.

d. Taxes.

20. Which of the following statements is false with regard to quality of financial reporting?

a. Financial statements should reflect an accurate picture of a company’s financial condition and performance.

b. It is unlikely that management can manipulate the bottom line due to the regulations in place to enforce GAAP.

c. Financial information should be useful both to assess the past and predict the future.

d. The closer that the picture presented through the financial data is to reality, the higher the quality of financial reporting.

Short Answer

1. Write a short essay explaining the following statement: “Unfortunately, there are mazelike interferences in financial statement data that hinder understanding the valuable information they contain.”

2. Describe the relationship between the FASB and the SEC.

3. Explain why the notes are an integral part of the financial statements.

4. Discuss the impact that the Sarbanes-Oxley Act of 2002 had on internal auditing.

5. Define internal and external sources of liquidity. What is a material deficiency in liquidity? If a firm has a material deficiency in liquidity what should be reported in the management discussion and analysis?

6. What types of information may be missing or hard to find in the financial statements?

7. Explain why the characteristics of comparability and consistency are important in financial reporting?

8. Write an essay discussing the two key principles that are the foundation of the accrual basis of accounting.

Chapter 2

True-False

1. The balance sheet is also called the statement of condition or statement of financial position.

2. The balance sheet is prepared for a period of time, generally a year.

3. A classified balance sheet means that the asset and liability sections are categorized into key areas.

4. Companies that use IFRS may switch the order of presentation of assets and liabilities, listing noncurrent items before current items.

5. As part of an integrated disclosure system required by the SEC, the information presented in annual reports includes three-year audited balance sheets.

6. A common-size balance sheet is useful to the analyst because it facilitates the structural analysis of the firm.

7. Working capital refers to the investment in property, plant and equipment.

8. The valuation of marketable securities on the balance sheet requires the separation of investment securities into three categories: held to maturity, trading securities, and securities available for sale.

9. Accounts receivable are recorded on the balance sheet at gross realizable value.

10. Retained earnings is the unused stash of cash that a firm has accumulated since inception.

Fill in the Blank

1. A expresses each item on the balance sheet as a percentage of total assets.

2. are those assets expected to be converted into cash within one year or operating cycle, whichever is longer.

3. are also referred to as short-term investments.

4. The net realizable value of accounts receivable is the actual amount of the account less an .

5. Additional information helpful to the analysis of accounts receivable and the allowance account is provided in the schedule of .

6. The three cost flow assumptions most frequently used in the U.S. are , , and .

7. arises when one company acquires another company for a price in excess of the fair market value of the net identifiable assets.

8. Companies that are paid in advance for services or products record a liability on the receipt of cash in an account titled or .

9. A lease affects both the balance sheet and the income statement.

10. Many companies list an account titled on the balance sheet even though no dollar amount will appear.

Multiple Choice

1. The balancing equation is expressed as:

a. Assets + Liabilities = Stockholders' Equity.

b. Revenues – Expenses = Net Income.

c. Sales – Costs = Net Profit.

d. Assets = Liabilities + Stockholders' Equity.

2. Which of the following statements is false?

a. Common-size balance sheets allow for comparison of firms with different levels of total assets by introducing a common denominator.

b. The common-size balance sheet reveals the composition of assets within major categories.

c. Each item on a common-size balance sheet is expressed as a percentage of sales.

d. The common-size balance sheet reveals the capital and the debt structure of the firm.

3. Which of the following accounts would be classified as current assets on the balance sheet?

a. Accounts receivable, inventory, cash equivalents.

b. Marketable securities, accounts payable, property, plant and equipment.

c. Prepaid expenses, goodwill, long-term investments.

d. Property, plant and equipment, inventory, goodwill.

4. Which of the following items would not be classified as cash equivalents?

a. U.S. Treasury bills.

b. Trading securities.

c. Commercial paper.

d. Money market funds.

5. Which of the following marketable securities are reported at fair value?

a. Held to maturity and trading securities.

b. Trading securities and securities available for sale.

c. Held to maturity and securities available for sale.

d. Corporate bonds and convertible debt.

6. Which of the following items should alert the analyst to the potential for manipulation when analyzing accounts receivable and the allowance for doubtful accounts?

a. Sales, accounts receivable and the allowance for doubtful accounts are all growing at approximately the same rate.

b. A company lowers its credit standards and also increases the balance in the allowance for doubtful accounts.

c. Accounts receivable is growing at a large rate and the allowance for doubtful accounts is decreasing.

d. An analysis of the “Valuation and Qualifying Accounts” schedule required in the Form 10-K reveals that the amounts recorded for bad debt expense are close in amount to the actual amounts written off each year.

7. Which method of inventory assumes the last units purchased will remain in ending inventory on the balance sheet?

a. FIFO.

b. LIFO.

c. Average cost.

d. LIFO and FIFO.

8. Which type of firm would most likely carry the most finished goods inventory?

a. A manufacturing firm.

b. A retail firm.

c. A service firm.

d. A wholesale firm.

9. Which method of inventory would be least likely to be used by a European firm?

a. FIFO.

b. LIFO.

c. Average cost.

d. LIFO and FIFO.

10. Which of the following statements is false?

a. Companies are allowed to use more than one inventory valuation method.

b. LIFO is an income tax concept.

c. Using FIFO for high-technology products makes sense if the firm is trying to reduce taxes because the technology industry is generally deflationary.

d. Companies using IFRS may not reverse entries for inventory write-downs if the market recovers.

Use the following information to answer questions 11 through 13:

ABC Companypurchases five products for sale in the order and at the costs shown:

Unit Cost per Unit

1 $10

2 $12

3 $15

4 $18

5 $13

11. Assume ABC sells two items and uses the FIFO method of inventory valuation. What amount would appear in ending inventory on the balance sheet?

a. $22

b. $46

c. $45

d. $31

12. Assume ABC sells two items and uses the LIFO method of inventory valuation. What amount would appear for cost of goods sold on the income statement?

a. $37

b. $41

c. $22

d. $31

13. Assume ABC uses the average cost method of inventory valuation. What unit cost would be used to determine the amount in ending inventory or cost of goods sold?

a. $12.67

b. $13.60

c. $15.00

d. $13.00

14. Which of the following statements is true?

a. The straight-line method of depreciation allocates a decreasing amount of depreciation expense each year.

b. Straight-line depreciation is the least used method for financial reporting purposes.

c. Fixed assets are reported at historical cost less accumulated depreciation on the balance sheet.

d. The total amount of depreciation over the asset’s life is larger when using an accelerated method of depreciation.

15. When will a firm regard goodwill on its books?

a. When one company acquires another company for a price in excess of the fair market value of the net identifiable assets acquired.

b. When the firm donates property to charities.

c. When it is determined that there has been a loss of value of long-term assets.

d. When fixed assets are impaired.

16. Which of the following accounts could be categorized as either a current or noncurrent liability depending on date the debt is due?

a. Notes payable and deferred taxes.

b. Accounts payable and current portion of long-term debt.

c. Deferred taxes and mortgages due in 30 years.

d. Long-term warranties and accounts payable.

17. Which items would be classified as long-term debt?

a. Accounts payable, unearned revenue, pension liabilities.

b. Common stock, retained earnings, bonds payable.

c. Mortgages, convertible debentures, bonds payable.

d. Deferred taxes, accrued expenses, treasury stock.

18. How are deferred taxes recorded on the balance sheet?

a. As current or noncurrent liabilities.

b. As stockholders’ equity.

c. As noncurrent assets or noncurrent liabilities.

d. As current or noncurrent assets or liabilities.

19. Which stockholders’ equity account represents the sum of every dollar a company has earned since its inception, less any payments made to shareholders in the form of dividends?

a. Treasury stock.

b. Accumulated other comprehensive income

c. Retained earnings.

d. Preferred stock.

20. Which item below would not be a quality of financial reporting issue related to the balance sheet?

a. Mismatching the type of debt (short or long-term) used to finance assets.

b. Discretionary expenses.

c. Overvaluation of assets.

d. Off-balance sheet financing.

Short Answer/Problem

1. Explain the format and key components of a balance sheet prepared in the U.S. or overseas.

2. Define current assets and current liabilities and give two examples of each.

3. Why should the allowance for doubtful accounts and the valuation and qualifying accounts schedule be analyzed?

4. Write a short explanation of why you agree or disagree with the following statement:

“The LIFO method of inventory valuation cannot be used by grocery stores.”

5. Explain the impact of calculating depreciation using the straight-line method versus an accelerated method on the amounts shown on a balance sheet.

6. Using the following information analyze the accounts receivable and the allowance for doubtful accounts for this company:

2015 2014

Sales $11,230 $10,340

Accounts receivable, net 1,510 1,860

Allowance for doubtful accounts 43 32

7. Using the following excerpts from the most recent annual report of WooHoo, a high technology firm, analyze the accounts receivable and allowance for doubtful accounts. Be sure to show all calculations and write a thorough interpretation of those calculations.

WooHoo

Valuation And Qualifying Accounts

For the Years Ended April 30, 2015, 2014 and 2013

8. Why is the inventory accounting method chosen by a company important to the user of financial statement information?

9. Using the following information calculate the ending inventory balance and the cost of goods sold expense that would be reported at the end of the year if the following inventory valuation methods are used:

a. Average cost

b. FIFO

c. LIFO

Units Purchase Price

Beginning inventory 100 $25

Purchase #1 80 $26

Purchase #2 160 $23

Purchase #3 90 $24

Sales 260

10. Using the following information calculate the ending inventory balance and the cost of goods sold expense that would be reported at the end of the year if the following inventory valuation methods are used:

a. Average cost

b. FIFO

c. LIFO

Units Purchase Price

Beginning inventory 8 $8

Purchase #1 15 $9

Purchase #2 24 $11

Purchase #3 12 $13

Sales 40

11.The Breakfast Company purchases equipment for $100,000. Management estimates that the equipment will have a useful life of eight years and no salvage value.

a. Calculate depreciation expense and the book value of the equipment at the end of the first year using the straight-line method of depreciation.

b. Calculate depreciation expense and the book value at the end of the first year using the double-declining balance method of depreciation.

12. Redtop Co. purchased a piece of equipment last year for $300,000. Management estimates that the equipment will have a useful life of five years and no salvage value. The depreciation expense recorded for tax purposes will be $72,000 this year (Year 2). The company uses the straight-line method of depreciation for reporting purposes.

a. Calculate the amount of depreciation expense for reporting purposes this year (Year 2).

b. What will be the net book value of the equipment reported on the balance sheet at the end of this year (Year 2)?

c. Will a deferred tax asset or liability be created as a result of the depreciation recorded for tax and financial reporting purposes?

d. What amount will be added to the deferred tax account as a result of the depreciation timing difference?

13. Explain the differences between accounts payable, short-term debt, current maturities of long-term debt, accrued liabilities and unearned revenue.

14. Explain the differences between long-term notes payable, mortgages, debentures, bonds payable, and convertible debt.

15. Using the following balance sheet, prepare a common size balance sheet:

Assets Liabilities and stockholders' equity

Current assets Current liabilities

Cash 4 Accounts payable 28

Short-term investments 9 Current portion of

Accounts receivable 32 long-term debt 12 Inventory 41 Total current liabilities 40

Prepaid expenses 2 Long-term liabilities

Deferred taxes, current 7 Long-term debt 48

Total current assets 95 Total liabilities 88

Long-term assets Stockholders' equity

Property & equipment 53 Common stock and PIC 51 Goodwill 12 Retained earnings 30

Long-term investments 8

Other assets 1 Total stockholders' equity 81

Total assets 169 Total liabilities and equity 169

16. Analyze the following common size balance sheet:

2015 2014

Current assets:

Cash 1% 16%

Accounts receivable 24 18

Inventory 35 30

Total current assets 60% 64%

Property, plant and equipment 37 26

Other assets 3 10

Total assets 100% 100%

Current liabilities:

Accounts payable 29% 27%

Short-term debt 23 33

Total current liabilities 52% 60%

Long-term debt 22 17

Total liabilities 74% 77%

Common stock and paid in capital 9 10

Retained earnings 17 13

Total stockholders' equity 26% 23%

Total liabilities and stockholders' equity 100% 100%

Chapter 3

True-False

1. The income statement presents cash revenues, cash expenses, net income, and earnings per share for an accounting period.

2. The statement of stockholders’ equity is an important link between the balance sheet and the income statement.

3. The income statement comes in two basic formats, the multiple-step and the single-step versions; however, for analysis purposes the single-step version should be used.

4. The common size income statement expresses each income statement item as a percentage of total assets.

5. Gross profit is the difference between sales and all operating expenses.

6. If the cost of goods sold percentage increases or decreases, this does not necessarily mean that costs have increased or decreased.

7. In volatile industries, such as high technology, gross profit margin may increase or decrease significantly each year.

8. Operating profit margin is impacted by sales and all operating expenses except cost of goods sold.

9. Users of financial statements need to distinguish between earnings increasing due to core operations versus items such as tax rate deductions.

10. Two special items, discontinued operations and extraordinary items, must be disclosed separately on the income statement.

Fill in the Blank

1. Two other terms used interchangeably with income are and .

2. income is the change in equity of a company during a period from transactions, other events, and circumstances relating to nonowner sources.

3. The method of inventory generally results in the matching of current costs with current revenues and therefore produces higher-quality earnings.

4. The gross profit margin and are complements of each other and the two percentages always add up to 100%.

5. costs are or should be a major expense in the budgets of companies for which marketing is an important element of success.

6. and represent the cost of assets other than land that will benefit a business enterprise for more than a year.

7. charges are the expenses recognized to record a decline in value of a long-term asset.

8. The method of accounting for investments should be used when the investor can exercise significant influence over the investee’s operating and financing policies.

9. Foreign currency translation effects, unrealized gains and losses, additional pension liabilities and cash flow hedges are items that may comprise a company’s other income.

10. Stock and stock result in the issuance of additional shares of stock to existing shareholders.

Multiple Choice

1. Which equation represents an income statement?

a. Assets = liabilities + stockholders’ equity.

b. Cash in – cash out = net income.

c. Revenues - expenses = net income.

d. Beginning retained earnings + revenues – expenses = ending retained earnings.

2. Which format of the income statement should be used for analysis purposes?

a. Multiple-step.

b. Cash basis.

c. Single-step.

d. Accrual basis.

3. Which of the following is an acceptable method to report total comprehensive income?

a. On the face of thebalance sheet.

b. Total comprehensive income does not have to be reported.

c. In the operating section of the cash flow statement.

d. In the statement of stockholders' equity.

4. How is a common-size income statement prepared?

a. Each income statement item is expressed as a percentage of total assets.

b. Each income statement item is expressed as a percentage of net sales.

c. Each income statement item is expressed as a percentage of net income.

d. Each income statement item is expressed as a percentage of cash flow.

5. How are sales reported on the income statement?

a. Sales are shown for three years net of returns and allowances.

b. Sales amounts are inflation-adjusted.

c. Sales are shown for two years and are reported in nominal terms.

d. Sales are shown at gross amounts, adjusted for inflation.

6. Which of the following statements is true?

a. In stable industries, such as retailers, the gross profit margin is generally volatile from year to year.

b. Gross profit margin and operating profit margin are complements of each other and the two percentages add up to 100%.

c. Fixed costs do not vary proportionately with volume changes but remain the same within a relevant range of activity.

d. In capital intensive industries sales volume changes result in a stable gross profit margin.

7. How should companies with more than one revenue source report revenue and cost of goods sold?

a. Each revenue source should be reported separately, but all cost of goods sold should be added together and reported as a single amount.

b. The revenues and cost of goods sold should be netted together and reported as a single line item.

c. All revenue sources should be added together and shown as one line item and all cost of goods sold should be added together and shown as one line item.

d. Each revenue line should be shown separately with a corresponding cost of goods sold line for each revenue source.

8. Selling and administrative expenses include which of the following income statement items?

a. Salaries, insurance, interest.

b. Salaries, rent, advertising.

c. Rent, interest, cost of goods.

d. Advertising, research & development, amortization.

9. What is amortization?

a. The process used to allocate the cost of natural resources.

b. The process used to allocate the cost of tangible fixed assets.

c. The process used to allocate the cost of capital leases, leasehold improvements and intangible assets.

d. The process used to allocate the cost of oil, gas, minerals and standing timber.

10. Which item would not be classified as an operating expense?

a. Interest expense.

b. Rent expense.

c. Depreciation.

d. Repairs and maintenance.

11. Which of the following statements is true?

a. It is unnecessary to analyze operating expenses over which management exercises discretion.

b. Impairment charges do not need to be analyzed since they are generally a non-recurring expense.

c. A good way to improve operating profit is to cut repairs and maintenance costs as much as possible.

d. Operating expenses can be easily analyzed by preparing a common-size income statement.

12. Why is it important to assess operating profit?

a. Operating profit represents the firm’s profits after consideration of all revenues, expenses and comprehensive income.

b. The figure for operating profit provides a basis for assessing the success of the firm apart from its financing and investing activities and separate from tax considerations.

c. Operating profit represents the firm’s profits after consideration of all revenues and expenses.

d. Operating profit represents the firm’s profits after consideration of all revenues and expenses, except for taxes.

13. Which of the items below would be included under “Other income and expense”?

a. Salaries, interest expense, equity losses.

b. Equity earnings, gains from sale of assets, interest income.

c. Research and development, dividend income, interest expense.

d. Advertising, cost of goods sold, selling and administrative expenses.

14. How does the equity method distort earnings?

a. Income is recognized even though cash may never be received.

b. Equity earnings are recorded even if the investor cannot exercise influence over the investee’s policies.

c. Equity earnings are only recorded on a cash basis of accounting.

d. Equity earnings are recorded when investment ownership is 100%.

15. How is it possible for a U.S. firm to have increasing earnings but a lower effective tax rate?

a.The firm has expenses that are not deductible for tax purposes.

b. Tax rates in foreign countries where the firm operates are higher.

c. Tax rates in foreign countries where the firm operates are lower.

d. It is not possible for a firm to have an effective tax rate different from the U.S. federal statutory tax rate.

16. Which item is not a special item that must be disclosed separately on the income statement?

a. Extraordinary gain.

b. Extraordinary loss.

c. Foreign currency translation adjustments.

d. Discontinued operations.

17. How is earnings per common share calculated?

a. Operating profit divided by the average number of common stock shares outstanding.

b. Net profit divided by the average number of common and preferred stock shares outstanding.

c. Operating profit divided by the average number of repurchased common stock shares.

d. Net profit divided by the average number of common stock shares outstanding.

18. Which of the following items could be found on a statement of shareholders' equity?

a.Reasons for retained earnings increases or decreases.

b. A reconciliation of beginning to ending cash.

c. The market value of the firm’s common stock.

d. Assets = Liabilities + Stockholders’ Equity.

Use the following information for Jett Co. to answer questions 19 and 20.

2015 2014

Sales 1,200 1,000

COGS 850 700

Operating expenses 200 200

Income taxes 30 35

19. Jett Co.'s gross profit, operating profit and net profit margins for 2015 are:

a. 50.0%, 32.5%, 22.5% respectively.

b. 29.2%, 12.5%, 10.0%, respectively.

c. 27.0%, 11.0%, 10.5%, respectively.

d. 21.5%, 17.5%, 12.0%, respectively.

20. Jett Co.'s average tax rates for 2015 and 2014 are:

a. 15.5% and 10.0%

b. 20.0% and 35.0%

c. 25.8% and 35.4%.

d. 31.4% and 36.8%.

Short Answer/Problem

1. Explain why the multiple-step format of the income statement is best for analysis?

2. What questions should the analyst try to answer when analyzing the trend of a firm's sales number?

3. The gross profit margin is increasing for a firm. Give three reasons that could explain the increase.

4. Discuss the following statement: “Gross profit margin should be stable for all firms.”

5. Why might it be unfavorable for a firm to reduce repairs and maintenance, advertising, and research and development expenses?

6. If an investor wants to understand how well a firm is performing in their core industry, which profit number (gross, operating or net) would be the best to analyze? Explain why.

7. RBO Company purchased 25% of the voting common stock of YJD Company on January 1 and paid $800,000 for the investment. YJD Company reported $50,000 of earnings for the year and paid $10,000 in cash dividends. Calculate investment income and the balance sheet investment account balance for RBO Company using the following methods:

a. Cost method.

b. Equity method.

8. Using the single-step income statement for ABC Company prepare a multiple-step income statement.

ABC Company

Income Statement

Income

Net sales $1,750

Interest income 90

1,840

Costs and expenses

Cost of goods sold 1,000

Interest expense 70

Depreciation expense 220

Income tax expense 70

Advertising expense 110

General and administrative expenses 180

Net earnings $ 190

9. Prepare an income statement using the following information:

Gross profit margin 40%

Gross profit $7,500

Tax rate 35%

Operating profit $400

10. Using the following information prepare a common size income statement:

Net sales $9,500

Cost of goods sold 5,900

Gross profit $3,600

General and administrative expenses 1,250

Selling expenses 920

Operating profit $1,430

Income tax expense 460

Net profit $ 970

11. The following information is available for Escalante Computer Company. Analyze the gross profit margin making any calculations deemed necessary.

2015 2014 2013

Product sales $2,700 $2,400 $1,960

Service revenues 380 50 40

Total sales $3,080 $2,450 $2,000

Cost of products $2,100 $1,750 $1,450

Cost of services 260 35 30

Total cost of sales $2,360 $1,785 $1,480

Gross profit $ 720 $ 665 $ 520

12. Explain the possible causes of the trends in the following data:

13. Use the following information to analyze BobKat Equipment Sales. Calculate any profit measures deemed necessary in order to discuss the profitability of the company.

BobKat Equipment Sales

Income Statement

For the Years Ended Dec. 31, 2015 and 2014

2015 2014

Net sales $124,000 $138,000

COGS 90,000 95,000

Gross profit $ 34,000 $ 43,000

General and administrative expenses 31,000 36,000

Operating profit $ 3,000 $ 7,000

Interest expense (1,000) (1,000)

Earnings before taxes $ 2,000 $ 6,000

Income taxes 800 1,800

Net income $ 1,200 $ 4,200

14.Analyze the common size income statements below for Coast Company:

15. Analyze the common size income statements below for 3T Company:

Chapter 4

True-False

1. The analyst of financial statements should consider cash flows over a period of time, looking at patterns of performance and exploring underlying causes of strength and weakness.

2. The statement of cash flows shows the changes in the balance sheet accounts between periods.

3. Cash flow from operations represents the “cash” income from the company’s business operations.

4. Cash from sales of property, plant and equipment is considered an operating activity on the cash flow statement.

5. Proceeds from borrowing are a financing cash outflow.

6. Repurchase of a firm’s own shares is an investing cash outflow.

7. Cash outflows result from increases in asset accounts and decreases in liability and equity accounts.

8. Analyzing the statement of cash flows helps determine the future external financing needs of a business firm.

9. An analysis of the statement of cash flows should, at a minimum, cover the following areas: analysis of cash inflows, analysis of cash outflows, and an analysis of the structure of asset and liabilities.

10. The amounts on a cash flow statement cannot be manipulated.

Fill in the Blank

1. Cash flows are segregated on a statement of cash flows by activities, activities, and activities.

2. A change in the retained earnings account is the result of the

for the period and the payment of .

3. Per FASB rules, firms may use the method or the method to calculate and present cash flow from operating activities.

4. The is one way to common size the cash flow statement.

For questions 5 through 10, insert the word “added” or “subtracted” in the blank.

5. An increase in inventory should be to convert net income to cash flow from operating activities.

6. An increase in accounts payable should be to convert net income to cash flow from operating activities.

7. A decrease in accrued liabilities should be to convert net income to cash flow from operating activities.

8. A decrease in accounts receivable should be to convert net income to cash flow from operating activities.

9. Depreciation and amortization should be to convert net income to cash flow from operating activities.

10. A gain on sale of asset should be to convert net income to cash flow from operating activities.

Multiple Choice

1. All of the following are reasons that the statement of cash flows is useful to the analyst except:

a. The statement of cash flows shows how cash is generated during an accounting period and how it has been used.

b. A positive net income figure on the income statement is ultimately insignificant unless a company can translate its earnings into cash, and the only source in financial statements for learning about cash generation is the statement of cash flows.

c. The statement of cash flows shows the adjustments made to net income in order to calculate cash flow from operations; those should be examined to determine why cash flow from operations is negative or positive.

d. The statement of cash flows is the only financial statement that cannot be manipulated.

2. How is the statement of cash flows connected to the balance sheet?

a. The statement of cash flows shows changes in the asset and liability accounts to explain cash from operating activities.

b. The changes in all revenue and expense accounts are calculated and then listed as cash inflows or outflows.

c. The changes in all of the balance sheet accounts are calculated and then listed as inflows or outflows, except for cash.

d. Changes in asset accounts are recorded as operating activities, changes in liability accounts are recorded as financing activities and changes in equity accounts are recorded as investing activities.

3. The following item would be classified as an operating activity on the statement of cash flows:

a. Payments for inventory.

b.Acquisitions of equipment.

c. Proceeds from borrowing.

d. Payments on loans.

4. The following item would be classified as an investing activity on the statement of cash flows:

a. Proceeds from borrowing.

b. Sale of goods.

c.Sale of property.

d. Payment to lenders.

5. The following item would be classified as a financing activity on the statement of cash flows:

a. Payments for inventory.

b. Payment of dividends.

c. Acquisition of land.

d. Sales of goods.

6. Which item is a noncash item that would be added to net income to convert it to cash flow from operating activities?

a. Accounts receivable.

b. Depreciation.

c. Accounts payable.

d. Inventory.

Use the indirect method to answer questions 7-10. The following information is available for Armstrong Company:

Net income $450 Increase in plant and equip. $170

Depreciation expense 80 Payment of dividends 10

Decrease in accts. receiv. 20 Increase in long-term debt 100

Increase in inventories 15 Decrease in accounts payable 30

7. What is cash flow from operating activities for Armstrong Company?

a. $505

b. $495

c. $335

d. $55

8. What is cash from investing activities for Armstrong Company?

a. ($160)

b. $160

c. $170

d. ($170)

9. What is cash from financing activities for Armstrong Company?

a. $70

b. $60

c. $90

d. ($110)

10. What is the change in cash for Armstrong Company?

a. $315

b. $565

c. $425

d. $215

Use the indirect method to answer questions 11-14. The following information is available for Felix Company:

Net income $300 Decrease in plant and equip. $40

Depreciation expense 20 Increase in deferred tax asset 5

Gain on sale of assets 35 Decrease in long-term debt 50

Increase in inventories 25 Decrease in accounts payable 15

11. What is cash flow from operating activities for Felix Company?

a. $240

b. $70

c. $320

d. $250

12. What is cash from investing activities for Felix Company?

a. $5

b. $40

c. $75

d. $10

13. What is cash from financing activities for Felix Company?

a. $50

b. $65

c. ($50)

d. $60

14. What is the change in cash for Felix Company?

a. $310

b. $205

c. $330

d. $230

15. What is implied if the inventory account has increased?

a. Cash flow from financing activities has decreased relative to net income.

b. Cash flow from operating activities has increased relative to net income.

c. Cash flow from operating activities has decreased relative to net income.

d. Cash flow from financing activities has increased relative to net income.

16. Why are gains and losses from asset sales removed from net income when calculating the cash flows from operating activities?

a. Selling assets is a noncash item.

b. Gains and losses from asset sales are a financing activity.

c. Gains and losses are not removed from net income when calculating the cash flows from operating activities

d. The entire proceeds from sales of long-lived assets are included in investing activities.

17. What is the preferred method to generate cash in a firm?

a. Operating activities.

b. Investing activities.

c. Financing activities.

d. Investing and financing activities.

18. Which item may be of concern when analyzing cash flow from financing activities?

a. Increasing inventories.

b. Borrowing each year to repay debt from prior years.

c. Repayment of debt.

d. Payments of dividends.

19. Which of the following would increase cash from operating activities?

a. Increasing accounts receivable.

b. Increasing inventories.

c. Decreasing accounts payable.

d. Decreasing accounts receivable.

20. Which of the following items would be a way to manipulate the cash flow from operating activities amount on the statement of cash flows?

a. Adding depreciation back to net income to determinecash flow from operating activities.

b. Including interest expense and tax expense in the calculation of cash flow from operating activities.

c. Recording an item that should be recorded as an operating activity as an investing activity.

d. The cash flow statement cannot be manipulated.

Short Answer/Problem

1. What can be learned from a statement of cash flows?

2. Discuss the format of a statement of cash flows prepared using the indirect method.

3. What are the three areas of a cash flow statement that an analyst should cover at a minimum? Discuss each area by explaining items an analyst should be concerned with when reviewing the cash flow statement.

4. Identify the following as operating (O), financing (F), or investing (I) activities:

a. Proceeds from borrowing

b. Purchases of property, plant and equipment

c. Cash from sale of a business segment

d. Interest payments to lenders

e. Cash from sales of goods and services

f. Payment of dividends

g. Payments for purchase of inventory

h. Payments for taxes

i. Repurchase of a firm’s own shares

j. Cash collections from loans to others

5. Indicate which of the following current asset and current liability accounts are operating (O), investing (I), or financing (F) accounts.

a. Current portion of long-term debt

b. Accounts receivable

c. Prepaid expenses

d. Marketable securities

e. Accrued expenses

f. Notes payable to bank

6. Indicate whether each of the following items would result in net cash flow from operating activities being higher (H) or lower (L) than net income.

a. Increase in inventory

b. Increase in accounts payable

c. Amortization expense

d. Decrease in accrued liabilities

e. Loss on sale of assets

f. Decrease in accounts receivable

g. Decrease in deferred tax assets

h. Increase in deferred revenue

i. Decrease in income taxes payable

j. Decrease in prepaid expenses

7. Jesse Corporation reported the following information for the current year:

(1) Net income is $205 million.

(2) Acquisitions were $32 million.

(3) Customer accounts receivable increased by $12 million.

(4) Dividends paid to common shareholders were $8 million.

(5) Depreciation expense was $41 million.

(6) Income tax payable decreased by $11 million.

(7) Long-term debt increased by $28 million.

(8) Accounts payable decreased by $6 million.

(9) Inventories increased by $17 million.

Required: Based on the above information, calculate the following items:

a. Cash flow from operating activities.

b. Cash flow from investing activities.

c. Cash flow from financing activities.

d. The increase or decrease in the cash balance.

8. N&M Corporation reported the following information for the current year:

(1) Net income is $560million.

(2) Sales of assets $26 million.

(3) Customer accounts receivable decreased by $14 million.

(4) Repurchases of common stock were $20 million.

(5) Depreciation expense was $38 million.

(6) Income tax payable increased by $4 million.

(7) Long-term debt decreased by $13 million.

(8) Accounts payable increased by $9 million.

(9) Inventories increased by $24 million.

Required: Based on the above information, calculate the following items:

a. Cash flow from operating activities.

b. Cash flow from investing activities.

c. Cash flow from financing activities.

d. The increase or decrease in the cash balance.

9.Prepare the statement of cash flows for Franklin Company using the indirect method.

Franklin Company

Income Statement

For the Year Ended December 31, 2015

Revenues $9,000

Depreciation expense $ 650

Other operating expenses 7,100 7,750

Income before income taxes $1,250

Interest expense 440

Income tax expense 270

Net income $ 540

Franklin Company

Balance Sheet

December 31, 2015 and 2014

2015 2014 2015 2014

Assets: Liab. & SE:

Cash $ 230 $ 480 A/P $ 370$ 550

A/R 510 590 Inc.Taxes/Pay. 120 280

Inventories 980 960 LT debt 910 830

Plant & Equip. 3,140 2,150 Common Stock 1,100 1,350

Less: Acc. Depr.(1,520) (870) Retained Earnings 840 300

Total Assets $3,340 $3,310 Total Liab. & SE $3,340$3,310

10. Prepare the statement of cash flows for Benji Company using the indirect method.

Benji Company

Income Statement

For the Year Ended December 31, 2015

Revenues $8,200

Depreciation expense $ 400

Other operating expenses 6,800 7,200

Income before income taxes $1,000

Income tax expense 340

Net income $ 660

Benji Company

Balance Sheet

December 31, 2015 and 2014

2015 2014 2015 2014

Assets: Liab. & SE:

Cash $ 380 $ 120 A/P $ 770 $ 600

A/R 640 580 Inc.Taxes/Pay. 90 160

Inventories 950 840 LT debt 1,080 1,630

Plant & Equip. 2,870 2,990 Common Stock 1,000 1,000

Less: Acc. Depr.(1,120) (720) Retained Earnings 780 420

Total Assets $3,720 $3,810 Total Liab. & SE $3,720$3,810

11. Using the excerpt from the Ralston Company statement of cash flows analyze thoroughly the cash flow from operating activities. Be sure to offer possible reasons for the changes identified.

12. Using the excerpt from the Animal World Company statement of cash flows analyze thoroughly the cash flow from operating activities. Be sure to offer possible reasons for the changes identified.

13. Using the summary analysis for eApparel, Inc. analyze the cash inflows and cash outflows for 2015 and 2014.

14. Use the following statement of cash flowsfor Star Pharmaceuticals to:

a. prepare a summary analysis of the statement of cash flows,

b. analyze cash flow from operating activities, and

c. analyze the cash inflows and cash outflows.

Star Pharmaceuticals

Statement of Cash Flows

For the Years Ended December 31, 2015 and 2014

15. Using the statements of cash flows for JAJ Enterprises:

a. prepare a summary analysis of the statement of cash flows,

b. analyze cash flow from operating activities, and

c. analyze the cash inflows and cash outflows.

JAJ Enterprises

Statement of Cash Flows

For the Years Ended December 31, 2015 and 2014

Chapter 5

True-False

1. The objectives of a financial statement analysis will vary depending on the perspective of the financial statement user.

2. A creditor is ultimately concerned with the ability of a firm to generate profits.

3. Supplementary schedules, such as data related to the breakdown of key financial figures by operating segment, are helpful to financial statement analysts.

4. Form 10-Ks and Form 10-Qs can be located through the Dun & Bradstreet Information services.

5. Articles from current business periodicals should not be used in financial statement analysis as journalists are often biased.

6. Financial ratios are powerful tools due to the fact that standard definitions exist and there is a set standard that should be met for each ratio.

7. Three ratios that help the financial analyst assess short-term solvency are the current ratio, the quick ratio and the cash flow liquidity ratio.

8. The accounts receivable turnover, inventory turnover and accounts payable turnover ratios are mathematical complements to the ratios that make up the cash conversion cycle.

9. The debt ratio considers the proportion of all stockholders’ equity that is financed with debt.

10. Tools used in a financial statement analysis should generally include common-size financial statements, key financial ratios, trend analysis, structural analysis, and comparison with industry competitors.

Fill in the Blank

1. A statement contains useful information about the board of directors and executive compensation, option grants, audit-related matters, related party transactions and proposals to be voted on by shareholders.

2. ratios measure a firm’s ability to meet cash needs as they arise.

3. ratios measure the liquidity of specific assets and the efficiency of managing assets.

4. ratios measure the extent of a firm’s financing with debt relative to equity and its ability to cover interest and other fixed charges.

5. ratios measure returns to stockholders and the value the marketplace puts on a company’s stock.

6. The cycle or cycle is the normal operating cycle of a firm that consists of buying or manufacturing inventory, selling inventory and paying accounts payable and collecting accounts receivable.

7. The ratio is a broader measure of coverage capability than the times interest earned ratio because it includes the fixed payments associated with leasing.

8. The shows the relationship between cash dividends and market price.

9. The helps the analyst see how the firm’s decisions and activities over the course of an accounting period interact to produce an overall return to the firm’s shareholders, the return on equity.

10. financial statements are projections of financial statements based on a set of assumptions regarding future revenues, expenses, level of investments in assets, financing methods and costs, and working capital management.

Multiple Choice

1. Which group of people would be the most concerned about the ability of a firm to make interest and principal payments?

a. Auditors.

b. Customers.

c. Creditors.

d. Investors.

2. Which group of people would be the most concerned about the operating areas that have contributed to the success of the firm and which have not?

a. Customers.

b. Management.

c. Auditors.

d. Creditors.

3. Which ratios help assess the firm’s ability to meet cash needs as they arise?

a. Current ratio and cash flow liquidity ratio.

b. Average collection period and net profit margin.

c. Debt ratio and dividend payout.

d. Operating profit margin and return on equity.

4. Which ratios measure the extent of a firm’s financing with debt relative to equity and its ability to cover interest and fixed charges?

a. Debt ratio and price-to-earnings ratio.

b. Cash flow adequacy and fixed charge coverage.

c. Days payable outstanding and gross profit margin.

d. Cash interest coverage and average collection period.

5. How is the cash conversion cycle calculated?

a. Average collection period + days inventory held + Days payable outstanding.

b. Average collection period - days inventory held + Days payable outstanding.

c.Average collection period - days inventory held - Days payable outstanding.

d.Average collection period + days inventory held - Days payable outstanding.

6. What does a low asset turnover compared to the industry imply?

a. The investment in assets may be too high.

b. Sales are higher than average.

c.The investment in assets is too low.

d. Net income is low relative to the investment in assets.

7. All of the following are steps of a financial statement analysis except:

a. Establish objectives of the analysis.

b. Prepare pro forma statements.

c. Study the industry in which the firm operates.

d. Develop knowledge of the firm and the quality of management.

8. What does a financial leverage index greater than one indicate about a firm?

a. Return on assets exceeds the return on equity.

b. Return on equity exceeds the return on assets.

c. The firm is not employing debt successfully.

d. The firm does not generate enough funds to cover interest payments.

9. The Du Pont System shows which of the following series of relationships?

a. Net profit margin x total asset turnover = Return on investment.

b. Net profit margin x financial leverage = Return on equity.

c. Net profit margin x total asset turnover = Return on investment and Return on investment x financial leverage = Return on equity.

d. Net profit margin x total asset turnover = Return on equity and Return on equity x financial leverage = Return on investment.

10. What is important to understand about the label “pro forma”?

a. Pro forma refers to GAAP-based financial statements.

b. Pro forma requires firms to present two distinct net profit amounts in their Form 10-Ks.

c. Pro forma relates to the amount of debt in a firm’s capital structure.

d. Pro forma earnings or financial statements are sometimes based on a firm’s own definition which is not technically a correct definition.

Use the following selected financial information for Wilcox Corporation to answer questions 11-20.

Wilcox Corporation

Income Statement

For the Year Ended December 31, 2015

Net sales $2,870

Cost of goods sold 1,985

Gross profit $ 885

Operating expenses 620

Operating profit $ 265

Interest expense 40

Earnings before taxes $ 225

Income tax expense 80

Net profit $ 145

Wilcox Corporation

Balance Sheet

December 31, 2015

Assets Liabilities and stockholders' equity

Current assets Current liabilities

Cash $25 Accounts payable $ 85

Short-term investments 15 Accrued liabilities 45

Accounts receivable 70 Total current liabilities 130

Inventory 150 Long-term debt 240

Total current assets 260 Total liabilities 370

Long-term assets Stockholders' equity

Net PPE 390 Common stock and PIC 80

Goodwill 210 Retained earnings 410

Total stockholders' equity 490

Total assets $860 Total liabilities and equity $860

WilcoxCorporation

Statement of Cash Flow Information

For the Year Ended December 31, 2015

Cash from operating activities $150

Investing activities:

Capital expenditures $ 60

Acquisitions $ 10

Financing activities:

Proceeds from long-term borrowing $ 50

Payments on long-term borrowing $ 25

Payments of cash dividends $ 20

Cash paid for interest $ 10

Cash paid for income taxes $ 75

11. Wilcox’squick ratio is:

a. 0.85

b. 2.00

c. 1.00

d. 0.75

12. Wilcox’saverage collection period is:

a. 5 days

b. 9 days

c. 13 days

d. 15 days

13. Wilcox’sdays payable outstanding is:

a. 7 days

b. 11 days

c. 16 days

d. 22 days

14. Wilcox’stotal asset turnover ratio is:

a. 3.98

b. 4.22

c. 5.91

d. 3.34

15. Wilcox’stimes interest earned ratio is:

a. 1.50

b. 4.50

c. 6.63

d. 8.60

16. Wilcox’s cash flow adequacy ratio is:

a. 1.43

b. 2.15

c. 1.90

d. 0.54

17. Wilcox’scash flow margin is:

a. 5.23%

b. 5.85%

c. 6.24%

d. 6.67%

18. Wilcox’s effective tax rate is:

a. 24.67%

b. 27.36%

c. 35.00%

d. 35.56%

19. Wilcox’sdebt ratio is:

a. 40.11%

b. 43.02%

c. 55.80%

d. 56.32%

20. Wilcox’sreturn on equity is:

a. 20.62%

b. 25.50%

c. 29.59%

d. 28.49%

Short Answer/Problem

1. Explain the key items of interest to the following groups of people when completing a financial statement analysis: investors, creditors and management.

2. What other sources of information will a financial statement analyst find useful other than the financial statements and related notes?

3. List and define the five categories of ratios generally used in financial statement analysis.

4. Explain the difference between the current ratio and the cash flow liquidity ratio.

5. List and discuss the ratios that make up the calculation of the cash conversion cycle.

6. Define cash flow adequacy and the importance of this ratio to credit rating agencies.

7. The following categories of ratios are used in financial statement analysis:

a. Liquidity

b. Operating efficiency (also referred to as Activity)

c. Leverage

d. Profitability

e. Market measures

Classify the following ratios according to the above categories:

(1) Dividend payout

(2) Fixed charge coverage

(3) Cash flow margin

(4) Days inventory held

(5) Times interest earned

(6) Net profit margin

(7) Earnings per share

(8) Fixed asset turnover

(9) Total asset turnover

(10) Current ratio

8. Using the ratios and information given below for PepCo Company, analyze the short-term liquidity of the firm.

2015 2014

Current ratio .86 .80

Quick ratio .65 .61

Cash flow liquidity ratio .69 .62

Average collection period 32 days 30 days

Days inventory held 74 days 74 days

Days payable outstanding 157days 163 days

Cash conversion cycle (51 days) (59 days)

Cash flow from operations (in millions) $2,508 $2,232

Net sales (in millions) $13,957 $13,074

9. Using the ratios and information given below for SportsOutlet.com, analyze the short-term liquidity and operating efficiency of the firm.

2015 2014

Current ratio 1.50 1.35

Quick ratio 1.15 1.08

Cash flow liquidity ratio 1.39 1.32

Average collection period 10 days 7 days

Days inventory held 35 days 28 days

Days payable outstanding 86 days 79 days

Cash conversion cycle (41 days) (44 days)

Fixed asset turnover 27.36 times 22.14 times

Total asset turnover 1.93 times 2.21 times

Cash flow from operations (in millions) $523 $376

Net sales (in millions) $6,743 $5,187

10. The following ratios have been calculated for Wholesale Appliances, Inc. Analyze the capital structure and long-term solvency of Wholesale Appliances, Inc.

2015 2014

11.The following ratios have been calculated for the Solar Tech Company. Analyze the profitability of Solar Tech Company.

2015 2014

Gross profit margin 37.0% 42.5%

Operating profit margin 4.7% 21.7%

Net profit margin 1.3% 17.2%

Cash flow margin 20.4% 25.9%

12. The following ratios have been calculated for Hi-Tech Toys. Analyze the capital structure, long-term solvency, and profitability of Hi-Tech Toys.

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13. Using the following information for Tiger Inc. calculate earnings per share, the price-to earnings ratio, dividend payout and dividend yield for the firm. Analyze these market ratios.

2015 2014

Net income $960 million $854 million

Shares of common stock outstanding 420 million 419 million

Dividends per share $ 1.75 $ 1.60

Market price per share $56 $50

14. Financial ratio data is listed below for Gallery of Dreams. Construct a list of strengths and weaknesses for the firm after analyzing the ratios.

15. Using the financial ratios calculated from the 2015 annual report of PVC Pipes, assess the short-term liquidity, operating efficiency, capital structure and long-term solvency and profitability of the firm.