Problem on Financial Statements | Test Bank – 10e - Test Bank | Financial Accounting Information for Decisions 10e by John Wild by John Wild. DOCX document preview.
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Student name:__________
FILL IN THE BLANK. Write the word or phrase that best completes each statement or answers the question.
1) _________________ applies analytical tools to financial statements and related data for making business decisions.
2) A common goal of financial statement users in evaluating a company's performance and financial condition includes evaluating its (1) __________________, (2) ______________, and (3) ___________________.
3) General-purpose financial statements include the (1)______________, (2) _____________, (3) _______________, (4) ______________ and (5) ________________.
4) The four building blocks of financial statement analysis are (1)_____________, (2) ____________, (3) ____________ and (4) _________________.
5) The standards (benchmarks) for comparisons when interpreting measures from financial statements include (1) ___________, (2) ____________, (3) _____________, and (4) _______________.
6) The comparison of a company's financial condition and performance across time is known as ____________________.
7) The comparison of a company's financial condition and performance to a base amount is known as _________________.
8) The measurement of key relationships between financial statement items is known as ________________.
9) The three common tools of financial statement analysis are (1) ____________, (2) __________________, and (3) ______________________.
10) A financial statement analysis report usually includes the following six sections: (1) ________________________, (2) ______________________, (3) _________________, (4) __________________ (5) ____________________, and (6) ______________________.
11) _______________ financial statements show financial amounts in side-by-side columns on a single statement.
12) Trend percentage is calculated by dividing _________________________ by ___________________________ and multiplying the result by 100.
13) A tool of financial statement analysis which is calculated as current assets minus current liabilities is called ____________.
14) The current ratio and acid-test ratio are used to reflect the ____________ of a business.
15) The debt ratio, the equity ratio, debt-to-equity ratio, and times interest earned are all ___________________ ratios.
16) The gross margin ratio, return on total assets, and basic earnings per share are all _____________ ratios.
17) ______________________ ratios include the price-earnings ratio and dividend yield.
18) Ratios may be expressed as a (1) ________________, (2) __________________, or (3) __________________.
19) A business segment is a part of a company that is separated by its (1) _______________ or (2) ____________.
20) The income level most likely to continue into the future is commonly referred to as ________________________.
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
21) Explain the purpose of financial statement analysis for both external and internal users.
22) Identify and explain the four building blocks of financial statement analysis.
23) What are the four standards for comparisons in financial analysis? Give an example of each.
24) Identify and describe three common tools of financial statement analysis.
25) What is the purpose of a good financial statement analysis report? What are the six key components?
26) Describe the purpose of horizontal financial statement analysis and how it is applied.
27) Describe the purpose of vertical financial statement analysis and how it is applied.
28) Describe ratio analysis including its purpose, application, and interpretation.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
29) A company's sales in Year 1 were $280,000, and its sales in Year 2 were $341,600. Using Year 1 as the base year, what is the sales trend percent for Year 2?
30) Calculate the percent increase or decrease for each of the following financial statement items:
Year 2 | Year 1 | |
Cash | $ 37,500 | $ 30,000 |
Accounts receivable | 63,000 | 52,500 |
Inventory | 67,500 | 90,000 |
Accounts payable | 35,100 | 27,000 |
Sales | 187,500 | 150,000 |
Equipment | 165,000 | 125,000 |
31) Comparative statements for Warmer Corporation are shown below:
Warmer Corporation | |||
Comparative Income Statements | |||
For the years ended December 31 | |||
Year 3 | Year 2 | Year 1 | |
Sales | $ 14,800 | $ 13,229 | $ 13,994 |
Cost of goods sold | 8,225 | 8,661 | 8,375 |
Gross profit | 6,575 | 4,568 | 5,619 |
Operating expenses | 3,664 | 3,576 | 3,487 |
Operating income | $ 2,911 | $ 992 | $ 2,132 |
Calculate trend percentages for all income statement amounts shown and comment on the results. Use Year 1 as the base year. Comment on the results.
32) Calculate the percent increases for each of the following selected balance sheet items.
Year 2 | Year 1 | |
Cash | $ 569 | $ 448 |
Accounts receivable | 2,234 | 2,337 |
Merchandise inventory | 1,062 | 1,071 |
Plant assets | 2,432 | 2,138 |
Bonds payable | 1,164 | 1,666 |
Equity | 2,777 | 2,894 |
33) For the following financial statement items, calculate trend percentages using Year 1 as the base year:
Year 5 | Year 4 | Year 3 | Year 2 | Year 1 | |
Sales | $ 1,195,400 | $ 1,118,000 | $ 1,049,000 | $ 963,200 | $ 860,000 |
Cost of sales | 752,400 | 704,000 | 671,000 | 616,700 | 559,000 |
Gross profit | $ 443,000 | $ 414,000 | $ 378,000 | $ 346,500 | $ 301,000 |
34) Express the following income statement information in common-size percentages and in trend percentages using Year 1 as the base year.
Common-Size Percentages | Trend Percentages | |||||
Year 2 | Year 1 | Year 2 | Year 1 | Year 2 | Year 1 | |
Sales | $ 540,000 | $ 460,000 | ||||
Cost of goods sold | 290,000 | 240,000 | ____ | ____ | ____ | ____ |
Gross profit | $ 250,000 | $ 220,000 | ||||
35) The comparative balance sheet for Silverlight Company is shown below. Express the balance sheet in common-size percentages.
Silverlight Company | |||
Comparative Balance Sheets | |||
For the years ended December 31 | |||
Year 3 | Year 2 | Year 1 | |
Cash | $ 49.6 | $ 34.2 | $ 35.7 |
Accounts receivable | 74.4 | 85.5 | 76.5 |
Merchandise inventory | 148.8 | 125.4 | 91.8 |
Plant assets (net) | 347.2 | 324.9 | 306.0 |
Total assets | $ 620.0 | $ 570.0 | $ 510.0 |
Accounts payable | $ 117.8 | $ 51.3 | $ 76.5 |
Bonds payable | 130.2 | 159.6 | 107.1 |
Common stock | 266.6 | 279.3 | 265.2 |
Retained earnings | 105.4 | 79.8 | 61.2 |
Total liabilities and equity | $ 620.0 | $ 570.0 | $ 510.0 |
36) Express the following balance sheets for Safety Company in common-size percentages.
Safety Company | ||
Balance Sheets | ||
For the years ended December 31 | ||
Year 2 | Year 1 | |
Assets | ||
Cash | $ 43,000 | $ 22,000 |
Accounts receivable | 38,000 | 42,000 |
Merchandise inventory | 61,000 | 52,000 |
Prepaid insurance | 6,000 | 9,000 |
Long-term investments | 49,000 | 20,000 |
Plant assets (net) | 218,000 | 218,000 |
Total assets | $ 415,000 | $ 363,000 |
Liabilities and Equity | ||
Current liabilities | $ 62,000 | $ 75,000 |
Long-term liabilities | 45,000 | 36,000 |
Common stock | 150,000 | 150,000 |
Retained earnings | 158,000 | 102,000 |
Total liabilities and equity | $ 415,000 | $ 363,000 |
37) Express the following income statement information in common-size percentages (round to nearest whole percent). Comment on the results.
Haans Corporation | ||
Comparative Income Statements | ||
For the years ended December 31 | ||
Year 2 | Year 1 | |
Sales | $ 1,200,000 | $ 1,000,000 |
Cost of goods sold | 804,000 | 650,000 |
Gross profit | $ 396,000 | $ 350,000 |
Selling expenses | 132,000 | 120,000 |
Administrative expenses | 180,000 | 150,000 |
Net income | $ 84,000 | $ 80,000 |
38) Use the balance sheets of Glover shown below to calculate the following ratios for Year 2.
(a) Current ratio.
(b) Acid-test ratio.
(c) Debt ratio.
(d) Equity ratio.
Glover Company | ||
Balance Sheets | ||
For the years ended December 31 | ||
Year 2 | Year 1 | |
Assets: | ||
Cash | $ 43,000 | $ 22,000 |
Accounts receivable | 38,000 | 42,000 |
Merchandise inventory | 61,000 | 52,000 |
Prepaid insurance | 6,000 | 9,000 |
Long-term investments | 49,000 | 20,000 |
Plant assets (net) | 218,000 | 218,000 |
Total assets | $ 415,000 | $ 363,000 |
Liabilities and Equity: | ||
Current liabilities | $ 62,000 | $ 75,000 |
Long-term liabilities | 45,000 | 36,000 |
Common stock | 150,000 | 150,000 |
Retained earnings | 158,000 | 102,000 |
Total liabilities and equity | $ 415,000 | $ 363,000 |
39) The following information is available for the Starr Corporation:
Sales | $ 750,000 |
Cost of goods sold | 450,000 |
Gross profit | 300,000 |
Operating income | 85,000 |
Net income | 42,000 |
Inventory, beginning-year | 75,000 |
Inventory, end-of-year | 45,000 |
Calculate the company's inventory turnover and its days' sales in inventory.
40) The following current year information is available from a manufacturing company:
Sales | $ 741,000 |
Gross profit on sales | 276,000 |
Operating income | 64,000 |
Income before taxes | 44,000 |
Net income | 33,600 |
Accounts Receivable, beginning-year | 70,720 |
Accounts Receivable, end-of-year | 59,280 |
Calculate the company's accounts receivable turnover and its days' sales uncollected.
41) Information from a manufacturing company's current year income statement follows. Calculate the company's (a) profit margin ratio, (b) gross margin ratio, and (c) times interest earned.
Sales | $ 850,000 |
Cost of goods sold | 455,000 |
Gross profit | $ 395,000 |
Operating expenses | 260,000 |
Operating income | $ 135,000 |
Interest expense | 32,000 |
Income before taxes | $ 103,000 |
Income taxes expense | 12,400 |
Net income | $ 90,600 |
42) A company reported net income of $78,000 and had 15,000 common shares outstanding throughout the current year. At year-end, the price per share of the company's stock was $49.40. What is the company's year-end price-earnings ratio?
43) 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?
44) Use the financial data shown below to calculate the following ratios for the current year.
(a) Current ratio.
(b) Acid-test ratio.
(c) Accounts receivable turnover.
(d) Days' sales uncollected.
(e) Inventory turnover.
(f) Days' sales in inventory.
Income statement data | |
Sales (all on credit) | $ 650,000 |
Cost of goods sold | 425,000 |
Income before taxes | 78,000 |
Net income | 54,600 |
Ending Balances | Beginning Balances | |
Cash | $ 19,500 | $ 15,000 |
Accounts receivable (net) | 65,000 | 60,000 |
Inventory | 71,500 | 64,500 |
Plant and equipment (net) | 195,000 | 183,900 |
Total assets | $ 351,000 | $ 323,400 |
Current liabilities | $ 62,400 | $ 52,700 |
Long-term notes payable | 97,500 | 100,000 |
45) A company's calendar-year financial data are shown below. The company had total assets of $339,000 and total equity of $144,400 for the prior year. No additional shares of common stock were issued during the year. The December 31 market price per share is $49.50. Cash dividends of $19,500 were paid during the year. Calculate the following ratios for the company:
(a) profit margin ratio
(b) gross margin ratio
(c) return on total assets
(d) return on common stockholders’ equity
(e) basic earnings per share
(f) price earnings ratio
(g) dividend yield.
Net sales | $ 650,000 |
Cost of goods sold | 422,500 |
Gross profit | $ 227,500 |
Operating expenses | 140,500 |
Operating income | $ 87,000 |
Interest expense | 9,100 |
Income before taxes | $ 77,900 |
Income taxes | 23,400 |
Net income | $ 54,500 |
Ending Balances | |
Cash | $ 19,500 |
Accounts receivable (net) | 65,000 |
Inventory | 71,500 |
Plant assets (net) | 195,000 |
Total assets | $ 351,000 |
Current liabilities | $ 74,100 |
Long-term notes payable | 97,500 |
Common stock, $5 par value | 65,000 |
Retained earnings | 114,400 |
Total liabilities and equity | $ 351,000 |
46) A company's calendar-year financial data are shown below. The company had total assets of $339,000 and total equity of $144,400 for the prior year. No additional shares of common stock were issued during the year. The December 31 market price per share is $49.50. Cash dividends of $19,500 were paid during the year. Calculate the following ratios for the company:
(a) debt ratio
(b) equity ratio
(c) debt-to-equity ratio
(d) times interest earned
(e) total asset turnover
Net sales | $ 650,000 |
Cost of goods sold | 422,500 |
Gross profit | $ 227,500 |
Operating expenses | 140,500 |
Operating income | $ 87,000 |
Interest expense | 9,100 |
Income before taxes | $ 77,900 |
Income taxes | 23,400 |
Net income | $ 54,500 |
Ending Balances | |
Cash | $ 19,500 |
Accounts receivable (net) | 65,000 |
Inventory | 71,500 |
Plant assets (net) | 195,000 |
Total assets | $ 351,000 |
Current liabilities | $ 74,100 |
Long-term notes payable | 97,500 |
Common stock, $5 par value | 65,000 |
Retained earnings | 114,400 |
Total liabilities and equity | $ 351,000 |
47) Comparative calendar-year financial data for a company are shown below. Calculate the following ratios for the company for Year 2 using the information provided below.
(a) accounts receivable turnover
(b) day’s sales uncollected
(c) inventory turnover
(d) days’ sales in inventory
Year 2 | Year 1 | |
Sales | $ 720,000 | $ 607,500 |
Cost of goods sold | 450,000 | 382,700 |
Operating expenses | 168,500 | 134,900 |
Net income | 51,200 | 51,700 |
December 31, Year 2 | December 31, Year 1 | |
Accounts receivable (net) | $ 157,500 | $ 162,500 |
Inventory | 139,500 | 110,500 |
Total assets | 1,012,500 | 944,800 |
48) Comparative calendar year financial data for a company are shown below. Calculate the following ratios for Year 2 using the information provided below.
(a) return on total assets
(b) return on common stockholders' equity.
Year 2 | Year 1 | |
Sales | $ 720,000 | $ 607,500 |
Gross profit | 270,000 | 224,800 |
Income before taxes | 79,200 | 78,700 |
Net income | 51,200 | 51,700 |
December 31, Year 2 | December 31, Year 1 | |
Liabilities | $ 493,500 | $ 452,500 |
Common stock ($12 par) | 180,000 | 180,000 |
Contributed capital in excess of par | 135,000 | 135,000 |
Retained earnings | 204,000 | 177,300 |
Total liabilities and equity | $ 1,012,500 | $ 944,800 |
49) The current year-end balance sheet data for a company are shown below. Calculate the items (a through c) using the information below.
(a) working capital
(b) current ratio
(c) acid-test ratio.
Assets: | |
Cash | $ 38,000 |
Short-term investments | 45,000 |
Accounts receivable (net) | 127,500 |
Merchandise inventory | 149,000 |
Long-term investments | 135,000 |
Plant assets (net) | 517,000 |
Total assets | $ 1,012,500 |
Liabilities and equity: | |
Accounts payable | $ 148,700 |
Accrued liabilities | 90,000 |
Notes payable (secured by plant assets) | 254,000 |
Common stock ($12 par) | 180,000 |
Contributed capital in excess of par | 135,000 |
Retained earnings | 204,000 |
Total liabilities and equity | $ 1,012,500 |
50) The comparative income statements for Silverlight Company are shown below. Calculate the following ratios for Year 2:
(a) profit margin ratio
(b) gross margin ratio
(c) times interest earned.
Silverlight Company | ||
Income Statements | ||
For Years Ended December 31 | ||
Year 2 | Year 1 | |
Net sales | $ 720,000 | $ 607,500 |
Cost of goods sold | 450,000 | 382,700 |
Gross profit | $ 270,000 | $ 224,800 |
Operating expense | 168,500 | 134,900 |
Income from operations | $ 101,500 | $ 89,900 |
Interest expense | 22,300 | 11,200 |
Income before taxes | $ 79,200 | $ 78,700 |
Income taxes | 28,000 | 27,000 |
Net income | $ 51,200 | $ 51,700 |
51) A corporation reports the following year-end balance sheet data. Calculate the following ratios using the information provided below.
(a) working capital
(b) acid-test ratio
(c) current ratio
(d) debt ratio
(e) equity ratio
(f) debt-to-equity ratio
Cash | $ 50,000 | Current liabilities | $ 64,000 |
Accounts receivable | 35,000 | Long-term liabilities | 72,000 |
Inventory | 60,000 | Common stock | 1,00,000 |
Equipment | 140,000 | Retained earnings | 49,000 |
Total assets | $ 285,000 | Total liabilities and equity | $ 285,000 |
52) Selected balances from a company's financial statements are shown below. Calculate the following ratios for Year 2.
(a) accounts receivable turnover
(b) inventory turnover
(c) days’ sales uncollected
(d) days’ sales in inventory
(e) profit margin.
(f) return on total assets.
December 31, Year 2 | December 31, Year 1 | For Year 2 | |
Accounts receivable | $ 27,000 | $ 24,000 | |
Merchandise inventory | 25,000 | 20,000 | |
Total assets | 296,000 | 244,000 | |
Accounts payable | 26,000 | 32,000 | |
Salaries payable | 3,000 | 4,400 | |
Sales (all on credit) | $ 312,000 | ||
Cost of goods sold | 165,600 | ||
Salaries expense | 48,000 | ||
Other expenses | 75,000 | ||
Net income | 24,000 |
53) The following selected financial information for a company was reported for the current year end. Calculate the following company ratios using the information below.
(a) Accounts receivable turnover.
(b) Inventory turnover.
(c) Days' sales uncollected
Accounts receivable, beginning-year | $ 170,000 |
Accounts receivable, year-end | 190,000 |
Merchandise inventory, beginning-year | 80,000 |
Merchandise inventory, year-end | 60,000 |
Cost of goods sold | 580,000 |
Credit sales | 1,000,000 |
54) Selected current year end financial information for a company is presented below. Calculate the following company ratios using the information provided below.
(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 |
55) Use the following information from the current year financial statements of a company to calculate the ratios below.
(a) Current ratio.
(b) Accounts receivable turnover. (Assume the prior year's accounts receivable balance was $100,000.)
(c) Days' sales uncollected.
(d) Inventory turnover. (Assume the prior year's inventory was $50,200.)
(e) Times interest earned ratio.
(f) Return on common stockholders' equity. (Assume the prior year's common stock balance was $480,000 and the retained earnings balance was $128,000.)
(g) Earnings per share (assuming the corporation only has common stock outstanding).
(h) Price earnings ratio. (Assume the company's stock is selling for $26 per share.)
(i) Divided yield ratio. (Assume that the company paid $1.25 per share in cash dividends.)
Income statement data:
Sales (all on credit) | $ 1,075,000 |
Cost of goods sold | 575,000 |
Gross profit on sales | $ 500,000 |
Operating expenses | 305,000 |
Operating income | $ 195,000 |
Interest expense | 20,400 |
Income before taxes | $ 174,600 |
Income taxes | 74,000 |
Net income | $ 100,600 |
Balance sheet data:
Cash | $ 38,400 |
Accounts receivable | 120,000 |
Inventory | 56,700 |
Prepaid Expenses | 24,000 |
Total current assets | $ 239,100 |
Total plant assets | 708,900 |
Total assets | $ 948,000 |
Accounts payable | $91,200 |
Interest payable | 4,800 |
Long-term liabilities | 204,000 |
Total liabilities | $ 300,000 |
Common stock, $10 par | 480,000 |
Retained earnings | 168,000 |
Total liabilities and equity | $ 948,000 |
56) Financial information for Sigma Company is presented below. Calculate the following ratios for Year 2.
(a) Inventory turnover.
(b) Accounts receivable turnover.
(c) Return on total assets.
(d) Times interest earned.
(e) Total asset turnover.
Year 2 | Year 1 | |
Assets: | ||
Cash | $ 18,000 | $ 22,000 |
Marketable securities | 25,000 | 0 |
Accounts receivable | 38,000 | 42,000 |
Inventory | 61,000 | 52,000 |
Prepaid insurance | 6,000 | 9,000 |
Long-term investments | 49,000 | 20,000 |
Plant assets, net | 218,000 | 225,000 |
Total assets | $ 415,000 | $ 370,000 |
Net income after interest expense and taxes | $ 62,250 |
Sales (all on credit) | 305,000 |
Cost of goods sold | 123,000 |
Interest expense | 15,600 |
Income tax expense | 27,000 |
57) The following summaries from the income statements and balance sheets of Kouris Company and Brittania, Incorporated are presented below.
(1) For both companies for Year 2, compute the:
(a) Current ratio
(b) Acid-test ratio
(c) Accounts receivable turnover
(d) Inventory turnover
(e) Days' sales in inventory
(f) Days' sales uncollected
Which company do you consider to be the better short-term credit risk? Explain.
(2) For both companies for Year 2, compute the:
(a) Profit margin ratio
(b) Return on total assets
(c) Return on common stockholders' equity
Which company do you consider to have better profitability ratios?
Kouris Company Consolidated Balance Sheets | ||
(in millions) | ||
December 31, Year 2 | December 31, Year 1 | |
Assets | ||
Current assets: | ||
Cash and cash equivalents | $ 634.0 | $ 575.5 |
Accounts receivable, net of allowance | 2,101.1 | 1,804.1 |
Inventories | 1,514.9 | 1,373.8 |
Other current assets | 429.9 | 401.3 |
Total current assets | 4,679.9 | 4,154.7 |
Property, plant, and equipment, net | 1,620.8 | 1,614.5 |
Other long term assets | 413.2 | 670.8 |
Total assets | $ 6,713.9 | $ 6,440.0 |
Liabilities and Stockholders’ Equity | ||
Current liabilities: | ||
Current portion of long-term debt | $ 205.7 | $ 55.3 |
Notes payable | 75.4 | 425.2 |
Accounts payable | 572.7 | 504.4 |
Accrued liabilities | 1,054.2 | 765.3 |
Income taxes payable | 107.2 | 83.0 |
Total current liabilities | 2,015.2 | 1,833.2 |
Long term liabilities | 708.0 | 767.8 |
Total liabilities | 2,723.2 | 2,601.0 |
Stockholders’ equity: | ||
Common stock | 2.8 | 2.8 |
Contributed capital in excess of par value | 589.0 | 538.7 |
Unearned stock compensation | (0.6) | (5.1) |
Accumulated other comprehensive loss | (239.7) | (192.4) |
Retained earnings | 3,639.2 | 3,495.0 |
Total stockholders’ equity | 3,990.7 | 3,839.0 |
Total liabilities and stockholders’ equity | $ 6,713.9 | $ 6,440.0 |
Kouris Company | |
Consolidated Statement of Income | |
December 31, Year 2 | |
(in millions) | |
Revenues | $ 10,697.0 |
Cost of sales | 6,313.6 |
Gross profit | 4,383.4 |
Operating expenses | 3,137.6 |
Operating income | 1,245.8 |
Interest expense | 42.9 |
Other revenues and expenses | 79.9 |
Income before tax | 1,123.0 |
Income taxes | 382.9 |
Income before effect of accounting change | 740.1 |
Cumulative effect of accounting change, net of tax | 266.1 |
Net income | $ 474.0 |
Brittania, Incorporated | ||
Consolidated Balance Sheets | ||
December 31, Year 2 | December 31, Year 1 | |
Assets | ||
Current assets: | ||
Cash and cash equivalents | $ 34.5 | $ 22.2 |
Accounts receivable, net of allowance | 15.5 | 14.7 |
Inventories | 27.2 | 28.4 |
Other current assets | 3.5 | 4.2 |
Total current assets | 80.7 | 69.5 |
Property, plant, and equipment, net | 5.7 | 7.0 |
Other long term assets | 1.1 | 1.5 |
Total assets | $ 87.5 | $ 78.0 |
Liabilities and Stockholders’ Equity | ||
Current liabilities: | ||
Accounts payable | $ 8.5 | $ 6.6 |
Accrued liabilities | 7.8 | 5.6 |
Total current liabilities | 16.3 | 12.2 |
Long term liabilities | 2.5 | 2.6 |
Total liabilities | 18.8 | 14.8 |
Stockholders’ equity: | ||
Common stock | 2.3 | 2.3 |
Contributed capital in excess of par value | 17.8 | 17.4 |
Unearned stock compensation | (0.1) | (0.5) |
Accumulated other comprehensive loss | (0.9) | (1.3) |
Treasury stock | (6.3) | (5.4) |
Retained earnings | 55.9 | 50.7 |
Total stockholders’ equity | 68.7 | 63.2 |
Total liabilities and stockholders’ equity | $ 87.5 | $ 78.0 |
Brittania, Incorporated | |
Consolidated Statement of Income | |
December 31, Year 2 | |
(in millions) | |
Revenues | $ 133.5 |
Cost of sales | 87.3 |
Gross profit | 46.2 |
Operating expenses | 37.3 |
Operating income | 8.9 |
Interest expense | (0.1) |
Other revenues and expenses | 0.3 |
Income before tax | 9.1 |
Income taxes | 3.9 |
Net income | $ 5.2 |
Answer Key
Test name: John Wild Ch13 Problem Material
1) Financial statement analysis
2) [past and current performance, current financial position, future performance and risk]
3) [income statement, balance sheet, statement of stockholders’ equity (or statement of retained earnings), statement of cash flows, notes to the financial statements]
4) [liquidity and efficiency, solvency, profitability, market prospects]
5) [intracompany, competitor, industry, guidelines (rules-of-thumb)]
6) horizontal analysis
7) vertical analysis
8) ratio analysis
9) [horizontal analysis, vertical analysis, ratio analysis]
10) [executive summary, analysis overview, evidential matter, assumptions, key factors, inferences]
11) Comparative
12) [analysis period amount, base period amount]
13) working capital
14) liquidity
15) solvency
16) profitability
17) Market prospects
18) [percent, rate, proportion]
19) [products/services, geographic locations]
20) sustainable income
21) The purpose of financial statement analysis is to assist users in improving the quality of business decisions. It reduces reliance on guesses and intuition and provides a systematic basis for making decisions. External users want information to make better and more informed decisions such as whether or not to invest in, or loan money to a company. Internal users, such as managers, use financial statement analysis to provide strategic information to improve company efficiency and effectiveness in providing products and services.
22) The four usual building blocks of financial statement analysis include (1) liquidity and efficiency, (2) solvency, (3) profitability, and (4) market prospects. Liquidity and efficiency are the ability to meet short-term obligations and to efficiently generate revenues. Solvency is the ability to generate future revenues and to meet long-term obligations. Profitability is the ability to provide financial rewards to attract and retain financing. Market prospects are the ability to generate positive market expectations.
23) The standards are intracompany comparisons, comparisons with competitors, industry comparisons, and guidelines (or rules of thumb). Intra-company comparisons require that a company compare its own prior performance to current performance. The performance of a company's direct competitor (such as Coke comparing its profit margin to PepsiCo's) is an example of comparisons with competitors. Industry statistics are available from services such as Dun & Bradstreet, and a company can compare its results to those industry statistics. There are general standards known as rules of thumb that can be used to evaluate a company's performance. For instance, there is a rule of thumb that a company's current ratio should be no less than 2 to 1.
24) Three common tools of financial statement analysis are: (1) horizontal analysis, which compares a company's financial condition and performance across time; (2) vertical analysis, which compares a company's financial condition and performance to a base amount; and (3) ratio analysis, which uses key relations between financial statement items.
25) A good financial statement analysis report serves as a means of communication with financial statement users. A financial statement analysis report usually consists of six component sections: (1) executive summary; (2) analysis overview; (3) evidential matter; (4) assumptions; (5) key factors; and (6) inferences.
26) Horizontal analysis is a tool to evaluate changes in financial statement data across time. Comparative statement analysis and trend analysis are two types of horizontal analysis. Comparative statements show line item amounts for two or more successive periods, and usually shows changes in both absolute dollar amounts and in percent changes. Trend analysis is used to reveal important changes occurring over successive financial periods. Trend analysis is different from horizontal analysis in that it doesn’t subtract the base period amount in the numerator.
27) Vertical analysis is used to evaluate individual financial statement items or group of items in terms of a specific base amount. The base amount for the balance sheet is usually total assets, and the base amount for the income statement is usually net sales or revenue. The base amount is usually defined as 100%. Common-size financial statements and graphical analysis are two methods of application of vertical financial statement analysis.
28) A ratio is a mathematical relation between two quantities and can be expressed as either percent, rate, or proportion. Ratios are used to analyze the relations between financial statement items that have an economically important relation, such as Sales and Accounts Receivable or Cost of Sales and Inventory. Ratios can be used for comparison to industry standards, a company's competitor, budgets, or past performance. Ratios are used in all four of the building blocks of financial analysis (liquidity and efficiency, solvency, profitability, and market prospects). Ratios are valuable because they can indicate areas of a company's financial situation, which may require further investigation.
29) $341,600/$280,000 × 100 = 122.0%
30)
Computation (in percent) | Percent Change | |
Cash | [($37,500 − $30,000)/$30,000] × 100 = | 25% increase |
Accounts receivable | [($63,000 − $52,500)/$52,500] × 100 = | 20% increase |
Inventory | [($67,500 − $90,000)/$90,000] × 100 = | 25% decrease |
Accounts payable | [($35,100 − $27,000)/$27,000] × 100 = | 30% increase |
Sales | [($187,500 − $150,000/$150,000] × 100 = | 25% increase |
Equipment | [($165,000 − $125,000)/$125,000] × 100 = | 32% increase |
31)
Warmer Corporation | |||
Comparative Income Statements | |||
For the years ended December 31 | |||
Year 3 | Year 2 | Year 1 | |
Sales | 105.8% | 94.5% | 100.0% |
Cost of goods sold | 98.2% | 103.4% | 100.0% |
Gross profit | 117.0% | 81.3% | 100.0% |
Operating expenses | 105.1% | 102.6% | 100.0% |
Operating income | 136.5% | 46.5% | 100.0% |
<br> During Year 2, sales declined, cost of sales increased, and operating expenses increased, causing income to be only 46.5% of Year 1 income. However, during Year 3, sales increased, cost of sales decreased, and although operating expenses increased from Year 1, operating income was 136.5% of Year 1 income. Year 2 was not a good year, but the company seemed to recover in Year 3.
32)
Cash | [($569 − $448)/$448] × 100 = | 27.0% | increase |
Accounts receivable | [($2,234 − $2,337)/$2,337] × 100 = | 4.4% | decrease |
Merchandise inventory | [($1,062 − $1,071)/$1,071] × 100 = | 0.8% | decrease |
Plant assets | [($2,432 − $2,138)/$2,138] × 100 = | 13.8% | increase |
Bonds payable | [($1,164 − $1,666)/$1,666] × 100 = | 30.1% | decrease |
Equity | [($2,777 − $2,894)/$2,894] × 100 = | 4.0% | decrease |
33)
Year 5 | Year 4 | Year 3 | Year 2 | Year 1 | |
Sales | 139.0% | 130.0% | 122.0% | 112.0% | 100% |
Cost of goods sold | 134.6% | 125.9% | 120.0% | 110.3% | 100% |
Gross profit | 147.2% | 137.5% | 125.6% | 115.1% | 100% |
34)
Common-Size Percentages | Trend Percentages | |||
Year 2 | Year 1 | Year 2 | Year 1 | |
Sales | 100.0% | 100.0% | 117.4% | 100.0% |
Cost of goods sold | 53.7% | 52.2% | 120.8% | 100.0% |
Gross profit | 46.3% | 47.8% | 113.6% | 100.0% |
35)
Silverlight Company | |||
Common-size Comparative Balance Sheets | |||
For the years ended December 31 | |||
Year 3 | Year 2 | Year 1 | |
Cash | 8% | 6% | 7% |
Accounts receivable | 12% | 15% | 15% |
Merchandise inventory | 24% | 22% | 18% |
Plant assets (net) | 56% | 57% | 60% |
Total assets | 100% | 100% | 100% |
Accounts payable | 19% | 9% | 15% |
Bonds payable | 21% | 28% | 21% |
Common stock | 43% | 49% | 52% |
Retained earnings | 17% | 14% | 12% |
Total liabilities and equity | 100% | 100% | 100% |
36)
Safety Company | ||
Common Size Comparative Balance Sheets | ||
For the years ended December 31 | ||
Year 2 | Year 1 | |
Assets: | ||
Cash | 10.4% | 6.1% |
Accounts receivable | 9.2% | 11.6% |
Merchandise inventory | 14.7% | 14.3% |
Prepaid insurance | 1.4% | 2.5% |
Long-term investments | 11.8% | 5.5% |
Plant assets (net) | 52.5% | 60.0% |
Total assets | 100.0% | 100.0% |
Liabilities and equity: | ||
Current liabilities | 14.9% | 20.7% |
Long-term liabilities | 10.8% | 9.9% |
Common stock | 36.2% | 41.3% |
Retained earnings | 38.1% | 28.1% |
Total liabilities and equity | 100.0% | 100.0% |
37)
Year 2 | Year 1 | |
Sales | 100% | 100% |
Cost of goods sold | 67% | 65% |
Gross profit | 33% | 35% |
Selling expenses | 11% | 12% |
General expenses | 15% | 15% |
Net income | 7% | 8% |
<br>Although a smaller percent of each sales dollar went to selling expenses in Year 2, the lower gross profit ratio created an unfavorable situation resulting in a 1% reduction in profit margin. If the gross profit ratio had remained at the Year 1 percent, gross profit would have been $420,000 and net income would have been $108,000, yielding a profit margin of 9% rather than 7%.
38) (a) ($43,000 + $38,000 + $61,000 + $6,000)/$62,000 = 2.39<br> <br> (b) ($43,000 + $38,000)/$62,000 = 1.31<br> <br> (c) ($62,000 + $45,000)/$415,000 = 25.78%<br> <br> (d) ($150,000 + $158,000)/$415,000 = 74.22%<br>
39) Inventory turnover = $450,000/(($75,000 + $45,000)/2) = 7.5 times
Days' sales in inventory = ($45,000/$450,000) × 365 = 36.5 days
40) Accounts receivable turnover = $741,000/[$70,720 + $59,280)/2] = 11.4 times
Days' sales uncollected = ($59,280/$741,000) × 365 =29.2 days
41) (a) $90,600/$850,000 = 10.7%<br> <br> (b) $395,000/$850,000 = 46.5%<br> <br> (c) $135,000/$32,000 = 4.2
42) Earnings per share = $78,000/15,000 shares = $5.20 per share<br> Price-earnings ratio = $49.40/$5.20 = 9.5
43) ($120,000 − $40,000)/$640,000 = 12.5%
44) (a) Current ratio:
($19,500 + $65,000 + $71,500)/$62,400 = 2.50
(b) Acid-test ratio:
($19,500 + $65,000)/$62,400 = 1.35
(c) Accounts receivable turnover:
$650,000/[($65,000 + $60,000)/2] = 10.40 times
(d) Days' sales uncollected:
($65,000/$650,000) × 365 = 36.50 days
(e) Inventory turnover:
$425,000/[($71,500 + $64,500)/2] = 6.25 times
(f) Days' sales in inventory:
($71,500/$425,000) × 365 = 61.41 days
45) (a) $54,500/$650,000 = 8.4%<br> <br> (b) $227,500/$650,000 = 35.0%<br> <br> (c) $54,500/[($351,000 + $339,000)/2] = 15.8%<br> <br> (d) $54,500/[($179,400 + $144,400)/2] = 33.7%<br> <br> (e) $54,500/($65,000/$5) = $4.19<br> <br> (f) $49.50/$4.19 = 11.8<br> <br> (g) ($19,500/13,000)/$49.50 = 3.0%
46) (a) ($74,100 + $97,500)/$351,000 = 48.9%<br> <br> (b) ($65,000 + $114,400)/$351,000 = 51.1%<br> <br> (c) ($74,100 + $97,500)/$179,400 = 0.96<br> <br> (d) $87,000/$9,100 = 9.6<br> <br> (e) $650,000/[($351,000 + $339,000)/2] = 1.9
47) (a) $720,000/[($157,500 + $162,500)/2] = 4.5 times
(b) ($157,500/$720,000) × 365 = 79.8 days
(c) $450,000/[($139,500 + $110,500)/2] = 3.6 times
(d) ($139,500/$450,000) × 365 = 113.2 days
48) (a) $51,200/(($1,012,500 + $944,800)/2) = 5.2%<br> <br> (b) Year 2 equity = $180,000 + $ 135,000 + $204,000 = $519,000<br> Year 1 equity = $180,000 + $135,000 + $177,300 = $492,300<br> $51,200/[($519,000 + $492,300)/2] = 10.1%
49) (a)<br>
Cash | $ 38,000 |
Short-term investments | 45,000 |
Accounts receivable | 127,500 |
Merchandise inventory | 149,500 |
Total current assets | $ 360,000 |
Accounts payable | $ 148,700 |
Accrued liabilities | 90,000 |
Total current liabilities | $ 238,700 |
Working capital = $360,000 − $238,700 = $121,300
(b) $360,000/$238,700 = 1.51
(c)
Cash | $ 38,000 |
Short-term investments | 45,000 |
Accounts receivable | 127,500 |
Total quick assets | $ 210,500 |
<br>$210,500/$238,700 = 0.88
50) (a) $51,200/$720,000 = 7.11%<br> <br> (b) $270,000/$720,000 = 37.50%<br> <br> (c) $101,500/$22,300 = 4.55 times
51) (a)<br> <br>
Current assets = ($50,000 + $35,000 + $60,000) | $ 145,000 |
Current liabilities | 64,000 |
Working capital | $ 81,000 |
<br> (b) Acid-test ratio:<br> ($50,000 + $35,000)/$64,000 = 1.33<br> <br> (c) Current ratio:<br> $145,000/$64,000 = 2.27<br> <br> (d) Debt ratio:<br> ($64,000 + $72,000)/$285,000 = 0.48<br> <br> (e) Equity ratio:<br> ($100,000 + $49,000)/$285,000 = 0.52<br> <br> (f) Debt-to-equity ratio:<br> $136,000/$149,000 = 0.91
52) (a) Accounts receivable turnover = $312,000/(($27,000 + $24,000/)2) = 12.2 times
(b) Inventory turnover = $165,600/(($25,000 + $20,000)/2) = 7.4 times
(c) Days' sales uncollected = ($27,000/$312,000) × 365 = 31.6 days
(d) Days’ sales in inventory = ($25,000/$165,600) × 365 = 55.1 days
(e) Profit margin = ($24,000/$312,000) = 7.7%
(f) Return on total assets = $24,000/[($296,000 + $244,000)/2] = 8.9%
53) (a) Accounts receivable turnover = $1,000,000/[($170,000 + $190,000)/2] = 5.6 times
(b) Inventory turnover = $580,000/[($80,000 + $60,000)/2] = 8.3 times
(c) Days' sales uncollected = ($190,000/$1,000,000) × 365 = 69.4 days
54) (a) Profit margin = ($325,000/$4,700,000) = 6.91%<br><br>(b)<br>
Beginning | Ending | |
Total liabilities | $550,000 | $530,000 |
Total equity | 760,000 | 745,000 |
Total assets | $1,310,000 | $1,275,000 |
<br>Total asset turnover = $4,700,000/[($1,310,000 + $1,275,000)/2] = 3.64<br><br>(c) Return on total assets = $325,000/[($1,310,000 + $1,275,000)/2] = 25.15%<br><br>(d) Return on common stockholders' equity = $325,000/[($760,000 + $745,000)/2] = 43.19%
55) (a)<br>
Cash | $ 38,400 |
Accounts receivable | 120,000 |
Inventory | 56,700 |
Prepaid expenses | 24,000 |
Total current assets | $ 239,100 |
Accounts payable | $ 91,200 |
Interest payable | 4,800 |
Total current liabilities | $ 96,000 |
Current ratio = $239,100/$96,000 = 2.49
(b) Accounts receivable turnover = $1,075,000/[$120,000 + $100,000)/2] = 9.77 times
(c) Days' sales uncollected = ($120,000/$1,075,000) × 365 = 40.74 days
(d) Inventory turnover = $575,000/[($56,700 + $50,200)/2] = 10.76 times
(e) Times interest earned = $195,000/$20,400 = 9.56 times
(f)
Beginning | Ending | |
Common stock | $ 480,000 | $ 480,000 |
Retained earnings | 128,000 | 168,000 |
Total equity | $ 608,000 | $ 648,000 |
<br>Return on common stockholders' equity = $100,600/[($608,000 + $648,000)/2] = 16.02%<br><br>(g) Number of shares of common stock = $480,000/$10 par = 48,000 shares<br>Earnings per share = $100,600/48,000 shares = $2.10<br><br>(h) Price earnings ratio = $26/$2.10 = 12.38<br><br>(i) Dividend yield ratio = $1.25/$26 = 4.81%
56) (a) Inventory turnover:<br> $123,000/[($61,000 + $52,000)/2] = 2.18 times<br> <br> (b) Accounts receivable turnover:<br> $305,000/[($38,000 + $42,000)/2] = 7.63 times<br> <br> (c) Return on total assets:<br> $62,250/[($415,000 + $370,000)/2] = 15.86%<br> <br> (d) Times interest earned:<br> ($62,250 + $15,600 + $27,000)/$15,600 = 6.72 times<br> <br> (e) Total asset turnover:<br> $305,000/[($415,000 + $370,000)/2] = 0.78 times
57) (1)<br>
Kouris | Brittania | |
(a) Current ratio | $4,679.9/$2,015.2 = 2.3 | $80.7/$16.3 = 5.0 |
(b) Acid test ratio | ($634.0 + $2,101.1)/$2,015.2 = 1.4 | ($34.5 + $15.5)/$16.3 = 3.1 |
(c) Accounts receivable turnover | $10,697.0/((2,101.1 + $1,804.1)/2) = 5.5 | $133.5/[($15.5 + $14.7)/2] = 8.8 |
(d) Inventory turnover | $6,313.6/(($1,514.9 + $1,373.8)/2) = 4.4 | $87.3/[($27.2 + $28.4)/2] = 3.1 |
(e) Days’ sales in inventory | ($1,514.9/$6,313.6) × 365 = 87.6 days | ($27.2/$87.3) × 365= 113.7 days |
(f) Days’ sales uncollected | ($2,101.1/$10,697.0) × 365 = 71.7 days | ($15.5/$133.5) × 365 = 42.4 days |
<br>Brittania has higher current ratios and acid-test ratios than Kouris, and collects their accounts receivable more quickly. Kouris, on the other hand has a higher inventory turnover and sells their inventory more quickly. Brittania appears to be the better short-term credit risk.<br> <br>(2)<br>
Kouris | Brittania | |
(a) Profit margin ratio | $474.0/$10,697.0 = 4.4% | $5.2/$133.5 = 3.9% |
(b) Return on total assets | $474.0/[($6,713.9 + $6,440.0)/2] = 7.2% | $5.2/[($87.5 + $78.0)/2] = 6.3% |
(c) Return on common stockholders’ equity | $474.0/[($3,990.7 + $3,839.0)/2] = 12.1% | $5.2/[($68.7 + $63.2)/2] = 7.9% |
<br>Kouris has performed better than Brittania on all of the profitability measures.
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