Exam 17: Financial Statement Analysis

The following information is based on the financial statements of Floyd Distributing Ltd., which has a December 31, year end: Other events that recently occurred at Floyd's: $\bullet$ Five out of six members of the board of directors resigned. Four of these individuals have launched a lawsuit on behalf of shareholders in an attempt to terminate the employment of senior management. $\bullet$ In February 2015, a major spill from Floyd's heating fuel tanks damaged the fruit trees of a commercial orchard next door to Floyd's warehouse. Instructions Using the information about Floyd Distributing Ltd., explain how use of ratio analysis alone may not lead to the optimum investment decision.

Solvency ratios are used to measure a company's short-term ability to pay its maturing obligations and to meet unexpected needs for cash

Earnings per share is calculated

Investors who are interested in purchasing a company's shares for growth potential will be interested in companies with a low payout ratio.

Which of the following is NOT commonly used as a tool of analysis?

Investors who are interested in purchasing company shares for the income potential will be interested in a company with a high payout ratio.

The balance sheets and income statements for two competing companies in the same industry are presented below: Instructions a. Calculate both companies' Debt to Total Assets ratio. b. Calculate both companies' Interest Coverage ratio. c. Comment on the two companies' solvency in comparison to each other. d. One of the companies is a public company, and the other is a private company. Identify which of the two companies appears to be the public company and explain your conclusion. Describe how that affects the extent to which it is financed by debt in comparison to the other company.

The asset turnover ratio measures

Which one of the following ratios would NOT likely be used by a short-term creditor in evaluating whether to sell on credit to a company?

Current Ratio is total assets divided by total liabilities.

In analyzing the financial statements of a company, a single item on the financial statements

Use the following information for questions . Selected financial ratios for Front Room Decorating Incorporated are as follows: 2013 2012 2011 Current ratio 2.50:1 2.0:1 1.75:1 Accounts receivable turnover 7 times 12 times 18 times Inventory turnover 9 times 9.1 times 8.9 times 98 Based upon an analysis of the above information, which of the following statements most accurately describes Front Room's financial results for 2013? a. The company is selling more inventory. b. The company is taking longer to collect its accounts receivable. c. The company's current ratio deteriorated. d. The company's liquidity improved. -Front Room's current ratio increased in 2013. From an analysis of the above numbers, the most likely cause for the increase is

Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time

A weakness of the current ratio is

In performing a vertical analysis, a 10% increase in net sales combined with an 8% increase in total expenses will cause profit to

A current ratio of 2:1 means that for every $1 of current assets, the company has $2 of current liabilities.

Use the following information for questions . Shannon Corporation had profit of $250,000 and paid dividends to common shareholders of $50,000 in 2013. The weighted average number of shares issued in 2013 was 50,000 shares. Shannon Corporation's common shares are selling for $40 per share on the Toronto Stock Exchange. -Shannon Corporation's payout ratio is

From a lenders point of view

Ratio analysis expresses the relationship among selected items of financial statement data.

A borrower's liquidity is very important in evaluating the safety of a long-term loan.