Exam 13: Analysis of Financial Statements

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

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

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

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

To compute trend percentages the analyst should:

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

Financial information for Sigma Company is presented below. Calculate the following ratios for 2018: (a) Inventory turnover. (b) Accounts receivable turnover. (c) Return on total assets. (d) Times interest earned. (e) Total asset turnover. Assets: Cash \ 18,00 \ 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

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

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?

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

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

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

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

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

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

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

Intra-company standards for financial statement analysis:

Working capital is computed as current liabilities minus current assets.

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

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