Exam 13: Analysis of Financial Statements

Comparative financial statements in which each individual financial statement amount is expressed as a percentage of a base amount are called:

Profitability is the ability to generate future revenues and meet long-term obligations.

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

A high level of expected risk suggests a low price-earnings (PE) ratio.

Analysis of a single financial number is often of limited value.

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) book value per common share (f) basic earnings per share (g) price earnings ratio (h) dividend yield. Net sales \6 50,000 Cost of goods sold Gross profit \2 27,500 Operating expenses Operating income \8 7,000 Interest expense Income before taxes \7 7,900 Income taxes Net income Ending Balances Cash \1 9,500 Accounts receivable (net) 65,000 Inventory 71,500 Plant assets (net) Total assets Current liabilities \7 4,100 Long-term notes payable 97,500 Common stock, \ 5 par value 65,000 Retained earnings Total liabilities and equity

Vertical analysis is a tool to evaluate individual financial statement items or groups of items in terms of a specific base amount.

Zhang Company reported Cost of goods sold of $835,000, beginning Inventory of $37,200 and ending Inventory of $46,300. The average Inventory amount is:

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

Martinez Corporation reported Net sales of $765,000 and Net income of $142,000. The Profit margin is:

The four building blocks of financial analysis are (1)________, (2) ________, (3) ________ and (4) ________.

Describe the purpose of vertical financial statement analysis and how it is applied.

Evaluation of company performance can include comparison and/or assessment of all but which of the following:

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

Financial reporting includes not only general purpose financial statements, but also information from SEC filings, press releases, shareholders' meetings, forecasts, management letters, auditor's reports, and Webcasts.

A financial statement analysis report helps to reduce uncertainty in business decisions through a rigorous and sound evaluation.

The higher the accounts receivable turnover, the less quickly accounts receivable are collected.

Selected balances from a company's financial statements are shown below. Calculate the following ratios for 2018: (a) accounts receivable turnover (b) inventory turnover (c) days' sales uncollected (d) days' sales in inventory (d) profit margin. (e) return on total assets. Dec. 31, Dec. 31, For the 2018 2017 Year 2018 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

Current assets divided by current liabilities is the:

When an item has a value in the base period and zero in the analysis period, the decrease is 100 percent.