Exam 13: Financial Statement Analysis

Assume that you are considering purchasing some of a company's long-term bonds as an investment.Which of the company's financial statement ratios would you probably be most interested in?

The quick ratio,although similar to the current ratio,is more conservative.

Sable Company is seeking a short-term loan from its local bank.The banker needs assurance that the company will be able to repay the loan.Describe three financial ratios the banker should consider including in the loan approval process.What information does each of your selected ratios provide?

Which ratios measure a company's long-term debt-paying ability and its financing structure?

Indicate whether each of the following statements about financial statement analysis is true or false. The reason behind a financial statement ratio or percentage analysis result is usually self-evident and does not require further study or analysis.______ In horizontal percentage analysis,an item from the financial statements is expressed as a percentage of the same item from a previous year's financial statements.______ Horizontal analysis for several years can be done by choosing one year as a base year and calculating increases or decreases in relation to that year.______ One form of horizontal analysis is the preparation of common size financial statements.______ Vertical analysis compares two or more financial statement items within the same time period.______

Many companies have to monitor some of their financial statement ratios,such as the current ratio,due to debt covenants.Selected transactions are provided below for a company that uses a perpetual inventory system,sells its merchandise at a selling price that exceeds cost,and had a current ratio of 1.85 before the event occurred. Required: In the above table,indicate whether each transaction would increase (+),decrease (-),or not affect (0)the company's working capital and the current ratio.

Select the term from the list provided that best matches each of the following descriptions or definitions:

Montana Company reported the following operating results for Year 1 and Year 2: Year 1 Amount \% of Sales Sales 800,000 Cost of goods sold 440,000 Gross margin 360,000 Operating expenses 225,000 Income before taxes 135,000 Income taxes 40,000 Net income 95,000 Year 2 Amount \% of Sales Sales 960,000 Cost of goods sold 635,000 Gross margin 325,000 Operating expenses 275,000 Income before taxes 50,000 Income taxes 15,000 Net income 35,000 Required: Express each income statement component for each year as a percentage of sales.Round your answer to one decimal place (i.e.,22.5%).

A limitation of financial statement analysis stems from the discretion of management to choose accounting procedures that cast the best light on the firm's performance.

The following information applies to Markham Company: Assets Cash \ 6,000 Accounts receivable 13,000 Inventory 16,000 Plant and equipment, net 21,000 Land Total assets Liabilities and stockholders' equity Accounts payable 000 Salaries payable 10,000 Bonds payable (due 2020) 12,000 Capital stock, no par 23,000 Retained earnings Total liabilities and stockholder's' equity Additional information: Net credit sales equal $220,000 and beginning accounts receivable were $11,000. Required: Compute Markham's: (a)Quick ratio (b)Current ratio (c)Working capital (d)Accounts receivable turnover (e)Average days to collect receivables Round your answers to two decimal places.

You are considering an investment in Facebook stock and wish to assess the company's position in the stock market.All of the following ratios can be used except:

Indicate whether each of the following statements about financial statement analysis is true or false. The asset turnover ratio is calculated by dividing net income by average total assets.______ The asset turnover ratio is likely to be high in an industry in which operations require only a minimal investment in assets.______ Return on equity measures the wealth generated by the amount of assets invested in a business.______ A higher value for the return on investment ratio would generally indicate more effective company management.______ The use of financial leverage often causes a business's return on equity to be lower than its return on investment.______

Knoell Company paid its sales employees $15,000 in sales commissions.What impact will this transaction have on the firm's working capital?

For Perez Corporation,return on equity is substantially higher than return on investment.What does that tell you about the company?

In terms of solvency,the higher the number of times interest is earned,the better.

A vertical analysis uses percentages to compare each of the parts of an individual statement to a key statement figure.For example,on an income statement each item would be shown as a percentage of net sales.

Starwood Corporation has current assets of $200,000,total current liabilities of $750,000,net credit sales of $1,300,000,beginning accounts receivable of $65,000,and ending accounts receivable of $69,000.What is Starwood's accounts receivable turnover?

Indicate whether each of the following statements about financial statement analysis is true or false. Vertical analysis of a company's balance sheet is useful in assessing its liquidity.______ Common size financial statements are a form of vertical analysis,but the common size statements for two or more years may usefully be compared.______ Vertical analysis of a balance sheet involves converting each component to a percentage of stockholders' equity.______ Small percentage changes resulting from vertical analysis may still represent large dollar amounts; therefore,changes in both absolute dollar amounts and percentages should be examined.______ A common size income statement is prepared by converting each component to a percentage of net income.______

Two ratios that provide insight on the relationship between credit sales and receivables are:

Short-term creditors are usually most interested in assessing: