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28. How easily can new firms enter a market is a question one might ask when assessing
_____________________________________________.
29. How easily can customers switch to substitute products is a question one might ask when assessing the
___________________________________.
30. Nonmonetary assets include assets that are ____________________, such as inventories, and assets
that are ____________________ such as brand names.
ANS: tangible, intangible
PTS: 1
SHORT ANSWER
1. What are the six interconnected activities related to financial statement analysis?
ANS:
1. Identify the economic characteristics of the industry in which a firm participates.
2. What is an industry’s value chain?
3. Identify Porters’ Five Forces?
4. What three financial statements are prepared by business firms and what information does each
provide?
ANS:
1. Balance sheet—Point in time reporting of assets, liabilities and stockholders’ equity.
5. Many people view the balance sheet as being a representation of a firm’s economic position. What are
some issues that reduce the quality of this representation?
ANS:
1. Many valuable resources of a firm that generate cash flows, such as a patent, will only appear as
6. Under the Sarbanes-Oxley Act of 2002, financial statements must include both a Management
Assessment and an Assurance Opinion. What information do the Management Assessment and an
Assurance Opinion provide to financial statement users?
ANS:
The Management Assessment makes explicit management’s responsibility for not only the financial
7. What are three activities reported in the statement of cash flows and what information does each
activity provide?
ANS:
1. Operating activities – Provides information on cash generated and used by a firm in its normal
8. What is comprehensive income?
ANS:
Comprehensive income equals net income for a period plus or minus the changes in shareholders’
9. What is the rationale for the statement of cash flows?
ANS:
The statement of cash flows provides information on the sources and uses of cash. Even profitable
2. The firm may need to acquire new property, plant, and equipment; retire outstanding debt; or
10. Describe what is meant by income from continuing operations?
11. When a company sells a subsidiary or a product line on what financial statement is it reported and
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how is it reported?
PROBLEM
1. Many market participants argue that financial markets are efficient and that financial statement users
cannot routinely analyze financial statements to find mispriced securities. This view would lead some
to suggest that there is little value to financial statement analysis.
Required:
Provide a discussion of the role of financial statement analysis in an efficient capital market and
reasons why financial statement analysis is still valuable.
ANS:
1. Even if markets are perfectly efficient, someone must do the analysis to bring about appropriate
2. Prepare an analysis of the automobile manufacturing industry using Porter’s five forces framework.
For each component force provide support for your conclusion. In addition, at the completion of your
analysis provide a conclusion, along with support, of whether you expect the automobile industry to
report high or low profitability in the near future.
ANS:
Buyer Power—HIGH—It appears that consumers are sensitive to price as many manufacturers have
similar offerings in each auto product class. In addition, cars are a large part of most consumers’
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Threat of substitutes—MEDIUM/LOW—It is doubtful that many U.S. consumers are going to switch to
3. Prepare an analysis of the grocery industry using Porter’s Five Forces framework. For each component
force provide support for your conclusion. In addition, at the completion of your analysis provide a
conclusion, along with support, of whether you expect the grocery industry to report high or low
profitability in the near future.
ANS:
Suggested solution:
You may want to have students think about grocery chains different strategies. For example, Wal-Mart
Supplier Power—MEDIUM to LOW—Given that there are fewer grocery chains, due to consolidation
and bankruptcies it is likely that these companies exert more and more influence over suppliers,
leading to low supplier power.
4. Tremble Company manufactures outdoors wear for women. During 2014, the company reported the
following items that affected cash.
Required:
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Indicate whether each of these items is a cash flow from operating activities (O), investing activities
(I), or financing activities (F).
_____A. Paid cash for supplies
_____B. Purchased equipment by paying cash
_____C. Collected cash on account from customers
_____D. Paid dividends to stockholders
_____E. Paid suppliers for fabric
_____F. Borrowed money from a bank on a long-term note
_____G. Paid interest to bank on the note
_____H. Paid wages to employees
_____I. Sold shares of common stock to new stockholders
5. During 2014, Waggoner Company performed services for which customers paid or promised to pay
$587,000. Of this amount, $552,000 had been collected by year end. Waggoner paid $340,000 in cash
for employee wages and owed the employees $15,000 at the end of the year for work that had been
done but had not paid for. Waggoner paid interest expense of $3,000 and $195,000 for other service
expenses. The income tax rate was 35%, and income taxes had not yet been paid at the end of the year.
Waggoner declared and paid dividends of $20,000. There were no other events that affected cash.
Required:
1. What was the amount of the increase or decrease in cash during the year?
2. Prepare an income statement for Waggoner for the year (December 31 year-end).
3. Prepare a statement of cash flows for the year (December 31 year-end)
ANS:
2.
Waggoner Company
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Debt-to-equity ratio 1.8 2.3 5.8 1.4
ANS:
Company 1: Meat packing company (high inventory turnover)
7. Nickel Industries reported the following amounts on its balance sheet on December 31, 2014:
Cash $180,000
Notes payable 100,000
Inventory 325,000
Contributed Capital 750,000
Net Property, Plant & Equipment 600,000
Accounts Receivable 30,000
Accounts Payable 75,000
Retained Earnings ?
1. What is the amount of Nickel’s total assets at the end of 2011?
2. Identify the items listed above that are liabilities.
3. What is the amount of Nickel’s retained earnings at the end of 2011?
4. Prepare a balance sheet for Nickel Industries using U.S. GAAP as of December 31, 2011.
5. Nickel Industries wishes to purchase merchandise from your company on account. The amount of
the purchases would probably be about $11,000 per month, and the terms would require Nickel to
make payment in full within 30 days. Would you recommend that your company grant credit to Nickel
under these terms? Explain the reasoning for your response.
ANS:
1. Total assets = $325,000 + 180,000 + 600,000 + 30,000 = $1,135,000
Nickel Industries
Balance Sheet
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Cost of goods sold 1,080,490 69.8% 241,000 71.1%
(b) Donovan Company appears to be more profitable. It has higher relative gross profit, income
from operations, income before taxes, and net income.
Calculations:
9. Use the current asset section of the balance sheets of the El Paso Company as of January 31, 2012 and
2011 presented below to answer the questions that follow.
2012 2011
Cash and cash equivalents $ 75,000 $ 58,800
Trade accounts receivable, net 157,500 193,200
Inventory 208,200 253,400
Other current assets 18,400 15,500
Total current assets $ 459,100 $ 520,900
Total assets $2,650,000 $3,430,000
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Required:
(a) In the spaces provided below, complete a Percentage Change analysis of the current asset section of
El Paso Company’s balance sheet for 2012, using the following format to provide your answers for the
amount of dollar change and the amount of percentage change, rounding “% Change” to one decimal
place, e.g., 8.3%.
Accounts $ Change % Change
(b) Provide a short evaluation of this analysis.
ANS:
(a)
$ Change % Change
Cash and cash equivalents $ 16,200 27.6%
(b) El Paso Company experienced a large gain in cash and cash equivalents, which indicates the
company is more liquid than the previous accounting period. Accounts receivable decreased, perhaps
10. Comparative financial statements for Larson Company, prepared on December 31 are shown below:
Income Statement 2012 2011
Sales revenue $190,000 $167,000
Cost of goods sold 112,000 100,000
Gross profit 78,000 67,000
Operating expenses and interest expense 56,000 53,000
Pretax income 22,000 14,000
Income tax 8,000 4,000
Net income 14,000 10,000
Balance Sheet
Cash $4,000 $7,000
Accounts receivable (net) 14,000 18,000
Inventory 40,000 34,000
Operational assets (net) 45,000 38,000
103,000 97,000
Current liabilities (no interest) $16,000 $17,000
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Long-term liabilities (10% interest) 45,000 45,000
Common stock (par $5) 30,000 30,000
Retained earnings 12,000 5,000
103,000 97,000
Required:
Assume that one-third of sales are on credit and that cash dividends of $3,000 were declared and paid
in 2012. Then, complete a percentage change income statement and a percentage change balance sheet
for the company, using both amount and percentage changes from 2011 to 2012.
ANS:
Amount %
Income Statement 2012 2011
Sales revenue $190,000 $167,000 $23,000 13.77
Balance Sheet
Cash $ 4,000 $ 7,000 ($3,000) (42.86)
Accounts receivable (net) 14,000 18,000 (4,000) (22.22)