177) Match each of the following terms with the appropriate definitions.
A. Comparative financial statement
B. Horizontal analysis
C. Liquidity and efficiency
D. Vertical analysis
E. Financial statement analysis
F. Market prospects
G. Solvency
H. Debt to equity ratio
I. Profitability
J. Common-size financial statement
______ (1) A company’s ability to generate positive market expectations.
______ (2) The application of analytical tools to general-purpose financial statements and related
data for making business decisions.
______ (3) A measure of solvency presented as the ratio of total liabilities to total equity.
______ (4) A statement with amounts for two or more successive accounting periods placed in
side-by-side columns, often with changes shown in dollar amounts and percentages.
______ (5) A company’s ability to provide financial rewards sufficient to attract and retain
capital.
______ (6)A statement where each amount is expressed as a percent of a base amount to reveal
the relative importance of each financial statement item.
______ (7) The comparison of a company’s financial condition and performance to a base
amount.
______ (8) Examination of financial data across time.
______ (9) A company’s ability to generate future revenues and meet long-term obligations.
______ (10) The availability of resources to meet short-term obligations and to efficiently
generate revenues.
178) Match each of the following terms with the appropriate formulas.
A. Days’ sales in inventory
B. Dividend yield
C. Total asset turnover
D. Inventory turnover
E. Return on common stockholders’ equity
F. Gross margin ratio
G. Days’ sales uncollected
H. Profit margin ratio
I. Times interest earned
J. Debt ratio
________ (1)
________ (2) * 365
________ (3)
________ (4)
________ (5)
________ (6)
________ (7)
________ (8)
________ (9)
________ (10) * 365
179) Identify the financial analysis building block most appropriately associated with each ratio
listed below by placing the letter of the building block a through d beside each ratio 1 through
10. Each building block may be used more than once.
A. Liquidity and Efficiency
B. Solvency
C. Profitability
D. Market Prospects
________ (1) Price Earnings Ratio
________ (2) Dividend Yield
________ (3) Accounts Receivable Turnover
________ (4) Days’ Sales in Inventory
________ (5) Return on Total Assets
________ (6) Equity Ratio
________ (7) Debt Ratio
________ (8) Inventory Turnover
________ (9) Basic Earnings per Share
________ (10) Times Interest Earned
180) Explain the purpose of financial statement analysis for both external and internal users.
181) Identify and explain the four building blocks of financial statement analysis.
182) What are the four standards for comparisons in financial analysis? Give an example of each.
183) Identify and describe three common tools of financial statement analysis.
184) What is the purpose of a good financial statement analysis report? What are the key
components?
185) Describe the purpose of horizontal financial statement analysis and how it is applied.
186) Describe the purpose of vertical financial statement analysis and how it is applied.
187) Describe ratio analysis including its purpose, application, and interpretation.
188) A company’s sales in Year 1 were $280,000, and its sales in Year 2 were $341,600. Using
Year 1 as the base year, what is the sales trend percent for Year 2?
189) Calculate the percent increase or decrease for each of the following financial statement
items:
Year 2
Year 1
Cash
$ 37,500
$ 30,000
Accounts receivable
63,000
52,500
Inventory
67,500
90,000
Accounts payable
35,100
27,000
Sales
187,500
150,000
Equipment
165,000
125,000
Computation (in percent)
Percent Change
Cash
[($37,500 – $30,000)/$30,000] * 100 =
25% increase
Accounts receivable
[($63,000 – $52,500)/$52,500] * 100 =
20% increase
Inventory
[($67,500 – $90,000)/$90,000] * 100 =
25% decrease
Accounts payable
[($35,100 – $27,000)/$27,000] * 100 =
30% increase
Sales
[($187,500 – $150,000/$150,000] * 100 =
25% increase
Equipment
[($165,000 – $125,000)/$125,000] * 100 =
32% increase
190) Comparative statements for Warmer Corporation are shown below:
Warmer Corporation
Comparative Income Statements
For the years ended December 31
Year 3
Year 2
Year 1
Sales
$14,800
$13,229
$13,994
Cost of goods sold
8,225
8,661
8,375
Gross profit
6,575
4,568
5,619
Operating expenses
3,664
3,576
3,487
Operating income
$ 2,911
$ 992
$ 2,132
Calculate trend percentages for all income statement amounts shown and comment on the results.
Use Year 1 as the base year.Comment on the results.
Year 1
Sales
94.5%
Cost of goods sold
Gross profit
81.3%
Operating expenses
Operating income
191) Calculate the percent increases for each of the following selected balance sheet items.
Year 2
Year 1
Cash
$ 569
$ 448
Accounts receivable
2,234
2,337
Merchandise inventory
1,062
1,071
Plant assets
2,432
2,138
Bonds payable
1,164
1,666
Equity
2,777
2,894
Cash
[($569 – $448)/$448] * 100
=
27.0% increase
Accounts receivable
[($2,234 – $2,337)/$2,337] * 100
=
4.4% decrease
Merchandise inventory
[($1,062 – $1,071)/$1,071] * 100
=
0.8% decrease
Plant assets
[($2,432 – $2,138)/$2,138] * 100
=
13.7% increase
Bonds payable
[($1,164 – $1,666)/$1,666] * 100
=
30.1% decrease
Equity
[($2,777 – $2,894)/$2,894] * 100
=
4.0% decrease
192) For the following financial statement items, calculate trend percentages using Year 1 as the
base year:
Year 5
Year 4
Year 3
Year 2
Year 1
Sales
$1,195,400
$1,118,000
$1,049,000
$963,200
$860,000
Cost of sales
752,400
704,000
671,000
616,700
559,000
Gross profit
$443,000
$414,000
$378,000
$346,500
$301,000
Year 5
Years 4
Year 3
Year 2
Year 1
Sales
139.0%
130.0%
122.0%
112.0%
100%
Cost of goods sold
134.6%
125.9%
120.0%
110.3%
100%
Gross profit
147.2%
137.5%
125.6%
115.1%
100%
193) Express the following income statement information in common-size percentages and in
trend percentages using Year 1 as the base year.
Common-Size
Percentages
Trend
Percentages
Year 2
Year 1
Year 2
Year 1
Year 2
Year 1
Sales
$540,000
$460,000
____
____
____
____
Cost of goods sold.
290,000
240,000
____
____
____
____
Gross profit
$250,000
$220,000
____
____
____
____
Year 2
Sales
Cost of goods sold
52.2%
Gross profit
92
194) The comparative balance sheet for Silverlight Co. is shown below. Express the balance
sheet in common-size percentages.
Silverlight Company
Comparative Balance Sheets (in $000)
For the years ended December 31
Year 3
Year 2
Year 1
Cash
$ 49.6
$ 34.2
$ 35.7
Accounts receivable
74.4
85.5
76.5
Merchandise inventory
148.8
125.4
91.8
Plant assets (net)
347.2
324.9
306.0
Total assets
$620.0
$570.0
$510.0
Accounts payable
$117.8
$ 51.3
$ 76.5
Bonds payable
130.2
159.6
107.1
Common stock
266.6
279.3
265.2
Retained earnings
105.4
79.8
61.2
Total liabilities and equity
$620.0
$570.0
$510.0
For the years ended December 31
Year 3
Year 2
Year 1
Cash
7%
Accounts receivable
15%
Merchandise inventory
18%
Plant assets (net)
Total assets
100%
100%
Accounts payable
15%
Bonds payable
21%
Common stock
52%
Retained earnings
Total liabilities and equity
100%
100%
195) Express the following balance sheets for Safety Company in common-size percentages.
93
Safety Company
Balance Sheets
For the years ended December 31
Year 2
Year 1
Assets
Cash
$ 43,000
$ 22,000
Accounts receivable
38,000
42,000
Merchandise inventory
61,000
52,000
Prepaid insurance
6,000
9,000
Long-term investments
49,000
20,000
Plant assets (net)
218,000
218,000
Total assets
$415,000
$363,000
Liabilities and Equity
Current liabilities
$ 62,000
$ 75,000
Long-term liabilities
45,000
36,000
Common stock
150,000
150,000
Retained earnings
158,000
102,000
Total liabilities and equity
$415,000
$363,000
196) Express the following income statement information in common-size percentages (round to
nearest whole percent). Comment on the results.
Haans Corp.
Comparative Income Statements
For the years ended December 31
Year 2
Year 1
Sales
$1,200,000
$1,000,000
Cost of goods sold
804,000
650,000
Gross profit
$ 396,000
$ 350,000
Selling expenses
132,000
120,000
Administrative expenses
180,000
150,000
Net income
$ 4,000
$ 80,000
Sales
Cost of goods sold
Gross profit
Selling expenses
General expenses
Net income
197) Use the balance sheets of Glover shown below to calculate the following ratios for Year 2
(round to the hundredths):
(a) Current ratio.
(b) Acid-test ratio.
(c) Debt ratio.
(d) Equity ratio.
Glover Company
Balance Sheets
For the years ended December 31
Year 2
Year 1
Assets:
Cash
$ 43,000
$ 22,000
Accounts receivable
38,000
42,000
Merchandise inventory
61,000
52,000
Prepaid insurance
6,000
9,000
Long-term investments
49,000
20,000
Plant assets (net)
218,000
218,000
Total assets
$415,000
$363,000
Liabilities and Equity:
Current liabilities
$ 62,000
$ 75,000
Long-term liabilities
45,000
36,000
Common stock
150,000
150,000
Retained earnings
158,000
102,000
Total liabilities and equity
$415,000
$363,000
(a) ($43,000 + $38,000 + $61,000 + $6,000)/$62,000 =
2.39
(b) ($43,000 + $38,000)/$62,000 =
1.31
(c) ($62,000 + $45,000)/$415,000 =
25.78%
(d) ($150,000 + $158,000)/$415,000 =
74.22%
198) The following information is available for the Starr Corporation:
Sales
$750,000
Cost of goods sold
450,000
Gross profit
300,000
Operating income
85,000
Net income
42,000
Inventory, beginning-year
71,200
Inventory, end-of-year
48,800
Calculate the company’s inventory turnover and its days’ sales in inventory.
199) The following current year information is available from a manufacturing company:
Sales
$740,000
Gross profit on sales
276,000
Operating income
64,000
Income before taxes
44,000
Net income
33,600
Accounts Receivable, beginning-year
58,000
Accounts Receivable, end-of-year
72,000
Calculate the company’s accounts receivable turnover and its days’ sales uncollected.
200) Information from a manufacturing company’s current year income statement follows.
Calculate the company’s (a) profit margin ratio, (b) gross margin ratio, and (c) times interest
earned.
Sales
$850,000
Cost of goods sold
455,000
Gross profit
$395,000
Operating expenses
260,000
Operating income
$ 135,000
Interest expense
32,000
Income before taxes
$103,000
Income taxes expense
12,400
Net income
$ 90,600
201) A company reported net income of $78,000 and had 15,000 common shares outstanding
throughout the current year. At year-end, the price per share of the company’s stock was $49.40.
What is the company’s year-end price-earnings ratio?
202) 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?
100
203) Use the financial data shown below to calculate the following ratios for the current year:
(a) Current ratio.
(b) Acid-test ratio.
(c) Accounts receivable turnover.
(d) Days’ sales uncollected.
(e) Inventory turnover.
(f) Days’ sales in inventory.
Income statement data
Sales (all on credit) $650,000
Cost of goods sold 425,000
Income before taxes 78,000
Net income 54,600
Ending
Balance
Beginning
Balance
Cash
$ 19,500
$ 15,000
Accounts receivable (net)
65,000
60,000
Inventory
71,500
64,500
Plant and equipment (net)
195,000
183,900
Total assets
$351,000
$323,400
Current liabilities
$ 62,400
$ 52,700
Long-term notes payable
97,500
100,000