1-13
SHORT ANSWER
1. What are the six interconnected activities related to financial statement analysis?
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:
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?
1-14
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?
7. What are three activities reported in the statement of cash flows and what information does each
activity provide?
ANS:
8. What is comprehensive income?
9. What is the rationale for the statement of cash flows?
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
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.
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.
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.
1-17
4. Tremble Company manufactures outdoors wear for women. During 2014, the company reported the
following items that affected cash.
Required:
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.
1-18
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:
6. The following selected financial data pertain to four companies: a hotel, a travel agency, a meat
packing company and a pharmaceutical company.
Required: Match each with the financial information and explain why you made your choice as you
did.
1-19
Balance Sheet Data
(component percentages)
Company
1
Company
2
Company
3
Company
4
Cash
7.2
22.0
6.0
11.2
Accounts Receivable
28.0
40.0
3.4
23.0
Inventory
21.4
0.5
0.9
27.4
Property, Plant & Equipment
32.0
19.0
75.1
25.0
Income Statement Data
(component percentages)
Gross Profit
15.2
Not
Applicable
Not
Applicable
44.0
Profit before Taxes
1.8
3.3
2.5
7.0
Ratios
Current ratio (over the last
five years)
1.6
1.3
0.5
1.8
Inventory turnover ratio
27.8
Not
Applicable
Not
Applicable
3.4
Debt-to-equity ratio
1.8
2.3
5.8
1.4
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
?
Required:
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.
1-20
ANS:
8. Comparative financial statement data for Donovan Company and Maltese Company, two competitors
in the same industry, appear below. All balance sheet data are as of December 31, 2012, and December
31, 2011.
Donovan Company
Maltese Company
2012
2011
2012
2011
Net sales
$1,549,035
$339,038
Cost of goods sold
1,080,490
241,000
Operating expenses
302,275
79,000
Interest expense
8,980
2,252
Income tax expense
54,500
6,650
Current Assets
325,975
312,410
83,336
79,467
Cash
Accounts Receivable
Inventory
Net Property, Plant & Equipment
Accounts Payable
Notes Payable
Total Liabilities
Contributed Capital
Retained Earnings
Total Shareholders’ Equity
1-21
Common Stock, $10 par
500,000
500,000
120,000
120,000
Retained earnings
173,460
146,595
38,096
28,998
Non-current liabilities
108,500
90,000
29,620
25,000
Current liabilities
65,325
75,815
35,348
30,281
REQUIRED:
(a) Prepare a common-size 2012 income statement using the data for Donovan Company and Maltese
Company in columnar form.
(b) Comment on the relative profitability of the companies by computing the return on assets (Net
income/(Average total assets) and the return on total equity (Net income / (Average Shareholders’
Equity) ratios for both companies.
Cost of goods sold
Gross Profit
468,545
Operating Expenses
302,275
Income from operations
166,270
Interest expense
Income tax expense
Net income
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
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.
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
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.
Sales revenue
Cost of goods sold
Gross profit
Operating expenses and interest expense
Pretax income
Income tax
Net income
Cash
Accounts receivable (net)
Inventory
Operational assets (net)
Total Assets
Current liabilities (no interest)
Long-term liabilities (10% interest)
Common stock (par $5)
Retained earnings
1-24
PTS: 1