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Chapter 13: Financial Statement Analysis
193. The following information is available from the balance sheets at the end of 2016 and 2015 for Kitchen Equipment
Company.
2016
2015
Accounts payable
$ 120,000
$ 100,000
Accrued liabilities
35,000
30,000
Taxes payable
40,000
10,000
Short-term notes payable
-0-
80,000
Bonds payable due within next year
300,000
100,000
Total current liabilities
$ 495,000
$ 320,000
Bonds payable
$ 600,000
$ 500,000
Common stock, $5 par
$ 800,000
$ 800,000
Retained earnings
200,000
100,000
Total stockholders' equity
$1,000,000
$ 900,000
Total liabilities and stockholders' equity
$2,095,000
$1,720,000
Net income for 2016 and 2015 was $120,000 and $460,000, respectively. No stock was issued during either year.
Answer the following:
A) How many shares of stock are outstanding at the end of 2016?
B) If a company has preferred stock, why are preferred dividends subtracted when computing earnings per
share?
C) What is the amount of earnings per share for the year ended December 31, 2016?
D) Explain what information is provided with earnings per share.
Chapter 13: Financial Statement Analysis
Knife Corp.
Use the selected data presented below from the financial statements of Knife Corp. for 2016 and 2015 to
answer the questions that follow.
2016
2015
Net income
$110,000
$123,000
Cash dividends paid on preferred stock
$12,000
$15,000
Cash dividends paid on common stock
$42,000
$38,000
Weighted average number of common shares outstanding
105,000
95,000
Market price per share of common stock at the end of the year
$16.00
$13.00
194. Refer to the data for Knife Corp.
REQUIRED:
(A) Calculate earnings per share for 2016 for Knife. Why is this considered one of the most quoted ratios for
public companies? Which investors, common or preferred or both, desire this information?
(B) Calculate the price/earnings ratio for 2016 for Knife. Why is this ratio important to investors? Explain.
195. Refer to the data for Knife Corp.
REQUIRED:
(A) Calculate the dividend yield ratio for 2016 for Knife. Explain.
(B) What factors could have caused the change in the market value of Knife’s stock from 2015 to 2016? Explain.
Chapter 13: Financial Statement Analysis
St. Petersburg Corporation
Use the information obtained from the comparative financial statements included in the St. Petersburg
Corporation's 2016 annual report that is presented below to answer the questions that follow. All amounts are in
thousands of dollars.
Dec. 31, 2016
Dec. 31, 2015
Total assets
$800,000
$975,000
Total common stockholders' equity
405,000
578,000
Total stockholders' equity
504,000
702,000
December 31
FOR THE FISCAL YEARS ENDED
2016
2015
Interest expense, net of tax
$ 5,000
$ 4,700
Interest expense
6,100
5,800
Income tax expense
22,600
32,600
Net income
110,000
27,000
Common dividends
12,600
7,200
Net sales
2,667,600
1,971,000
Preferred dividends
9,000
14,400
196. Refer to the financial information for St. Petersburg Corporation.
REQUIRED:
(A) Calculate the return on assets ratio for St. Petersburg for 2016. What is the reason for the adjustment of
interest?
(B) Calculate the return on common stockholders' equity ratio for 2016 for St. Petersburg. What is the reason for
the adjustment of preferred dividends?
Chapter 13: Financial Statement Analysis
197. Refer to the financial information for St. Petersburg Corporation.
REQUIRED:
(A) Identify the two components of the return on assets ratio for St. Petersburg. Explain the change in the return
on assets ratio during 2016 as it relates to these components.
(B) During 2016, how much is St. Petersburg’s average cost of borrowed capital as compared to the cost of the
money provided by the preferred stockholders? Which is the more profitable? Explain.
198. Refer to the financial information for St. Petersburg Corporation.
REQUIRED:
During 2016, has St. Petersburg successfully employed favorable leverage based on the average cost of capital?
What action should the company take?
Chapter 13: Financial Statement Analysis
199. Refer to the financial information for St. Petersburg Corporation.
REQUIRED:
Calculate the earnings per share for St. Petersburg for 2016 and 2015 assuming an average of 100,000 common
shares were outstanding during 2016 and an average of 80,000 common shares were outstanding during 2015.
Explain the change as it probably relates to the market value of the stock.
200. Starlight Cruises reported net income of $2,880 million for the year ended December 31, 2016. Total
stockholders’ equity for the year ended December 31, 2016 was $20,100 million and on December 31, 2015, it
was $20,900 million. No preferred stock was outstanding in either year.
REQUIRED:
1. Compute Starlight’s return on common stockholders’ equity for the year ended December 31, 2016.
2. What other ratio would you want to compute to decide whether Starlight is successfully employing
leverage? Explain your answer.
Chapter 13: Financial Statement Analysis
201. The following selected data are taken from the financial statements of Ulysses Company:
Sales revenue
$ 650,000
Cost of goods sold
300,000
Gross profit
$ 350,000
Selling and administrative expense
150,000
Operating income
$ 200,000
Interest expense
75,000
Income before tax
$ 125,000
Income tax expense (40%)
50,000
Net income
$ 75,000
Accounts payable
$ 55,000
Accrued liabilities
70,000
Income taxes payable
10,000
Interest payable
25,000
Short-term loans payable
200,000
Total current liabilities
$ 360,000
Long-term bonds payable
$ 600,000
Preferred stock, 10%, $100 par
$ 250,000
Common stock, no par
600,000
Retained earnings
550,000
Total stockholders’ equity
$1,400,000
Total liabilities and stockholders’ equity
$2,360,000
REQUIRED:
1. Compute the following ratios for Ulysses Company:
a. Return on sales
b. Asset turnover (Assume that total assets at the beginning of the year were $1,600,000.) Round final answers to 3
decimals.
c. Return on assets
d. Return on common stockholders’ equity (Assume that the only changes in stockholders’ equity during the year
were from the net income for the year and dividends on the preferred stock.)
2. Comment on Ulysses’ use of leverage. Has it successfully employed leverage? Explain.
Chapter 13: Financial Statement Analysis
Chapter 13: Financial Statement Analysis
202. The Stockholders’ Equity section of the balance sheet for Grant Corp. at the end of 2016 appears as follows:
7%, $100 par, cumulative preferred stock, 200,000 shares
authorized, 55,000 shares issued and outstanding $ 5,500,000
Additional paid-in capital on preferred 2,500,000
Common stock, $5 par, 500,000 shares authorized,
420,000 shares issued and outstanding 2,100,000
Additional paid-in capital on common 18,000,000
Retained earnings 32,500,000
Total stockholders’ equity $60,600,000
Net income for the year was $1,250,000. Dividends were declared and paid on the preferred shares during the
year, and a quarterly dividend of $0.30 per share was declared and paid each quarter on the common shares. The
closing market price for the common shares on December 31, 2016, was $24.72 per share.
REQUIRED:
1. Compute the following ratios for the common stock:
a. Earnings per share
b. Price/earnings ratio
c. Dividend payout ratio
d. Dividend yield ratio
2. Assume that you are an investment adviser. What other information would you want to have before advising a
client regarding the purchase of Grant stock?
Chapter 13: Financial Statement Analysis
203. The Stockholders’ Equity section of the balance sheet for Brompton Construction Company at the end of 2016 is as
follows:
10%, $10 par, cumulative preferred stock, 500,000 shares authorized, 200,000 shares
issued and outstanding
$ 2,000,000
Additional paid-in capital on preferred
7,500,000
Common stock, $1 par, 2,500,000 shares authorized, 2,000,000 shares issued and outstanding
2,000,000
Additional paid-in capital on common
21,000,000
Retained earnings
25,500,000
Total stockholders’ equity
$58,000,000
The lower portion of the 2016 income statement indicates the following:
Net income before tax
$ 9,900,000
Income tax expense (40%)
(3,960,000)
Income before extraordinary items
$ 5,940,000
Extraordinary loss from hurricane
$(6,000,000)
Less related tax effect (40%)
2,400,000
(3,600,000)
Net income
$ 2,340,000
Assume that the number of shares outstanding did not change during the year.
REQUIRED:
1. Compute earnings per share before extraordinary items.
2. Compute earnings per share after the extraordinary loss.
3. Which of the two EPS ratios is more useful to management? Explain your answer. Would your answer be
different if the ratios were to be used by an outsider, like a potential stockholder? Why or why not?
Chapter 13: Financial Statement Analysis
204. The Stockholders’ Equity section of the balance sheet for Calhoun Industries at the end of 2016 is as follows:
12.5%, $10 par, cumulative preferred stock, 500,000 shares authorized, 200,000 shares
issued and outstanding
$ 2,000,000
Additional paid-in capital on preferred
7,500,000
Common stock, $1 par, 2,500,000 shares authorized, 2,000,000 shares issued and outstanding
2,000,000
Additional paid-in capital on common
21,000,000
Retained earnings
25,500,000
Total stockholders’ equity
$58,000,000
The lower portion of the 2016 income statement indicates the following:
Net income before tax
$12,500,000
Income tax expense (30%)
(3,750,000)
Income before extraordinary items
$ 8,750,000
Extraordinary loss from tornado
$(5,000,000)
Less related tax effect (30%)
1,500,000
(3,500,000)
Net income
$ 5,250,000
Assume that the number of shares outstanding did not change during the year.
REQUIRED:
1. Compute earnings per share before extraordinary items.
2. Compute earnings per share after the extraordinary loss.
3. Which of the two EPS ratios is more useful to management? Explain your answer. Would your answer be
different if the ratios were to be used by an outsider, like a potential stockholder? Why or why not?
Chapter 13: Financial Statement Analysis
205. Some ratios are more useful for management, whereas others are better suited to the needs of outsiders, such as
stockholders and bankers. What is an example of a ratio that is primarily suited to management use and why?
What ratio is more suited to use by outsiders and why?
206. Your supervisor asks you to compare the company’s results for the year, as measured by various ratios, with one
of the published surveys that arranges information by industry classification. What difficulties might you
encounter when making comparisons using industry standards?
207. For what purpose is horizontal analysis used by management? Is this information provided to stockholders? If so,
in what form? If not, why?
208. The Starch Company experiences a 20% increase in sales over the previous year. However, gross profit actually
decreased by 10% from the previous year. What are some of the possible causes for an increase in sales but a
decline in gross profit?
209. Why is liquidity important for businesses?
210. What situations could cause a decrease in the current ratio, but an increase in the acid-test ratio? If this happens, is
management to be commended or is a problem evident? Explain
Chapter 13: Financial Statement Analysis
211. What is meant by the concept of "activity" as it relates to turnover ratios? Explain.
212. What makes the analysis of a service company different from the analysis of a merchandising company?
213. Service-oriented companies have different needs than product-oriented companies when analyzing
financial statements.
REQUIRED: Why is this true? Give an example of a financial ratio that is meaningless to a service business.
214. Would a banker be more interested in the liquidity or the profitability of a company? Explain.
215. What is meant by a company's "long-term financial health"? Which side of the balance sheet is more
informative for this issue? Explain.
216. What is the best way to assess solvency? Explain.
217. Ware Company has a return on assets of 15% and a return on common stockholders’ equity of 10%. John Ware, the
president of the company, has asked you to explain the reason for this difference. What causes the difference? How
is the concept of financial leverage involved?
Chapter 13: Financial Statement Analysis
218. What importance is placed on a company's stock price in the ratio analysis of a company? Explain.
219. What do profitability ratios measure? Explain.
220. Ranier Parts Company has a return on assets of 12% and a return on common stockholders' equity of 15%. What
causes the difference in the two returns?
221. Discuss the common reporting characteristics of discontinued operations and extraordinary items in the
financial statements.
from them are deducted from the items themselves.
Select the term below most properly satisfies each statement.
a. total assets
b. horizontal analysis
c. vertical analysis
d. net sales
222. A comparison of financial statement items within a single period
223. A comparison of financial statement items over a period of time
224. When using vertical analysis, accounts on the balance sheet should be stated as a percentage of this amount
Chapter 13: Financial Statement Analysis
225. When using vertical analysis, accounts on the income statement should be stated as a percentage of this amount
For each of the following sentences, select the phrase or group of words that best completes the statement.
a. Earnings per share
b. Dividend yield ratio
c. Dividend payout ratio
d. Leverage
e. Return on assets ratio
f. Return on common stockholders' equity ratio
g. Debt-to-equity ratio
h. Price/earnings ratio
226. The percentage of earnings paid out as dividends.
227. A measure of a company's success in earning a return for all providers of capital.
228. The relationship between dividends and the market price of a company's stock.
229. The measure of a company's success in earning a return for the common stockholders.
230. A company's bottom line stated on a per-share basis.
Indicate the type of each ratio listed below.
a. liquidity ratio
b. solvency ratio
c. profitability ratio
231. Current ratio
232. Debt-to-equity ratio
233. Earnings per share
234. Gross profit ratio
Chapter 13: Financial Statement Analysis
235. Dividend payout ratio
236. Inventory turnover ratio
237. Times interest earned ratio
238. Return on assets ratio
239. Profit margin ratio
240. Price/earnings ratio
For each ratio listed, select whether an increase or decrease in the ratio is generally considered to be better.
a. increase
b. decrease
241. Current ratio
242. Dividend yield ratio
243. Asset turnover ratio
244. Number of days’ sales in receivables
Chapter 13: Financial Statement Analysis
245. Times interest earned ratio
Select the ratio that each statement below most properly satisfies.
a. Dividend yield ratio
b. Cash flow from operations to capital expenditures ratio
c. Debt service coverage ratio
d. Return on common stockholders’ equity ratio
e. Times interest earned ratio
f. Asset turnover ratio
g. Debt-to-equity ratio
h. Dividend payout ratio
i. Price/earnings ratio
246. A measure of a company's success in earning a return for the common stockholders
247. The relationship between net sales and total assets
248. The relationship between dividends and the market price of a company's stock
249. An income statement measure of the ability of a company to make its interest payments
250. A measure of the ability of a company to finance long-term asset acquisitions from cash from operations
251. The selection of a particular inventory valuation method has a significant effect on certain key ratios.
a. True
b. False
252. Various organizations publish summaries of selected ratios organized by industry for a sample of U.S. companies.
a. True
b. False
253. The definition of a conglomerate is a company that operates in one industry and uses different inventory valuation
techniques.
a. True
b. False
Chapter 13: Financial Statement Analysis
2016
2015
254. Since inflation is an important consideration in analyzing financial statements, the FASB requires the submission of
all financial statements in an inflation-adjusted format to the SEC.
a. True
b. False
255. Kingston Company’s accounts receivable turned over nine times during the year. This translates into strict
adherence of the company's net/30 credit terms by Kingston's customers.
a. True
b. False
256. Use the current asset section of the balance sheets of the Breeze Company as of June 30, 2016 and 2015 presented
below to prepare a horizontal analysis.
2016
2015
Cash and cash equivalents
$ 16,000
$ 20,000
Accounts receivable, net
40,000
30,000
Inventory
30,000
50,000
Prepaid Rent
18,000
12,000
Total current assets
$ 104,000
$ 112,000
Land
$ 150,000
$ 150,000
Plant and equipment
800,000
600,000
Accumulated Depreciation
(130,000)
(60,000)
Total long-term assets
$ 820,000
$ 690,000
Total assets
$ 924,000
$ 802,000
REQUIRED:
1. In the spaces provided below, complete a horizontal analysis of the current asset section of Breeze Company's
balance sheets for 2016 and 2015. Your answers should be rounded to the nearest percentage. Show decreases in
parentheses.
2. Identify the three items on the current asset section that experienced the largest change from one year to the
next. For each of these items, explain where you would look to find additional information about the change.
$ Change % Change
Chapter 13: Financial Statement Analysis
257. What would be at least three reasons for a decrease in inventory turnover? Explain.
258. Lockhart Corp.’s December 31, 2014, balance sheet reported current assets of $120,000 and current liabilities
of $100,000. The current ratio increased by 25% one year later, on December 31, 2015. Current liabilities on
this date were $140,000. Determine current assets on December 31, 2015.
259. Shoreville Corp.’s December 31, 2014, balance sheet reported current assets of $260,000 and current
liabilities of $200,000. The current ratio increased by 20% one year later, on December 31, 2015. Current
liabilities on this date were $280,000. Determine current assets on December 31, 2015.
Chapter 13: Financial Statement Analysis
260. Since almost all debts require payment with quick assets, the quick ratio is more useful than the cash flow
from operations to current liabilities ratio.
a. True
b. False
