Test Bank – Chapter 5 – Using Financial Statement Information 5-35
14. Use the information that follows taken from Tyler Company’s financial statements for the
years ending December 31, 2017 and 2016.
Balance Sheet Information
2017
2016
Assets
Cash
$ 90
$ 50
Accounts receivable
60
80
Inventory
40
80
Land, building, and equipment
230
270
Total Assets
$420
$480
Liabilities and Shareholders’ Equity
Accounts payable
$ 5
$ 85
Common stock
260
260
Retained earnings
155
135
Total Liabilities & Shareholders’ Equity
$420
$480
Income Statement Information
Sale revenue
$850
Cost of goods sold
600
Gross profit
$250
Operating expenses
230
Net income
$ 20
The industry in which Tyler is a member has an average accounts receivable turnover of
10 times. How does Tyler compare in 2017? Comment on what information is provided
with this calculation and how credit managers might use it to make decisions. Assume all
sales were credit sales.
Solution:
5-36 Test Bank – Chapter 5 – Using Financial Statement Information
15. Use the information that follows taken from Tyler Company’s financial statements for the
years ending December 31, 2017 and 2016.
Balance Sheet Information
2017
2016
Assets
Cash
$ 90
$ 50
Accounts receivable
60
80
Inventory
40
80
Land, building, and equipment
230
270
Total Assets
$420
$480
Liabilities and Shareholders’ Equity
Accounts payable
$ 5
$ 85
Common stock
260
260
Retained earnings
155
135
Total Liabilities & Shareholders’ Equity
$420
$480
Income Statement Information
Sale revenue
$850
Cost of goods sold
600
Gross profit
$250
Operating expenses
230
Net income
$ 20
If the industry in which Tyler is a member has an average return on assets of 11%,
determine if in 2017, Tyler is more or less profitable than the average firm in its industry.
Assume Tyler has no interest expense.
Solution:
Test Bank – Chapter 5 – Using Financial Statement Information 5-37
16. Use the information that follows taken from Tyler Company’s financial statements for the
years ending December 31, 2017 and 2016.
Balance Sheet Information
2017
2016
Assets
Cash
$ 90
$ 50
Accounts receivable
60
80
Inventory
40
80
Land, building, and equipment
230
270
Total Assets
$420
$480
Liabilities and Shareholders’ Equity
Accounts payable
$ 5
$ 85
Common stock
260
260
Retained earnings
155
135
Total Liabilities & Shareholders’ Equity
$420
$480
Income Statement Information
Sale revenue
$850
Cost of goods sold
600
Gross profit
$250
Operating expenses
230
Net income
$ 20
The industry in which Tyler is a member has an average return on equity of 10%. For
2017, determine how Tyler compares.
Solution:
5-38 Test Bank – Chapter 5 – Using Financial Statement Information
17. Use the information that follows taken from Tyler Company’s financial statements for the
years ending December 31, 2017 and 2016.
Balance Sheet Information
2017
2016
Assets
Cash
$ 90
$ 50
Accounts receivable
60
80
Inventory
40
80
Land, building, and equipment
230
270
Total Assets
$420
$480
Liabilities and Shareholders’ Equity
Accounts payable
$ 5
$ 85
Common stock
260
260
Retained earnings
155
135
Total Liabilities & Shareholders’ Equity
$420
$480
Income Statement Information
Sale revenue
$850
Cost of goods sold
600
Gross profit
$250
Operating expenses
230
Net income
$ 20
The industry in which Tyler operates has an average current ratio of 2.1 on December
31, 2017. Comment on Tyler’s solvency compared to the industry average as measured
by its current ratio.
Solution:
Test Bank – Chapter 5 – Using Financial Statement Information 5-39
18. Use the information that follows taken from Tyler Company’s financial statements for the
years ending December 31, 2017 and 2016.
Balance Sheet Information
2017
2016
Assets
Cash
$ 90
$ 50
Accounts receivable
60
80
Inventory
40
80
Land, building, and equipment
230
270
Total Assets
$420
$480
Liabilities and Shareholders’ Equity
Accounts payable
$ 5
$ 85
Common stock
260
260
Retained earnings
155
135
Total Liabilities & Shareholders’ Equity
$420
$480
Income Statement Information
Sale revenue
$850
Cost of goods sold
600
Gross profit
$250
Operating expenses
230
Net income
$ 20
The industry in which Tyler is a member has an average debt/equity ratio of 0.98.
Determine if, as measured by Tyler’s debt/equity ratio on December 31, 2017, Tyler is
taking full advantage of investing borrowed capital in its operations relative to that of the
average firm in its industry.
5-40 Test Bank – Chapter 5 – Using Financial Statement Information
19. Use the information that follows taken from Tyler Company’s financial statements for the
years ending December 31, 2017 and 2016.
Balance Sheet Information
2017
2016
Assets
Cash
$ 90
$ 50
Accounts receivable
60
80
Inventory
40
80
Land, building, and equipment
230
270
Total Assets
$420
$480
Liabilities and Shareholders’ Equity
Accounts payable
$ 5
$ 85
Common stock
260
260
Retained earnings
155
135
Total Liabilities & Shareholders’ Equity
$420
$480
Income Statement Information
Sale revenue
$850
Cost of goods sold
600
Gross profit
$250
Operating expenses
230
Net income
$ 20
Using the current and quick ratios, indicate whether Tyler’s solvency position improved
or deteriorated during 2017.
20. Monroe Company has total assets, liabilities, and shareholders’ equity of $27,000,
$20,000, and $7,000, respectively. Assume no material change occurred during the year
to totals on the balance sheet. What amount of long-term debt must Monroe retire by
issuing new shares of common stock issued in order to decrease its debt/equity ratio to
1.0?
21. Harrison Company has common stock of $50,000 and retained earnings of $40,000 at
yearend. During the year, 10,000 shares of stock were outstanding. Net income was
reported as $6,000.
A. Calculate earnings per share.
B. How does earnings per share differ from most of the other ratios with respect to
financial statements?
22. Briefly describe a company with a current ratio of 0.35 and return on equity of 0.03.
5-42 Test Bank – Chapter 5 – Using Financial Statement Information
23. Taylor Company has the following financial data on January 1, 2017 and January 1,
2016.
1/1/17
Cash
$15,000
$27,000
Accounts receivable
23,000
11,000
Marketable securities
3,000
10,000
Inventory
16,000
35,000
Net plant and equipment
40,000
32,000
Current liabilities
$18,000
$27,000
Long-term debt
49,000
30,000
Shareholders’ equity
30,000
58,000
A. In terms of the quick and current ratio, has the short-term solvency position of Taylor
improved, remained the same, or declined?
B. If you were a potential short-term creditor to Taylor, would you be more willing to
extend credit on either January 1, 2016 or 2017? Explain.
24. Briefly describe a company with a quick ratio of 3.70 and return on equity of 0.06.
A. (in thousands)
1/01/17
1/01/16
Current ratio = Current assets / Current liabilities =
= ($15 + $23 + $3 + $16)/$18 =
= ($27 + $11 + $10 + $35)/$27 =
Quick ratio = Quick assets / Current liabilities =
= ($15 + $23 + $3)/$18 =
= ($27 + $11 + $10)/$27 =
Test Bank – Chapter 5 – Using Financial Statement Information 5-43
SHORT ESSAY QUESTIONS
1. Distinguish between backward-looking and forward-looking as it pertains to financial
statements.
2. What role do investment services, such as Moody’s and Standard & Poor’s, play in the
assessment of a business environment?
3. Comment on the following news headline: “Van Buren, Inc. Takes a Bath in Current
Year.”
5-44 Test Bank – Chapter 5 – Using Financial Statement Information
4. What must an analyst learn first when assessing a particular business environment?
5. Identify two forms of analyzing financial statements at a particular point in time. Which of
these forms is subject to great variation among different analysts?
6. Buchanan Company has the following financial data on December 31, 2017 and 2016:
12/31/16
12/31/17
Cash
$16,000
$21,000
Accounts receivable
12,000
4,000
Inventory
15,000
12,000
Net plant and equipment
5,000
3,000
Current liabilities
8,000
18,000
Common stock
5,000
5,000
Retained earnings
31,000
2,000
Buchanan ‘s 2017 income statement reported:
Revenue
$160,000
Cost of goods sold
150,000
Gross margin
$ 10,000
Depreciation expense
2,000
Net income
$ 8,000
Buchanan’s 2017 data from its statement of cash flows:
Cash flow from operations
$ 42,000
Cash flow from investing activities
0
Cash flow from financing activities, (all dividends paid)
(22,000)
Required: Using appropriate ratios, comment on the change in Buchanan’s solvency
position and assess the probable cause of the change from 2016 to 2017.
Test Bank – Chapter 5 – Using Financial Statement Information 5-45
7. Why are not all companies audited by certified public accountants?
8. Briefly explain how management may influence the quality of earnings of a company.
9. How might a company overstate performance? Why might this occur?
5-46 Test Bank – Chapter 5 – Using Financial Statement Information
10. How does off-balance-sheet financing make a company appear less risky?
11. Explain the concept of leverage.
12. In what ways might an investor use accounting information provided by a foreign
company differently from information provided by a domestic corporation?
Test Bank – Chapter 5 – Using Financial Statement Information 5-47
13. How does operating performance differ from financial flexibility?