Type
Solution Manual
Book Title
Financial Accounting Fundamentals 5th Edition
ISBN 13
978-0078025754

978-0078025754 Chapter 13 Solution Manual Part 1

March 26, 2020
Chapter 13
Analysis of Financial Statements
QUESTIONS
1. Financial reporting includes the entire process of preparing and issuing financial
2. With comparative statements, financial statement items for two or more successive
accounting periods are placed side by side on a single statement, with the change in
3. Total assets (or equivalently, the total of liabilities plus equity) are assigned a value of
4. The nature of a company's business, the composition of its current assets, and the
5. A 2-to-1 current ratio may not be adequate if the company's current assets consist of
6. Adequate working capital enables a company to carry sufficient inventories, meet
7. When evaluated in light of a company's credit terms, the number of days' sales
8. A high accounts receivable turnover implies that accounts are collected quickly,
9. Users are interested in the capital structure of a company, as measured by debt and
equity ratios, for at least two reasons. First, as a company includes more debt in its
10. Inventory turnover reflects on the efficiency of inventory management. That is, a
high inventory turnover means that a given sales volume can be supported with a
11. Since management is responsible for a company's performance, all ratios that are
useful in evaluating a company are of some usefulness in assessing management
12. Almost all companies have some liabilities. Since total assets equals total liabilities
plus equity, total assets are almost always higher than common stockholders'
13. This gain is considered to be unusual but not infrequent. It would be included in the
14. Profit margin: Net Income / Sales ($ in millions)
15. Equity ratio: Total Equity / Total Assets ($ in millions)
16. Debt ratio: Total Liabilities / Total Assets ( in millions)
17. Return on total assets: Net Income / Average Total Assets ( in millions)
2013: 30,474,764 / [(214,075,018 + 181,071,570)/2] = 15.4%
QUICK STUDY
Quick Study 13-1 (5 minutes)
is a. Income statement
is b. Balance sheet
Quick Study 13-2 (10 minutes)
1. (b) competitor
Quick Study 13-3 (15 minutes)
2015
2014
Dollar
Change
Percent
Change
Quick Study 13-4 (5 minutes)
Trend percents
Quick Study 13-5 (5 minutes)
Common-size percents
Quick Study 13-6 (10 minutes)
Ratio
2015
Change
1. Profit Margin Ratio ................................
9%
Favorable
Quick-Study 13-7 (30 minutes)
Parker has a greater amount of working capital. This by itself does not
indicate whether the company is more capable of meeting its current
obligations. However, support is provided by the current ratio and acid-
test ratio, which show Parker is in a more liquid position than Morgan. This
Quick Study 13-8A (5 minutes)
This material error should be reported on the statement of retained
Quick Study 13-9 (10 minutes)
a. Although ratio analysis can eliminate currency differences, it cannot
eliminate differences in the application of GAAP under different
Additional examples that are arguably even more problematic: (1)
Consider two companies, one reporting under U.S. GAAP and the other
under IFRS, which we are reviewing via the Operating Cash Flow /
b. A key advantage to using horizontal and vertical analyses when
examining companies reporting under different currencies is that the
EXERCISES
Exercise 13-1 (10 minutes)
1.
B
6.
A
Exercise 13-2 (5 minutes)
1. Profit Margin (f); Total Asset Turnover (e) --in either order
Exercise 13-3 (20 minutes)
2015
2014
2013
2012
2011
Sales ........................................
189
181
168
156
100
Analysis: The trend in sales is positive. While this is better than no growth,
one cannot definitively say whether the sales trend is favorable without
Exercise 13-4 (25 minutes)
2015
2014
Sales ....................................................
100.0%
100.0%
Cost of goods sold ............................
75.7
46.5
Exercise 13-5 (25 minutes)
Answer: Net income decreased.
Supporting calculations: When the sum of each year's common-size cost of
goods sold and total expenses is subtracted from the common-size sales
Exercise 13-6 (20 minutes)
Simon Company
Common-Size Comparative Balance Sheets
December 31, 2013-2015
At December 31
2015
2014*
2013
Assets
Cash ...................................................................
6.1%
8.0%
10.0%
Accounts receivable, net ..................................
17.1
14.0
13.3
Analysis: Several observations can be made.
(1) Cash as a percent of assets has declinedthis is favorable provided sufficient
cash is available for operations.
Exercise 13-7 (25 minutes)
1. Current ratio
2. Acid-test ratio
2015: = 0.93 to 1
Analysis and Interpretation: Simon's short-term liquidity position has
deteriorated over this three-year period. Both the current and acid-test
$31,800 + $89,500
$129,900
Exercise 13-8 (25 minutes)
1. Days' sales uncollected
2. Accounts receivable turnover
3. Inventory turnover
4. Days’ sales in inventory
Exercise 13-9 (25 minutes)
1. Debt and equity ratios
2015
2014
Total liabilities and debt ratio
Total equity and equity ratio
2. Debt-to-equity ratio
3. Times interest earned
Analysis and Interpretation: Simon added debt to its capital structure
Exercise 13-10 (30 minutes)
1. Profit margin
2. Total asset turnover
3. Return on total assets
Analysis and Interpretation: Simon's operating efficiency appears to be
declining because the return on total assets decreased from 7.1% to 6.4%.
Exercise 13-11 (20 minutes)
1. Return on common stockholders' equity
2. Price-earnings ratio, December 31
3. Dividend yield
Exercise 13-12 (30 minutes)
COMPARATIVE ANALYSIS REPORT
Clay's profit margins are higher than Roak's. However, Roak has
significantly higher total asset turnover ratios. As a result, Roak generates
a substantially higher return on total assets.
The trends of both companies include evidence of growth in sales, total
asset turnover, and return on total assets. However, Clay's rates of
improvement are better than Roak's. These differences may result from the
Exercise 13-13A (10 minutes)
1. A Income (loss) from continuing operations
2. C Extraordinary gain (loss)

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