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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,
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
Short-term investments .............
$374,634
$234,000
$140,634
60.1%
Accounts receivable ...................
97,364
101,000
(3,636)
-3.6%
Notes payable..............................
0
88,000
88,000
(not calculable)
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
EXERCISES
Exercise 13-1 (10 minutes)
1.
B
6.
A
2.
C
7.
B
3.
D
8.
B
4.
C
9.
C
5.
A
10.
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
Cost of goods sold ................
191
182
172
159
100
Accounts receivable ..............
201
192
182
169
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 13-6 (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
Merchandise inventory .....................................
21.5
18.5
14.3
Prepaid expenses ..............................................
2.0
2.1
1.3
Plant assets, net ...............................................
53.3
57.3
61.1
Total assets .......................................................
100.0%
100.0%
100.0%
Liabilities and Equity
Accounts payable .............................................
24.8%
16.9%
13.6%
Long-term notes payable secured by
mortgages on plant assets ..........................
18.8
22.9
22.1
Common stock, $10 par value .........................
31.3
36.7
43.3
Retained earnings ............................................
25.1
23.5
21.0
Total liabilities and equity ................................
100.0%
100.0%
100.0%
* Column does not equal 100.0 due to rounding.
Analysis: Several observations can be made.
(1) Cash as a percent of assets has declined—this 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 13-10 (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
($268,250 + $242,750)/2
