Chapter 13 – Analyzing and Interpreting Financial Statements
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Solutions Manual, Chapter 13
1
Chapter 13
Analyzing and Interpreting
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,
thereby providing cash that can be used to meet obligations. A high turnover also
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)
Quick Study 13-5 (10 minutes)
1. competitor
2. guidelines
3. intracompany
4. industry
Quick Study 13-6 (10 minutes)
Ratio
2013
Change
1. Profit Margin Ratio …………………………..
9%
Favorable
2. Debt Ratio …………………………………..…..
47%
Unfavorable
3. Gross Margin Ratio ……………………..…..
34%
Unfavorable
4. Acid-test Ratio…………………………….…..
1.00
Unfavorable
5. Accounts Receivable Turnover ………..
5.5
Unfavorable
6. Basic Earnings Per Share ………………..
$1.25
Favorable
7. Inventory Turnover ……………………..…..
3.6
Favorable
8. Dividend Yield …………………………….…..
2.0%
Favorable
Chapter 13 – Analyzing and Interpreting Financial Statements
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
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
accounting systems. For example, if we compare the gross margin
percent for a European company applying FIFO under IFRS versus an
(that is, not be reversed). (2) Consider the same type of comparison as
we look at the Return on Total Assets ratio. Again, we can potentially
see differences in asset values through IFRS’s more aggressive
methods. These methods include the mark-up associated with reversals
of previous write-downs. Also some long-term asset revaluation
Exercise 13-4 (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 13-5 (25 minutes)
2013
2012
Sales …………………………………………….
100.0%
100.0%
Cost of goods sold ……………………….
75.7
46.5
Gross profit ………………………………….
24.3
53.5
Operating expenses……………………...
17.3
35.0
Net income …………………………………...
7.0%
18.5%
Exercise 13-7 (20 minutes)
Simon Company
Common-Size Comparative Balance Sheets
December 31, 2012-2014
At December 31
2014
2013*
2012
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
(2) Accounts receivable have increased as a percent of assets—this may be
(3) Plant assets have declined as a percent of assets—this is favorable if the
(4) Accounts payable have markedly increased as a percent of assets—this could
(5) Common stock has markedly declined—this could reflect a stock buyback