CHAPTER 14
Financial Statement Analysis
ASSIGNMENT CLASSIFICATION TABLE
Learning Objectives
Questions
Brief
Exercises
Do It!
Exercises
1. Discuss the need for comparative
analysis.
1, 2, 3, 5
1
2. Identify the tools of financial
statement analysis.
2, 3, 5, 6
2
3. Explain and apply horizontal analysis.
3, 4, 25
2, 3, 5, 6, 7
1, 4
1, 3, 4
4. Describe and apply vertical analysis.
3, 4, 25
2, 4, 8
4
2, 3, 4
5. Identify and compute ratios used
in analyzing a firm’s liquidity,
profitability, and solvency.
5, 6, 7, 8, 9,
10, 11,12, 13,
14, 15, 16,
17, 18, 19
2, 9, 10, 11,
12, 13
2, 4
5, 6, 7, 8,
9, 10, 11
6. Understand the concept of earning
power, and how irregular items are
presented.
20, 21, 22, 23
14, 15
3, 4
12, 13
7. Understand the concept of quality
of earnings.
24
4
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1
Prepare vertical analysis and comment on profitability.
Simple
20–30
2
Compute ratios from balance sheet and income statement.
Simple
20–30
3
Perform ratio analysis, and evaluate financial position
and operating results.
Simple
20–30
4
Compute ratios, and comment on overall liquidity and
profitability.
Moderate
30–40
5
Compute selected ratios, and compare liquidity, profitability,
and solvency for two companies.
Moderate
50–60
6
Compute numerous ratios.
Simple
30–40
7
Compute missing information given a set of ratios.
Complex
30–40
8
Prepare income statement with discontinued operations
and extraordinary loss.
Moderate
30–40
9
Prepare income statement with nontypical items.
Moderate
30–40
WEYGANDT FINANCIAL ACCOUNTING 9E
CHAPTER 14
FINANCIAL STATEMENT ANALYSIS
Number
LO
BT
Difficulty
Time (min.)
BE1
1
C
Moderate
10–12
BE2
2–5
K, AP
Simple
8–10
BE3
3
AP
Simple
6–8
BE4
4
AP
Simple
6–8
BE5
3
AP
Simple
4–6
BE6
3
AP
Simple
4–6
BE7
3
AP
Simple
4–6
BE8
4
AP
Simple
5–7
BE9
5
AP
Simple
4–6
BE10
5
AP
Simple
3–5
BE11
5
AN
Simple
6–8
BE12
5
AN
Moderate
6–8
BE13
5
AN
Moderate
6–8
BE14
6
AP
Simple
4–6
BE15
6
AP
Simple
3–5
DI1
3
AP
Simple
6–8
DI2
5
AP
Simple
10–12
DI3
6
AP
Simple
6–8
DI4
3–7
C
Simple
3–5
EX1
3
AP
Simple
10–12
EX2
4
AP
Simple
10–12
EX3
3, 4
AP
Simple
12–15
EX4
3, 4
AP
Simple
10–12
EX5
5
AN
Simple
8–10
EX6
5
AP
Simple
8–10
EX7
5
AP
Simple
6–8
EX8
5
AP
Simple
6–8
EX9
5
AP
Simple
6–8
EX10
5
AP
Moderate
8–10
FINANCIAL STATEMENT ANALYSIS (Continued)
Number
LO
BT
Difficulty
Time (min.)
EX11
5
AP
Simple
10–12
EX12
6
AP
Moderate
8–10
EX13
6
AP
Simple
6–8
P1
4, 5
AN
Simple
20–30
P2
5
AP, AN
Simple
20–30
P3
5
AP, AN
Simple
20–30
P4
5
AN
Moderate
30–40
P5
5
AP
Moderate
50–60
P6
5
AP
Simple
30–40
P7
5
AN
Complex
30–40
P8
6
AP
Moderate
30–40
P9
6
AP
Moderate
30–40
BYP1
3, 5
AN, E
Moderate
20–25
BYP2
3, 5
AN, E
Simple
15–20
BYP3
3, 5
AN, E
Simple
15–20
BYP4
—
AN
Simple
15–20
BYP5
5
C, E
Moderate
15–20
BYP6
1, 7
C
Simple
15–20
BYP7
5
E
Simple
10–15
BYP8
—
E
Simple
15–20
BYP9
6
AP
Simple
5–10
BLOOM’S TAXONOMY TABLE
Copyright © 2014 John Wiley & Sons, Inc. Weygandt, Financial Accounting, 9/e, Solutions Manual (For Instructor Use Only) 14-2
Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End–of-Chapter Exercises and Problems
Learning Objective
Knowledge
Comprehension
Application
Analysis
Synthesis
Evaluation
1. Discuss the need for comparative
analysis.
Q14-1
Q14-2
Q14-3
Q14-5
BE14-1
2. Identify the tools of financial
statement analysis.
Q14-6
BE14-2
Q14-2
Q14-3
Q14-5
BE14-2
3. Explain and apply horizontal
analysis.
BE14-2
Q14-25
Q14-3
DI14-4
Q14-4
BE14-2
BE14-3
BE14-5
BE14-6
BE14-7
DI14-1
E14-1
E14-3
E14-4
4. Describe and apply vertical
analysis.
BE14-2
Q14-25
Q14-3
DI14-4
Q14-4
BE14-2
BE14-4
BE14-8
E14-2
E14-3
E14-4
P14-1
5. Identify and compute ratios
used in analyzing a firm’s
liquidity, profitability, and
solvency.
Q14-6
Q14-8
BE14-2
Q14-5
Q14-7
Q14-9
Q14-10
Q14-11
Q14-12
Q14-13
Q14-14
Q14-15
Q14-16
Q14-17
Q14-18
DI14-4
Q14-19
BE14-2
BE14-9
BE14-10
DI14-2
E14-6
E14-7
E14-8
E14-9
E14-10
P14-2
P14-3
P14-5
P14-6
BE14-11
BE14-12
BE14-13
E14-5
E14-11
P14-1
P14-2
P14-3
P14-4
P14-7
6. Understand the concept of
earning power, and how
irregular items are presented.
Q14-20
Q14-21
Q14-22
Q14-23
DI14-4
BE14-14
BE14-15
DI14-3
E14-12
E14-13
P14-8
P14-9
7. Understand the concept of
quality of earnings.
Q14-24
DI14-4
Broadening Your Perspective
Decision Making
Across the
Organization
Communication
FASB Codification
Financial Reporting
Comp. Analysis
Real-World Focus
Financial Reporting
Comp. Analysis
Decision Making
Across the
Organization
Ethics Case
All About You
ANSWERS TO QUESTIONS
1. (a) Jose is not correct. There are three characteristics: liquidity, profitability, and solvency.
(b) The three parties are not primarily interested in the same characteristics of a company. Short-term
2. (a) Comparison of financial information can be made on an intracompany basis, an intercompany
basis, and an industry average basis (or norms).
3. Horizontal analysis (also called trend analysis) measures the dollar and percentage increase or
decrease of an item over a period of time. In this approach, the amount of the item on one statement
5. A ratio expresses the mathematical relationship between one quantity and another. The relationship
is expressed in terms of either a percentage (200%), a rate (2 times), or a simple proportion (2:1).
6. (a) Liquidity ratios: Current ratio, acid-test ratio, accounts receivable turnover, and inventory
turnover.
(b) Solvency ratios: Debt to assets and times interest earned.
7. Julie is correct. A single ratio by itself may not be very meaningful and is best interpreted by
comparison with: (1) past ratios of the same company, (2) ratios of other companies, or (3) industry
8. (a) Liquidity ratios measure the short-term ability of the enterprise to pay its maturing obligations
Questions Chapter 14 (Continued)
9. The current ratio relates current assets to current liabilities. The acid-test ratio relates cash, short–term
information about short-term liquidity and is an important complement to the current ratio.
10. Hizar Company does not necessarily have a problem. The accounts receivable turnover can be
11. (a) Asset turnover.
(b) Inventory turnover.
12. The price earnings (P/E) ratio is a reflection of investors’ assessments of a company’s future
earnings. In this question, investors favor Microsoft because it has the higher P/E ratio. The investors
feel that Microsoft will be able to generate even higher future earnings and so the investors are
13. The payout ratio is cash dividends divided by net income. In a growth company, the payout ratio is
often low because the company is reinvesting earnings in the business.
14. (a) The increase in profit margin is good news because it means that a greater percentage of net
sales is going towards income.
(b) The decrease in inventory turnover signals bad news because it is taking the company longer
to sell the inventory and consequently there is a greater chance of inventory obsolescence.
(c) An increase in the current ratio signals good news because the company improved its ability
to meet maturing short-term obligations.
Questions Chapter 14 (Continued)
15.
Return on assets
(7.6%)
=
AssetsAverage
Income Net
Return on common stockholders’ equity
(12.8%)
=
Equity rs‘Stockholde Common Average
Dividends Preferred – Income Net
The difference between the two rates can be explained by looking at the denominator value and
by remembering the basic accounting equation, A = L + SE. The asset value will clearly be the larger
of the two denominator values; therefore, it will also give the smaller return.
16. (a) The times interest earned, which is an indication of the company’s ability to meet interest
payments, and the debt to assets ratio, which indicates the company’s ability to withstand losses
without impairing the interests of creditors.
17. Earnings per share means earnings per share of common stock. Preferred dividends are
subtracted from net income in computing EPS in order to obtain income available to common
stockholders.
18. (a) Trading on the equity means that the company has borrowed money at a lower rate of interest
than it is able to earn by using the borrowed money. Simply stated, it is using money supplied
19.
Net income – Preferred dividends
Weighted – average common shares outstanding
= Earnings per share
$160,000 – $40,000
50,000
= $2.40
EPS of $2.40 is high relative to what? Is it high relative to last year’s EPS? The president may be
20. Discontinued operations refers to the disposal of a significant component of the business such as
21. EPS on income before extraordinary items usually is more relevant to an investment decision
than EPS on net income. Income before extraordinary items represents the results of continuing
Questions Chapter 14 (Continued)
22. Extraordinary items are events and transactions that are unusual in nature and infrequent in occurrence.
Therefore, an extraordinary item is a one–time item which is not typical of the company’s operations.
23. Items (a), (d), and (g) are extraordinary items.
24. (1) Use of alternative accounting methods. Variations among companies in the application of
generally accepted accounting principles may hamper comparability.
(2) Use of pro forma income measures that do not follow GAAP. Pro forma income is calculated
(3) Improper revenue and expense recognition. Many high–profile cases of inappropriate accounting
involve recording items in the wrong period.
25. The following provide examples of horizontal and vertical analysis:
Horizontal Analysis: Financial Highlights; Results of operations-consolidated reviews; Result of
GAAP information.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 14-1
Dear Uncle Sammy,
It was so good to hear from you! I hope you and Aunt Jennie are still enjoying
your new house.
You asked some interesting questions. They relate very well to the material
that we are studying now in my financial accounting class. You said you
heard that different users of financial statements are interested in different
I hope this answers your questions. If it does not, or you have more questions,
please write me again or call. We could even meet for lunch sometime; it
would be great to see you!
Love,
Your niece (or nephew)