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Chapter 12 - Financial Statement Analysis
Chapter 12
Financial Statement Analysis
REVIEW QUESTIONS
Question 12-1 (LO 12.1, 12.2)
The three types of comparisons commonly used in financial statement analysis are comparisons
Question 12-2 (LO 12.1, 12.2)
For vertical analysis, we express each item as a percentage of the same base amount, such as a
Question 12-3 (LO 12.1)
Question 12-4 (LO 12.1)
The company that has most of its equity balance in retained earnings is likely an older and more
Question 12-5 (LO 12.2)
Question 12-6 (LO 12.3)
We measure income statement accounts over a period of time (like a video), while we measure
Question 12-7 (LO 12.3)
Liquidity refers to a company’s ability to pay its current liabilities. The accounts used to
Question 12-8 (LO 12.3)
Question 12-9 (LO 12.3)
(a) Good news.
Question 12-10 (LO 12.3)
Question 12-11 (LO 12.4)
Question 12-12 (LO 12.4)
(a) Good news.
Question 12-13 (LO 12.4)
The return on assets and the return on equity differ due to financial leverage – the amount of debt
Question 12-14 (LO 12.5)
Question 12-15 (LO 12.6)
The trend in earnings per share is favorable. Companies report discontinued operations
Question 12-16 (LO 12.6)
Question 12-17 (LO 12.6)
A larger estimation of the allowance for uncollectible accounts, the write-down of overvalued
Question 12-18 (LO 12.6)
A lower estimation of the allowance for uncollectible accounts, waiting to report an inventory
Question 12-20 (LO 12.6)
All of the changes proposed near the end of the chapter improve the income statement and the
Chapter 12 - Financial Statement Analysis
BRIEF EXERCISES
Brief Exercise 12-1 (LO 12.1)
2018
2017
Amount
%
Amount
%
Cash
$ 420,000
7.0
$ 1,050,000
21.0
Brief Exercise 12-2 (LO 12.2)
Year
Increase (Decrease)
2018
2017
Amount
%
Cash
$ 420,000
$ 1,050,000
$ (630,000)
(60.0)
Brief Exercise 12-3 (LO 12.1)
Athletic World’s income before tax as a percentage of sales increased. Income before
Chapter 12 - Financial Statement Analysis
Brief Exercise 12-4 (LO 12.2)
Brief Exercise 12-5 (LO 12.2)
Brief Exercise 12-6 (LO 12.3)
Brief Exercise 12-7 (LO12.3)
Chapter 12 - Financial Statement Analysis
Brief Exercise 12-8 (LO12.3)
COGS must equal $980,000 to complete the inventory turnover ratio.
Inventory turnover ratio
COGS
$200,000
= 4.9 times
Brief Exercise 12-9 (LO12.3)
Current ratio before purchase of inventory
Chapter 12 - Financial Statement Analysis
Brief Exercise 12-10 (LO12.4)
Brief Exercise 12-11 (LO12.4)
Return on assets
$130,000
$700,000
= 18.6%
Brief Exercise 12-12 (LO12.5)
Income from continuing operations
$32,000,000
Discontinued operation:
Brief Exercise 12-13 (LO12.5)
12-8 Financial Accounting, 4e
1. Other expenses
Brief Exercise 12-14 (LO12.6)
1. Conservative
Brief Exercise 12-15 (LO12.6)
Chapter 12 - Financial Statement Analysis
EXERCISES
Exercise 12-1 (LO12.1, 12.2, 12.3, 12.4, 12.5, 12.6)
Items
g
1. Vertical analysis
Descriptions
a. A company’s ability to pay its current liabilities.
b. Accounting choices that result in reporting lower income, lower assets, and
Exercise 12-2 (LO12.1)
Federer Sports Apparel
Income Statement
For the Years Ended December 31
2019
2018
Amount
%
Amount
%
Net sales
$ 18,800,000
100.0
$ 15,500,000
100.0
Chapter 12 - Financial Statement Analysis
Exercise 12-3 (LO12.2)
Federer Sports Apparel
Income Statement
For the Years Ended December 31
Year
Increase (Decrease)
2019
2018
Amount
%
Revenues
$ 18,800,000
$ 15,500,000
$3,300,000
21.3
Exercise 12-4 (LO12.1, 12.2)
Requirement 1
Federer Sports Apparel
Balance Sheet
December 31
2019
2018
Assets
Amount
%
Amount
%
Cash
$ 2,300,000
14.7
$ 800,000
5.8
Accounts receivable
1,500,000
9.6
1,200,000
8.8
Chapter 12 - Financial Statement Analysis
Requirement 2
Federer Sports Apparel
Balance Sheet
December 31
Year
Increase (Decrease)
Assets
2019
2018
Amount
%
Cash
$ 2,300,000
$ 800,000
$1,500,000
187.5
Exercise 12-5 (LO12.3)
Requirement 1
Risk Ratios
Calculations
Receivables turnover ratio
$19,310,000
($1,100,000 + $1,600,000) / 2
= 14.3 times
Requirement 2
Based on the above ratios, Adrian Express is more risky than the industry average.
Exercise 12-6 (LO12.4)
Requirement 1
Profitability Ratios
Calculations
Gross profit ratio
($19,310,000 – $12,250,000)
$19,310,000
= 36.6%
Requirement 2
Adrian Express is less profitable than the industry average. The gross profit ratio,
Exercise 12-7 (LO12.3)
Requirement 1
Risk Ratios
Calculations
a. Receivables turnover ratio
$1,890,000
($102,000 + $98,000) / 2
= 18.9 times
Requirement 2
One company can have a higher current ratio while the other has a higher acid-test
ratio. The company may have a higher current ratio due to higher inventory and
Chapter 12 - Financial Statement Analysis
Exercise 12-8 (LO12.4)
Requirement 1
<
Profitability Ratios
Calculations
a. Gross profit ratio
$495,750
$1,890,000
= 26.2%
Requirement 2
One company can have a higher return on assets while the other company has a higher
Exercise 12-9 (LO12.4)
Requirement 1
Profitability Ratios
Calculations
a. Gross profit ratio
$14,820,000 – $9,544,080
$14,820,000
= 35.6%
Requirement 2
Dividends paid to shareholders in 2018 were $318,000. This amount can be
determined by analyzing the changes to retained earnings as follows:
Retained earnings, 2017
$300,000
Exercise 12-10 (LO12.4)
Profitability Ratios
Calculations
Return on assets
$65,700
$900,000
= 7.3%
Stockholders’ equity, beginning
$600,000
Exercise 12-11 (LO12.5)
a. Other expenses
