1. Horizontal analysis is the analysis of increases and decreases in financial statement items. The
change in the amount and the percentage increase (decrease) in the item is presented. The amount
2. Comparative statements provide information as to changes between dates or periods. Trends
p
3. Before this question can be answered, the increase in net income should be compared with
changes in sales, expenses, and assets devoted to the business for the current year. The return
5. a. A high inventory turnover minimizes the amount invested in inventories, thus freeing
funds for more advantageous use. Storage costs, administrative expenses, and losses
b
b
6. The ratio of fixed assets to long-term liabilities increased from 3.4 for the preceding year to
p
7. a. The rate earned on total assets adds interest expense to the net income, which is divided
b
y average total assets. It measures the profitability of the total assets, without regard for how
CHAPTER 15
FINANCIAL STATEMENT ANALYSIS
DISCUSSION QUESTIONS
15-1
p
CHAPTER 15 Financial Statement Analysis
DISCUSSION QUESTIONS (Concluded)
8. The price-earnings ratio measures the market’s expectations of a company’s future earnings
9. The dividend yield measures the rate of return common stockholders receive from a cash dividend.
10. One report is the Report on Internal Control, which verifies management’s conclusions on
15-2
CHAPTER 15 Financial Statement Analysis
PE 15–1A
PE 15–1B
PE 15–2A
Amount Percentage
PE 15–2B
Amount Percentage
PE 15–3A
= 2.2
= 1.5
PRACTICE EXERCISES
CHAPTER 15 Financial Statement Analysis
PE 15–3B
a. Current Ratio = Current Assets ÷ Current Liabilities
= 3.0
b. Quick Ratio = Quick Assets ÷ Current Liabilities
PE 15–4A
= 10.4
Average Accounts Receivable
Average Daily Sales
PE 15–4B
a. Accounts Receivable Turnover = Sales ÷ Average Accounts Receivable
Average Accounts Receivable
Average Daily Sales
b. =
b. =Number of Days’ Sales in Receivables
Number of Days’ Sales in Receivables
CHAPTER 15 Financial Statement Analysis
PE 15-5A
a. Inventory Turnover = Cost of Goods Sold ÷ Average Inventory
Average Inventory
Average Daily Cost of Goods Sold
PE 15–5B
a. Inventory Turnover = Cost of Goods Sold ÷ Average Inventory
Average Inventory
Average Daily Cost of Goods Sold
=$72,500 ÷ ($435,000 ÷ 365)
b. =
b. =
Number of Days’ Sales in Inventory
Number of Days’ Sales in Inventory
15-5
CHAPTER 15 Financial Statement Analysis
PE 15–6A
PE 15–6B
PE 15–7A
PE 15–7B
Fixed Assets
Long-Term Liabilities
Total Liabilities
Total Stockholders’ Equity
Total Stockholders’ Equity
=
Ratio of Fixed Assets to Long-Term Liabilities
Ratio of Liabilities to Stockholders’ Equity
Ratio of Fixed Assets to Long-Term Liabilities
Number of Times
Interest Charges Are Earned =
Number of Times
Interest Charges Are Earned
Interest Expense
Interest Expense
Income Before Income Tax +
=
Income Before Income Tax +
Interest Expense
Interest Expense
Total Liabilities
Fixed Assets
Long-Term Liabilities
a.
b. =
b. =
a. =
Ratio of Liabilities to Stockholders’ Equity
15-6
CHAPTER 15 Financial Statement Analysis
PE 15–8A
Ratio of Sales to Assets = Sales ÷ Average Total Assets
PE 15–8B
Ratio of Sales to Assets = Sales ÷ Average Total Assets
PE 15–9A
PE 15–9B
$410,000 + $90,000
$5,000,000
=
Rate Earned on Total Assets = Net Income + Interest Expense
Average Total Assets
Rate Earned on Total Assets =
Net Income + Interest Expense
Average Total Assets
15-7
CHAPTER 15 Financial Statement Analysis
PE 15–10A
PE 15–10B
b. Net Income – Preferred Dividends
Average Common Stockholders’ Equity
a. Rate Earned on Stockholders’ Equity = Net Income
Average Stockholders’ Equity
a. Rate Earned on Stockholders’ Equity = Net Income
Average Stockholders’ Equity
b. Rate Earned on Common
Stockholders’ Equity =Net Income – Preferred Dividends
Average Common Stockholders’ Equity
=
Rate Earned on Common
Stockholders’ Equity
CHAPTER 15 Financial Statement Analysis
PE 15-11A
PE 15–11B
b. Market Price per Share of Common Stock
Earnings per Share on Common Stock
Price-Earnings Ratio =
a. Net Income – Preferred Dividends
Shares of Common Stock Outstanding
$7.00
Earnings per Share
on Common Stock =
a. =
Earnings per Share
on Common Stock
Net Income – Preferred Dividends
Shares of Common Stock Outstanding
=Price-Earnings Ratiob. Market Price per Share of Common Stock
Earnings per Share on Common Stock
15-9
CHAPTER 15 Financial Statement Analysis
Ex. 15–1
a.
Amount Percent Amount Percent
Sales $2,500,000 100% $2,350,000 100%
Cost of goods sold 1,500,000 60% 1,292,500 55%
Gross profit $1,000,000 40% $1,057,500 45%
b. The vertical analysis indicates that the cost of goods sold as a percent of sales
increased by 5 percentage points (60% – 55%), while selling expenses decreased
Current year Previous year
EXERCISES
GRESHAM, Inc.
Comparative Income Statement
For the Years Ended December 31, 20—
15-10
CHAPTER 15 Financial Statement Analysis
Ex. 15–2
a.
Amount Percent Amount Percent
Revenues:
Admissions $116,034 23.7% $130,239 25.7%
Expenses and other:
Direct expense of events $101,402 20.7% $106,204 21.0%
NASCAR purse and
sanction fees 122,950 25.1% 120,146 23.7%
b. Overall revenue decreased some between the two years, as did the overall mix of
revenue sources. The NASCAR broadcasting revenue increased by almost 3% of
total revenue, while admissions revenue decreased by 2% of total revenue. One
of the major expense categories, NASCAR purse and sanction fees, increased by
1.3% of total revenue. The Direct expenses of events and Other direct expenses
remained relatively constant during the two year period. General and administrative
Current Year Prior Year
SPEEDWAY MOTORSPORTS, INC.
Comparative Income Statement (in thousands of dollars)
For the Years Ended December 31, 20—
15-11
CHAPTER 15 Financial Statement Analysis
Ex. 15–3
a.
Amount Percent
Net sales $4,000,000 100%
Operating income 160,000 4%
Other income 120,000 3%
$ 280,000 7%
Other expense 80,000 2%
b. The cost of goods sold is 7% lower than the industry average, but the selling
expenses and administrative expenses are 3% and 2% higher than the industry
average. The combined impact causes net income as a percent of sales to be 2%
Electronics
TANNENHILL COMPANY
Common-Sized Income Statement
For the Year Ended December 31, 20—
Tannenhill
Company
Industry
Average
100%
2%
5%
2%
3%
15-12
CHAPTER 15 Financial Statement Analysis
Ex. 15–4
Amount Percent Amount Percent
Current assets $1,300,000 26% $ 945,000 21%
Ex. 15–5
a.
Current year Previous year
Amount Amount Amount Percent
Sales $1,120,000 $1,000,000 $120,000 12.0%
Cost of goods sold 971,250 875,000 96,250 11.0%
b. The net income for Moreno Company increased by approximately 80% between
years. This increase was the combined result of an increase in sales of 12%
and lower percentage increase in cost of goods sold.
NOVAK COMPANY
Comparative Balance Sheet
For the Years Ended December 31, 20—
Increase (Decrease)
MORENO COMPANY
Comparative Income Statement
For the Years Ended December 31, 20—
Current year Previous year
15-13
CHAPTER 15 Financial Statement Analysis
Ex. 15–6
a. (1) Working Capital = Current Assets – Current Liabilities
b. The liquidity of Gostkowski has improved from the preceding year to the current
Ex. 15–7
b. The solvency of PepsiCo has increased slightly over this time period. The
current ratio has increased from 1.0 to 1.1, and the quick ratio has increased by
0.2. PEPSICO appears to have ample resources to meet its short term
Current Assets
Current Liabilities
Quick Assets
Current Liabilities
Current Assets
Current Liabilities
= 1.0
$17,089 $18,154
= 1.1
a.
=(2) Current Ratio
(1) Current Ratio =
(3) Quick Ratio =
Current Year: $18,720 Previous Year: $17,441
15-14
CHAPTER 15 Financial Statement Analysis
Ex. 15–8
a. The working capital, current ratio, and quick ratio are calculated incorrectly. The
working capital and current ratio incorrectly include intangible assets and property,
plant, and equipment as a part of current assets. Both are noncurrent. The quick
ratio has both an incorrect numerator and denominator. The numerator of the quick
ratio is incorrectly calculated as the sum of inventories, prepaid expenses, and
The correct calculations are as follows:
= Current Assets – Current Liabilities
= $330,000 – $300,000
$330,000
$300,000
b. Unfortunately, the working capital, current ratio, and quick ratio are below the
minimum threshold required by the bond indenture. This may require the company
Working Capital
$30,000
Current Assets
Current Liabilities
=
1.1
0.9
$300,000 =
=
=
=
Current Ratio
15-15
CHAPTER 15 Financial Statement Analysis
Ex. 15–9
$487,500
$9,349
1
$487,500 = ($475,000 + $500,000) ÷ 2
Average Accounts Receivable
Average Accounts Receivable
Average Daily Sales
Sales
58.9 days
$457,500 =
(2)
$7,771
2016: = 52.1 days 2015:
=Number of Days’ Sales in Receivables
a. (1)
=
Accounts Receivable Turnover
1
2
3
4
15-16
CHAPTER 15 Financial Statement Analysis
Ex. 15–10
52.1 days
Accounts Receivable Turnover Average Accounts Receivable
Sales
Lestrade: ($600,000 + $710,000) ÷ 2
$12,561.6 =
Average Accounts Receivable
Average Daily Sales
36.5 days
=
a. (1)
=
(2)
Number of Days’ Sales in Receivables
Xavier: =
($820,000 + $880,000) ÷ 2
$23,287.7
*
**
15-17
CHAPTER 15 Financial Statement Analysis
Ex. 15–11
Number of Days’ Sales in Inventory
Inventory Turnover
a. (1)
=
Cost of Goods Sold
Average Inventory
(2)
48.7 days
40.6 days=
=
=Average Inventory
Average Daily Cost of Goods Sold
($860,000 + $840,000) ÷ 2
Current Year:
Previous Year:
$17,466
($840,000 + $800,000) ÷ 2
$20,219
**
*
15-18
CHAPTER 15 Financial Statement Analysis
Ex. 15–12
b. Dell has a much higher inventory turnover ratio than does HP (32.1 vs. 13.4).
Likewise, Dell has a much smaller number of days’ sales in inventory (11.4 days
vs. 27.3 days). These significant differences are a result of Dell’s make-to-order
strategy. Dell has successfully developed a manufacturing process that is able to
fill a customer order quickly. As a result, Dell does not pre-build as many computers
a. (1)
Inventory Turnover =
$44,754
($6,317 + $7,490) ÷ 2
=
(2)
HP:
13.4
Cost of Goods Sold
Average Inventory
=
Number of Days’ Sales in Inventory Average Inventory
15-19
CHAPTER 15 Financial Statement Analysis
Ex. 15–13
c. Both the ratio of liabilities to stockholders’ equity and the number of times bond
interest charges were earned have improved from the previous year. These results
a.
Current year:
$2,124,000
$2,360,000
=Ratio of Liabilities to Stockholders’ Equity Total Stockholders’ Equity
Total Liabilities
0.9=
$480,000 + $120,000
$120,000
5.0Current year:
=
*
15-20