Wild, Shaw, Chiappetta, FAP 23e Solutions Manual: Chapter 17
Chapter 17
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,
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)
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QUICK STUDY
Quick Study 17-1 (5 minutes)
is a. Income statement
Quick Study 17-2 (10 minutes)
1. (b) competitor
Quick Study 17-3 (15 minutes)
2017
2016
Dollar
Change
Percent
Change
1000
Quick Study 17-4 (5 minutes)
Trend percents
Quick Study 17-5 (5 minutes)
Common-size percents
Quick Study 17-6 (10 minutes)
Ratio
2017
2016
1. Profit Margin Ratio …………………………..
9%
8%
3. Gross Margin Ratio ………………………….
5. Accounts Receivable Turnover ………..
7. Inventory Turnover ………………………….
8. Dividend Yield …………………………………
Wild, Shaw, Chiappetta, FAP 23e Solutions Manual: Chapter 17
Quick-Study 17-7 (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 17-8A (5 minutes)
This material error should be reported on the statement of retained
1002
Quick Study 17-9 (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
b. A key advantage to using horizontal and vertical analyses when
Wild, Shaw, Chiappetta, FAP 23e Solutions Manual: Chapter 17
1003
EXERCISES
Exercise 17-1 (10 minutes)
1.
B
6.
A
Exercise 17-2 (5 minutes)
Exercise 17-3 (20 minutes)
2017
2016
2015
2014
2013
Sales ………………………………….
189
181
168
156
100
Accounts receivable …………..
201
192
182
169
100
3.
D
8.
B
4.
C
9.
C
1004
Exercise 17-4 (25 minutes)
2017
2016
Sales …………………………………………….
100.0%
100.0%
Cost of goods sold ……………………….
75.7
46.5
Net income ……………………………………
7.0%
18.5%
Exercise 17-5 (25 minutes)
1005
Exercise 17-6 (20 minutes)
Simon Company
Common-Size Comparative Balance Sheets
December 31, 2015-2017
At December 31
2017
2016*
2015
Assets
Cash ………………………………………………………….
6.1%
8.0%
10.0%
24.8%
13.6%
Analysis: Several observations can be made.
(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
1006
Exercise 17-7 (25 minutes)
1. Current ratio
2. Acid-test ratio
1007
Exercise 17-8 (25 minutes)
1. Days’ sales uncollected
2. Accounts receivable turnover
3. Inventory turnover
4. Days’ sales in inventory
1008
Exercise 17-9 (25 minutes)
1. Debt and equity ratios
2017
2016
Total liabilities and debt ratio
Total equity and equity ratio
2. Debt–to-equity ratio
3. Times interest earned
Analysis and Interpretation: Simon added debt to its capital structure
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Exercise 17-10 (30 minutes)
1. Profit margin
2. Total asset turnover
3. Return on total assets
Exercise 17-11 (20 minutes)
1. Return on common stockholders’ equity
2. Price-earnings ratio, December 31
3. Dividend yield
Analysis and interpretation
1011
Exercise 17–12 (30 minutes)
COMPARATIVE ANALYSIS REPORT
Clay’s profit margins are higher than Roak’s. However, Roak has
significantly higher total asset turnover ratios. As a result, Roak generates
a substantially higher return on total assets.
Exercise 17–13A (10 minutes)
1. A Net sales less operating expense section
Expenses
$1,480,000
Exercise 17-14 (15 minutes)
RANDA MERCHANDISING, INC.
Income Statement
For Year Ended December 31, 2017
Net sales ………………………………………………………………..
$2,900,000
Exercise 17-15 (15 minutes)
1. Current ratio = (in ¥s) ¥ 1,097,597 / ¥ 144,232 = 7.61
(in $s) $ 9,110 / $ 1,197 = 7.61
2. The results in part 1 reveal that ratios can help us overcome
Wild, Shaw, Chiappetta, FAP 23e Solutions Manual: Chapter 17
1014
PROBLEM SET A
Problem 17-1A (120 minutes)
Part 1
HAROUN COMPANY
Income Statement Trends
For Years Ended December 31, 2017-2011
2017
2016
2015
2014
2013
2012
2011
Sales ……………………………….
182.5%
161.2%
147.6%
136.2%
127.8%
119.6%
100.0%
HAROUN COMPANY
Balance Sheet Trends
December 31, 2017-2011
2017
2016
2015
2014
2013
2012
2011
Cash ………………………………..
65.2%
87.6%
92.1%
94.4%
98.9%
96.6%
100.0%
Accounts recble., net ……….
Merchandise inventory ……..
Other current assets …………
Plant assets, net ………………
Total assets ……………………..
Current liabilities ……………..
Common stock …………………
Other paid-in capital …………
Retained earnings…………….
Total liabilities & equity …….
Cost of goods sold …………..
Gross profit ……………………..
Operating expenses …………
Problem 17-1A (concluded)
Part 2
Analysis and Interpretation
• The statements and the trend percent data indicate that the company
1016
Problem 17-2A (60 minutes)
Part 1
Part 2
KORBIN COMPANY
Common-Size Comparative Income Statements
For Years Ended December 31, 2017, 2016, and 2015
2017
2016
2015
Sales ……………………………………………………
100.00%
100.00%
100.00%