Chapter 17 Financial Statement Analysis • 499
Study
Guide
17
Name Perfect
Score
Your
Score
Identifying Accounting Terms 20 Pts.
Analyzing Financial Ratios 19 Pts.
Calculating Financial Ratios 11 Pts.
Total 50 Pts.
Part One—Identifying Accounting Terms
Directions: Select the one term in Column I that best fits each definition in
Column II. Print the letter identifying your choice in the Answers column.
Answers
1.
2.
3.
10.
11.
12.
13.
14.
15.
Column I
A. benchmark
B. comparative financial
statements
C. current ratio
J. market ratio
K. operating expense
ratio
L. operating margin
M. price-earnings ratio
N. profit margin
O. profitability ratio
Column II
1. A ratio that measures the ability of a business to generate
income. (p. 516)
2. A standard used to evaluate financial performance. (p. 516)
3. Financial statements that provide information for multiple
fiscal periods. (p. 517)
10. Total Liabilities divided by Total Assets. (p. 526)
11. A comparison of one item on a financial statement with the same
item on a previous period’s financial statement. (p. 528)
12. Net income after federal income tax divided by the number of
outstanding shares of stock. (p. 533)
13. A ratio that measures a corporation’s financial performance in
relation to the market value of its stock. (p. 534)
14. The relationship between dividends per share and market price
per share. (p. 534)
15. The relationship between the market value per share and
earnings per share of a stock. (p. 534)
O
A
B
D
H
F
J
E
M
500 • Working Papers
Part Two—Analyzing Financial Ratios
Directions: Place a T for True or an F for False in the Answers column to show whether
each of the following statements is true or false.
1. Vertical analysis ratios are an example of a profitability ratio. (p. 516)
2. A benchmark ratio can be stated as a single value or a target range. (p. 516)
3. To perform vertical analysis on an income statement, each amount is divided by net
sales. (p. 516)
9. A business should never make a business decision for the sole purpose of meeting a
benchmark ratio. (p. 524)
10. A vertical analysis ratio for accounts receivable above the target range may indicate
that ThreeGreen is too restrictive in extending credit to its customers. (p. 524)
11. Investors use the debt ratio to rate the ability of the business to pay its current and
long-term liabilities. (p. 526)
12. The debt ratio is an example of a solvency ratio. (p. 526)
13. Best Company’s target range for its debt ratio is 20.0% to 25.0%. The company’s debt
ratio decreased from 34.5% to 26.7%. This is an unfavorable trend. (p. 526)
14. A horizontal analysis ratio is calculated by dividing the difference between the current
and prior period amounts by the current period amount. (p. 528)
Answers
1.
2.
3.
9.
10.
11.
12.
13.
14.
TE
T
T
T
T
F
T
F
T
F
Chapter 17 Financial Statement Analysis • 501
Name Date Class
Part Three—Calculating Financial Ratios
Directions: For each of the following items, select the choice that best completes the statement.
Print the letter identifying your choice in the Answers column.
Selected financial information for Lambert Company is presented below.
Sales $840,000.00
Cost of Merchandise Sold $400,000.00
Total Operating Expenses $360,000.00
Net Income after Federal Income Taxes $68,000.00
1. The earnings per share is
(A) $3.00 (C) $6.80
(B) $14.70 (D) 8.1% (p. 533)
2. The debt ratio is
(A) 26.3% (C) 7.00
(B) 14.3% (D) 17.0% (p. 526)
6. The price-earnings ratio is
(A) 8.8 (C) 5.0%
(B) 17.6 (D) 11.3% (p. 534)
7. The operating margin is
(A) 19.0% (C) 54.3%
(B) 42.9% (D) 9.5% (p. 519)
8. The working capital is
(A) $95,000.00 (C) $120,000.00
(B) $70,000.00 (D) 26.3% (p. 535)
Answers
1.
2.
6.
7.
8.
C
B
A
D
B
502 • Working Papers
Across
3. A standard used to evaluate financial performance.
7. Total liabilities divided by total assets.
8. A ratio that measures a corporation’s financial
performance in relation to the market value of its
stock.
Down
1. Net income after federal income tax divided by
the number of outstanding shares of stock.
2. The relationship between dividends per share
and market price per share.
4. A ratio that measures the relationship of current
1
4
7
8
9
1110
56
32
1
4
7
8
9
1110
56
32
TE
1
4
7
8
9
1110
56
32
1
4
7
8
9
1110
56
32
E
A
R
N
I
N
G
S
P
D
I
V
I
D
E
N
D
U
Q
MA RKE
N
T
RG
TRAT
DEBTR
R
AT IO
BENCH
U
MA RK
IO
U
T
Y
A
P
OS SMAR
N
D
A
E
R
T
GI
N
Chapter 17 Financial Statement Analysis • 503
Name Date Class
17-1 WORK TOGETHER, p. 521
Analyzing an income statement
Ratio Target Range Actual Ratio Favorable
Trend
Favorable
Result
Low High Current Year Prior Year
Gross margin 50.4% 52.0%
1.
Current Year Prior Year
Amount Percent Amount Percent
Net Sales 659 4 7 0 53 100.0 642 1 8 9 81 100.0
Cost of Merchandise Sold 321 0 3 4 21 301 8 4 3 28
Gross Profit 338 4 3 6 32 340 3 4 6 53
Operating Expenses:
Advertising Expense 24 9 8 1 05 3.8 23 1 4 9 84 3.6
Credit Card Fee Expense 6 9 7 7 95 1.1 6 8 1 9 25 1.1
Salary Expense 92 1 9 4 99 95 1 9 0 11
Supplies Expense—Office 3 9 4 9 22 0.6 4 1 0 9 28 0.6
Supplies Expense—Store 4 9 8 9 92 0.8 4 2 1 9 10 0.7
Uncollectible Accounts Expense 16 4 8 7 08 2.5 12 1 9 7 16 1.9
Utilities Expense 5 2 6 9 69 0.8 4 9 1 0 82 0.8
Total Operating Expenses 198 1 6 3 18 193 6 8 8 29
Tri-State Pipe
Comparative Income Statement
For Years Ended December 31, 20— and 20–
2.
48.7 47.0
51.3 53.0
14.0 14.8
30.0 30.2
51.3% 53.0% Yes Yes
504 • Working Papers
17-1 ON YOUR OWN, p. 521
Analyzing an income statement
1.
Ratio Target Range Actual Ratio Favorable
Trend
Favorable
Result
Low High Current Year Prior Year
Gross margin 54.2% 54.9%
Current Year Prior Year
Amount Percent Amount Percent
Net Sales 747 9 2 3 57 100.0 694 8 4 1 18 100.0
Cost of Merchandise Sold 339 4 1 8 69 318 1 8 9 99
Gross Profit 408 5 0 4 88 376 6 5 1 19
Operating Expenses:
Miscellaneous Expense 4 1 9 2 71 0.6 5 1 4 8 61 0.7
Payroll Taxes Expense 9 6 2 7 46 1.3 8 7 6 5 28 1.3
Rent Expense 8 4 4 7 55 1.1 7 8 4 8 00 1.1
Salary Expense 106 9 5 3 84 97 3 7 5 74
Supplies Expense—Office 4 3 9 6 25 0.6 4 1 8 4 19 0.6
Supplies Expense—Store 5 3 5 3 08 0.7 5 0 1 9 71 0.7
Uncollectible Accounts Expense 8 0 4 2 78 1.1 7 3 1 9 36 1.1
Utilities Expense 9 8 2 3 69 1.3 9 2 2 0 08 1.3
Total Operating Expenses 198 4 6 7 34 185 8 5 5 62
PBH Corporation
Comparative Income Statement
For Years Ended December 31, 20— and 20–
2.
TE
45.4 45.8
54.6 54.2
14.3 14.0
26.5 26.7
54.6% 54.2% Yes Yes
Chapter 17 Financial Statement Analysis • 505
Name Date Class
17-2 WORK TOGETHER, p. 527
Analyzing a balance sheet
1.
Current Year Prior Year
Amount Percent Amount Percent
ASSETS
Current Assets:
Cash 27 4 1 3 71 12.7 25 2 3 8 46 14.0
Prepaid Insurance 2 8 0 0 00 1.3 1 2 0 0 00 0.7
Notes Receivable 6 3 5 5 00 2.9 2 4 0 0 00 1.3
Interest Receivable 9 5 65 0.0 6 2 50 0.0
Total Current Assets 161 6 8 0 90 145 6 3 5 77
Plant Assets:
Office Equipment (net) 11 9 7 8 55 5.5 12 9 1 8 64 7.2
Store Equipment (net) 42 4 1 0 83 19.6 21 9 4 8 39 12.2
Total Plant Assets 54 3 8 9 38 34 8 6 7 03
Total Assets 216 0 7 0 28 100.0 180 5 0 2 80 100.0
LIABILITIES
Current Liabilities:
Accounts Payable 16 6 3 3 44 7.7 11 8 8 9 95 6.6
Sales Tax Payable 3 5 8 9 68 1.7 3 2 8 1 18 1.8
Total Liabilities 48 8 3 2 50 35 9 4 6 89
STOCKHOLDERS’ EQUITY
Capital Stock 25 0 0 0 00 11.6 25 0 0 0 00 13.9
Retained Earnings 142 2 3 7 78 65.8 119 5 5 5 91 66.2
Total Stockholders’ Equity 167 2 3 7 78 144 5 5 5 91
Total Liabilities and Stockholders’ Equity 216 0 7 0 28 100.0 180 5 0 2 80 100.0
Tri-State Pipe
Comparative Balance Sheet
December 31, 20— and 20–
74.8 80.7
25.2 19.3
22.6 19.9
77.4 80.1
506 • Working Papers
17-2 WORK TOGETHER (concluded)
2.
Target Range Actual Ratio Favorable
Trend
Favorable
Result
Low High Current Year Prior Year
Accounts receivable 12.0% 14.0%
Merchandise inventory 50.0% 55.0%
TE
8.6% 9.0% No No
48.6% 55.0% No No
Chapter 17 Financial Statement Analysis • 507
Name Date Class
17-2 ON YOUR OWN, p. 527
Analyzing a balance sheet
1.
Current Year Prior Year
Amount Percent Amount Percent
ASSETS
Current Assets:
Cash 42 2 5 0 56 12.6 22 9 6 5 32 9.2
Petty Cash 5 0 0 00 0.1 5 0 0 00 0.2
Accounts Receivable (net) 24 9 1 8 33 22 9 1 8 35
Merchandise Inventory 142 8 9 4 19 109 7 1 8 25
Total Current Assets 226 6 4 1 58 167 2 4 1 17
Plant Assets:
Office Equipment (net) 44 9 1 8 10 13.4 36 9 9 1 18 14.8
Store Equipment (net) 62 9 8 8 14 18.8 45 1 9 4 99 18.1
Total Plant Assets 107 9 0 6 24 82 1 8 6 17
Total Assets 334 5 4 7 82 100.0 249 4 2 7 34 100.0
LIABILITIES
Current Liabilities:
Accounts Payable 14 3 7 9 90 4.3 36 1 9 8 74 14.5
Sales Tax Payable 6 5 6 2 36 2.0 6 1 2 9 19 2.5
Employee Income Tax Payable 1 8 5 2 00 0.6 1 7 0 3 00 0.7
Social Security Tax Payable 3 8 9 3 56 1.2 3 5 8 2 07 1.4
Medicare Tax Payable 9 1 0 60 0.3 8 3 7 75 0.3
Health Insurance Premiums Payable 8 7 0 00 0.3 8 0 0 40 0.3
PBH Corporation
Comparative Balance Sheet
December 31, 20— and 20–
7.4 9.2
42.7 44.0
67.7 67.1
32.3 32.9
508 • Working Papers
17-2 ON YOUR OWN (concluded)
2.
Target Range Actual Ratio Favorable
Trend
Favorable
Result
Low High Current Year Prior Year
Accounts receivable 12.0% 14.0%
Merchandise inventory 40.0% 45.0%
Total current assets 60.0% 68.0%
TE
7.4% 9.2% No No
42.7% 44.0% Yes Yes
67.7% 67.1% No Yes
Chapter 17 Financial Statement Analysis • 509
Name Date Class
17-3 WORK TOGETHER, p. 532
Analyzing financial statements using horizontal analysis
1.
Current
Year
Prior
Year
Increase (Decrease)
Amount Percent
Net Sales 659 4 7 0 53 642 1 8 9 81
Cost of Merchandise Sold 321 0 3 4 21 301 8 4 3 28
Gross Profit 338 4 3 6 32 340 3 4 6 53
Miscellaneous Expense 3 8 2 6 79 4 1 9 4 19 (3 6 7 40) (8.8)
Payroll Taxes Expense 8 2 9 8 94 8 5 6 8 54 (2 6 9 60) (3.1)
Rent Expense 8 4 4 7 55 8 4 0 0 00 4 7 55 0.6
Salary Expense 92 1 9 4 99 95 1 9 0 11
Supplies Expense—Office 3 9 4 9 22 4 1 0 9 28 (1 6 0 06) (3.9)
Supplies Expense—Store 4 9 8 9 92 4 2 1 9 10 7 7 0 82 18.3
Uncollectible Accounts Expense 16 4 8 7 08 12 1 9 7 16
Utilities Expense 5 2 6 9 69 4 9 1 0 82 3 5 8 87 7.3
Tri-State Pipe
Comparative Income Statement
For Years Ended December 31, 20– and 20–
17 2 8 0 72 2.7
19 1 9 0 93 6.4
(1 9 1 0 21) (0.6)
(2 9 9 5 12) (3.1)
4 2 8 9 92 35.2
510 • Working Papers
17-3 ON YOUR OWN, p. 532
Analyzing financial statements using horizontal analysis
1.
Current
Year
Prior
Year
Increase (Decrease)
Amount Percent
ASSETS
Current Assets:
Notes Receivable 6 3 5 5 00 2 4 0 0 00 3 9 5 5 00 164.8
Interest Receivable 9 5 65 6 2 50 3 3 15 53.0
Total Current Assets 161 6 8 0 90 145 6 3 5 77
Plant Assets:
Office Equipment (net) 11 9 7 8 55 12 9 1 8 64 (9 4 0 09) (7.3)
Store Equipment (net) 42 4 1 0 83 21 9 4 8 39 20 4 6 2 44 93.2
Total Plant Assets 54 3 8 9 38 34 8 6 7 03
Total Assets 216 0 7 0 28 180 5 0 2 80 35 5 6 7 48 19.7
LIABILITIES
Current Liabilities:
Health Insurance Premiums Payable 4 6 3 00 4 3 5 00 2 8 00 6.4
Retirement Benefits Payable 4 6 5 00 4 3 7 00 2 8 00 6.4
Unemployment Tax Payable—Federal 3 0 4 06 2 8 5 82 1 8 24 6.4
Unemployment Tax Payable—State 1 5 0 92 1 4 1 86 9 06 6.4
Federal Income Tax Payable 3 6 8 3 00 6 1 4 8 00 (2 4 6 5 00) (40.1)
Dividends Payable 20 0 0 0 00 10 0 0 0 00 10 0 0 0 00 100.0
Total Liabilities 48 8 3 2 50 35 9 4 6 89
PBH Corporation
Comparative Balance Sheet
December 31, 20— and 20–
TE
16 0 4 5 13 11.0
19 5 2 2 35 56.0
12 8 8 5 61 35.8
Chapter 17 Financial Statement Analysis • 511
Name Date Class
17-4 WORK TOGETHER, p. 537
Analyzing financial statements using financial ratios
1., 2.
3., 4.
Current
Year
Prior
Year
Increase over
Prior Year
(Yes or No)
Evaluation
Earnings per share $3.26
Target Range
Actual Ratio Favorable
Result
Low High
Working capital $150,000.00 $200,000.00
Supporting calculations:
Net income after federal income taxes $148,186.18
Number of shares outstanding ÷ 40,000
Earnings per share $ 3.70
$3.70 Yes EPS increased by 13.5% over the
prior year, a favorable trend.
$186,491.00 Yes
Current assets $604,984.00
Current liabilities − 418,493.00
Working capital $186,491.00
512 • Working Papers
17-4 ON YOUR OWN, p. 537
Analyzing financial statements using financial ratios
1., 2.
3., 4.
Current
Year
Prior
Year
Increase over
Prior Year
(Yes or No)
Evaluation
Earnings per share $0.56
Target Range
Actual Ratio Favorable
Result
Low High
Working capital $1,200,000.00 $1,800,000.00
Current ratio 1.30 1.70
TE
Supporting calculations:
Net income after federal income taxes $6,118,089.54
Number of shares outstanding ÷ 8,500,000
Earnings per share $ 0.72
$0.72 Yes EPS increased by 28.6% over the
prior year, a favorable trend.
$1,404,803.00 Yes
1.43 Yes
Current assets $4,657,856.00
Current liabilities − 3,253,053.00
Working capital $1,404,803.00
Chapter 17 Financial Statement Analysis • 513
Name Date Class
17-1 APPLICATION PROBLEM (LO1), p. 541
Analyzing an income statement
Ratio Target Range Actual Ratio Favorable
Trend
Favorable
Result
Low High Current Year Prior Year
Gross margin 27.5% 28.0%
1.
Current Year Prior Year
Amount Percent Amount Percent
Net Sales 979 2 9 2 15 100.0 951 8 4 8 08 100.0
Cost of Merchandise Sold 703 7 7 9 06 673 1 8 4 19
Gross Profit 275 5 1 3 09 278 6 6 3 89
Insurance Expense 6 2 0 0 00 0.6 6 0 0 0 00 0.6
Miscellaneous Expense 12 7 4 8 14 1.3 14 1 8 8 07 1.5
Payroll Taxes Expense 8 8 3 4 84 0.9 8 0 2 7 91 0.8
Rent Expense 18 0 0 0 00 1.8 18 0 0 0 00 1.9
Salary Expense 98 1 4 8 50 89 1 8 4 08
Supplies Expense—Office 2 1 4 8 21 0.2 1 8 4 8 66 0.2
Supplies Expense—Store 9 4 1 8 19 1.0 10 1 9 8 17 1.1
Uncollectible Accounts Expense 1 4 8 0 00 0.2 9 1 4 00 0.1
Utilities Expense 6 8 4 8 89 0.7 6 8 7 1 09 0.7
TR’s Quik Mart
Comparative Income Statement
For Years Ended December 31, 20— and 20–
2.
71.9 70.7
28.1 29.3
10.0 9.4
28.1% 29.3% Yes No
514 • Working Papers
17-2 APPLICATION PROBLEM (LO2, 3), p. 541
Analyzing a balance sheet
1.
Current Year Prior Year
Amount Percent Amount Percent
ASSETS
Current Assets:
Cash 33 1 7 8 76 8.6 40 2 1 7 86 10.8
Interest Receivable 9 5 00 0.0 1 0 50 0.0
Total Current Assets 304 2 4 0 01 288 3 1 1 93
Plant Assets:
Office Equipment (net) 14 7 2 0 50 3.8 16 9 4 8 50 4.5
Store Equipment (net) 66 6 9 1 25 17.3 68 1 9 4 25 18.3
Total Plant Assets 81 4 1 1 75 85 1 4 2 75
Total Assets 385 6 5 1 76 100.0 373 4 5 4 68 100.0
LIABILITIES
Current Liabilities:
Accounts Payable 32 1 7 8 04 8.3 15 9 1 8 91 4.3
STOCKHOLDERS’ EQUITY
Capital Stock 200 0 0 0 00 51.9 200 0 0 0 00 53.6
Retained Earnings 119 1 4 8 07 30.9 130 5 4 1 02 35.0
Total Stockholders’ Equity 319 1 4 8 07 330 5 4 1 02
Total Liabilities and Stockholders’ Equity 385 6 5 1 76 100.0 373 4 5 4 68 100.0
TR’s Quick Mart
Comparative Balance Sheet
December 31, 20– and 20–
TE
78.9 77.2
21.1 22.8
82.8 88.5
Chapter 17 Financial Statement Analysis • 515
Name Date Class
17-2 APPLICATION PROBLEM (concluded)
2.
Target Range Actual Ratio Favorable
Trend
Favorable
Result
Low High Current Year Prior Year
Merchandise inventory 65.0% 68.0%
Total current assets 76.0% 78.0%
64.5% 62.1% Yes No
78.9% 77.2% No No
516 • Working Papers
17-3 APPLICATION PROBLEM (LO4, 5), p. 541
Analyzing financial statements using horizontal analysis
1.
Current
Year
Prior
Year
Increase (Decrease)
Amount Percent
Net Sales 721 1 9 9 15 558 3 6 5 40
Cost of Merchandise Sold 348 1 1 7 38 228 4 2 4 84
Gross Profit 373 0 8 1 77 329 9 4 0 56
Operating Expenses:
Insurance Expense 8 8 6 8 04 8 1 2 9 78 7 3 8 26 9.1
Miscellaneous Expense 3 9 9 6 67 5 4 7 4 82
Payroll Taxes Expense 15 2 1 4 27 15 4 1 8 58
Rent Expense 24 0 0 0 00 24 0 0 0 00
Salary Expense 169 0 1 9 10 166 1 3 8 42
Supplies Expense—Office 4 2 4 5 08 3 5 1 7 48 7 2 7 60 20.7
Supplies Expense—Store 5 2 7 3 77 5 0 2 8 48 2 4 5 29 4.9
Uncollectible Accounts Expense 17 0 4 5 17 13 4 8 1 04 3 5 6 4 13 26.4
Vector Industries
Comparative Income Statement
For Years Ended December 31, 20— and 20–
TE
162 8 3 3 75 29.2
119 6 9 2 54 52.4
43 1 4 1 21 13.1
(1 4 7 8 15) (27.0)
( 2 0 4 31) (1.3)
0.0
2 8 8 0 68 1.7
Chapter 17 Financial Statement Analysis • 517
Name Date Class
17-3 APPLICATION PROBLEM (concluded)
2.
Current
Year
Prior
Year
Increase (Decrease)
Amount Percent
ASSETS
Current Assets:
Cash 51 9 8 9 62 15 4 4 5 82 36 5 4 3 80 236.6
Petty Cash 5 0 0 00 3 0 0 00 2 0 0 00 66.7
Notes Receivable 1 8 5 0 00 3 2 0 0 00 (1 3 5 0 00) (42.2)
Interest Receivable 1 4 00 2 6 00 (1 2 00) (46.2)
Total Current Assets 196 4 1 7 86 151 6 3 4 49 44 7 8 3 37 29.5
Plant Assets:
Office Equipment (net) 24 9 1 8 18 21 8 9 4 18 3 0 2 4 00 13.8
Store Equipment (net) 32 1 9 4 48 36 9 1 4 13 (4 7 1 9 65)
Total Plant Assets 57 1 1 2 66 58 8 0 8 31 (1 6 9 5 65) (2.9)
Total Assets 253 5 3 0 52 210 4 4 2 80 43 0 8 7 72 20.5
LIABILITIES
Current Liabilities:
Accounts Payable 10 8 0 8 04 18 4 8 6 17
Sales Tax Payable 4 0 3 0 07 3 2 4 9 25
Employee Income Tax Payable 9 8 2 00 9 2 0 00
Total Liabilities 30 0 8 3 38 30 6 2 4 70 (5 4 1 32) (1.8)
STOCKHOLDERS’ EQUITY
Capital Stock 50 0 0 0 00 50 0 0 0 00 0.0
Retained Earnings 173 4 4 7 14 129 8 1 8 10 43 6 2 9 04 33.6
Total Stockholders’ Equity 223 4 4 7 14 179 8 1 8 10 43 6 2 9 04 24.3
Total Liabilities and Stockholders’ Equity 253 5 3 0 52 210 4 4 2 80 43 0 8 7 72 20.5
Vector Industries
Comparative Balance Sheet
December 31, 20— and 20–
(12.8)
(7 6 7 8 13) (41.5)
7 8 0 82 24.0
6 2 00 6.7
518 • Working Papers
17-4 APPLICATION PROBLEM (LO6, 7, 8), p. 541
Analyzing financial statements using financial ratios
1., 2.
3., 4.
Current
Year
Prior
Year
Increase over
Prior Year
(Yes or No)
Evaluation
Earnings per share $3.29
Target Range
Actual Ratio Favorable
Result
Low High
Working capital $900,000.00 $1,100,000.00
TE
Supporting calculations:
Net income after federal income taxes $7,948,184.15
Number of shares outstanding ÷ 2,500,000
Earnings per share $ 3.18
Dividends per share $ 2.40
Market price ÷ $ 38.15
Dividend yield = 6.29%
$3.18 No EPS decreased by 3.3% over the
prior year, an unfavorable trend.
$926,566.93 Yes
Current assets $3,418,461.04
Current liabilities − 2,491,894.11
Working capital $ 926,566.93
Current assets $3,418,461.04
Current liabilities ÷ $2,491,894.11
Current ratio = 1.37