CHAPTER 14
Financial Statement Analysis
ASSIGNMENT CLASSIFICATION TABLE
Learning Objectives
Questions
Brief
Exercises
Do It!
Exercises
Problems
1. Apply horizontal and vertical analysis
to financial statements.
1, 2, 3, 4
1, 2, 3, 4, 5,
6, 7, 8
1
1, 2, 3, 4
1
14, 15, 16,
3. Apply the concept of sustainable
20, 21, 22, 23
14, 15
3
12, 13
8, 9
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.
30–40
and solvency for two companies.
Compute numerous ratios.
7
Compute missing information given a set of ratios.
30–40
8
Prepare a statement of comprehensive income.
30–40
Prepare a statement of comprehensive income.
WEYGANDT FINANCIAL AND MANAGERIAL ACCOUNTING 2E
CHAPTER 14
FINANCIAL STATEMENT ANALYSIS
Number
LO
BT
Difficulty
Time (min.)
BE1
1
C
Moderate
10–12
BE2
1, 2
K, AP
Simple
8–10
BE11
2
AN
Simple
6–8
BE12
2
AN
Moderate
6–8
BE13
2
AN
Moderate
6–8
BE14
3
AP
Simple
4–6
BE15
3
AP
Simple
3–5
DI1
1
AP
Simple
6–8
DI2
2
AP
Simple
DI3
3
AP
Simple
6–8
EX1
1
AP
Simple
10–12
EX2
1
AP
Simple
EX3
1
AP
Simple
12–15
EX4
1
AP
Simple
10–12
EX5
2
AN
Simple
8–10
EX6
2
AP
Simple
8–10
EX7
2
AP
Simple
6–8
EX8
2
AP
Simple
6–8
EX9
2
AP
Simple
6–8
EX10
2
AP
Moderate
8–10
BE3
1
AP
Simple
6–8
BE4
1
AP
Simple
6–8
BE5
1
AP
Simple
4–6
BE6
1
AP
Simple
4–6
BE7
1
AP
Simple
4–6
BE8
1
AP
Simple
5–7
BE9
2
AP
Simple
4–6
BE10
2
AP
Simple
3–5
FINANCIAL STATEMENT ANALYSIS (Continued)
Number
LO
BT
Difficulty
Time (min.)
EX11
2
AP
Simple
10–12
P7
2
AN
Complex
30–40
P8
3
AP
Moderate
30–40
P9
3
AP
Moderate
30–40
BYP1
1, 2
AN, E
Moderate
20–25
BYP2
1, 2
AN, E
Simple
15–20
BYP3
1, 2
AN, E
Simple
15–20
BYP4
2
Simple
15–20
BYP5
Moderate
15–20
BYP6
1, 2
Simple
15–20
BYP7
Simple
10–15
BYP8
Simple
15–20
BYP9
3
AP
Simple
3
Moderate
3
Simple
P1
1, 2
AN
Simple
20–30
P2
2
20–30
P3
2
Simple
20–30
P4
2
AN
Moderate
30–40
P5
2
Moderate
50–60
P6
2
Simple
30–40
BLOOM’ S TAXONOMY TABLE
Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End–of-Chapter Exercises and Problems
Learning Objective
Knowledge
Comprehension
Application
Analysis
Synthesis
Evaluation
1. Apply horizontal and vertical
analysis to financial statements.
BE14-2
Q14-1
Q14-2
Q14-3
BE14-1
Q14-4
BE14-2
BE14-3
BE14-5
BE14-6
BE14-7
DI14-1
E14-1
E14-3
E14-4
E14-4
3. Apply the concept of sustainable
income.
Q14-20
Q14-21
Q14-22
Q14-23
BE14-14
BE14-15
DI14-3
E14-12
E14-13
P14-8
P14-9
Ethics Case
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
creditors are primarily interested in the liquidity of the enterprise. In contrast, long-term creditors
and stockholders are primarily interested in the profitability and solvency of the company.
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
is compared with the amount of that same item on one or more earlier statements. Vertical analysis
(also called common-size analysis) expresses each item within a financial statement in terms of a
percent of a base amount.
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).
Ratios can provide clues to underlying conditions that may not be apparent from individual financial
statement components. The ratio is more meaningful when compared to the same ratio in earlier
periods or to competitors’ ratios or to industry ratios.
Questions Chapter 14 (Continued)
10. Hizar Company does not necessarily have a problem. The accounts receivable turnover can be
misleading in that some companies encourage credit and revolving charge sales and slow collections
in order to earn a healthy return on the outstanding receivables in the form of high rates of interest.
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.
Questions Chapter 14 (Continued)
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.
earning power of the investment.
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.
19.
Net income – Preferred dividends
Weighted – average common shares outstanding
= Earnings per share
20. Discontinued operations refers to the disposal of a significant component of the business such as
the stopping of an entire activity or eliminating a major class of customers. It is important to report
discontinued operations separately from continuing operations because the discontinued component
will not affect future income statements.
Questions Chapter 14 (Continued)
23. The following provide examples of horizontal and vertical analysis:
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
It is important to compare different financial statement elements to other
items. The amount of a financial statement element such as cash does not have
much meaning unless it is compared to something else. Comparisons can
be done on an intracompany basis. This basis compares an item or financial
Total assets
(a) The three tools of financial statement analysis are horizontal analysis,
vertical analysis, and ratio analysis. Horizontal analysis evaluates a series
(b) Horizontal Analysis
BRIEF EXERCISE 14-3
Horizontal analysis:
Increase
or (Decrease)
Dec. 31, 2017
Dec. 31, 2016
Amount
Percentage
Vertical analysis:
Dec. 31, 2017
Dec. 31, 2016
Amount
Percentage*
Amount
Percentage**
BRIEF EXERCISE 14-5
2018
2017
2016
Amount
Percentage
BRIEF EXERCISE 14-6
2017
2016
Increase
BRIEF EXERCISE 14-7
BRIEF EXERCISE 14-8
2018
2017
2016
Net income
20%
BRIEF EXERCISE 14-9
BRIEF EXERCISE 14–10
BRIEF EXERCISE 14–11
BRIEF EXERCISE 14–12
BRIEF EXERCISE 14–13
BRIEF EXERCISE 14–14
SILVA CORPORATION
Partial Statement of Comprehensive Income
BRIEF EXERCISE 14–15
HOLLOWAY CORPORATION
Partial Statement of Comprehensive Income
SOLUTIONS FOR DO IT! REVIEW EXERCISES
DO IT! 14-1
DO IT! 14-2
DO IT! 14-3
HRABIK CORPORATION
Partial Statement of Comprehensive Income
SOLUTIONS TO EXERCISES
EXERCISE 14-1
KURZEN INC.
Condensed Balance Sheets
December 31
EXERCISE 14-2
NAVARRO CORPORATION
Condensed Income Statements
For the Years Ended December 31
EXERCISE 14-3
(a) GURLEY CORPORATION
Condensed Balance Sheets
December 31
EXERCISE 14-3 (Continued)
GURLEY CORPORATION
Condensed Balance Sheets (Continued)
December 31
(b) GURLEY CORPORATION
Condensed Balance Sheet
December 31, 2017
EXERCISE 14-4
(a) EMLEY CORPORATION
Condensed Income Statements
For the Years Ended December 31
(b) EMLEY CORPORATION
Condensed Income Statements
For the Years Ended December 31
EXERCISE 14-5
EXERCISE 14-5 (Continued)
(b)
Ratio
Nordstrom
Macy’s
Industry
EXERCISE 14-6
EXERCISE 14-7
EXERCISE 14-8
EXERCISE 14-9
EXERCISE 14–10
EXERCISE 14-10 (Continued)
EXERCISE 14–11
EXERCISE 14–12
(a) HAAS CORPORATION
Partial Statement of Comprehensive Income
For the Year Ended October 31, 2017
(b) To: Chief Accountant
EXERCISE 14–13
(a) TRAYER CORPORATION
Partial Statement of Comprehensive Income
For the Year Ended December 31, 2017
SOLUTIONS TO PROBLEMS
PROBLEM 14-1
(a) Condensed Income Statement
For the Year Ended December 31, 2017
(b) Farris Company appears to be more profitable. It has higher relative
PROBLEM 14-1 (Continued)
PROBLEM 14-2
PROBLEM 14-2 (Continued)
PROBLEM 14-3
(a)
2017
2018
*($113,000 + $30,000 – $125,000)
**($125,000 + $45,000 – $145,000)
PROBLEM 14-3 (Continued)
PROBLEM 14-4
(a) LIQUIDITY
2016
2017
Change
turnover
PROBLEM 14-4 (Continued)
(b)
2017
2018
Change
PROBLEM 14-5
(b) The comparison of the two companies shows the following:
PROBLEM 14-6
PROBLEM 14-6 (Continued)
PROBLEM 14-7
PROBLEM 14-7 (Continued)
PROBLEM 14-8
TERWILLIGER CORPORATION
Condensed Statement of Comprehensive Income
For the Year Ended December 31, 2017
PROBLEM 14-9
JAIME CORPORATION
Statement of Comprehensive Income
For the Year Ended December 31, 2017
BYP 14-1 FINANCIAL REPORTING PROBLEM
(a) APPLE, INC.
Trend Analysis of Net Sales and Net Income
For the Three Years Ended 2013
(b) (dollar amounts in millions)
BYP 14-1 (Continued)
(c) (dollar amounts in millions)
BYP 14-2 COMPARATIVE ANALYSIS PROBLEM
(a)
PepsiCo
Coca-Cola Company
BYP 14-3 COMPARATIVE ANALYSIS PROBLEM
(a)
Amazon
Wal-Mart
BYP 14-4 DECISION MAKING ACROSS THE ORGANIZATION
The current ratio increase is a favorable indication as to liquidity, but
BYP 14-4 (Continued)
BYP 14-5 REAL-WORLD FOCUS
(a) Optional elements include:
(b) SEC-required elements include:
BYP 14-6 COMMUNICATION ACTIVITY
To: Abby Landis
From: Accounting Major
Subject: Financial Statement Analysis
BYP 14-7 ETHICS CASE
(a) The stakeholders in this case are:
BYP 14-8 ALL ABOUT YOU
BYP 14-9 FASB CODIFICATION ACTIVITY
(a) Discontinued Operations
IFRS 14-1 INTERNATIONAL FINANCIAL REPORTING PROBLEM