Chapter 14 – Financial Statement Analysis
CHAPTER 14
FINANCIAL STATEMENT ANALYSIS
1.
a. Inventory turnover ratio in 2015
b. Debt to equity ratio in 2015
c. Cash flow from operating activities in 2015
Net income
$ 410,000
Adjustments to Net Income
+ Depreciation
Change in AR
Change in inventory
Change in AP
CF from Operations
$ 600,000
d. Average collection period
e. Asset turnover ratio
f. Interest coverage ratio
g. Operating profit margin
Chapter 14 – Financial Statement Analysis
h. Return on equity
i. P/E ratio
Unable to calculate as market price is not provided.
j. Compound leverage ratio
2.
a.
Purchase of Bus $ (33,000)
b.
Cash dividend $ (80,000)
c.
Cash dividend $ (80,000)
Purchase of bus (33,000)
3. ROA = (EBIT/Sales) (Sales/Average Total Assets) = Return on Sales ATO
5. This transaction would increase the current ratio. The transaction reduces both current
assets and current liabilities by the same amount, but the reduction has a larger
6. c. Inventory increases due to a new (internally developed) product line.
8. a. Lower bad debt expense will result in higher operating income.
9. a. Certain GAAP rules can be exploited by companies in order to achieve specific
10. a. Off balance-sheet financing through the use of operating leases is acceptable when
11. a. A warning sign of accounting manipulation is abnormal inventory growth as
12. ROE = Net Profit Margin Total Asset Turnover Leverage Ratio
13. Use Equation 14.1 to solve for operating ROA:
14. ROE = Tax Burden Interest Burden Margin Turnover Leverage
15.
16. a. Economic Value Added = (ROC – Cost of Capital) Total Assets
b. Economic value added per dollar of invested capital:
Acme: ( .17 – .09) $1 = $ .08
CFA 1
Answer:
CFA 2
Answer:
CFA 3
Answer:
SmileWhite has the higher quality of earnings for several reasons:
i. SmileWhite amortizes its goodwill over a shorter period than does QuickBrush.
Chapter 14 – Financial Statement Analysis
CFA 4
Answer:
c. Preferred Dividends = 0.1 $25 18,000 = $45,000
45$265,1$ =
−
f. Times Interest Earned =
expense Interest
EBIT
0.30
78$
78$259,2$ =
+
=
CFA 5
Answer:
Chapter 14 – Financial Statement Analysis
a. QuickBrush has had higher sales and earnings growth (per share) than
SmileWhite. Margins are also higher. But this does not necessarily mean that
QuickBrush is a better investment. SmileWhite has a higher ROE, which has been
stable, while QuickBrush’s ROE has been declining. We can use DuPont analysis
to identify the source of the difference in ROE:
b. QuickBrush’s recent EPS growth has been achieved by increasing book value
per share, not by achieving greater profits per dollar of equity. Since EPS is
equal to (Book value per share ROE), a firm can increase EPS even if ROE is
CFA 6
Answer:
a. ROE
== Equity
profit Net
Equity
Assets
Assets
Sales
Sales
EBIT
EBIT
profitPretax
profitPretax
profitNet
Chapter 14 – Financial Statement Analysis
CFA 8
Answer:
2013
2016
Operating margin = Operating income － Depreciation
Sales
$38 － $3
$542 = 6.45%
$76 － $9
$979 = 6.84%
* As ROE can be defined as either (Net Income/Average Equity) or (Net Income/Year-
end Equity), here we use the latter definition for this problem.
a. Using the DuPont formula:
ROE (2013) = (1 – .4063) .9143 .0645 2.2122 1.5409 = .119 = 11.9%
Chapter 14 – Financial Statement Analysis