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Exam 9: Financial Statement Analysis

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Question 51

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Indicate whether each of the following statements is true or false. Some forms of financial statement analysis involve identifying changes in the same item for the same company over a period of time. ______ Some forms of financial statement analysis involve comparing operations of different companies in the same industry. ______ Vertical analysis is also called trend analysis. ______ Vertical analysis refers to studying the behavior of individual financial statement items over several periods. ______ Horizontal analysis could be done using changes in the absolute dollar amount of an item or trends in percentages. ______

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Some forms of financial statement analys...

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Question 52

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The accounts receivable turnover ratio can be used to asses a firm's solvency.

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Question 53

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While horizontal analysis examines one item over many time periods, vertical analysis examines many items in the same interval of time.

Which of the following statements regarding ratio analysis is incorrect?

Which of the following statements regarding the information disclosed in financial statements is incorrect?

Darden Company has cash of $40,000, accounts receivable of $60,000, inventory of $32,000, and equipment of $100,000. Assuming current liabilities of $48,000, this company's working capital is:

Accrual accounting requires the use of many estimates, including:

Financial ratio analysis is a form of horizontal analysis in that comparisons are made between different accounts in the same set of financial statements.

Various ratios are computed to assess different aspects of a company's financial condition and (or) strength. Required: In the table below, indicate which aspect of financial condition each specified ratio is designed to assess:

Long-term creditors are usually most interested in evaluating:

Working capital is current assets minus current liabilities.

For Perez Corporation, return on equity is substantially higher than return on investment. What does that tell you about the company?

Vertical analysis always involves comparing financial statement elements over a span of time.

The following balance sheet information is provided for Greene Company for Year 2: $\begin{array}{lr}\text { Assets }\\\text { Cash } & \$ 6,600 \\\text { Accounts receivable } & 12,750 \\\text { Inventory } & 15,300 \\\text { Prepaid expenses } & 2,100 \\\text { Plant and equipment, net of depreciation } & 20,000 \\\text { Land } & \underline{ 13,900 }\\\text { Total assets } &\underline{ \$ 70,650}\\\text { Liabilities and Stockholders' Equity }\\\text { Accounts payable } & \$ 3,090 \\\text { Salaries payable } & 7,730 \\\text { Bonds payable (Due in ten years) } & 14,500 \\\text { Common stock, no par } & 14,000 \\\text { Retained earnings } &\underline{ 31,330} \\\text { Total liabilities and stockholders' equity }& \$ 70,650\end{array}$ What is the company's quick (acid-test) ratio? (Round your answer to 2 decimal places.)

The Fortune Company reported the following income for Year 2: $\begin{array}{lr}\text {Sales}&\$135,000\\\text {Cost of goods sold}&\underline{82,500}\\\text {Gross margin}&\$52,500\\\text {Selling and administrative expense}&\underline{20,000}\\\text { Operating income } & \$ 32,500 \\\text { Interest expense } & \underline{5,500} \\ \text {Income before taxes } & \$ 27,000 \\\text { Income tax expense } & \underline{ 8,100} \\\text { Net income } & \underline{\$ 18,900}\end{array}$ What is the company's number of times interest is earned ratio?

Many companies have to monitor some of their financial statement ratios, such as the current ratio, due to debt covenants. Selected transactions are provided below for a company that uses a perpetual inventory system, sells its merchandise at a selling price that exceeds cost, and had a current ratio of 1.85 before the event occurred. Required: In the above table, indicate whether each transaction would increase (+), decrease (−), or not affect (0) the company's working capital and the current ratio.

Selected financial information for Martin Company for Year 2 follows: $\begin{array}{llr} \text { Sales } &\$498,000\\ \text { Cost of goods sold } &320,000\\ \text { Merchandise inventory } &\\ &\\ \text {Beginning of year } &72,000\\ \text { End of year} &80,000\\\end{array}$ Required: How many times did Martin's merchandise inventory turnover during Year 2? (Round your answer to one decimal place.)

If the company purchased a $60,000 piece of equipment by paying $30,000 and having the rest financed with a short-term note from the bank, then immediately after this transaction what is the expected impact on the components of the current ratio?

The following balance sheet information was provided by O'Connor Company: $\begin{array}{lrr}\text { Assets } & \text { Year 2 } & \text { Year 1 } \\\text { Cash } & \$ 3,600 & \$ 2,600 \\\text { Accounts receivable } & \$ 8,600 & \$ 6,600 \\\text { Inventory } & \$ 36,000 & \$ 37,000\end{array}$ Assuming that net credit sales for Year 2 totaled $161,000, what is the company's most recent accounts receivable turnover?

Net income divided by sales is the formula for which of these analytical measures?