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Exam 14: Financial Statement Analysis

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Question 21

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The effects of differences in accounting methods are of little importance when analyzing comparable data from competing businesses.

A) True
B) False

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Question 22

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In a vertical analysis, the base for cost of goods sold is

A) total selling expenses
B) sales
C) total expenses
D) gross profit

E) B) and D)
F) A) and D)

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Question 23

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Horizontal analysis of comparative financial statements includes

Assume the following sales data for a company: $\begin{array} { l r } \text { Current year } & \$ 325,000 \\\text { Preceding year } & 250,000\end{array}$ What is the percentage increase in sales from the preceding year to the current year?

On a common-sized income statement, all items are stated as a percent of total assets or equities at year-end.

When a corporation discontinues a segment of its operations at a loss, the loss should be reported as a separate item after income from continuing operations on the income statement.

The ratio of the market price per share of common stock on a specific date to the annual earnings per share is referred to as the price-earnings ratio.

Vertical analysis refers to comparing the financial statements of a single company over several years.

Times interest earned is computed as

The particular analytical measures chosen to analyze a company may be influenced by all of the following except

A company reports the following: $\begin{array} { l r } \text { Sales } & \$ 2,520,000 \\\text { Average total assets (excluding long-term investments) } & 1,400,000\end{array}$ ​ Determine the asset turnover ratio. Round your answer to one decimal place.

The numerator of the return on total assets is

An advantage of the current ratio is that it considers the makeup of the current assets.

The following data are taken from the financial statements: $\begin{array}{lrr}&\text { Current } & \text { Preceding } \\&\text { Year } & \text { Year }\\\text { Sales } & \$ 3,600,000 & \$ 4,000,000 \\\text { Cost of goods sold } & 2,000,000 & 2,700,000 \\\text { Beginning inventory } & 372,000 & 352,000 \\\text { Inventory, end of year } & 390,000 & 372,000\end{array}$ ​ (a) Determine for each year (1) the inventory turnover, round answer to one decimal place. (2) the number of days' sales in inventory. Round intermediate calculations to whole numbers and final answers to two decimal places. (b) Comment on the favorable and unfavorable trends revealed by the data

A company can compare its financial data to the data of other companies and industry averages to evaluate its position.

The number of days' sales in receivables is one means of expressing the relationship between average daily sales and accounts receivable.

If a company has issued only one class of stock, the earnings per share are determined by dividing net income plus interest expense by the number of shares outstanding.

The following data are taken from the balance sheet at the end of the current year. ​ $\begin{array} { l r } \text { Cash } & \$ 154,000 \\\text { Accounts receivable } & 210,000 \\\text { Inventory } & 240,000 \\\text { Prepaid expenses } & 15,000 \\\text { Marketable securities } & 350,000 \\\text { Property, plant, and equipment } & 375,000 \\\text { Accounts payable } & 245,000 \\\text { Accrued liabilities } & 4,000 \\\text { Income tax payable } & 10,000 \\\text { Notes payable, short-term } & 85,000\end{array}$ ​ Determine the (a) working capital, (b) current ratio, and (c) quick ratio. Round ratios to one decimal place. ​

The balance sheets at the end of each of the first two years of operations indicate the following: $\text { Kellman Company }$ $\begin{array}{lrr}&\text { Year } 2&\text { Year } 1\\\text { Total current assets } & \$ 600,000 & \$ 560,000 \\\text { Total investments } & 60,000 & 40,000 \\\text { Total property, plant, and equipment } & 900,000 & 700,000 \\\text { Total current liabilities } & 125,000 & 65,000 \\\text { Total long-term liabilities } & 350,000 & 250,000 \\\text { Preferred } 9 \% \text { stock, } \$ 100 \text { par } & 100,000 & 100,000 \\\text { Common stock, } \$ 10 \text { par } & 600,000 & 600,000 \\\text { Paid-in capital in excess of par-Common stock } & 75,000 & 75,000 \\\text { Retained earnings } & 310,000 & 210,000\end{array}$ -Using the balance sheets for Kellman Company, if net income is $250,000 and interest expense is $20,000 for Year 2, and the market price of common shares is $30, what is the price-earnings ratio on common stock for Year 2? (Round intermediate calculation to two decimal places and final answers to one decimal place.)

The numerator in calculating the accounts receivable turnover is