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Exam 13: Financial Statement Analysis

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Question 21

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Indicate whether each of the following statements about financial statement analysis is

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Ratio analysis may involve studying rela...

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Question 22

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Which of the following is (are) objective(s) of ratio analysis?

A) Assessing past performance.
B) Assessing the prospects for future performance.
C) Analyzing how a company finances its operations.
D) All of these answers are correct.

E) A) and D)
F) A) and C)

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Question 23

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The following balance sheet information is provided for Greene Company for Year 2: $\begin{array}{|l|r|}\hline \text { Cash } & \$\quad 5,400 \\\hline \text { Accounts receivable } & 15,500 \\\hline \text { Inventory } & 18,000 \\\hline \text { Prepaid expenses } & 1,600 \\\hline \text { Pant and equipment, net of depreciation } & 20,200 \\\hline \text { Land } & \underline { 19950 }\\\hline \text { Total assets } & \underline { \$ \quad 80,650 }\\\hline\\\hline \text { Liabilities and Stockholders' Equity }\\\hline\text { Accounts payable } & \$ \quad 4,500 \\\hline\text { Salaries payable } & 11,500 \\\hline \text { Bonds payable (Due in 2020) } & 19,000 \\\hline \text { Common stock, no par } & 30,000 \\\hline \text { Retained earnings } & \underline { 15,650}\\\hline \text { Total liabilities and stockholder' equity } & \underline { \$ \quad 80,650}\\\hline\end{array}$ What is the company's quick (acid-test) ratio (rounded to one decimal point) ?

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

Indicate whether each of the following statements about financial statement analysis is

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

Which of the following statements regarding net margin is incorrect?

Which of the following statements is correct?

Which ratios measure a company's long-term debt paying ability and its financing s

When debt is used to finance the purchase of assets,the term or time span of the debt should always be shorter than the lifespan of the assets.

The study of an individual item or account over several periods in the same financial year or over many years is known as:

A banker may perform a financial ratio analysis to assess a firm's ability to repay debt in a timely manner.

Which of the following statements about financial statement analysis is incorrect?

Which ratio measures the percentage of company's assets that are financed by debt?

Many companies have to monitor closely certain 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 and a quick ratio of 1.19 before the event occurred. $\begin{array}{|l|l|l|}\hline & \text { Impact on } & \text { Impact on } \\\hline & \text { Current Ratio } & \text { Ouick Ratio } \\\hline \text { Description of Transaction } & (+) \text { or }(-) \text { or }(\mathbf{0}) & (+) \text { or }(-) \text { or }(0) \\\hline \text { 1. Collected accounts receivable } & & \\\hline \text { 2. Issued common stock for cash } & & \\\hline \text { 4. Paid previously declared cash dividend } & & \\\hline \text { 5. Paid the balance on an account payable } & & \\\hline \text { 6. Purchased a building by issuing a long. } & & \\\hline \text { term note } & & \\\hline \text { 7. Purchased inventory on account } & & \\\hline \text { 8. Purchased current marketable securities for } & & \\\text { cash } & & \\\hline \text { 9. Sold merchandise for cash } & & \\\hline \text { 10. Sold merchandise on account } & & \\\hline\end{array}$ Required: In the above table,indicate whether each transaction would increase (+),decrease (-),or not affect (0)the company's current ratio and quick ratio.

Solvency ratios are used to analyze the long-term debt-paying ability and the composition of the financing s

Crawford Company's current ratio for Year 2 was 1.42,which was slightly above the current ratio for similar companies in its industry.Crawford's quick ratio for Year 2 was 0.68,which is substantially lower than for similar companies in its industry.What conclusion would you draw based on this information?

Discuss the limitations that affect financial statement analysis.

Osgood Company provided the following income statement for Year 1 and Year 2: $\begin{array}{l}\begin{array}{|l}\hline\\\hline \text { Sales }\\\hline \text { Cost of goods sold }\\\hline \text { Gross margin }\\\hline \text {Less operating expenses:}\\\hline \text { Selling and administrative expenses }\\\hline \text { Interest expense }\\\hline \text {Income before tax}\\\hline \text {Income tax expense}\\\hline \text { Net income }\\\hline\end{array}\begin{array}{|c|}\hline \underline {2014}\\\hline {\$\quad 220,000} \\\hline \underline {156,000} \\\hline 64,000 \\\hline\\\hline 26,000 \\\hline \underline {2,000} \\\hline 36,000 \\\hline \underline {10,800} \\\hline \underline {\$\quad 25,200} \\\hline\end{array}\begin{array}{c|}\hline \underline {2013}\\\hline{\$\quad160,000} \\\hline \underline {105,000 }\\\hline 55,000 \\\hline \\\hline 15,000 \\\hline \underline {3,000 }\\\hline 37,000 \\\hline \underline {11,100 }\\\hline \underline {\$\quad 25,900} \\\hline\end{array}\end{array}$ Required: (a)Perform vertical analysis on Osgood's income statements for Year 1 and Year 2.Round your answer to one decimal place (i.e.22.4%)

Horizontal analysis is also known as: