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Exam 9: Financial Statement Analysis

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Question 71

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The following income statement was prepared by Case Company for 2014: Required: Perform vertical analysis for Case Company's 2014 income statement.

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Question 72

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Explain the difference between horizontal analysis and vertical analysis of a company's financial statements.

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Horizontal analysis means examining indi...

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Question 73

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The accounting concept or principle that is perhaps the greatest single culprit in distorting the results of financial statement analysis is the:

The Abel Company provided the following information from its financial records: $\begin{array} { | l | r | l | r | r | } \hline \text { Net income } & \$ 250,000 & \text { Common shares outstanding } 1 / 1 & 200,000 \\\hline \text { Common stock dividends } & \$ 20,000 & \text { Common shares outstanding } 12 / 31 & 300,000 \\\hline \text { Preferred stock dividends } & \$ 25,000 & \text { Preferred shares outstanding } 1 / 1 & 10,000 \\\hline \text { Sales } & \$ 1,000,000 & \text { Preferred shares outstanding } 12 / 31 & 6,000 \\\hline\end{array}$ What is the amount of the company's earnings per share?

Select the term from the list provided that bests matches each of the following descriptions or definitions:

The Fortune Company reported the following income for 2014: $\begin{array} { | l | r | } \hline \text { Sales } & \$ 130,000 \\\hline \text { Cost of goods sold } & 80,000 \\\hline \text { Gross margin } & \$ 50,000 \\\hline \text { Selling and administrative expense } & 15,000 \\\hline \text { Operating income } & \$ 35,000 \\\hline \text { Interest expense } & 5,000 \\\hline \text { Income before taxes } & \$ 30,000 \\\hline \text { Income tax expense } & 10,000 \\\hline \text { Net income } & \$ 20,000 \\\hline & \\\hline\end{array}$ What is the company's number of times interest is earned ratio?

Cost of goods sold/average inventory is the formula for which of these analytical measures?

A vertical analysis uses percentages to compare each of the parts of an individual statement to a key statement figure. For example, on an income statement each item would be shown as a percentage of net sales.

Which ratio measures how effectively a company is using assets to generate revenue?

The following partial balance sheet is provided for Groome Company: $\begin{array}{l}\text { Liabilities and Stockholders' Equity }\\\begin{array} { | l | r | r | } \hline \text { Accounts payable } & \$ 9,000 \\\hline \text { Salaries payable } & 12,000 \\\hline \text { Bonds payable (Due in 2020) } & 20,000 \\\hline \text { Common stock, no par } & 30,000 \\\hline \text { Retained earnings } & \underline{54,000} \\\hline \text { Total liabilities and stockholder' equity } & \$ \quad \underline{125,000} \\\hline\end{array}\end{array}$ What is the company's debt to assets ratio?

The following balance sheet information is provided for Apex Company for 2014: What is the company's working capital?

Crawford Company's current ratio for 2014 was 1.42, which was slightly above the current ratio for similar companies in its industry. Crawford's quick ratio for 2014 was 0.68, which is substantially lower than for similar companies in its industry. What conclusion would you reach based on this information?

What is a primary drawback with examining and comparing absolute amounts from two businesses' financial statements?

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.

As of December 31, 2013, Gant Corporation had a current ratio of 1.29, quick ratio of 1.05, and working capital of $18,000. The company uses a perpetual inventory system and sells merchandise for more than it cost. On January 1, 2014, Gant paid $250 for transportation in cost on merchandise it had received. Which of the following statements is incorrect?

Select the incorrect statement regarding net margin.

The accounting profession assumes that financial statement users have an expert knowledge of business.

The following information was provided by Joseph Company as of December 31, 2014: On the most recent trading date, Joseph's common shares sold at $36 and the preferred shares sold at $14. The following information on industry averages is provided: Earnings per share $2.06 Price-earnings ratio 13.2:1 Required: 1) Calculate and compare Joseph Company's ratios with the industry averages shown above. Round your answer to two decimal places. 2) Discuss whether you would invest in this company.

Common methods of financial statement analysis include all of the following except:

As of December 31, 2013, Gant Corporation had a current ratio of 1.29, quick ratio of 1.05, and working capital of $18,000. The company uses a perpetual inventory system and sells merchandise for more than it cost. On January 1, 2014, Gant recorded cost of goods sold of $4,100. As a result of this transaction, Gant's quick ratio will: