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Exam 13: Financial Statement Analysis

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Question 31

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

A) True
B) False

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Question 32

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Two ratios that provide insight on the relationship between credit sales and receivables are:

A) Current ratio and inventory turnover ratio.
B) Accounts receivable turnover and average days to collect receivables.
C) Average days to collect receivables and asset turnover.
D) Accounts receivable turnover and current ratio.

E) B) and C)
F) A) and B)

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Question 33

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The following information applies to Acorn Cons

Assume that you are considering purchasing some of a company's long-term bonds as an investment.Which of the company's financial statement ratios would you probably be most interested in?

Which type of approach should be used when evaluating corporate results using horizontal analysis?

The Martin Company reported net income of $15,000 on gross sales of $80,000.The company has average total assets of $135,000,of which $102,000 is property,plant and equipment.What is the company's return on investment (rounded to the nearest decimal point) ?

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

Which ratio would you use to examine a company's ability to pay its debts in the short term?

The most frequently quoted measure of earnings performance is the stockholders' equity ratio.

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.

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

The following information is from the financial records of Newton Company for Year 2: $\begin{array}{|l|r|}\hline \text { Sales } & \$ 620,000 \\\hline \text { Interest expense } & 26,000 \\\hline \text { Income tax expense } & 46,000 \\\hline \text { Net income } & 104,000 \\\hline\end{array}$ Required: Calculate the number of times interest is earned for Newton in Year 2.Round your answer to one decimal place.

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

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

Indicate whether each of the following statements is

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: $\begin{array}{|l|l|l|l|l|l|}\hline & & &&& \text { Stock } \\\hline &\text { Ratio }& \text { Liquidity } & \text { Solvency } & \text { Profitability } & \text { Market } \\\hline \text { 1. } & \text { Accounts receivable tumover } \\\hline \text { 2. } & \text { Average days to collect receivables } \\\hline 3 . & \text { Book value per share } \\\hline \text { 4. } & \text { Current ratio } \\\hline \text { 5. } & \text { Debt to equity ratio } \\\hline 6 . & \text { Dividend yield } \\\hline 7 . & \text { Earnings per share } \\\hline \text { 8. } & \text { Inventory turnover } \\\hline \text { 9. } & \text { Net margin } \\\hline \text { 10. } & \text { Average days to sell inventory } \\\hline \text { 11. } & \text { Number of times interest is earned } \\\hline \text { 12. } & \text { Plant assets to long-term liabilities } \\\hline \text { 13. } & \text { Price-eamings ratio } \\\hline \text { 14. } & \text { Quick ratio } \\\hline \text { 15. } & \text { Return on equity } \\\hline \text { 16. } & \text { Return on investment } \\\hline \text { 17. } & \text { Debt to assets ratio } \\\hline \text { 18. } & \text { Asset turnover ratio } \\\hline \text { 19. } & \text { Working capital } \\\hline\end{array}$

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

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

Comparative income statements for Pearle Company are provided below: $\begin{array}{lll}\hline \quad \quad \quad \quad \quad \quad \quad \quad \text {Pearle Company }\\\hline \quad \quad \quad \quad \text { Comparative Income Statement }\\\hline \quad \quad \quad \quad \quad \text {Years Ended December 31 ,}\\\begin{array}{|l|l|l|}\hline & 2014&2013\\\hline \text { Sales } & \$ 595,000&532,200 \\\hline \text { Less cost of goods sold } & \underline { 386,200 } & \underline { 357,650 } \\\hline \text { Gross margin } &208,800&174,550 \\\hline \text { Less operating expenses } & \underline { 108,950 } & \underline { 99,770 } \\\hline \text { Income before taxes } & 99,850 & 74,780 \\\hline \text { Income taxes } & \underline { 39,940 } & \underline {29,912 } \\\hline \text { Net income } & \underline { \$59,910 } & \underline { \$ 44,868 } \\\hline\end{array}\end{array}$ Required: Perform a horizontal analysis of Pearle Company's income statement by computing horizontal percentages for each item.Round your answer to one decimal place (i.e.22.5%).

The Dennis Company reported net income of $50,000 on sales of $300,000.The company has average total assets of $500,000 and average total liabilities of $100,000.What is the company's return on equity ratio?