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Exam 13: Interpreting Financial Statements

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Question 1

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Match each of the following terms with the appropriate definitions.

Premises

Responses

Gross margin ratio

A company's ability to cover long-term obligations.

Debt ratio

A statement where each amount is expressed as a percent of a base amount to reveal the relative importance of each financial statement item.

Return on common stockholders' equity

A company's ability to generate positive market expectations.

Dividend yield

Examination of financial data across time.

Profit margin ratio

The application of analytical tools to general-purpose financial statements and related data for making business decisions.

Total asset turnover

The availability of resources to meet short-term obligations and to efficiently generate revenues.

Times interest earned

A company's ability to provide financial rewards sufficient to attract and retain capital.

Days' sales uncollected

A statement with data for two or more successive accounting periods placed in side-by-side columns, often with changes shown in dollar amounts and percents.

Days' sales in inventory

The comparison of a company's financial condition and performance to a base amount.

Inventory turnover

The portion of total assets provided by equity, computed as total equity divided by total assets.

Premises

Gross margin ratio

Debt ratio

Return on common stockholders' equity

Dividend yield

Profit margin ratio

Total asset turnover

Times interest earned

Days' sales uncollected

Days' sales in inventory

Inventory turnover

Responses

A company's ability to cover long-term obligations.

A statement where each amount is expressed as a percent of a base amount to reveal the relative importance of each financial statement item.

A company's ability to generate positive market expectations.

Examination of financial data across time.

The application of analytical tools to general-purpose financial statements and related data for making business decisions.

The availability of resources to meet short-term obligations and to efficiently generate revenues.

A company's ability to provide financial rewards sufficient to attract and retain capital.

A statement with data for two or more successive accounting periods placed in side-by-side columns, often with changes shown in dollar amounts and percents.

The comparison of a company's financial condition and performance to a base amount.

The portion of total assets provided by equity, computed as total equity divided by total assets.

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Correct Answer

Premises

Responses

Gross margin ratio

Debt ratio

Return on common stockholders' equity

Dividend yield

Profit margin ratio

Total asset turnover

Times interest earned

Days' sales uncollected

Days' sales in inventory

Inventory turnover

Premises

Gross margin ratio

Debt ratio

Return on common stockholders' equity

Dividend yield

Profit margin ratio

Total asset turnover

Times interest earned

Days' sales uncollected

Days' sales in inventory

Inventory turnover

Responses

Question 2

Multiple Choice

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Selected comparative income statement amounts for a company are shown below. Using 2013 as the base year for a horizontal analysis, compute the account with the most significant change.

A) Sales.
B) General and administrative expenses.
C) Interest expense.
D) Miscellaneous expense.
E) Cannot be determined from the given data.

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

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Question 3

Multiple Choice

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The common-size percent is computed by:

A company paid cash dividends on its preferred stock of $40,000 in the current year when its net income was $120,000 and its average common stockholders' equity was $640,000. What is the company's return on common stockholders' equity?

A company has sales of $5,417,000, a gross profit ratio of 35%, ending merchandise inventory of $201,425, and total current assets of $1,539,600. What is the days sales' in inventory ratio for the year?

A financial statement analysis report helps to reduce uncertainty in business decisions through a rigorous and sound evaluation.

Express the following income statement information in common-size percents (round to nearest whole percent). Comment on the results. THORSTEN CORP. Comparative Income Statement For Years Ended December 31,2014 and 2013 $\begin{array}{|l|r|r|}\hline &{2014} & {2013} \\\hline \text { Sales } & \$ 1,200,000 & \$ 1,000,000 \\\hline \text { Cost of goods sold } & \underline{804,000} & \underline{650,000} \\\hline \text { Gross profit } & \$ 396,000 & \$ 350,000 \\\hline \text { Selling expenses } & 132,000 & 120,000 \\\hline \text { Administrative expenses } & 180,000 & 150,000 \\\hline \text { Net income } & \$ 84,000 & \$ 80,000 \\\hline\end{array}$

Profitability is the ability to generate positive market expectations.

The ability to meet short-term obligations and to generate revenues using the least amount of resources is called:

Corona Company's balance sheet accounts follow: What is Corona Company's debt to equity ratio for 2013?

Selected current year company information follows: $\begin{array}{|l|r|}\hline \text { Net income } & \$ 325,000 \\\hline \text { Net sales } & 4,700,000 \\\hline \text { Total liabilities, beginning-year } & 550,000 \\\hline \text { Total liabilities, end-of-year } & 530,000 \\\hline \text { Total stockholder's' equity, beginning-year } & 760,000 \\\hline \text { Total stockholder's' equity, end-of-year } & 745,000 \\\hline\end{array}$ Calculate the following company ratios: (a) Profit margin. (b) Total asset turnover. (c) Return on total assets. (d) Return on common stockholders' equity (assume the company has no preferred stock).

Internal users of financial information:

Liquidity refers to the availability of resources to meet short-term cash requirements.

The percent change is computed by subtracting the analysis period amount from the base period amount, then dividing the result by the base period amount and then multiplying that result by 100.

Working capital is computed as current liabilities minus current assets.

Match each of the following terms with the appropriate formulas.

The comparative balance sheet for Golden Co. is shown below. Express these amounts in a comparative, common-size balance sheet.

A company has a current ratio of 1.92, total liabilities of $193,849, long-term notes payable of $85,791, and a quick ratio of .96. What are total quick assets for the company?

Market prospects are the ability to provide financial rewards sufficient to attract and retain financing.

Describe the purpose of vertical financial statement analysis and how it is applied.