Exam 5: Essentials of Financial Statement Analysis

Which of the following financial ratios is not a component of the Z score model?

The long-term asset turnover ratio captures information about property,plant,and equipment utilization.

The current asset turnover ratio helps the analyst spot efficiency gains from improved accounts receivable and inventory management.

An unexplained increase in fixed asset sales may indicate that management needs to raise cash quickly.

The first step to informed financial statement analysis is a careful examination of the auditor's opinion.

Manero Company included the following information in its annual report: 2014 2013 2012 Sales \ 178,400 \ 162,500 \ 155,500 Cost of goods sold 115,000 102,500 100,000 Operating expenses 50,000 50,000 45,000 Net income 13,400 10,000 10,500 -In a trend income statement for 2014,where 2012 is the base year,sales are expressed as

The Z-score model combines five financial ratios in a precise way to estimate a company's default risk.

Condensed financial data are presented below for the Phoenix Corporation: 2014 2013 Accounts receivable \ 267,500 \ 230,000 Inventory 312,500 257,500 Total current assets 670,000 565,000 Intangible assets 50,000 60,000 Total assets 825,000 695,000 Current liabilities 252,500 200,000 Long-term liabilities 77,500 75,000 Sales 1,640,000 Cost of goods sold 982,500 Interest expense 10,000 Income tax expense 77,500 Net income 127,500 Cash flow from operations 71,000 Cash flow from investing activities (6,000) Cash flow from financing activities (62,500) Tax rate 30\% -If there is no preferred stock,the return on common equity for 2014 is (rounded):

In the highest risk S&P category of CCC/C,about 60% of the firms default within a year.

Trend statements help the user

Financial ratios help lenders quantify a potential borrower's default risk before a loan decision is finalized.

Using total sales instead of credit sales in the accounts receivable turnover calculation can produce misleading results and is a problem primarily for companies that have a material amount of cash sales.

Most companies try to develop customer loyalty while controlling costs.

Trend statements are better than common size statements at indicating which of the following?

Selected data of the Peninsula Company follow: As of December 31 Balance Sheet Data 2014 2013 Accounts receivable \ 671,000 \ 642,000 Allowance for doubtful accounts 31,000 \ 22,000 Net accounts receivable \ 640,000 \6 20,000 Inventories\_lower of cost or market \5 42,500 \6 42,500 Year Ended December 31 Income Statement Data 2014 2013 Net credit sales \ 3,150,000 \ 3,000,000 Net cash sales 800,000 600,000 Net sales 83,950,000 \ 3,600,000 Cost of goods sold \ 2,370,000 \ 2,160,000 Selling, general, and administrative expenses 475,000 350,000 Other 150,000 125,000 Total operating expenses \ 2,995,000 \ 2,635,000 Net income \ 955,000 \ 965,000 Required: a.What is the accounts receivable turnover for 2014? b.What is the inventory turnover for 2014?

The financial structure leverage ratio measures the degree to which the company uses long-term debt to finance assets.

Hansel Corporation's condensed balance sheets appear below: (Base Year) 2014 2013 2012 Assets: Current assets \ 55,000 \ 56,500 \ 70,000 Plant \& equipment, net 495,000 410,000 440,000 Intangible assets, net 20,000 27,500 40,000 Total assets \5 70,000 \4 94,000 \5 50,000 Liabilities \& Stockholders' Equity: Current liabilities \ 40,000 \ 35,000 \ 32,500 Long-term liabilities 395,000 310,000 375,000 Stockholders' equity 135,000 149,000 142,500 Total liabilities \& equity \5 70,000 \4 94,000 \5 50,000 -In a common size balance sheet for 2013,plant and equipment (net)is expressed as

An analyst desiring to determine the degree to which a company's earnings have fluctuated historically in relation to changes in economic growth would employ cross-sectional analysis.

Selected information taken from the 2014 annual report of Aardvark Company follows.During 2014,the company had no nonoperating or nonrecurring items included in income and had no outstanding preferred stock. (\ in millions) Sales \ 19,903 \ 18,781 Interest expense 130 169 Net income 1,153 1,088 Total assets 12,673 12,461 Dividends (153) (131) Total stockholders' equity \ 4,288 \ 4,007 Assumed tax rate 35\% 35\% Industry ROA 7.32\% Industry operating profit margin 6.1\% Required: a.For 2014,calculate:ROA,ROCE,operating profit margin,and asset turnover.Round your percentage answers to one decimal place.For example,.1234 = 12.3%. b.Based on the industry data provided,does Aardvark appear to have a competitive advantage (briefly explain your answer)? If so,what strategy is the firm apparently following?

Analysts typically eliminate after-tax interest expense from EBI when calculating ROA.