Exam 5: Essentials of Financial Statement Analysis

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\% -The total assets turnover ratio for 2014 is (rounded):

The financial statement reporting "filter" is

Time-series analysis helps identify financial trends

The quick ratio does not include inventory in the denominator because few businesses can instantaneously convert their inventories into cash.

Rome Company's net accounts receivable was $200,000 at December 31,2013 and $350,000 at December 31,2014.Net cash sales for 2014 were $250,000.The accounts receivable turnover for 2014 was 8.0,and this turnover figure was computed from net credit sales for the year. Required: What were Rome's total net sales for 2014?

Cross-sectional analysis helps identify similarities and differences across companies over time.

Jones Corporation wrote off $150,000 of obsolete inventory at December 31,2014. Required: Describe the effect of this write-off on the company's 2014 current and quick ratios.

A type of analysis that helps identify similarities and differences across companies or business units at a single moment in time is

Companies that spend more cash on operating activities than they generate must find ways to finance these operating cash shortfalls.

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\% -In a common size income statement for 2014,cost of goods sold is expressed as:

EBI refers to the company's earnings before interest.

When return on assets is high at a highly levered firm,return on common equity will be low.

Credit risk analysis using financial ratios typically involves an assessment of profitability and solvency.

Although a company's earnings are important in financial statement analysis,with respect to credit evaluations and lending decisions an analysis of its cash flows is

Lenders typically petition to have a borrower judged insolvent by a court when the borrower is in default.

Trend income statements recast each statement item as a percent of sales.

A low-credit-risk company generates operating cash flows substantially in excess of what are required to sustain its business activities.

The only way a company can increase its operating profits per asset dollar is to expand the amount of sales generated from each asset dollar.

A company can increase its return on assets by either increasing the profit margin or decreasing the intensity of asset utilization.

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 2012,where 2012 is the base year,sales are expressed as