Exam 5: Essentials of Financial Statement Analysis

Solvency refers to the long-term ability to generate sufficient cash to satisfy plant capacity needs,fuel growth,and to repay debt when due.

Differences in the business strategies companies adopt give rise to economic differences that are reflected as differences in asset utilization only.

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 2012,total liabilities and equity are expressed as

Which one of the following helps the analyst remove the effects of an information filter?

Asset turnover is defined as sales divided by total assets.

Mature companies' capital expenditures are limited to the amount needed to sustain current levels of operation.

Common size income statements show you how much of each sales dollar hits the bottom line as profit.

Financially healthy companies

Both common and preferred stock dividends are subtracted in arriving at net income available to common stockholders.

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 days inventory held for 2014 is (rounded):

Companies are not required to disclose business transactions that involve potential conflicts of interest if the transactions are with affiliated companies.

The quick ratio measures the most immediate liquidity of a company.

Analysts need to understand what accounting data do and do not reveal about a company's economic activities and condition.

Because GAAP specifies what must be contained in financial reports,management is precluded from disclosing financial and nonfinancial operating details that GAAP does not require-thus promoting comparability among companies' financial reports.

Lower profitability means higher default risk.

Time-series analysis helps identify financial trends over time for a single company.

The disadvantage of debt financing is that interest on debt is tax-deductible.

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 current ratio for 2014 is (rounded):

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 accounts receivable turnover for 2014 is (rounded): (Assume all sales are on account.)

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 common size income statement for 2014,the cost of goods sold is expressed as