Exam 5: Essentials of Financial Statement Analysis

Companies assigned a Moody's "Aaa" credit rating have a 2-4% default rate.

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 inventory turnover for 2014 is (rounded):

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 balance sheet,each balance sheet item is expressed as a percentage of

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 trend balance sheet for 2013,stockholders' equity is expressed as

There is more than one commonly used debt ratio.

Analysts must always be vigilant about the possibility that accounting distortions are present and complicate the interpretation of financial ratios,percentage relations,and trend indices.

Before computing ROA,analysts isolate a company's sustainable operating profits by removing nonoperating or nonrecurring items from reported income.

Panera Bread Company is a national bakery-cafe concept with 1,380 Company-owned and franchise-operated bakery-cafe locations in 40 states and in Ontario,Canada.The company has grown from serving approximately 60 customers a day at its first bakery-cafe to currently serving nearly six million customers a week system-wide,becoming one of the largest food service companies in the United States.Sara Lee Corporation is a global manufacturer and marketer of high-quality,brand-name products for consumers throughout the world focused primarily on the meats,bakery and beverage categories.Selected financial information about each company follows: Sara Lee Panera Bread Sales \ 10,793 million \ 1,353.5 million Net Income \ 527 million \ 86.8 million Return on Assets (ROA) 8.32\% 11.55\% Profit margin 7.05\% 6.45\% Asset turnover 1.18 1.79 Required: a.Why is Sara Lee less profitable than Panera Bread? b.Return on assets and return on sales in the bakery industry are 4.85% and 8.16%,respectively.How do these two companies compare to their industry and what might explain any noted differences?

Credit risk refers to the risk of payment default by the borrower,and the resulting loss to the lender of interest and loan principal payments.

In a common size cash flow statement,all items are expressed as a percentage of

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 balance sheet for 2014,accounts receivable is expressed as:

Informed financial statement analysis begins with knowledge of the company and its industry.

Financial ratio,percentage,and trend comparisons can be distorted by all of the following except

A benchmark comparison is an analytic tool similar in approach to time-series analysis.

All of the following are used as financial analysis tools except

Profit margin can be decomposed into its individual factors including COGS/Sales and Taxes/Sales.

Crue Company's merchandise inventory and other related accounts for 2014 follow: Sales \ 3,937,500 Cost of goods sold 2,756,250 Merchandise inventory: Beginning of year 750,000 End of year 825,000 Required: Calculate Crue's inventory turnover during 2014 assuming that the merchandise inventory buildup was relatively constant during the year.

Operating and administrative efficiencies that result in lower expenses per dollar of sales possibly explain a trend where income grows faster than sales.

The interest coverage ratio reflects the cushion between operating profit inflows and required interest payments.