Exam 3: Financial Statements and Ratio Analysis

The Sarbanes-Oxley Act of 2002 was passed to eliminate many of the disclosure and conflict of interest problems of corporations.

The liquidity of a business firm refers to the solvency of the firm's overall financial position.

Inflation can distort

Which of the following ratios is difficult for creditors of a firm to analyze because the data are usually not available in published financial statements?

Table 3.2 Dana Dairy Products Key Ratios Income Statement Dana Dairy Products For the Year Ended December 31, 2010 Balance Sheet Dana Dairy Products December 31, 2010 -The current ratio for Dana Dairy Products in 2005 was ________. (See Table 3.2)

Operating profits are defined as

Table 3.1 Information (2010 values) 1. Sales totaled $110,000 2. The gross profit margin was 25 percent. 3. Inventory turnover was 3.0. 4. There are 360 days in the year. 5. The average collection period was 65 days. 6. The current ratio was 2.40. 7. The total asset turnover was 1.13. 8. The debt ratio was 53.8 percent. -Notes payable for CEE in 2010 was ________. (See Table 3.1)

Since the differences in the composition of a firm's current assets and liabilities can significantly affect the firm's "true" liquidity, it is important to look beyond measures of overall liquidity to assess the activity (liquidity) of specific current accounts.

Publicly-owned corporations are required by the Securities and Exchange Commission (SEC) and individual state securities commissions to provide their stockholders with an annual stockholders' report.

Ratio analysis merely directs the analyst to potential areas of concern; it does not provide conclusive evidence as to the existence of a problem.

The average age of inventory can be calculated as inventory turnover divided by 365.

Reliable Auto Parts has 5,000 shares of common stock outstanding. The company also has the following amounts in revenue and expense accounts. Calculate (a) gross profits. (b) operating profits. (c) net profits before taxes. (d) net profits after taxes (assume a 40 percent tax rate). (e) cash flow from operations. (f) earnings available to common stockholders. (g) earnings per share.

Colonial Furniture's net profits before taxes for 2002 totaled $354,000. The company's total retained earnings were $338,000 for 2004 year end and $389,000 for 2005 year end. Colonial is subject to a 26 percent tax rate. How large was the cash dividend declared by Colonial Furniture in 2005?

A firm with sales of $1,000,000, net profits after taxes of $30,000, total assets of $1,500,000, and total liabilities of $750,000 has a return on equity of

Table 3.2 Dana Dairy Products Key Ratios Income Statement Dana Dairy Products For the Year Ended December 31, 2010 Balance Sheet Dana Dairy Products December 31, 2010 -The average collection period for Dana Dairy Products in 2010 was (See Table 3.2)

The higher the value of the times interest earned ratio, the higher the proportion of the firm's interest income compared to its contractual interest payments.

The DuPont system merges the income statement and balance sheet into two summary measures of profitability

The statement of cash flows provides insight into the firm's assets and liabilities and reconciles them with changes in its cash and marketable securities during the period of concern.

The ________ measures the return on owners' (both preferred and common stockholders) investment in the firm.

Table 3.1 Information (2010 values) 1. Sales totaled $110,000 2. The gross profit margin was 25 percent. 3. Inventory turnover was 3.0. 4. There are 360 days in the year. 5. The average collection period was 65 days. 6. The current ratio was 2.40. 7. The total asset turnover was 1.13. 8. The debt ratio was 53.8 percent. -Net fixed assets for CEE in 2010 were ________. (See Table 3.1)