Comparative calendar year financial data for a company are shown below. Calculate the following ratios for 2018: (a) return on total assets (b) return on common stockholders' equity. \[\begin{array} { l | l | l } \hline & { 2018 } & { 2017 } \\ \text { Sales } & \$ 720,000 & \$ 607,500 \\ \hline \text { Gross profit } & 270,000 & 224,800 \\ \hline \text { Income before taxes } & 79,200 & 78,700 \\ \hline \text { Net income } & 51,200 & 51,700\\ \hline & & \\ \hline & { 2018 } & { 2017 } \\ \hline \text { Liabilities } & \$ 493,500 & \$ 452,500 \\ \hline \text { Common stock (\$12 par) } & 180,000 & 180,000 \\ \hline \text { Contributed capital in excess of par } & 135,000 & 135,000 \\ \hline \text { Retained earnings } & \underline{204,000} & 177,300 \\ \hline \text { Total liabilities and equity } & \$ 1,012,500 & \$ 944,800\\ \hline \end{array}\]

(a) $51,200/(($1,012,500 + $944,800)/2)

Exam 17: Analysis of Financial Statements

Selected balances from a company's financial statements are shown below. Calculate the following ratios for 2018: (a) accounts receivable turnover (b) inventory turnover (c) days' sales uncollected (d) days' sales in inventory (d) profit margin. (e) return on total assets. Dec. 31. Dec. 31. For the Accounts receivable 2018 Year 2018 Merchandise inventory \ 27,000 \ 24,000 Total assets 25,000 20,000 Accounts payable 296,000 244,000 Salaries payable 26,000 32,000 Sales (all on credit) 3,000 4,400 Cost af goods sold \ 312,000 Salaries expense 165,600 Other expenses 48,000 Net income 75,000

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Question 1

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(a) Accounts receivable turnover = $312,000/(($27,000 + $24,000/)2) 12.2times
(b) Inventory turnover = $165,600/(($25,000 + $20,000)/2) = 7.4times
(c) Days' sales uncollected = ($27,000/$312,000) * 365 = 31.6 days
(d) Days' sales in inventory = ($25,000/$165,600) * 3655.days
(d) Profit margin = ($24,000/$312,000) * 100 = _{7.7%
(e) Return on total assets = $24,000/[($296,000 + $244,000)/2] = 18.9%}

A common focus of financial statement users in evaluating a company's performance and financial condition includes evaluating its (1) , (2) , and (3) .

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Question 2

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past and current performance; current financial position; future performance and risk (answers can appear in any order)

Match the following terms to the appropriate definitions.

A company's ability to generate positive market expectations.

Comparative financial statement

The application of analytical tools to general-purpose financial statements and related data for making business decisions.

Horizontal analysis

A measure of solvency presented as the ratio of total liabilities to total equity.

Liquidity and efficiency

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A company's ability to generate positive market expectations.

Comparative financial statement

The application of analytical tools to general-purpose financial statements and related data for making business decisions.

Horizontal analysis

A measure of solvency presented as the ratio of total liabilities to total equity.

Liquidity and efficiency

A statement with data for two or more successive accounting periods placed in side-by-side columns, often with changes shown in dollar amounts and percentages.

Vertical analysis

A company's ability to provide financial rewards sufficient to attract and retain capital.

Financial statement analysis

(6)A statement where each amount is expressed as a percent of a base amount to reveal the relative importance of each financial statement item.

Market prospects

The comparison of a company's financial condition and performance to a base amount.

Solvency

Examination of financial data across time.

Debt to equity ratio

A company's ability to generate future revenues and meet long-term obligations.

Profitability

The availability of resources to meet short-term obligations and to efficiently generate revenues.

Common-size financial statement

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Question 3

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Horizontal analysis is the comparison of a company's financial condition and performance to a base amount.

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Question 4

Match each of the following formulas with the appropriate terms.

Net income - Preferred dividends Average common stockholders' equity

Days' sales in inventory

(Accounts receivable * 365)/Net sales

Dividend yield

Total liabilities/Total assets

Total asset turnover

Correct Answer:

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Net income - Preferred dividends Average common stockholders' equity

(Accounts receivable * 365)/Net sales

Total liabilities/Total assets

Income before interest expense and income taxes/Interest expense

Annual cash dividends per share/Market price per share

(Net sales - Cost of goods sold)/Net sales

Cost of goods sold/Average inventory

______Net sales/Average total assets

Net income/Net sales

(Ending inventory * 365)/Cost of goods sold

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Question 5

Describe the purpose of horizontal financial statement analysis and how it is applied.

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Question 6

Industry standards for financial statement analysis:

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Question 7

The measurement of key relationships between financial statement items is known as ________.

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Question 8

Zhang Company reported Cost of goods sold of $835,000, beginning Inventory of $37,200 and ending Inventory of $46,300. The average Inventory amount is:

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Question 9

The building blocks of financial statement analysis do not include:

(Multiple Choice)

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Question 10

Financial reporting refers to:

(Multiple Choice)

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Question 11

Comparative calendar year financial data for a company are shown below. Calculate the following ratios for 2018: (a) return on total assets (b) return on common stockholders' equity. 2018 2017 Sales \ 720,000 \ 607,500 Gross profit 270,000 224,800 Income before taxes 79,200 78,700 Net income 51,200 51,700 2018 2017 Liabilities \ 493,500 \ 452,500 Common stock ( \1 2 par) 180,000 180,000 Contributed capital in excess of par 135,000 135,000 Retained earnings 177,300 Total liabilities and equity \ 1,012,500 \ 944,800

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Question 12

When a negative amount is in the base period and a positive amount is in the analysis period (or vice versa), a meaningful percent change cannot be calculated.

(True/False)

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Question 13

Graphical analysis of the balance sheet can be useful in assessing sources of financing.

(True/False)

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Question 14

A good financial statement analysis report usually includes the following six sections: (1), (2) , (3) , (4) (5) , and (6) .

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Question 15

In order to be classified as an extraordinary gain or loss, the item must be both (1) ____ and (2) .

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Question 16

A company with a low inventory turnover requires a smaller investment in inventory than one producing the same sales with a higher turnover.

(True/False)

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Question 17

A corporation reports the following year-end balance sheet data. Calculate the following ratios: (a) working capital (b) acid-test ratio (c) current ratio (d) debt ratio (e) equity ratio (f) debt-to-equity ratio Cash……………………….. $ 50,000 Current liabilities $ 64,000 Accounts receivable………. 35,000 Long-term liabilities………. 72,000 Inventory………………….. 60,000 Common stock…………….. 100,000 Equipment………………… 140,000 Retained earnings…………. 49,000 Total assets……………….. $285,000 Total liabilities and equity $285,000

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Question 18

The use of debt is sometimes described as financial leverage because debt can have the effect of increasing the return on equity.

(True/False)

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Question 19

A company paid cash dividends on its preferred stock of $40,000 in the current year when its net income was $120,000 and its average common stockholders' equity was $640,000. What is the company's return on common stockholders' equity?

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Question 20

Exam 17: Analysis of Financial Statements

A common focus of financial statement users in evaluating a company's performance and financial condition includes evaluating its (1) ________, (2) ________, and (3) ________.

Horizontal analysis is the comparison of a company's financial condition and performance to a base amount.

Describe the purpose of horizontal financial statement analysis and how it is applied.

Industry standards for financial statement analysis:

The measurement of key relationships between financial statement items is known as ________.

Zhang Company reported Cost of goods sold of $835,000, beginning Inventory of $37,200 and ending Inventory of $46,300. The average Inventory amount is:

The building blocks of financial statement analysis do not include:

Financial reporting refers to:

When a negative amount is in the base period and a positive amount is in the analysis period (or vice versa), a meaningful percent change cannot be calculated.

Graphical analysis of the balance sheet can be useful in assessing sources of financing.

A good financial statement analysis report usually includes the following six sections: (1)________, (2) ________, (3) ________, (4) ________ (5) ________, and (6) ________.

In order to be classified as an extraordinary gain or loss, the item must be both (1) ____________ and (2) ________.

A company with a low inventory turnover requires a smaller investment in inventory than one producing the same sales with a higher turnover.

The use of debt is sometimes described as financial leverage because debt can have the effect of increasing the return on equity.

A company paid cash dividends on its preferred stock of $40,000 in the current year when its net income was $120,000 and its average common stockholders' equity was $640,000. What is the company's return on common stockholders' equity?

Accounting in Business

Analyzing and Recording Transactions

Adjusting Accounts and Preparing Financial Statements

Completing the Accounting Cycle

Accounting for Merchandising Operations

Inventories and Cost of Sales

Accounting Information Systems

Cash and Internal Controls

Accounting for Receivables

Plant Assets Natural Resoures and Intangibles

Current Liabilities and Payroll Accounting

Accounting for Partnerships

Accounting for Corporations

Long-Term Liabilities

Investments

Reporting the Statement of Cash Flows

Managerial Accounting Concepts and Principles

Job Order Costing

Process Costing

Cost-Volume-Profit Analysis

Master Budgets and Planning

Flexible Budgets and Standard Costs

Performance Measurement and Responsibility Accounting

Capital Budgeting and Managerial Decisions

Present and Future Values in Accounting

Activity-Based Costing

Filters

A common focus of financial statement users in evaluating a company's performance and financial condition includes evaluating its (1) , (2) , and (3) .

A good financial statement analysis report usually includes the following six sections: (1), (2) , (3) , (4) (5) , and (6) .

In order to be classified as an extraordinary gain or loss, the item must be both (1) ____ and (2) .