Exam 7: Introduction to Financial Statement Analysis

King Products Corporation King Products Corporation Statement of Financial Position (in thousands) June 30 Year 6 Year 5 Cash \ 60 \ 50 Marketable securities (at market) 40 30 Accounts receivable (net) 90 60 Inventories (at lower of cost or market) 120 100 Prepaid items 30 40 Total current assets \3 40 \2 80 Long-term investments (at cost) 50 40 Land (at cost) 150 150 Building (net) 160 180 Equipment (net) 190 200 Patents (net) 70 34 Gondwill (net) 40 26 Total long-term assets \6 60 \6 30 Total assets \1 ,000 \9 10 Notes payable \ 46 \ 24 Accounts payable 94 56 Accrued interest 30 30 ( Total current liabilities \1 70 \1 10 Notes payable, 10 \% due 12/31/ Year 12 20 20 Bonds payable, 12\% due 6/30/ Year 15 30 30 Total long-term debt \5 0 \5 0 Total liabilities \2 20 \1 60 Preferred stock- 5 \% cumulative, \ 100 par, non-participating, authorized, issued 200 200 and outstanding, 2,000 shares Common stock- \ 10 par, 40,000 shares authorized, 30,000 shares issued and 300 300 outstanding Additional paid-in capital--common 150 150 Retained earnings 130 100 Total shareholders' equity \7 80 \7 50 Total liabilities and shareholders' equity \1 ,000 \9 10 King Products Corporation Income Statement For the year ended June 30 (in thousands) Year 6 Net sales \ 600 Costs and expenses Cost of goods sold 440 Selling, general, and administrative 60 Interest expense 10 Income before taxes \ 90 Income taxes 45 Net income \4 5 (CMA adapted, Dec 96 #17) Refer to the King Products Corporation example.King Products Corporation's average collection period for the fiscal year ended at June 30, Year 6, using a 360-day year, was.

Igor Corporation's accounts receivable, net of allowance for uncollectibles, were $250,000 at December 31, Year 3, and $350,000 at December 31, Year 4.Net cash sales for Year 4 were $300,000.The accounts receivable turnover was 6.0.Igor's net sales for Year 4 were

Ratios provide little information unless the analyst places them in a context.After calculating the ratios, the analyst must compare them with some standard.Which of the following is not a possible standard?

Most firms that sell to other businesses, as opposed to consumers, sell on account and collect within 30 to 90 days.Interpreting any particular firm's accounts receivable turnover and days receivable outstanding requires knowing the terms of sale.If a firm's terms of sale are "net 30 days" and the firm collects its accounts receivable in 45 days, then the

Given the following information for the Siri Company, calculate the ratios as requested. December 31, December 31, Year 1 Year 2 Current assets \ 100,000 \ 150,000 Noncurrent assets 400,000 500,000 Current liabilities 50,000 100,000 Long-term debt 300,000 300,000 Common stock, 10,000 shares 100,000 100,000 Retained earmings 50,000 150,000 Year 2 Net income \ 100,000 Interest expense 40,000 Income taxes 30,000 Total revenues 1,000,000 a. Interest coverage ratio b. Long-term debt ratio at December 31, Year 2 c. Total assets tumover

Comparing firms using a common-size balance sheet rests on the assumption that

ROCE will exceed ROA whenever ROA exceeds the after-tax cost of borrowing plus any dividends required for preferred shareholders.Which of the following is/are true?

Management can take deliberate steps to produce a financial statement that presents a better current ratio at the balance sheet date than the average, or normal, current ratio during the rest of the year. Analysts refer to such actions as window dressing:

As a practical matter, most firms report segment information by _____ indicating that most firms appear to be organized on these same lines.

Measures for assessing short-term liquidity risk include all of the following except:

A common-sized income statement permit(s)

Using lower cost borrowed funds and earning a higher rate of return on those funds than their cost

_____ measures the amount of sales generated from a particular level of investments in fixed assets.

The following ratio relates the results of operating performance to the investments (assets) of a firm without regard to how the firm financed those investments. $\frac{\text { Net Income + Interest Expense Net of Income Tax Savings}}{\text {Average Total Assets }}$ The ratio is called a rate of return on:

Ratio analysis is one tool management may use to examine a firm's profitability and risk.Another tool often used by management are pro forma financial statements. Required: a. Describe the purpose of pro forma financial statements. b. Describe how pro forma financial statements may be constructed.

A firm desires to increase its ratio of cash flow from operations divided by average current liabilities from its anticipated level of 30 percent for the coming year to a more desirable level of 40 percent.Which of the following actions is consistent with this increase?

Most financial statement analysis explores some aspect of a firm's

Analysis of the Return on Assets has particular relevance to the

Rate of return on common shareholders' equity (ROCE)

Inventory turnover ratio