Exam 7: Introduction to Financial Statement Analysis

Total assets turnover reflects the effects of turnover ratios for accounts receivable, inventory, and fixed assets.

The _____ ratio indicates how fast firms sell their inventory items, measured in terms of the rate of movement of goods into and out of the firm.

Describe the relation between financial statement analysis and investment decisions.

The accounts payable turnover ratio can reveal

Measures of profitability for a firm engaging in operations selling merchandise in its stores to generate net income do not include:

(CMA Jun 96 #6) All-Things Inc.manufactures a variety of consumer products.The company's founders have managed the company for thirty years and are now interested in retiring.Consequently, they are seeking to sell the company.Trial Associates is looking into the acquisition of All-Things and has requested the latest financial statements and selected financial ratios in order to evaluate All-Things' financial stability and operating efficiency.The summary information provided by All-Things is presented below. All-Things Inc. Income Statement For the Year Ended May 31, Year 6 (in thousands) Sales (net) \ 30,500 Interest income 500 Total revenue \ 31.000 Costs and expenses: Cost of goods sold 17,600 Selling and administrative expense 3,550 Depreciation and amortization expense 1,890 Interest expense 900 Total costs and expenses \2 3,940 Income before taxes 7,060 Income taxes 2.900 Net income \4 ,160 $\text { Selected Financial Ratios }$ 5-Year All-Things Industry Year 4 Year 5 Average Current ratio 1.62 1.61 1.63 Acid-test ratio .63 .64 .68 Total asset turnover 1.83 1.84 1.84 Inventory turnover 3.21 3.17 3.18 Times interest earned 8.50 8.55 8.45 Total debt to net worth (Total debt / Total shareholders' equity) .86 Net profit margin 12.1\% 13.2\% 13.0\% 5- year Industy All-Things Average Yean 5 Year 4 1.63 1.61 1.62 Currentratio .68 .64 .63 Acichtest ratio 1.84 1.84 1.83 Total asset turnover 3.18 3.17 3.21 Inventory turnover 8.45 8.55 8.50 Times interest earned Total debt to net worth (Total debt / Total shareholders' equity) 13.0\% 13.2\% 12.1\% Net profit margin All-Things Inc. Comparative Statement of Financial Position As of May 31 (In thousands) Year 6 Year 7 Cash \ 400 \ 500 Marketable securities (at cost) 500 200 Accounts receivable (net) 3,200 2,900 Inventory 5,800 5,400 Total current assets Property, plant, and equipment (net) 7.100 7,000 Total assets \1 7,000 \1 6,000 Accounts payable \ 3,700 \ 3,400 Income taxes payable 900 800 Accrued expenses 1.700 1.400 Total current liabilities \ 6,300 \ 5,600 Long-term debt 2.000 1.800 Total liabilities \8 ,300 \7 ,400 Common stock ( \ 1 par value) 2,700 2,700 Paid-in-capital in excess of par 1,000 1,000 Retained earnings 5,000 4,900 Total shareholders' equity \ 8.700 \ 8.600 Total liabilities and shareholders' equity \ 17.000 \ 16.000 Required: a. Calculate a new set of ratios for the fiscal Year 6 for All-Things Inc. based on the financial statements presented. b. Briefly explain the analytical use of each of the seven ratios presented, describing what the investors can learn about All-Things Inc.'s financial stability and operating efficiency. c. Identify two limitations of ratio analysis.

Describe the fixed asset turnover ratio.

In assessing the debt ratios, analysts customarily vary the standard in relation to the stability of the firm's earnings and cash flows from operations.Banks have liabilities to assets ratios, typically

The profit margin ratio for ROCE indicates

What factors affect the risk of business firms?

(CMA adapted, Jun 90 #21) Regarding the information for Ramer Company and Matson Company, assume that some of the ratios and data for Ramer and Matson are affected by income taxes.Assuming no interperiod income tax allocation, which of the following items would be directly affected by income taxes for the period?

Devlin Company Devlin Company Statement of Financial Position as of May 31 (in thousands) Assets year 7 year 6 Current assets Cash \ 45 \ 38 Trading securities 30 20 Accounts receivable (net) 68 48 Inventories 90 80 Prepaid expenses 22 30 Total current assets \ 255 \ 216 Investments, at equity 38 30 Property, plant, and equipment (net) 375 400 Intangible assets (net) 80 45 Total assets \ 748 \ 691 Liabilities and shareholders' equity Current liabilities Notes payable \ 35 \ 18 Accounts payable 70 42 Accrued expenses 5 4 Income taxes pavable 15 16 Total current liabilities 125 80 Long-term debt 35 35 Deferred taxes 3 2 Total liabilities \ 163 \ 117 Shareholders' equity Preferred stock, 6\%,\ 100 par value, cumulative 150 150 Common stock, \ 10 par value 225 195 Additional paid-in capital-common stock 114 100 Retained earmings 96 129 Total shareholders' equity \5 85 \5 74 Total liabilities and shareholders' equity \7 48 \6 91 Devlin Company Income Statement For the year ended May 31 (in thousands) Year 7 Year 6 Net sales \ 480 \ 460 Costs and expenses Cost of goods sold 330 315 Selling, general, and administrative 52 51 Interest expense 8 9 Income before taxes \ 90 \ 85 Income taxes 36 34 Net income \5 4 \5 1 (CMA adapted, Jun 97 #14) Refer to the Devlin Company example.Assuming there are no preferred stock dividends in arrears, Devlin Company's return on common shareholders' equity for the year ended May 31, Year 7, was

The numerator of the rate of return on common shareholders' equity

The return from investing in the shares of common stock include(s):

An analyst examines changes in a firm's ratios over the three-year period-a so-called cross-section analysis.

The rate of return on assets relates the results of operating performance to the investments of a firm without regard to how the firm financed those investments.The ratio is calculated as follows:

The analysis of business transactions is facilitated by

Most individuals prefer _____ to _____ and they will want a _____ expected return if they purchase common stock shares than if they invest in a certificate of deposit.

Devlin Company Devlin Company Statement of Financial Position as of May 31 (in thousands) Assets year 7 year 6 Current assets Cash \ 45 \ 38 Trading securities 30 20 Accounts receivable (net) 68 48 Inventories 90 80 Prepaid expenses 22 30 Total current assets \ 255 \ 216 Investments, at equity 38 30 Property, plant, and equipment (net) 375 400 Intangible assets (net) 80 45 Total assets \ 748 \ 691 Liabilities and shareholders' equity Current liabilities Notes payable \ 35 \ 18 Accounts payable 70 42 Accrued expenses 5 4 Income taxes pavable 15 16 Total current liabilities 125 80 Long-term debt 35 35 Deferred taxes 3 2 Total liabilities \ 163 \ 117 Shareholders' equity Preferred stock, 6\%,\ 100 par value, cumulative 150 150 Common stock, \ 10 par value 225 195 Additional paid-in capital-common stock 114 100 Retained earmings 96 129 Total shareholders' equity \5 85 \5 74 Total liabilities and shareholders' equity \7 48 \6 91 Devlin Company Income Statement For the year ended May 31 (in thousands) Year 7 Year 6 Net sales \ 480 \ 460 Costs and expenses Cost of goods sold 330 315 Selling, general, and administrative 52 51 Interest expense 8 9 Income before taxes \ 90 \ 85 Income taxes 36 34 Net income \5 4 \5 1 (CMA adapted, Jun 97 #17) Refer to the Devlin Company example.Devlin Company's rate of return on assets for the year ended May 31, Year 7, was

What ratio(s) customarily include(s) in the numerator cash, marketable securities, and accounts receivable, with the denominator including all current liabilities?