Exam 7: Introduction to Financial Statement Analysis

The value of common stock investments will likely change between the time the shares are purchased and the time in the future when they are sold.The difference between the eventual selling price and the purchase price, is often called

The current ratio indicates a firm's ability to meet its short-term obligations.Analysts prefer a current ratio that at least exceeds

The rate of return on common shareholders' equity (ROCE) measures a firm's performance in using and financing assets to generate earnings.

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/are possible standard(s)?

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 #18) Refer to the Devlin Company example.Devlin Company's times interest earned for the year ended May 31, Year 7, was

The calculation of Rate of Return on Common Shareholders' Equity (ROCE) is as follows: Rate of Return on Common = Shareholders' Equity

What are pro forma financial statements?

Financial leverage

The rate of return on common shareholders' equity

(CMA adapted, Dec 93 #17) Norton Inc.has a 2 to 1 current ratio.This ratio would increase to more than 2 to 1 if

When a firm has securities outstanding that, if exchanged for shares of common stock, would decrease basic earnings per share by 30% or more, generally accepted accounting principles require a dual presentation: basic earnings per share and diluted earnings per share.

The rate at which accounts receivable turnover

Common shareholders have a residual claim on all income after creditors and preferred shareholders receive amounts contractually owed them.

Various techniques are used in the analysis of financial data to emphasize the comparative and relative importance of data presented and to evaluate the position of the firm.These techniques include(s)

The capital provided by common shareholders during the period include(s):

ROCE disaggregates into the following components:

Which ratio measures a firm's performance in using assets to generate earnings independent of how the firm financed acquisition of those assets?

The accounts receivable turnover ratio equals

Financial statement analysis often assess the profitability and risk of an organization.Specific ratios target each of these areas to answer questions such as "How profitable is this company?" or "How risky (liquid) is an investment in this company?" Required: a. Discuss three ratios that address how profitable a company might be. b. Discuss three ratios that address how risky (liquid) a company might be.

The typical steps in financial statement analysis and valuation include(s):