Exam 7: Introduction to Financial Statement Analysis

The higher the capital structure leverage ratio, the _____ is the proportion of financing that common shareholders provide and the _____ is the proportion that creditors and preferred shareholders provide.Thus, the _____ the capital structure leverage ratio, the _____ is financial leverage.

Use the following comparative balance sheet to compute ratios as requested. Buff Company COMPARATIVE BALANCE SHEET As of December 31 , Year 1 and Year 2 Assets Year 2 Year 1 Current assets Cash \ 10,000 \ 5,000 Accounts receivable 6,000 4,000 Merchandise inventory 20,000 15,000 Total Current assets \ 36,000 \ 24,000 Property, plant, and equipment Building 30,000 30,000 Liabilities and Shareholders' Equity Current liabilities Advance from customer \ 400 \ 500 Accounts payable 1,000 1,000 Rent payable 2,000 1,500 Utilities pavable 200 200 Salaries payable 1,000 800 Total Current liabilities \4 ,600 \4 ,000 Shareholders' Equity Common stock, 2,000 shares 5,000 5,000 Additional paid-in capital 40,000 40,000 Retained eamings 16.400 5,000 Total Shareholders' equity 61,400 50,000 ( Total Liabilities and shareholders' equity \6 6,000 \5 4,000 Compute the following ratios at year end for Year 2 for Buff Company: a. Long-term debt ratio b. Debt-equity ratio c. Current ratio d. Leverage ratio Assume that a bank loans $\$ 10,000$ cash (due in 5 years) to the company on December 31 , Year 2 . Make the appropriate adjustments to the financial statements and compute the following ratios: e. Long-term debt ratio f. Debt-equity ratio g. Current ratio h. Leverage ratio

In theory, the numerator of the accounts receivable turnover ratio should include only sales made on account if the objective is to measure how quickly a firm collects its accounts receivable.

A steel manufacturer experienced a decrease in its fixed asset turnover from .9 in Year 5 to .7 in Year 6.This change is consistent with which of the following explanations?

Discuss how the analyst can disaggregate ROA into the product of two other ratios to study changes in ROA.

Concerning the analysis of financial data to emphasize the comparative and relative importance of data presented and to evaluate the position of the firm, it is important to take into consideration