Deck 14: Income Statement Analysis

Question 1

Fedora SpA is a wool hat manufacturer.The price of wool is increasing at the rate of 20% a year.Labor cost per hour increases at the rate of 2% a year.During period X1,for 100 CU of sales,the raw materials represented 50% of the cost of manufacturing a hat.Manufacturing labor represented 20% of the cost of manufacturing a hat.Forty percent of both manufacturing and SG&A costs were allowances for depreciation of fixed assets,the rest were labor costs or purchases from third parties that tend to increase at the same rate as manufacturing labor cost per hour.No new investment is considered in X1 or X2.Selling,general,administrative and interest expenses represent 32% of the sales revenue.The working capital needed to support 100 CU of sales is 50 CU that are financed at an average cost of capital of 4% a year (the amount of WCN is expected to remain the same in X2).Net profit before tax is 8% of the selling price.What is the expected profit per 100 CU of revenue for X2 if selling prices cannot increase more than 5%?

A) 3.17 CU
B) 6.18 CU
C) 5.94 CU
D) 5.88 CU

Answer 1

B

Question 2

How is the operating profit calculated?

A) Operating profit = Value added + Reversal of provisions - Depreciation expenses and movement in provisions + Other operating revenues - Other operating expenses
B) Operating profit = EBITDA + Reversal of provisions- Depreciation expenses and movement in provisions + Other operating revenues - Other operating expenses
C) Operating profit = Commercial margin + Reversal of provisions - Depreciation expenses and movement in provisions + Other operating revenues - Other operating expenses
D) Operating profit = EBITDA - Reversal of provisions + Depreciation expenses and movement in provisions - Other operating revenues + Other operating expenses

Answer 2

B

Question 3

How is the total production for the period calculated?

A) Total production for the period = Sale of goods and/or services produced by the business - Change in inventory of finished manufactured goods and works in progress + Production capitalized
B) Total production for the period = Sale of goods and/or services produced by the business + Change in inventory of finished manufactured goods and works in progress + Production capitalized
C) Total production for the period = Sale of goods and/or services produced by the business - Change in inventory of finished manufactured goods and works in progress - Production capitalized
D) Total production for the period = Sale of goods and/or services produced by the business + (Change in inventory of finished manufactured goods and works in progress/Production capitalized)

Answer 3

B

Question 4

Which of the following statements is not correct?

A) EBITDA is looked at as a measure of the cash flow generated by operations.
B) EBITDA measures the wealth created by the enterprise from its operations,independently of its financial income and expenses,charges for depreciation and amortization,and other adjustments such as provisions for doubtful accounts.
C) EBITDA is also called operating profit.
D) EBITDA helps in evaluating the firm's management's short-term ability to create wealth since it is not affected by long-term strategic decisions regarding financing and capital investment policies.

Question 5

How is the EBITDA calculated?

A) EBITDA = Value Added + Operating subsidies - Taxes and similar expenses (excluding income tax)- Wages and salaries - Social security and other welfare allowances
B) EBITDA = Commercial margin + Operating subsidies - Taxes and similar expenses (excluding income tax)- Wages and salaries - Social security and other welfare allowances
C) EBITDA = Total production for the period + Operating subsidies - Taxes and similar expenses (excluding income tax)- Wages and salaries - Social security and other welfare allowances
D) EBITDA = Value Added + Operating subsidies - Taxes and similar expenses (excluding income tax)- Wages and salaries - Social security and other welfare allowances - Depreciation expenses

Question 6

Which of the following statements is not correct?

A) The trend analysis allows the examination of long trends (e.g. ,evolution over 10 years).
B) For trends to be meaningful,the business model must be stable over the period of comparison.
C) The trend analysis is not often applied to the balance sheet.
D) The trend analysis enables the analyst to compare and contrast the financial statements of two and more companies in the same industrial sector or risk class more easily.

Question 7

Firms A and B are in all points identical with the exception of their choice of sources of financing outside their shareholders' equity.Firm A has one third of its liabilities in the form of long-term loans,one third in the form of overdraft and one third representing accounts payables.Firm B has two third of its liabilities as interest-bearing long-term debt,no overdraft and one third as accounts payable.In the first year of their operations,in a 'normal' interest market,which of the two firms will show the higher profit after interest expenses (before taxes).

A) Firm B will have the higher profit before taxes.
B) Firm A will show the higher profit before taxes.
C) Both firms will report the same amount of profit.

Question 8

Common-size analysis is based on the preparation of common-sized financial statements,i.e. ,an income statement and a balance sheet presented in percentage of a base figure (indexed as 100).What is generally the base for the income statement?

A) Net income
B) Net sales
C) Exceptional revenue
D) Interest expense

Question 9

How should a Rent A Car company and the local phone utility report the sales revenue from auctioning their used vehicles after these have fulfilled their strategically defined useful life?

A) Both the rental car company and the utility company report the revenue as 'exceptional revenue'.
B) Both the rental car company and the utility company report the revenue as 'revenue from operations'.
C) The rental car company reports this revenue as 'operating revenue' while the utility company reports the equivalent sale as 'exceptional revenue'.
D) The rental car company reports this revenue as 'exceptional revenue' while the utility company reports the equivalent sale as 'operational revenue'.

Question 10

Firms A and B are in all points identical with the exception of their choice of depreciation method for their fixed assets.Firm A uses an accelerated depreciation method while firm B used a straight-line method.In the first year of their operations,which firm has the higher EBITDA

A) Firm A has the higher EBITDA.
B) Both firms have the same EBITDA.
C) Firm B has the higher EBITDA.

Question 11

Eudora Inc.is a pharmaceutical laboratory involved in advanced biotechnology research,manufacturing and sales and distribution of advanced medications in growing markets.At the beginning of X1 shareholders' equity was 1,000 CU.From period X1 to period X2,production increased from 2,000 CU to 2,400 CU.Simultaneously,consumptions from third parties increased from 1,500 to 1,860.The philosophy of management is that value-added should be partitioned as follows: 50% to employees in the form of remunerations in the larger sense,5% go to paying for interest expenses,15% go to the state in the form of taxes paid,5% are set aside as a provision for price reductions for patients in developing countries who cannot afford buying the medication at the list price,and 25% go to shareholders (but no dividends are paid in either year),.What was the return on equity during X1 and during X2.

A) X1 ROE = 12.5%;X2 ROE = 13.5%.
B) X1 ROE = 25%;X2 ROE = 25%.
C) X1 ROE = 25%;X2 ROE = 24%.
D) X1 ROE = 12.5%;X2 ROE = 12%

Question 12

If,year on year,sales revenue increased by 10%,gross margin decreased from 40% to 35% of sales revenue and profit before tax increased by 6%,by how much did the Selling General and Administrative Expenses (which were 10% of sales revenue in the first year)increase or decrease from one year to the next (assume no interest expense accrued during the period).

A) SG&A declined by 25%
B) SG&A increased by 33%
C) SG&A declined by 33%
D) SG&A increased by 25%

Question 13

Which of the following statements is not correct?

A) The common-size analysis permits the analyst to compare and contrast the financial statements of two and more companies in the same industrial sector or risk class more easily.
B) The common-size analysis reduces the problem of the size difference between companies.
C) The common-size analysis helps the analyst formulate hypotheses about the most efficient business model between the firms compared,and identify possible thresholds in economies of scale.
D) The common-size analysis allows only comparison over one year.

Question 14

How is the business profitability of a firm often measured,to allow inter-enterprise comparisons?

A) EBITDA/Net income
B) EBITDA/Commercial margin
C) EBITDA/Value added
D) EBITDA/Sales

Question 15

Trend analysis and common-size analysis can give sufficient or final answers to the decision maker.

Question 16

What is the term used for the analysis which measures the changes over past accounting period(s)of a limited number of items or of the whole set of financial statements?

A) Limited analysis
B) Vertical analysis
C) Trend analysis
D) Common-size analysis

Question 17

Entity A's proportion of costs that do not vary with volume of sales (depreciation,managers' remunerations,etc. )is larger than that of entity B.Both entities showed a positive income from operations in period X1.If sales revenue for each firm were to increase by the same percentage during X2,which of the four scenarios below would you likely expect to see happen?

A) Entity A's total costs will rise faster rate than those of entity B.
B) Entity A's total costs will rise at a slower rate than those of entity B.
C) Entity A's profit will increase while profit of entity B will stay the same.
D) Entity A's profit will decrease faster than that of entity B will increase

Question 18

Apple Inc.chose to report recognized sales revenue of i-Phones and i-Pods evenly over the 18 months following the sale on the grounds that the sales contract implies that upgrades and updates of the software will be provided to the customer.The customer essentially paid in advance for services to be rendered.Apple's argument is that a correct application of the matching principle requires that the costs of upgrades and the revenue (perceived in advance as unearned revenue)be recognized in the same period.Apple Inc.' s choice is in conformity with IFRS rules.

Question 19

How is the operating net income before taxes calculated?

A) Net operating income before taxes = EBITDA +/- Shares of profits (losses)from joint ventures + Financial income - Financial expenses
B) Net operating income before taxes = Value added +/- Shares of profits (losses)from joint ventures + Financial income - Financial expenses
C) Net operating income before taxes = Commercial margin +/- Shares of profits (losses)from joint ventures + Financial income - Financial expenses
D) Net operating income before taxes = Operating profit +/- Shares of profits (losses)from joint ventures + Financial income - Financial expenses

Question 20

Which of the following items is not a key intermediate balance?

A) Market value added
B) Value added
C) Gross operating profit
D) Commercial margin

Question 21

In the income statement 'by function' of a retailer,the cost of goods sold is the equivalent of:

A) Purchases plus average inventory .
B) Goods available for sale minus ending inventory.
C) Purchases minus beginning inventory plus ending inventory.
D) Ending inventory plus purchases of new merchandise minus beginning inventory.