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Exam 13: Analysis of Financial Statements

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Question 111

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Horizontal analysis:

A) Is a method used to evaluate changes in financial data across time.
B) Is also called vertical analysis.
C) Is the presentation of financial ratios.
D) Is a tool used to evaluate financial statement items relative to industry statistics.
E) Evaluates financial data across industries.

F) B) and C)
G) C) and E)

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Question 112

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Net income divided by net sales is the:

A) Return on total assets.
B) Profit margin.
C) Current ratio.
D) Total asset turnover.
E) Days' sales in inventory.

F) B) and E)
G) A) and B)

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Question 113

Multiple Choice

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Stark Company's most recent balance sheet reported total assets of $1.9 million, total liabilities of $0.8 million, and total equity of $1.1 million. Its Debt to equity ratio is:

Use the following information from the current year financial statements of a company to calculate the ratios below: (a) Current ratio. (b) Accounts receivable turnover. (Assume the prior year's accounts receivable balance was $100,000.) (c) Days' sales uncollected. (d) Inventory turnover. (Assume the prior year's inventory was $50,200.) (e) Times interest earned ratio. (f) Return on common stockholders' equity. (Assume the prior year's common stock balance was $480,000 and the retained earnings balance was $128,000.) (g) Earnings per share (assuming the corporation only has common stock outstanding). (h) Price earnings ratio. (Assume the company's stock is selling for $26 per share.) (i) Divided yield ratio. (Assume that the company paid $1.25 per share in cash dividends.)

External users of financial information:

The measurement of key relationships between financial statement items is known as ________.

The evaluation of company performance and financial condition includes evaluation of (1) past and current performance, (2) current financial position, and (3) future performance and risk.

Refer to the following selected financial information from Gomez Electronics. Compute the company's debt-to-equity ratio for Year 2. $\begin{array}{lrr}& \text { Year 2 } & \text { Year 1 } \\\text { Net sales } & \$ 478,500 & \$ 426,250 \\\text { Cost of goods sold } & 276,300 & 250,120 \\\text { Interest expense } & 9,700 & 10,700 \\\text { Net income before tax } & 67,250 & 52,680 \\\text { Net income after tax } & 46,050 & 39,900 \\\text { Total assets } & 317,100 & 288,000 \\\text { Total liabilities } & 181,400 & 167,300 \\\text { Total equity } & 135,700 & 120,700\end{array}$

A company's calendar-year financial data are shown below. The company had total assets of $339,000 and total equity of $144,400 for the prior year. No additional shares of common stock were issued during the year. The December 31 market price per share is $49.50. Cash dividends of $19,500 were paid during the year. Calculate the following ratios for the company: (a) profit margin ratio (b) gross margin ratio (c) return on total assets (d) return on common stockholders' equity (e) book value per common share (f) basic earnings per share (g) price earnings ratio (h) dividend yield.

The return on common stockholder's equity measures a company's success in earning net income for its owners.

Common-size statements:

The following selected financial information for a company was reported for the current year end. Calculate the following company ratios: (a) Accounts receivable turnover. (b) Inventory turnover. (c) Days' sales uncollected Accounts receivable, beginning-year $170,000 Accounts receivable, year-end 190,000 Merchandise inventory, beginning-year 80,000 Merchandise inventory, year-end 60,000 Cost of goods sold 580,000 Credit sales 1,000,000

Net sales divided by average accounts receivable, net is the:

Dividing Accounts receivable, net by Net sales and multiplying the result by 365 is the:

Zhang Company reported Cost of goods sold of $835,000, average Inventory of $41,750, and Net sales of $2,338,000. The Inventory turnover ratio is:

Refer to the following selected financial information from Texas Electronics. Compute the company's accounts receivable turnover for Year 2. $\begin{array}{lrr}& \text { Year 2 } & \text { Year 1 } \\\text { Cash } & \$ 37,500 & \$ 36,850 \\\text { Short-term investments } & 90,000 & 90,000 \\\text { Accounts receivable, net } & 85,500 & 86,250 \\\text { Merchandise inventory } & 121,000 & 117,000 \\\text { Prepaid expenses } & 12,100& 13,500\\\text { Plant assets } & 388,000 & 392,000 \\\text { Accounts payable } & 113,400 & 111,750 \\\text { Net sales } & 711,000 & 706,000 \\\text { Cost of goods sold } & 390,000 & 385,500\end{array}$

The ability to meet short-term obligations and to efficiently generate revenues is called:

Vertical analysis is used to reveal patterns in data covering two or more successive periods.

The return on total assets can be calculated as profit margin times total asset turnover.

Intra-company standards for financial statement analysis: