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business
financial statement analysis

Questions and Answers of Financial Statement Analysis

PROBLEM 1–12 Key comparative figures ($ millions) for both NIKE and Reebok follow:Key Figures NIKE Reebok Financing (liabilities equity) . . . . . . $5,397.4 $1,756.1 Net income (profit) . . . .
PROBLEM 1–12 Ace Co. is to be taken over by Beta Ltd. at the end of year 2007. Beta agrees to pay the shareholders of Ace the book value per share at the time of the takeover. A reliable analyst
PROBLEM 1–11 The Tristar Mutual Fund manager is considering an investment in the stock of Best Computer and asks for your opinion regarding the company. Best Computer is a computer hardware sales
EXERCISE 1–1 Selected ratios for three different companies that operate in three different industries (merchandising, pharmaceuticals, utilities) are reported in the table below:Ratio Co. A Co. B
EXERCISE 1–1 As a consultant to MCR Company, you are told it is considering the acquisition of Lakeland Corporation. MCR Company requests that you prepare certain financial statistics and analysis
PROBLEM 1–8 The balance sheet and income statement for Chico Electronics are reproduced below (tax rate is 40%).CHICO ELECTRONICS Balance Sheet ($ thousands)As of December 31 Year 4 Year 5 Assets
EXERCISE 1–1 You are planning to analyze Voltek Company’s December 31, Year 6, balance sheet. The following information is available:1. Beginning and ending balances are identical for both
EXERCISE 1–1 You are an analyst reviewing Foxx Company. The following data are available for your financial analysis (unless otherwise indicated, all data are as of December 31, Year 2):Current
EXERCISE 1–1 Assume you are an analyst evaluating Mesco Company. The following data are available in your financial analysis (unless otherwise indicated, all data are as of December 31, Year
PROBLEM 1–4 Compute increases (decreases) in percents for both Years 6 and 7 by entering all the missing data in the table below. Analyze and interpret any significant results revealed from this
PROBLEM 1–3 Perform a comparative analysis of Eastman Corporation by completing the analysis below.Describe and comment on any significant findings in your comparative analysis.EASTMAN CORPORATION
EXERCISE 1–1 Kampa Company and Arbor Company are similar firms that operate in the same industry. Arbor began operations in 2001 and Kampa in 1995. In 2006, both companies pay 7% interest on their
EXERCISE 1–15 On January 1, Year 1, you are considering the purchase of Nico Enterprises’ common stock. Based on your analysis of Nico Enterprises, you determine the following:1. Book value at
EXERCISE 1–14 On January 1,Year 1, you are considering the purchase of $10,000 ofColinCompany’s 8%bonds.The bonds are due in 10 years, with interest payable semiannually on June 30 and effective
EXERCISE 1–13 Compute the present value for each of the following bonds:a. Priced at the end of its fifth year, a 10-year bond with a face value of $100 and a contract (coupon) rate of 10%per annum
EXERCISE 1–12 Compute the percent of increase or decrease for each of the following account balances:Year 2 Year 1 Short-term investments . . . . . . $217,800 $165,000 Accounts receivable . . . . .
EXERCISE 1–11 Compute index-number trend percents for the following accounts, using Year 1 as the base year.State whether the situation as revealed by the trends appears to be favorable or
EXERCISE 1–10 Huff Company and Mesa Company are similar firms that operate in the same industry. The following information is available:HUFF MESA 2006 2005 2004 2006 2005 2004 Current ratio . . . .
EXERCISE 1–1 Common-size and trend percents for JBC Company’s sales, cost of goods sold, and expenses follow:COMMON-SIZE PERCENTS TREND PERCENTS 2006 2005 2004 2006 2005 2004 Sales . . . . . . .
EXERCISE 1–1 Refer to the financial statements of Mixon Company in Exercises 1–3 and 1–5. The following additional information about the company is known:Common stock market price, December 31,
EXERCISE 1–1 Refer to the financial statements of Mixon Company in Exercises 1–3 and 1–5. Evaluate the efficiency and profitability of the company by computing the following: (a) net profit
EXERCISE 1–1 Refer to the information in Exercises 1–3 and 1–5 about Mixon Company. Compare the long-term risk and capital structure positions of the company at the end of 2006 and 2005 by
EXERCISE 1–1 Refer to the information in Exercise 1–3 about Mixon Company. The company’s income statements for the years ended December 31, 2006 and 2005 show the following:2006 2005 Sales . .
EXERCISE 1–1 Refer to Mixon Company’s balance sheets in Exercise 1–3. Express the balance sheets in common-size percents. Round to the nearest one-tenth of a percent.
EXERCISE 1–2 Express the following income statement information in common-size percents and assess whether this company’s situation is favorable or unfavorable.HARBISON CORPORATION Comparative
EXERCISE 1–1 The preparation and analysis of comparative balance sheets and income statements are commonly applied tools of financial statement analysis and interpretation.Required:a. Discuss the
2–70B. What factors and incentives motivate companies (management) to engage in earnings management?What are the implications of these incentives for financial statement analysis?
2–69B. Identify and explain three types of earnings management that can reduce earnings quality.
2–68B. Explain how earnings management affects earnings quality. How is earnings management distinguished from fraudulent reporting?
2–67B. What is the effect of external factors on earnings quality?
2–66B. How does a balance sheet analysis provide a check on the validity and quality of earnings?
2–65B. What is the relation between the reported value of assets and reported earnings? What is the relation between the reported values of liabilities, including provisions, and reported earnings?
2–64B. What are discretionary expenses? What is the importance of discretionary expenses for analysis of earnings quality?
2–63B. What is meant by earnings quality? Why do users assess earnings quality? What major factors determine earnings quality?
2–62A. Public accounting firms are being implored to assess a company’s reported earnings per share relative to the market expectation of earnings per share (e.g., consensus analysts’ forecast)
2–61A. Citigroup is currently audited by KPMG. Who pays KPMG for its audit of Citigroup? To whom is KPMG providing assurance regarding the fair presentation of the Citigroup financial statements?
2–60A. What are some circumstances suggesting higher audit risk? Explain.
2–59A. What does the auditor’s reference to generally accepted accounting principles imply for our analysis of financial statements?
2–58A. An auditor does not prepare financial statements but instead samples and investigates data to render a professional opinion on whether the statements are “fairly presented.” List the
2–57A. What are some implications to financial analysis stemming from the audit process?
2–56A. What does the opinion section of the auditor’s report usually cover?
2–55A. What are auditing procedures? What are some basic objectives of a financial statement audit?
2–54A. What are generally accepted auditing standards?
2–53. Would you be willing to pay more or less for a stock, on average, when the accounting information provided to you about the firm is unaudited? Explain.
2–52. Explain how accounting concepts and standards, and the financial statements based on them, are subject to the pervasive influence of individual judgments and incentives.
2–51. Describe the role that accrual accounting information and cash flow information play in your own models of company valuation.
2–50. Explain what is meant by the term earnings management and what incentives managers have to engage in earnings management.
2–49. What are popular earnings management strategies? Explain.
2–48. Why do managers sometimes manage earnings?
2–47. What gives rise to accounting distortions? Explain.
2–46. What is the process to carry out an accounting analysis?
2–45. What is accounting analysis? Explain.
2–44. Explain how estimates and judgments of financial statement preparers can create differences between financial statement information and economic reality.
2–43. What are the major issues that an analyst needs to consider when analyzing financial statements prepared under the fair value accounting model?
2–42. In your opinion does historical cost or fair value model generate more (a) relevant and (b) reliable accounting information? Argue your case.
2–41. Discuss the advantages and disadvantages of fair value accounting.
2–40. Describe the three basic valuation approaches for estimating fair values. Relate the valuation approaches to hierarchy of inputs.
2–39. Which types of assets/liabilities lend themselves more easily to fair value measurements: financial or operating? Explain with reference to the hierarchy of inputs.
2–38. Explain the hierarchy of inputs used in determining fair values. The use of which level of input lowers the reliability of fair value estimates?
2–37. Fair values are market-based measurements not entity-specific measurements. Explain with an example.
2–36. Provide a formal definition for fair value. What are the key elements of this definition?
2–35. Describe what income purports to represent under the historical cost and the fair value accounting models. How is income determined under either model?
2–34. What are the key differences between the historical cost and the fair value models of accounting?
2–33. Explain how accounting principles can, in certain cases, create differences between financial statement information and economic reality.
2–32. What adjustments would you make to net income to determine economic income?
2–31. Determining core income is an important first step to estimating permanent income. Explain. What adjustments to net income should be made for estimating core income?
2–30. Define and cite an example of a value irrelevant component of income.
2–29. Distinguish between the permanent and transitory components of income. Cite an example of each, and discuss how each component affects analysis.
2–28. Accounting income has elements of both permanent income and economic income. Explain this statement.
2–27. Explain how accountants measure income.
2–26. Economic income measures change in value while permanent income is proportional to value itself.Explain this statement.
2–25. What are the two basic economic concepts of income? What implications do they have for analysis?
2–24. Define income. Distinguish income from cash flow.
2–23. Accrual accounting information, cash flow information, and analysts’ forecasts are information for investors. Compare and contrast each of these sources in terms of relevance and
2–22. Accrual accounting information is conceptually more relevant than cash flows. Describe empirical findings that support this superiority of accrual accounting.
2–21. What factors give rise to the superiority of accrual accounting over cash accounting? Explain.
2–20. Explain why cash flow measures of performance are less useful than accrual-based measures.
2–19. Distinguish between short-term and long-term accruals.
2–18. Explain when costs should be recognized as expenses.
2–17. Describe the criteria necessary for a business to record revenue.
2–16. It is difficult to measure the business performance of a company in the short run using only cash flow measures because of timing and matching problems. Describe each of these problems and
2–15. Describe at least four major limitations of financial statement information.
2–14. Describe empirical evidence showing that financial accounting information is relevant for decision making.
2–13. What are the two types of conservatism? Which type of conservatism is more useful for analysis?
2–12. What is conservatism? What are its advantages?
2–11. Explain historical cost and fair value models of accounting. What explains the move toward fair value accounting?
2–10. Describe tasks that financial intermediaries perform on behalf of financial statement users.
2–9. Describe alternative information sources beyond statutory financial reports that are available to investors and creditors.
2–8. Describe forces that serve to limit the ability of management to manage financial statements.
2–7. Describe factors that bring about managerial discretion for preparing financial statements.
2–6. Who has the main responsibility for ensuring fair and accurate financial reporting by a company?
2–5. Explain how accounting standards are established.
2–4. What constitutes contemporary GAAP?
2–3. Describe the content and purpose of at least four financial reports that must be filed with the SEC.
2–2. Why are earnings announcements made in advance of the release of financial statements? What information do they contain and how are they different from financial statements?
2–1. Describe the U.S. financial reporting environment including the following:a. Forces that impact the content of statutory financial reportsb. Rule-making bodies and regulatory agencies that
1–33. Discuss implications of the efficient market hypothesis (EMH) for financial statement analysis.
1–32. Explain how the efficient market hypothesis (EMH) depicts the reaction of market prices to financial and other data.
1–31. Identify and describe a technique to compute equity value only using accounting variables.
1–30. What is amiss with the claim: The value of a stock is the discounted value of expected future cash flows?

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