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business
financial statement analysis

Questions and Answers of Financial Statement Analysis

EXERCISE 8–1 Return on net operating assets is a function of both profit margin and net operating asset turnover.Required:How do you believe that knowledge of operating profit margin and operating
EXERCISE 8–1 A machine that produces hockey pucks costs $20,500 and produces 10 pucks per hour. Two similar companies purchase the machine and begin producing and selling pucks. The first company,
EXERCISE 8–1 A press report carried the following news item: General Motors, Ford, and Chrysler are expected to post losses on fourth-quarter operations despite sales gains. Automakers’ revenues
PROBLEM 8–1 As a financial analyst at a debt-rating agency, you are asked to analyze return on invested capital and asset utilization (turnover) measures for ZETA Corporation. Selected financial
PROBLEM 8–1 Selected financial statement data from Texas Telecom, Inc., for Years 5 and 9 are reproduced below ($ millions):Year 5 Year 9 Income Statement Data Revenues
PROBLEM 8–1 Johnson Corporation sells primarily two products: (A) consumer cleaners and (B) industrial purifiers.Its gross margin and components for the past two years are:Year 7 Year 6 Sales
PROBLEM 8–1 Comparative income statements of Spyres Manufacturing Company for Years 9 and 8 are reproduced below:Year 9 Year 8 Net sales.................................. $600,000 $500,000 Cost of
PROBLEM 8–1 At a meeting of your company’s Investment Policy Committee the possibility of investing in ZETA Corporation (see Case CC-2 in the Comprehensive Case chapter) is considered. During
PROBLEM 8–1 Selected data from Kemp Corporation are reproduced below:KEMP CORPORATION Product-Line Information ($ thousands)Year 1 Year 2 Year 3 Year 4 Data communications equipment Net
PROBLEM 8–1 While you are an analyst at Investment Counselors, Inc., the senior portfolio manager at your firm makes a decision to increase sporting goods apparel manufacturer stocks in the
PROBLEM 8–1 Walt Disney Company (Disney) is a diversified international entertainment company with operations in three business segments. Revenue and operating income data for the three segments
PROBLEM 8–1 The following data are excerpted from the annual report of Lands’ End:For the period ended Year 9 Year 8 Year 7 Year 6 Year 5 Net
PROBLEM 8–1 Selected financial data for Petersen Corporation’s revenue and income (contribution) are reproduced below:Line of Business Year 1 Year 2 Year 3 Year 4 Revenue Manufactured and
CASE 8–5 Wal-Mart and Sears (prior to its merger with Kmart), two Sears and Wal-Mart large retailers in the U.S., offer an interesting study in contrasts.Wal-Mart has steadily grown to become the
9–1. What are some of the uses for prospective analysis?
9–2. What steps must usually take place before the forecasting process can begin?
9–3. In addition to recent trends, what other items of information might be brought to bear in the projection of sales?
9–4. What is the forecast horizon?
9–5. What assumption is usually made about sales growth at the end of the forecast horizon?
9–6. Describe the steps in forecasting the income statement.
9–7. Describe the two-step process of forecasting the balance sheet.
9–8. What are value drivers?
9–9. Describe the typical trend of value drivers over time.
9–10A. Why are short-term cash forecasts important for the analysis of financial statements?
9–11A. What limitations are associated with short-term cash forecasting?
9–12A. Describe the relation between inflows of cash and outflows of cash.
9–13A. It is often asserted: From an operational point of view, management focuses on cash rather than working capital. Do you agree with this statement? Why or why not?
9–14A. Describe the primary difference between “funds flow” analysis and ratio analysis. Which analysis technique is preferred and why?
9–15A. What is the usual first step in preparing cash forecasts, and what considerations are required in this step?
EXERCISE 9–1 Quarterly sales and net income data for General Electric for Year 1 through Year 9 are shown below ($ millions).Required:Use these data and any other historical information available
EXERCISE 9–1 Comparative income statements and balance sheets for Coca-Cola are Coca-Cola shown below ($ millions).Year 2 Year 1 Income Statement Net
EXERCISE 9–1 Comparative income statements and balance sheets for Best Buy are shown below ($ millions).Year 2 Year 1 Income Statement Net sales
EXERCISE 9–1 Comparative income statements and balance sheets for Merck ($ millions)follow:Year 2 Year 1 Income Statement Net sales
EXERCISE 9–1 Following are financial statement information for Welmark Corporation as of Year 2 and Year 3.WELMARK CORPORATION Year 2 Year 3 Sales
PROBLEM 9–1 Telnet Corporation is a newly formed computer manufacturer. Telnet plans to begin operations on January 1, Year 2. Selected financial information is available for the preparation of
PROBLEM 9–1 Refer to the following financial statements of Quaker Oats Company.INCOME STATEMENT Year ended June 30 ($ millions except per share data) Year 11 Year 10 Year 9 Net sales
PROBLEM 9–1 Refer to the following financial statements for Kodak:INCOME STATEMENT For Year Ended December 31 (in millions) 20x6 20x5 20x4 Net sales
PROBLEM 9–1 Miller Company is planning to construct a two-unit facility for the loading of beverage barrels onto ships. On or before January 1, Year 2, stockholders will invest $100,000 in the
PROBLEM 9–1 Royal Company has incurred substantial losses for several years and is insolvent. On March 31, Year 5, Royal petitions the court for protection from creditors and submits the following
10–1. Why is liquidity important in analysis of financial statements? Explain its importance from the viewpoint of more than one type of user.
10–2. Working capital equals current assets less current liabilities. Identify and describe factors impairing the usefulness of working capital as an analysis measure.
10–3. Are fixed assets potentially includable in current assets? Explain. If your answer is yes, describe situations where inclusion is possible.
10–4. Certain installment receivables are not collectible within one year. Why are these receivables sometimes included in current assets?
10–5. Are all inventories included in current assets? Why or why not?
10–6. What is the justification for including prepaid expenses in current assets?
10–9. Your analysis of two companies reveals identical levels of working capital. Are you confident in concluding their liquidity positions are equivalent?
10–10. What is the current ratio? What does the current ratio measure? What are reasons for using the current ratio for analysis?
10–11. Since cash generally does not yield a return, why does a company hold cash?
10–12. Is there a relation between level of inventories and sales? Are inventories a function of sales? If there is a relation between inventories and sales, is it proportional?
10–13. What are management’s objectives in determining a company’s investment in inventories and receivables?
10–14. What are the limitations of the current ratio as a measure of liquidity?
10–15. What is the appropriate use of the current ratio as a measure of liquidity?
10–16. What are cash-based ratios of liquidity? What do they measure?
10–17. How can we measure “quality” of current assets?
10–18. What does accounts receivable turnover measure?
10–19. What is the days’ sales in receivables? What does it measure?
10–20. Assume a company’s days’ sales in receivables is 60 days in comparison to 40 days for the prior period.Identify at least three possible reasons for this change.
10–21. What are the repercussions to a company of (a) overinvestment and (b) underinvestment in inventories?
10–22. What problems are expected in an analysis of a company using the LIFO inventory method when costs are increasing? What effects do price changes have on the (a) inventory turnover ratio and
10–23. Why is the composition of current liabilities relevant to our analysis of the quality of the current ratio?
10–24. A seemingly successful company can have a poor current ratio. Identify possible reasons for this result.
10–25. What is window-dressing of current assets and liabilities? How can we recognize whether financial statements are window-dressed?
10–26. What is the rule of thumb governing the expected level of the current ratio? What risks are there in using this rule of thumb for analysis?
10–27. Describe the importance of sales in assessing a company’s current financial condition and the liquidity of its current assets.
10–28. Identify important qualitative considerations in the analysis of a company’s liquidity. What SEC disclosures help our analysis in this area?
10–29. What is the importance of what-if analysis on the effects of changes in conditions or policies for a company’s cash resources?
10–30. Identify several key elements in the evaluation of solvency.
10–31. Why is analysis of a company’s capital structure important?
10–32. What is meant by financial leverage? Identify one or more cases where leverage is advantageous.
10–34. How should we treat deferred income taxes in an analysis of capital structure?
10–35. In analysis of capital structure, how should lease obligations not capitalized be treated? Under what conditions should they be considered equivalent to debt?
10–36. What is off-balance-sheet financing? Provide one or more examples.
10–37. What are liabilities for pensions? What factors should our analysis of a company’s pension obligations take into consideration?
10–38. When is information on unconsolidated subsidiaries important to solvency analysis?
10–39. Would you classify the items below as equity or liabilities? State your reason(s) and any assumptions.a. Minority interest in consolidated financial statements.d. Convertible debt.b.
10–40.a. Why might an analysis of financial statements need to adjust the book value of assets?b. Give three examples of the need for possible adjustments to book value.
10–41. In evaluating solvency, why are long-term projections necessary in addition to a short-term analysis?What are some limitations of long-term projections?
10–42. What is the difference between common-size analysis and capital structure ratio analysis? Explain how capital structure ratio analysis is useful to financial statement analysis.
10–43. Equity capital on the balance sheet is reported using historical cost accounting and at times differs considerably from market value. How should our analysis allow for this, if at all, in
10–44. Why is the evaluation of asset composition useful for capital structure analysis?
10–45. What does the earnings to fixed charges ratio measure? What does this ratio add to the other tools of credit analysis?
10–46. In computing the earnings to fixed charges ratio, what broad categories of items are included in fixed charges? What tax adjustments must be considered for these items?
10–47. A company you are analyzing has a purchase commitment of raw materials under a noncancelable contract that is substantial in amount. Under what conditions do you include this purchase
10–48. Is net income a reliable measure of cash available to meet fixed charges?
10–50. Comment on the assertion: “Debt is a supplement to, not a substitute for, equity financing.”
10–53. Why are debt securities regularly rated while equity securities are not?
10–54. What factors do rating agencies emphasize in rating an industrial bond? Describe these factors.
10–55. Can an analysis of financial statements improve on published bond ratings? Explain.
10–56. What is the reason(s) why companies hire bond rating agencies to rate their debt?
EXERCISE 9–1 Interpret the effect of the following six independent events and transactions for the:a. Accounts receivable turnover (currently equals 3.0).b. Days’ sales in receivables.c.
EXERCISE 9–1 Interpret the effect of the following six independent events and transactions for the:a. Accounts receivable turnover (equals 4.0 prior to the event).b. Days’ sales in receivables.c.
EXERCISE 9–1 The management of a corporation wishes to improve the appearance of its current financial position as reflected in the current and quick ratios.Required:a. Describe four ways in which
EXERCISE 9–1 Financial data ($ thousands) for Wisconsin Wilderness, Inc., are reproduced below:Short-term liabilities ........ $ 500 Long-term liabilities ......... 800 Equity capital
EXERCISE 9–1 The following information is relevant for Questions 1 and 2:Austin Corporation’s Year 8 financial statement notes include the following information:a. Austin recently entered into
EXERCISE 10–6 1. Among the effects of these adjustments for the times interest earned coverage ratio is (choose one of the following):a. Lease capitalization increases this ratio.b. Lease
EXERCISE 10–6 2. Among the effects of these adjustments for the long-term debt to equity ratio is (choose one of the following):a. Only the held-to-maturity debt securities adjustment decreases
EXERCISE 10–6 3. What is the effect of a cash dividend payment on the following ratios (all else equal)?Times Interest Earned Long-Term Debt to Equitya. Increase Increaseb. No effect Increasec. No
EXERCISE 10–6 4. What is the effect of selling inventory for profit on the following ratios (all else equal)?Times Interest Earned Long-Term Debt to Equitya. Increase Increaseb. Increase Decreasec.
EXERCISE 10–6 5. The existence of uncapitalized operating leases is to (choose one of the following):a. Overstate the earnings to fixed charges coverage ratio.b. Overstate fixed charges.c.
EXERCISE 10–6 Selected financial data of Future Technologies, Inc., at December 31, Year 1, are shown below:Cash......................................... $ 42,000 Accounts payable ........$ 78,000

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