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financial statement analysis

Questions and Answers of Financial Statement Analysis

EXERCISE 10–6 Shown below are selected financial accounts of RAM Corp. as of December 31, Year 1:Cash......................................... $ 80,000 Accounts payable ........ $130,000 Accounts
EXERCISE 10–6 Reproduced below are selected financial data at the end of Year 5 and forecasts for the end of Year 6 for Top Corporation:Year 6 Year 6 Account Year 5 (Forecast) Account Year 5
PROBLEM 10–6 The income statement of Kimberly Corporation for the year ended December 31, Year 1, is re-produced below:KIMBERLY CORPORATION Consolidated Income Statement ($ thousands)For Year Ended
PROBLEM 10–8 The income statement of Lot Corp. for the year ended December 31, Year 1, follows:LOT CORPORATION Income Statement ($ thousands)For Year Ended December 31, Year 1 Sales
PROBLEM 10–6 Your supervisor is considering purchasing the bonds and preferred shares of ARC Corp. She fur- nishes you the following ARC income statement and expresses concern about the coverage
PROBLEM 10–6 Refer to the following financial data of Fox Industries Ltd.:FOX INDUSTRIES LIMITED Condensed Income Statement ($ thousands)FISCAL YEAR ENDED Year 7 Year 6 Year 5 Year 4 Year 3
PROBLEM 10–6 TOPP Company is planning to invest $20,000,000 in an expansion program expected to increase income before interest and taxes by $4,000,000. TOPP currently is earning $5 per share on
PROBLEM 10–6 You are a senior portfolio manager with Reilly Investment Management reviewing the biweekly printout of equity value screens prepared by a brokerage firm. One of the screens used to
PROBLEM 10–13 Required:a. Assuming TOPP maintains its current income level and achieves the expected income from expansion, what will be TOPP’s earnings per share:(1) If expansion is financed by
PROBLEM 10–6 You are analyzing the bonds of ZETA Company (see Case CC–2 in the Comprehensive Case Chapter for data) as a potential long-term investment. As part of your decision-making process,
PROBLEM 10–6 As a new employee of Clayton Asset Management, you are assigned to evaluate the credit quality of BRT Corp. bonds. Clayton holds the bonds in its high-yield bond portfolio. The
PROBLEM 10–16 Assume you are a fixed-income analyst at an investment management firm. You are following the developments at two companies, Sturdy Machines and Patriot Manufacturing, which are both
PROBLEM 10–6 Fax Corporation’s income statement and balance sheet for the year ended December 31, Year 1, are reproduced below:FAX CORPORATION Income Statement For Year Ended December 31, Year 1
CASE 10–2 Kopp Corporation’s income statement and balance sheet for the year ending December 31, Year 1, are reproduced below:KOPP CORPORATION Income Statement For Year Ended December 31, Year 1
CASE 10–2 Ian Manufacturing Company was organized five years ago and manufactures toys. Its most recent three years’ balance sheets and income statements are reproduced below:IAN MANUFACTURING
CASE 10–2 Altria Group, formerly known as Philip Morris Companies, is a major manufacturer and distributor of consumer products. It has a history of steady growth in sales, earnings, and cash
CASE 10–2 Assume you are an analyst at a brokerage firm. One of the companies you follow is ABEX Chemicals, Inc., which is rapidly growing into a major producer of petrochemicals (principally
11–1. Why is analysis of research and development expenses important in assessing and forecasting earnings?What are some concerns in analyzing research and development expenses?
11–3. What is the purpose in recasting the income statement for analysis?
11–4. Where do we find the data necessary for analysis of operating results and for their recasting and adjustment?
11–5. Describe the recasting process. What is the aim of the recasting process in analysis?
11–6. Describe the adjustment of the income statement for financial statement analysis.
11–7. Explain earnings management. How is earnings management distinguished from fraudulent reporting?
11–8. Identify and explain at least three types of earnings management.
11–9. What factors and incentives motivate companies (management) to engage in earnings management?What are the implications of these incentives for financial statement analysis?
11–10. Why is management interested in the reporting of extraordinary gains and losses?
11–11. What are the analysis objectives in evaluating extraordinary items?
11–13. Describe the effects of extraordinary items on:a. Company resources.
b. Management evaluation.11–14. Comment on the following statement: “Extraordinary gains or losses do not result from ‘normal’ or‘planned’ business activities and, consequently, they
11–15. Can accounting manipulations influence earnings-based estimates of company valuation? Explain.
11–16.a. Identify major determinants of PB and PE ratios.b. How can the analyst use jointly the values of PB and PE ratios in assessing the merits of a particular stock investment?
11–17. What is the difference between forecasting and extrapolation of earnings?
11–18. How do MD&A disclosure requirements aid in earnings forecasting?
11–19. What is earning power? Why is earning power important for financial statement analysis?
11–20. How are interim financial statements used in analysis? What accounting problems with interim statements must we be alert to in an analysis?
11–21. Interim financial reports are subject to limitations and distortions. Identify and discuss at least two reasons for this.
11–22. What are major disclosure requirements for interim reports? What are the objectives of these requirements?
11–23. What are the implications of interim reports for financial analysis?
EXERCISE 11–1 Refer to the financial statements of Quaker Oats Company in Problem 9-6 along with the following footnote.SUPPLEMENTARY EXPENSE DATA ($ millions) Year 11 Year 10 Year 9 Advertising,
EXERCISE 11–1 An analyst needs to understand the sources and implications of variability in financial statement data.Required:Identify factors affecting variability in earnings per share, dividends
EXERCISE 11–1 Refer to the financial statements of Quaker Oats Company in Problem 9-6 along with the following footnotes.SUPPLEMENTARY EXPENSE DATA($ millions) Year 11 Year 10 Year 9 Advertising,
EXERCISE 11–1 You are considering the purchase of all outstanding preferred and common stock of Finex, Inc., for $700,000 on January 2, Year 2. Finex’s financial statements for Year 1 are
PROBLEM 11–4 Income statements of Ferro Corporation, along with its note 7 on income taxes and selected information from its Form 10-K, are reproduced below:CONSOLIDATED STATEMENT OF INCOME Years
PROBLEM 11–4 Canada Steel, Ltd., produces steel castings and metal fabrications for sale to manufacturers of heavy construction machinery and agricultural equipment. Early in Year 3 the company’s
PROBLEM 11–4 After careful financial statement analysis, we obtain these predictions for Colin Technology:Beginning Beginning Year Net Income Book Value Year Net Income Book Value 1.............
PROBLEM 11–4 IT service companies develop Web storefronts that are integrated with back-end implementation systems. Only a small number of companies offer such extensive e-business integration. The
CC–2. What type of investigation should precede analysis of financial statements?
CC–3. What are the analytical implications of recognizing that financial statements are an abstraction of a company’s underlying business transactions and events?
CC–4. What additional knowledge and analytical skills must an analysis of financial statements bring to bear on companies operating in specialized or regulated industries?
CC–5. What are the attributes of a good financial analysis report? What distinct sections constitute a complete financial analysis report?
PROBLEM 11–4 The following financial data are available for each of two manufacturers of mountain bikes.AXEL BIKE Capital structure 5%, 20-year notes .............................................
PROBLEM 11–4 Reproduced below are condensed common-size financial statements of companies operating in nine different industries. The nine industries represented are:a. Tobacco manufacturingd.
PROBLEM 11–4 Selected financial ratios from the(i) S&P 400, (ii) the brewing industry, and (iii) Anheuser-Busch Companies (BUD), for Years 2 through 6 are reproduced below.Required:a. Using these
PROBLEM 11–4 You are the portfolio manager of a highyield bond portfolio at Solomon Group.You are concerned about the financial stability of Florida Gypsum Corporation (FGC), whose bonds represent
PROBLEM 11–4 Select a company from a nonregulated industry for which you can obtain complete financial statements for at least the most recent six years.Required:Based on these financial
PROBLEM 11–4 The financial statements and notes of ZETA Corporation are reproduced over the next several pages.Required:Answer the following questions and provide supporting calculations. Explain
PROBLEM 11–4 The Policy Committee of your company decides to change investment strategies. This change entails an increase in exposure to the stocks of large companies producing consumer products
1. Explain the relevance of cash flows in analyzing business activities.
1. Describe the reporting of cash flows by business activities.
1. Describe the preparation and analysis of the statement of cash flows.
1. Interpret cash flows from operating activities.
1. Analyze cash flows under alternative company and business conditions.
1. Describe alternative measures of cash flows and their usefulness.
1. Illustrate an analytical tool in evaluating cash flows(Appendix 7A).
7–1. What is the meaning of the term cash flow? Why is this term subject to confusion and misrepresentation?
7–2. What information can a user of financial statements obtain from the statement of cash flows?
7–4. Explain the three categories of adjustments in converting net income to cash flows from operations.
7–5. Describe the two methods of reporting cash flow from operations.
7–6. Contrast the purpose of the income statement with that of cash flow from operations.
7–8. Describe the computation of free cash flow. What is its relevance to financial analysis?
7–9. List insights that the statement of cash flows can provide to our analysis.
EXERCISE 7–1 Refer to the financial statements of Campbell Soup Company in Appendix A.Required:Explain how Campbell Soup Company can have net income of $401.5 million, but generate$805.2 million in
EXERCISE 7–1 The balance sheets of Barrier Corporation as of December 31, Year 2, and Year 1, and its statement of income and retained earnings for the year ended December 31, Year 2,
EXERCISE 7–1 Indicate if each transaction and event is (1) a source of cash, (2) a use of cash, and/or (3) an adjustment leading to a source or use of cash (assume an indirect format). List also
EXERCISE 7–1 Indicate if each transaction and event is (1) a source of cash, (2) a use of cash, and/or (3) an adjustment leading to a source or use of cash (assume an indirect format). List also
EXERCISE 7–1 During a meeting of the management committee of Edsel Corporation, a number of proposals are made to alleviate its weak cash position and improve income. Evaluate and comment on both
EXERCISE 7–1 An economics book has the following statement: “For the business firm there are, typically, three EXERCISE 7–8 major sources of funds. Two of these, depreciation reserves and
EXERCISE 7–1 Analysts often exploit the relation between a company’s life cycle (see Exhibit 2.3) and its cash flows to better understand company performance and financial condition.Required:a.
EXERCISE 7–1 In reviewing the financial statements of NanoTech Co., you discover that net income increased while operating cash flows decreased for the most recent two consecutive years.Required:a.
EXERCISE 7–1 Refer to the financial statements of Campbell Soup Company in Appendix A.Required:a. How much cash does Campbell Soup collect from customers during Year 10? (Hint: Use the statement of
EXERCISE 7–1 Refer to Campbell Soup Company’s statement of cash flows in Appendix A.Required:Convert Campbell’s statement of cash flows for Year 11 to show cash flows from operations(CFO) using
EXERCISE 7–1 Refer to Campbell Soup Company’s state- Campbell Soup Company ment of cash flows in Appendix A.Required:Convert Campbell’s statement of cash flows for Year 10 to report its cash
EXERCISE 7–1 A colleague who is aware of your understanding of financial statements asks for help in analyzing the transactions and events of Zett Corporation. The following data are provided:ZETT
EXERCISE 7–1 Dax Corporation’s genetically engineered flowers have rapidly gained market acceptance and shipments to customers have increased dramatically. The company is preparing for
EXERCISE 7–1 Using the income statement and balance sheets of Niagara Company below, prepare a statement of cash flows for the year ended December 31, Year 9, using the direct method.NIAGARA
EXERCISE 7–1 Complete the requirements of Problem 7–6 using the business activities listed below:Part Ia. An annual installment of $100,000 due on long-term debt is paid on its due date.b.
PROBLEM 7–8 While on assignment you discover that you have misplaced the balance sheet of Bird Corpora-tion as of January 1, Year 1. However, you do have the following data on Bird Corporation:BIRD
EXERCISE 7–1 Indicate whether the following independent transactions increase (), decrease (), or do not affect (NE) the current ratio, the amount of working capital, and cash from operations.
EXERCISE 7–1 Your banker confides to you after looking at a number of financial statements that she is confused about the difference between two operating measures, net income and cash from
PROBLEM 7–8 Following the acquisition of Kraft during Year 8, the Philip Morris Companies released its Year 8 financial statements. The Year 8 financial statements and other data are reproduced on
PROBLEM 7–8 Refer to the financial statements of ZETA Corporation reproduced in assignment Case CC–2 of the Comprehensive Case (following Chapter 11).Required:a. Prepare a schedule computing cash
PROBLEM 7–8 The statement of cash flows for Lands’ End is reproduced here: CASE 7–1 LANDS’ END, INC. & SUBSIDIARIES Consolidated Statements of Cash Flows FOR PERIOD ENDED($ in thousands) Year
PROBLEM 7–8 The statement of cash flows for Yahoo! is reproduced here:YAHOO! INC.Consolidated Statements of Cash Flows YEAR ENDED DECEMBER 31,(in thousands) Year 8 Year 7 Year 6 Cash flows from
PROBLEM 7–8 The management of Wyatt Corporation is frustrated because its parent company, SRW Corpora- CASE 7–3 tion, repeatedly rejects Wyatt’s capital spending requests. These refusals led
PROBLEM 7–8 The management of Dover Corporation claims that the securities market undervalues shares of its company. They propose to take it private by means of a leveraged buyout. Management’s
EXERCISE 5–1 The diagram below portrays Company X (the parent or investor company), its two subsidiaries C1 and C2, and its “50 percent or less owned” affiliate C3. Each of the companies has
CASE 6–5A The R. Lott Company’s net income for the year ended December 31, Year 6, is $10,000.During Year 6, R. Lott declares and pays $1,000 cash dividends on preferred stock and $1,750 cash
CASE 6–5A Information concerning the capital structure of Dole Corporation is reproduced below:DECEMBER 31 Year 5 Year 6 Common stock.......................... 90,000 shares 90,000 shares
CASE 6-4 The officers of Environmental, Inc., considered themselves fortunate when the company sold a$9,000,000 subordinated convertible debenture issue on June 30, Year 1, with a 6% coupon. They had

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