Question
astery Problem: Financial Statement Analysis Liquidity and Solvency Measures Your friend, another accountant, has bet you that with your knowledge of accounting and just the
astery Problem: Financial Statement Analysis
Liquidity and Solvency Measures
Your friend, another accountant, has bet you that with your knowledge of accounting and just the computations for common analytical measures, you can figure out many aspects of a company's financial statements. You take the bet!
Match each computation to one of the liquidity and solvency measures in the table. (Hint: Begin by looking for simple computations and identifying the amounts in those computations. Look for other measures that use those amounts.)
| Liquidity and Solvency Measures | Computations | |
| Working capital |
| |
| Current ratio |
| |
| Quick ratio |
| |
| Accounts receivable turnover |
| |
| Number of days' sales in receivables |
| |
| Inventory turnover |
| |
| Number of days' sales in inventory |
| |
| Ratio of fixed assets to long-term liabilities |
| |
| Ratio of liabilities to stockholders' equity |
| |
| Times interest earned |
|
Look for patterns in the computations and match them to ratios that are related to each other. Identify the amounts in the computations and consider how they are related to amounts in other computations.
Balance Sheet
Use the following balance sheet form to enter amounts you identify from the computations on the Liquidity and Solvency Measures part. You will identify other amounts for the balance sheet on the Profitability Measures part. If you have a choice of two amounts, assume the first amount in the ratio is for the end of the year. Compute any missing amounts.
| Balance Sheet December 31, 20Y6 | |
| Assets | |
| Current assets: | |
| Cash | $823,000 |
| Marketable securities | |
| Accounts receivable (net) | |
| Inventory | |
| Prepaid expenses | |
| Total current assets | |
| Long-term investments | |
| Property, plant, and equipment (net) | |
| Total assets | |
| Liabilities | |
| Current liabilities | |
| Long-term liabilities | |
| Total liabilities | |
| Stockholders' Equity | |
| Preferred stock, $10 par | |
| Common stock, $5 par | |
| Retained earnings | |
| Total stockholders' equity | |
Identify the amounts in the Liquidity and Solvency Measures panel and the Profitability Measures panel that are balance sheet items and enter them accordingly.
Profitability Measures
Match each computation to one of the profitability measures in the table.
| Profitability Measures | Computations | |
| Asset turnover |
| |
| Return on total assets |
| |
| Return on stockholders' equity |
| |
| Return on common stockholders' equity |
| |
| Earnings per share on common stock |
| |
| Price-earnings ratio |
| |
| Dividends per share |
| |
| Dividend yield |
|
Look for patterns in the computations and match them to ratios that are related to each other. Identify the amounts in the computations and consider how they are related to amounts in other computations. Note that two of the computations use shares.
Comparative Income Statement
Use the following comparative income statement form to enter amounts you identify from the computations on the Liquidity and Solvency Measures part and on the Profitability Measures part. Compute any missing amounts and complete the horizontal analysis columns. Enter percentages as decimal amounts, rounded to one decimal place. When rounding, look only at the figure to the right of one decimal place. If < 5, round down and if 5, round up. For example, for 32.048% enter 32.0%. For 32.058% enter 32.1%.
| Comparative Income Statement For the Years Ended December 31, 20Y6 and 20Y5 | ||||||||||||
| Increase/(Decrease) | ||||||||||||
| 20Y6 | 20Y5 | Amount | Percentage | |||||||||
| Sales | $fill in the blank 96aab5041fcff98_1 | $7,277,000 | % | |||||||||
| Cost of goods sold | fill in the blank 96aab5041fcff98_4 | (3,444,000) | % | |||||||||
| Gross profit | $fill in the blank 96aab5041fcff98_7 | $3,833,000 | % | |||||||||
| Selling expenses | $fill in the blank 96aab5041fcff98_10 | $(1,455,400) |
| % | ||||||||
| Administrative expenses | (1,240,500) | (1,104,500) | % | |||||||||
| Total operating expenses | $fill in the blank 96aab5041fcff98_15 | $(2,559,900) | % | |||||||||
| Operating income | $fill in the blank 96aab5041fcff98_18 | $1,273,100 | % | |||||||||
| Other expense (interest) | fill in the blank 96aab5041fcff98_21 | (120,600) | % | |||||||||
| Income before income tax expense | $fill in the blank 96aab5041fcff98_24 | $1,152,500 | % | |||||||||
| Income tax expense | fill in the blank 96aab5041fcff98_27 | (180,720) | ||||||||||
| Net income | $fill in the blank 96aab5041fcff98_30 | $971,780 | % |
Feedback
For missing amounts, review their definitions in your text. Changes in the horizontal analysis may be increases or decreases.
Final Questions
Your accountant friend reveals that the company whose information you have been working on is actually a company he is thinking of investing in. What advice and insight do you have for your friend?
Using only the information from your horizontal analysis of the comparative income statement, complete the following sentences.
has decreased significantly from 20Y5 to 20Y6, even though
has increased. However,
has also
, which slowed the increase in
. In addition,
has increased at a faster rate. The company appears
.
Based on these observations, do you recommend that your friend invest in this companys stock?
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Forecasting Volatility In The Financial Markets
Authors: Stephen Satchell, John Knight
2nd Edition
0750655151, 9780750655156
