Multiple Questions (2 points per question)

1. On a common size basis, which of the following assets is normally largest for a commercial bank?

a.

Accounts and Notes Receivable

b.

Inventory

c.

Property, Plant and Equipment

d.

Cash and Cash Equivalents

2. The second step in financial statement analysis is to identify the company strategy. Which of the following is a question an analyst should ask when performing a strategy analysis?

a.

Are industry sales growing rapidly or slowly?

b.

Do earnings include revenues that appear mismatched with the business model employed by the firm?

c.

Does the industry include a large number of firms selling similar products?

d.

What is the company's degree of geographical diversification?

3. Company A has Return On Equity (ROE) of 25%. The company just declared a dividend payment. What will ROE be after the declaration?

a.

More than 25%.

b.

Less than 25%.

c.

25%.

d.

Unable to determine without more information.

4. A company in the growth phase of its product life cycle will normally have the following pattern of cash flows

a.

Negative cash flows from operations, negative cash flows from investing and positive cash flows from financing.

b.

Negative or positive cash flows from operations, negative cash flows from investing and positive cash flows from financing.

c.

Positive cash flows from operations, positive cash flows from investing and positive cash flows from financing.

d.

Negative or positive cash flows from operations, negative cash flows from investing and negative cash flows from financing.

5. Which of the following is an adjustment that would need to be made to net income when calculating cash flows from operations under the indirect method?

a.

add amortization expense

b.

add gain on sale of subsidiary

c.

add an increase in accounts receivable

d.

add a decrease in accounts payable

500 in Deferred Income TaxExpense will:

6. A decrease of 800 in Stock Based Compensation Expense will have what effect:

a.

a decrease of 800 in cash from operations

b.

an increase of 800 in cash from operations

c.

a decrease of 800 in cash from financing

d.

None of the above

7. Normally, Cash Flow from Investing will start providing cash during which phase of the product life cycle?

a.

Introduction

b.

Growth

c.

Maturity

d.

Decline

8. One important difference between return on assets (ROA) and return on common shareholder's equity (ROCE) is

a.

ROA does not differentiate based on how a company finances its assets; ROCE does.

b.

ROA does not distinguish between the different types of income items, such as income from continuing operations, discontinued operations, extraordinary items and changes in accounting principles; ROCE does.

c.

ROCE does not distinguish between the different types of income items, such as income from continuing operations, discontinued operations, extraordinary items and changes in accounting principles; ROA does.

d.

ROCE does not differentiate based on how a company finances its assets; ROA does.

9. Firms with high levels of operating leverage experience which of the following in comparison to firms with low levels of operating leverage

a.

Higher levels of risk in operations.

b.

Lower expected rates of return.

c.

Lower variability in returns on assets.

d.

Higher sales.

10. Which of the following scenarios is consistent with an increasing cost of goods sold to sales percentage and increasing inventory turnover?

a.

Firm raises prices to increase its gross margin but inventory sells more slowly.

b.

Weak economic conditions lead to reduced demand for a firm's products, necessitating price reductions to move goods.

c.

Strong economic conditions lead to increased demand for a firm's products, allowing price increases.

d.

Firm shifts its product mix toward lower margin, faster moving products.

11. One common problem with the current ratio is that it is susceptible to manipulation. If prior to the end of the accounting period Saxon Company has a current ratio of 1.5 and management wishes to boost its current ratio it may decide to

a.

pay off accounts payable prior to year end.

b.

purchase more inventory on account.

c.

purchase short-term investments with cash.

d.

purchase more inventory with cash.

12. Here are several ratios calculated from Midas Company's financial statements:

Days in Receivables = 45

Days in Payables = 36

Days in Inventory = 30

How many days of working capital financing does Midas need to obtain from other sources?

a.

39 days

b.

36 days

c.

56 days

d.

26 days

13. All of the following are true regarding a high quality balance sheet except:

a.

It should portray the economic resources that can be reasonably expected to generate future economic benefits.

b.

It should provide a complete and fair portrayal of all of the firm's obligations at a point in time, including the present value of long-term liabilities for future payments.

c.

It should minimize measurement error and bias.

d.

It should be optimistic in terms of accounting numbers.

14. Which of the following items is consistent with earnings being informative about current performance and informing the analyst that level of current earnings are not sustainable?

a.

The firm recognizes an unexpected gain

b.

The firm recognizes a fair value gain on a financial asset as a result of a favorable move in interest rates.

c.

The firm recognizes additional expenses this period due to pre-opening costs associated with new stores.

d.

The firm experiences a large jump in sales and earnings as a result of successful research and development of new products.

15. The management of company A increased the estimated salvage value of the company's PP&E. What effect will that change have on the interest coverage ratio?

a.

Increase.

b.

Decrease.

c.

No effect.

d.

Unable to determine without more information.

Short Questions (10 points per question)

1.The following selected financial data pertain to four companies: a hotel, a travel agency, a meat packing company and a pharmaceutical company.

Required: Match each with the financial information and briefly explain why you made your choice as you did.

Balance Sheet Data

(component percentages)

Company 1

Company 2

Company 3

Company 4

Cash

7.2

22.0

6.0

11.2

Accounts Receivable

28.0

40.0

3.4

23.0

Inventory

21.4

0.5

0.9

27.4

Property, Plant & Equipment

32.0

19.0

75.1

25.0

Income Statement Data

(component percentages)

Gross Profit

15.2

Not Applicable

Not Applicable

44.0

Profit before Taxes

1.8

3.3

2.5

7.0

Ratios

Current ratio (over the last five years)

1.6

1.3

0.5

1.8

Inventory turnover ratio

27.8

Not Applicable

Not Applicable

3.4

Debt-to-equity ratio

1.8

2.3

5.8

1.4

2.Which three types of firms have the most incentive to engage in earnings management? Briefly explain.

3.(No need to do - we will learn this subject next class) The city of Los Angeles wants to issue $1,800,000 of noninterest-bearing bonds to be repaid $30,000 twelve times a year for 5 years.

How much should investors be willing to pay for the bonds if they require an 8% return on their investment (assuming monthly compounding)? Show your work

Problem (40 points)

Sanderson Farms is the third largest poultry producer in the United States and produces 9.375 million chickens per week. It is the only Fortune 1000 company headquartered in Mississippi.

Sanderson's financial statements for the three years ended December 31, 2012, 2013 and 2014, are provided as supplementary material.

1.Profitability Analysis

a.Compute Sanderson return on assets (ROA) for 2014 and 2013. What trend do you observe in Sanderson ROA? (2 points)

b.Decompose Sanderson ROA for 2014 and 2013 to its two main components we learned in class.Comment on which of the two components is causing the trend you observed in question 1(a) (4 points)

c.Identify the two line items in the relevant financial statement that can explain the trend you observed in questions 1(a) and 1(b) (use common size analysis and/or percentage change analysis to show the change). (4 points)

d.Briefly explain what could have caused the change in the two line items you identified in 1(c) (4 points)

2.Risk Analysis

a.Can the company pay off its current liabilities within the following year? Use the most appropriate ratio. (3 points)

b.If all of Sanderson Current liabilities were due within a few days, will the company be able to pay them off? Use the most appropriate ratio. (3 points)

c.Did Sanderson short term liquidity risk increased or decreased in 2014? Use the ratios you calculated in 2(a) and (b). (2 points)

3.Cash Flow Statement

a.In your opinion, in which life cycle phase is Sanderson? Briefly explain (7 points)

4.Accounting Quality

a.Compute two distinct ratios from the financial statements which helps detect early warnings signs of earnings management (6 points)

b.The table below presents analysts' EPS consensus forecast (Wall St.) and actual EPS. Based on the data from the table, is there any early evidence that might suggest Sanderson management is managing earnings? (3 points)

c.Based on the evidence in 4 (a) and (b) Briefly comment whether you believe Sanderson management is managing earnings (2 points)

5.Based on the analysis you conducted in questions 1-4, would you recommend an investment in Sanderson Farms? Briefly explain (Bonus 5 points)