Chapter 13: Analysis of Financial Statements (Concept Overview)

A certain company has an acid test ratio of 0.97. This implies which of the following.

Current liabilities are greater than the quick assets of the company. The acid-test ratio is calculated by dividing quick assets by current liabilities. In this case, the quick assets are only 97% (or 0.97) of the current liabilities which means that the current liabilities are greater than the quick assets.

Apple Company compares its first quarter sales revenue for the current year with its previous year's first quarter sales revenue. This is an example of what type of comparison?

Intracompany

Which of the following is not a solvency ratio?

Price earnings ratio Solvency is a company's long-run financial viability and its ability to meet long-term obligations and includes: debt and equity ratios, debt-to-equity ratio, and the times interest earned ratio.

Compute the dollar change for accounts payable using the following information. Use year 1 as the base year. Accounts Payable balance on Year 1 is $75,000 and on Year 2 is $65,000.

$(10,000) Dollar Change = Analysis period amount Year 2 $65,000 − Base period amount Year 1 $75,000 = $(10,000).

Compute the percent change for accounts payable using the following information. Use year 1 as the base year. Accounts Payable balance on Year 1 is $75,000 and on Year 2 is $65,000.

-13.33% Percent Change = (Analysis period amount Year 2 $65,000 − Base period amount Year 1 $75,000) / Base period amount Year 1 $75,000 × 100 = −13.33%

A company has total assets of $150,000; total liabilities of $50,000 and total equity of $100,000. What is this company's debt-to-equity ratio?

0.5 The debt-to-equity ratio is computed by dividing total liabilities by total equity. Debt-to-equity ratio: $50,000 / $100,000 = 0.5

Total Assets for a company are $700,000; Accounts Payable is $75,000; Bonds Payable is $225,000; Common Stock is $300,000 and Retained Earnings is $100,000. The common-size percent for Accounts Payable is:

10.7% Accounts Payable $75,000 / Base Amount Total Assets $700,000 × 100 = 10.7% Common-size percent.

A company's sales in year 1 were $300,000, year 2 were $351,000, and year 3 were $400,000. Using year 2 as a base year, the sales percent for year 3 is ___.

113.96% Analysis period amount for year 3 of $400,000 / $351,000 Base period amount × 100 = Trend percent of 113.96

Net sales are $525,000, beginning accounts receivable are $15,000 and ending accounts receivable are $20,000. The accounts receivable turnover is _____ times.

30 Accounts receivable turnover = Net sales $525,000 divided by average accounts receivable. Average accounts receivable = ($15,000 + $20,000) / 2 = $17,500. Accounts receivable turnover = $525,000 / 17,500 = 30 times.

A company's net sales in year 1 were $300,000 and were $400,000 in year 5. The company's total assets were $350,000 in year 1 and were $370,000 in year 5. What is the percent change in net sales and total assets over this period?

33.33% and 5.71% Net sales: ($400,000 − $300,000) / $300,000 = 33.33% Total assets: ($370,000 − $350,000) / $350,000 = 5.71%

A company has earnings per share of $10 and the market price per common share is $50. What is this company's price-earnings ratio?

5 The price-earnings ratio is computed by dividing the market price per common share by the earnings per share. Earnings per share = $50 / $10 = 5.

Rose Company reported net income of $24,000, net sales of $400,000, and average assets of $600,000. What is the profit margin ratio?

6% Profit margin = Net income of $24,000 ÷ Net sales of $400,000 = 6%

Retrospective application means:

Applying a different accounting principle to prior periods.

Users especially rely on this information to predict future operations. Many users view this section as the most important:

Continuing operations

This section of an analysis report has forecasts, estimates, interpretations, and conclusions drawing on all sections of the report.

Inferences

A tool used to evaluate individual financial statement items or a group of items is called:

Vertical analysis

Comparison of a company's financial condition and performance to a base amount is an example of what type of analysis?

Vertical analysis

Financial statement analysis applies _____ tools to financial statements for decision-making.

analytical

Comparative financial statements show:

changes in relative importance of each financial statement item.

A pie chart graphic of a common-size income statement will show:

each cost as a component of net sales.

Profitability measures a company's ability to:

earn an adequate return

Financial statement analysis provides information to internal users to improve:

efficiency and effectiveness

General-purpose financial statements include all of the following except:

general ledger accounts General-purpose financial statements include the income statement, balance sheet, statement of stockholders' equity (or statement of retained earnings), statement of cash flows, and notes to these statements.

Horizontal analysis is the review of financial statement data across time and the term horizontal comes from the _____ movement of our eyes as we review comparative financial statements:

left-to-right

All of the following are one of the building blocks of financial statement analysis except:

marketing prospects The four building blocks of financial statement analysis includes liquidity and efficiency, solvency, profitability, and market (not marketing) prospects.

Liquidity is the availability of resources to pay __________-term cash requirements

short

This building block reveals a company's ability to generate future revenues and meet long-term obligations.

solvency