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Exam 13: Interpreting Financial Statements

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Question 21

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External users of financial information:

A) Are those individuals involved in managing and operating the company.
B) Include internal auditors and consultants.
C) Are not directly involved in operating the company.
D) Make strategic decisions for a company.
E) Make operating decisions for a company.

F) A) and B)
G) None of the above

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Question 22

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A high level of expected risk suggests a low price-earnings ratio.

A) True
B) False

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Question 23

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The use of horizontal and vertical analysis eliminates many differences between GAAP and IFRS, but the user must exercise some caution when drawing conclusions from these reports.

A company has long-term notes payable of $175,625, taxes of $9,500, ending merchandise inventory of $450,290, interest expense of $14,050, net sales of $720,000 a gross profit ratio of 35%, a times interest earned ratio of 4.23, and total assets of $1,300,417. What is the company's earnings before interest and taxes?

Net income divided by net sales is equal to the:

A rough guideline states that for a company with no discounts offered, days' sales uncollected should not exceed 1⅓times the days in its credit period.

Net income divided by average total assets is equal to the:

In horizontal analysis the percent change is computed by:

Financial statement analysis can be used for personal investment decisions.

The comparison of a company's financial condition and performance to a base amount is known as:

______________________________ applies analytical tools to general-purpose financial statements and related data for making business decisions.

Explain the form and content of a complete income statement.

For the following financial statement items, calculate trend percents using 2010 as the base year:

Profitability is the company's ability to generate future revenues and meet long-term financial obligations.

The comparison of a company's financial condition and performance across time is known as:

Extraordinary items:

Horizontal analysis is the comparison of a company's financial condition and performance to a base amount.

The evaluation of company performance and financial condition includes evaluation of (1) past and current performance, (2) current financial position, and (3) future performance and risk.

Efficiency refers to how productive a company is in using its assets and is usually measured relative to how much revenue is generated from a certain level of assets.

Use the following information from the current year financial statements of a company to calculate the ratios below: (a) Current ratio. (b) Accounts receivable turnover. (Assume the prior year's accounts receivable balance was $100,000.) (c) Days' sales uncollected. (d) Inventory turnover. (Assume the prior year's inventory was $50,200.) (e) Times interest earned ratio. (f) Return on common stockholders' equity. (Assume the prior year's common stock balance was $480,000 and the retained earnings balance was $128,000.) (g) Earnings per share (assuming the corporation has a simple capital structure, with only common stock outstanding). (h) Price earnings ratio. (Assume the company's stock is selling for $26 per share.) (i) Divided yield ratio. (Assume that the company paid $1.25 per share in cash dividends.) $\begin{array}{|l|r|}\hline\text { Income statement data: } & \\\hline \text { Sales (all on credit) } & \$ 1,075,000 \\\hline \text { Cost of goods sold } & 575,000 \\\hline \text { Gross profit on sales } & \$ 500,000\\\hline \text { Operating expenses } & 305,000 \\\hline \text { Operating income } & \$ 195,000 \\\hline \text { Interest expense } & 20,400 \\\hline \text { Income before taxes } & \$ 174,600 \\\hline \text { Income taxes } & 74,000 \\\hline \text { Net income } & \$ 100,600\\\hline\end{array}$ $\begin{array}{|l|r|}\hline\text { Balance sheet data: } & \\\hline \text { Cash } & \$ 38,400 \\\hline \text { Accounts receivable } & 120,000 \\\hline \text { Inventory } & 56,700 \\\hline \text { Prepaid Expenses } & 24,000 \\\hline \text { Total current assets } & \$ 239,100 \\\hline \text { Total plant assets } & 708,900 \\\hline \text { Total assets } & \$ 948,000 \\\hline \text { Accounts payable } & \$ 91,200 \\\hline \text { Interest payable } & 4,800 \\\hline \text { Long-term liabilities } & 204,000 \\\hline \text { Total liabilities } & \$ 300,000 \\\hline \text { Common stock, } \$ 10 \text { par } & 480,000 \\\hline \text { Retained earnings } & 168,000 \\\hline \text { Total liabilities and equity } & \$ 948,000 \\\hline\end{array}$