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Exam 17: Analysis of Financial Statements

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Question 1

True/False

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The use of debt is sometimes described as financial leverage because debt can have the effect of increasing the return on equity.

A) True
B) False

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Question 2

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Current assets divided by current liabilities is the:

A) Solvency ratio.
B) Liquidity ratio.
C) Quick ratio.
D) Current ratio.
E) Debt ratio.

F) C) and D)
G) B) and E)

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Question 3

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Quick assets divided by current liabilities is the:

Use the following selected information from Wheeler, LLC to determine the 2017 and 2016 trend percentages for cost of goods sold using 2016 as the base. $\begin{array}{|l|r|r|}\hline & \mathbf{2 0 1 7} &2016 \\\hline \text { Net sales } & \$ 276,200 & \$ 231,400 \\\hline \text { Cost of goods sold } & 151,900 & 129,590 \\\hline \text { Operating expenses } & 55,240 & 53,240 \\\hline \text { Net earnings } & 27,820 & 19,820\\\hline\end{array}$

Financial reporting includes not only general purpose financial statements, but also information from SEC filings, press releases, shareholders' meetings, forecasts, management letters, auditor's reports, and Webcasts.

Trend analysis of financial statement items can include comparisons of relations between items on different financial statements.

Intra-company analysis compares a company's current performance to its own prior performance.

The background on a company, its industry, and its economic setting is usually included in which of the following sections of a financial statement analysis report?

The return on total assets can be calculated as profit margin times total asset turnover.

The higher the accounts receivable turnover, the less quickly accounts receivable are collected.

How long a company holds inventory before selling it can be measured by dividing cost of goods sold by the average inventory balance to determine the:

Jones Corp. reported current assets of $193,000 and current liabilities of $137,000 on its most recent balance sheet. The current assets consisted of $62,000 Cash; $43,000 Accounts Receivable; and $88,000 of Inventory. The acid-test (quick) ratio is:

Guidelines (rules-of-thumb) are general standards of comparison developed from:

Match each of the following terms with the appropriate formulas. - $\frac{\text {Total liabilities }}{\text {Total assets }}$

Refer to the following selected financial information from Frankle Corp. Compute the company's current ratio. $\begin{array}{|l|r|}\hline\\\hline \text { Current Assets } & 306,450 \\\hline \text { Plant assets } & 388,000 \\\hline \text { Current Liabilities } & 107,800 \\\hline \text { Net sales } & 676,000 \\\hline \text { Net Income } & 75,000\\\hline\end{array}$

Graphical analysis of the balance sheet can be useful in assessing sources of financing.

A trend percent, or index number, is calculated by dividing the analysis period amount by the base period amount and multiplying the result by 100.

Refer to the following selected financial information from McCormik, LLC. Compute the company's days' sales in inventory for Year 2. (Use 365 days a year.) $\begin{array}{|l|r|r|}\hline & \text { Year 2 } & {\text { Year 1 }} \\\hline \text { Cash } & \$ 37,500 & 36,850 \\\hline \text { Short-term investments } & 90,000 & 90,000 \\\hline \text { Accounts receivable, net } & 85,500 & 86,250 \\\hline \text { Merchandise inventory } & 121,000 & 117,000 \\\hline \text { Prepaid expenses } & 12,100 & 13,500 \\\hline \text { Plant assets } & 388,000 & 392,000 \\\hline \text { Accounts payable } & 113,400 & 111.750 \\\hline \text { Net sales } & 711,000 & 706,000 \\\hline \text { Cost of goods sold } & 390,000 & 385,500 \\\hline\end{array}$

A good financial report does not link interpretations and conclusions of analysis with the underlying information.

Match each of the following terms with the appropriate formulas. - $\frac{\text {Net income - Preferred dividends }}{\text { Average common stockholders' equity}}$