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Exam 7: Financial Statement Analysis

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Question 1

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All of the following statements are true EXCEPT:

A) The debt and equity ratios must total 100%.
B) The debt ratio measures the ability to long-term debt.
C) Debt ratio is a key ratio examined by investors.
D) Creditors view a high debt ratio with caution.

E) A) and D)
F) All of the above

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Question 2

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La Paz Company reported the following data: a_Prepare a vertical analysis of the income statement,both years,showing appropriate percentages for each item listed above.Round percentages to the nearest one-tenth percent. b_Based on your results,what conclusions can you make?

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Question 3

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Which of the following statements about inventory turnover is most appropriate?

Data for the most recent four fiscal years of Colt Corporation are given below: $\begin{array}{lllll}&2017 & 2016 & 2015 & 2014 \\\text { Net Sales } & \$ 78,000 & 75,000 & \$ 67,000 & \$ 60,000 \\\text { Cost of goods sold } & 33,000 & 32,000 & 30,000 & 26,000 \\\text { Gross margin } & 45,000 & 43,000 & 37,000 & 34,000 \\\text { Operating expenses } & 25,000 & 22,000 & 19,000 & 14,000 \\\text { Net income } & 20,000 & 21,000 & 18,000 & 20,000\end{array}$ a_Prepare an analysis showing the trend percentages for the four-year period using 2014 as the base year. b_What do the trend percentages indicate regarding Colt Corporation's income statement data?

Assuming the accounts payable balance at the end of 2017 is $75,000,and it has decreased 20% since the end of 2016,the balance at the end of 2016 (rounded to the nearest whole dollar_was:

Select from the following list the letter of the ratio title for the formula provided in the question. -Select the letter of the ratio title that corresponds to the following formula. $\frac{\text { Cash + short-term investments + Net current receivables }}{\text {Current liabilities }}$

Selected items from the balance sheet and income statement are shown below for the Carswell Corporation for 2017 and 2016.Calculate the amount of the change and the percentage change for each item. $\begin{array}{lll}&2017&2016\\\text { Cash } & \$ 130,000 & \$ 100,000 \\\text { Accounts receivable } & 100,000 & 125,000 \\\text { Merchandise inventory } & 65,000 & 85,000 \\\text { Accounts payable } & 62,500 & 50,000 \\\text { Sales } & 150,000 & 135,000 \\\text { Cost of goods sold } & 73,500 & 67,500\end{array}$

The current ratio should exceed one and a current ratio of 2.0 is considered very good.

Table 18-12 McKay Ltd. and Thorton Inc. are competitors in the same industry. The following comparative income statements have been prepared. - Refer to Table 18-12.Prepare a common-size income statement using the format below.(Round all amounts to the nearest tenth of a percent.) $\begin{array} { | l | l | l | } \hline & \text { McKay Ltd. } & \text { Thorton Inc. } \\\hline \text { Revenues } & & \\\hline \text { Cost of revenues } & & \\\hline \text { Gross margin } & & \\\hline \text { Operating expenses: } & & \\\hline \text { Sales and marketing expense } & & \\\hline \text { General and administrative expense } & & \\\hline \text { Research and development expense } & & \\\hline \text { Total operating expenses } & & \\\hline & & \\\hline \text { Income before income tax } & & \\\hline \text { Income taxexpense } & & \\\hline \text { Net income (loss) } & & \\\hline\end{array}$

Trend percentages are not a form of horizontal analysis.

Oglethorpe Company reports the following information from the vertical analysis of its balance sheet: Current assets: $23.5 \%$ in 2017 $23.9 \%$ in 2018 Which of the following statements could be logically concluded from the above data?

Horizontal analysis compares each item in the income statement to the net sales amount.

Table 18-7 Jackson Company has prepared the following comparative income statement, for 2017, to compare its performance with industry averages: -Refer to Table 18-7.Based on the above data,an analyst could determine that Jackson's inventory turnover is lower than the industry average.

Using standard measures enable investors and creditors to compare companies of similar sizes or different sizes.

Match the following: A) vertical analysis B) rate of return on net sales C) long-term solvency D) common-size statement E) rate of return on common shareholders' equity F) current ratio G) dividend yield H) book value per common share I) debt ratio J) short-term liquidity K) accounts receivable turnover L) acid-test ratio M) horizontal analysis N) working capital O) day's sales in receivables P) times-interest-earned ratio Q) inventory turnover R) price/earnings ratio S) benchmarking -Analysis of a financial statement that reveals the relationship of each statement item to the total,which is 100%

Match the following: A) vertical analysis B) rate of return on net sales C) long-term solvency D) common-size statement E) rate of return on common shareholders' equity F) current ratio G) dividend yield H) book value per common share I) debt ratio J) short-term liquidity K) accounts receivable turnover L) acid-test ratio M) horizontal analysis N) working capital O) day's sales in receivables P) times-interest-earned ratio Q) inventory turnover R) price/earnings ratio S) benchmarking -Ratio of the sum of cash plus short-term investments plus net current receivables to current liabilities

Net credit sales for Torro Corporation for 2017 were $600,000.Net accounts receivable at the beginning of the year were $125,000 and were $150,000 at the end of the year.What was the days' sales in receivables (round to the nearest day) ?

Following is the income statement for Masters Corporation for the year ended December 31,2017: Masters Corporation Income Statement For the Year Ended December 31, 2017 $\begin{array}{lc}\text { Net sales }&\$770,000\\\text { Expenses: }\\\text { Cost of goods sold } & 478,500 \\\text { Selling expenses } & 35,000 \\\text { General expenses } & 39,300 \\\text { Interest expense } & 42,000 \\\text { Income tax expense } & 35,000\\\text { Total expenses } &{629,800} \\\text { Net Income }&{\$ 140,200}\end{array}$ a_Calculate the gross profit percentage b_Calculate the profit margin.

The numbers in the financial statements under Accounting Standards for Private Enterprises (ASPE) _and International Financial Reporting standards (IFRS) _will usually differ,the procedures for analyzing the relationships among the reported numbers:

Which of the following is the MOST useful for decision makers?