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Exam 17: Financial Statement Analysis

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Question 71

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Bradley Corporation had the following comparative current assets and current liabilities: Instructions Calculate the following liquidity measures for 2014: a. Current ratio b. Acid-test ratio c. Receivables turnover d. Inventory turnover

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Question 72

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The use of alternative accounting principles

A) is not a problem in ratio analysis because the notes to the statements disclose the principles used.
B) may be a problem in ratio analysis even if disclosed.
C) is not a problem in ratio analysis since eventually all principles will lead to the same end.
D) is only a problem in ratio analysis with respect to inventory.

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Question 73

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Selected data from O'Brien Ltd. are presented below: Instructions Calculate the profitability ratios that can be derived from the above information.

Which of the following is NOT a profitability ratio?

In a horizontal analysis, if an item has a small value in the base year and a large value in the next year, the percentage change will not be meaningful.

Profitability ratios measure a company's ability to survive over a long period of time.

The following are income statements of two companies that are both in the fast food industry. All amounts are in 000's and are for the year ended December 31, 2014. Instructions Using vertical analysis determine which corporation is the more profitable and identify the most significant cause of the difference.

A liquidity ratio measures the

Which one of the following would NOT be considered a liquidity ratio?

Comparison with industry averages for diversified companies has

The financial statements of Keans Plumbing Inc. appear below: Additional information: 1. Cash dividends of $36,000 were declared and paid in 2014 2. Weighted average number of shares during 2014 was 60,000 shares. 3. Market value of common shares on December 31, 2014, was $18 per share. 4. Depreciation expense was $40,000 in 2014. Instructions Using the financial statements and additional information, calculate the following ratios for Keans Plumbing Inc. for 2014. Show all calculations. Calculations a. Current ratio _________ b. Return on equity _________ c. Price-earnings _________ d. Debt to total assets e. Receivables turnover _________

Meaningful analysis of financial statements will include either horizontal or vertical analysis, but not both.

A successful grocery store would probably have

Shareholders are most interested in evaluating

The following information for 2014 is provided for two public companies in the same industry: Instructions Answer the following questions about the two companies. Use the information provided to calculate the ratios needed to support your answers. a. Based on the above information, which company is more profitable? b. About which company are investors more optimistic? c. In which company would investors prefer to buy shares for growth potential? In which company would they prefer to buy shares if their goal is dividend income?

The 2014 income statements for two different companies are provided below: Instructions a. Are the two companies in the same or different industries? Use vertical analysis to support your answer. b. Can vertical analysis be used to compare the profitability of the two companies that are in different industries to each other? Support your answer with examples based on your calculations in part

If a company has an acid-test ratio significantly higher than the current ratio, it means that the company has a significant amount of inventory.

The higher the percentage of total debt to total assets, the greater the risk that the company will be unable to meet its maturing obligations.

The profit margin is calculated by dividing

The following selected ratios are available for Rainbow Corporation for the three most recent years: $\begin{array}{lccc}&2015&2014&2013\\\text { Debt to total assets } & \overline{48 \%} & \overline{52 \%} & \overline{60 \%} \\\text { Interest coverage } & 2.5 \text { times } & 2.6 \text { times } & 2.0 \text { times } \\\text { Free cash flow } & \$ 600,000 & \$ 590,000 & \$ 200,000\end{array}$ Instructions Using each of the three ratios above to support your answer, explain whether or not Rainbow's solvency has improved over the last three years.