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Exam 17: Analysis of Financial Statements

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Question 31

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The return on common stockholder's equity measures a company's success in earning net income for its owners.

A) True
B) False

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Question 32

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

A) Political analysis.
B) Investment analysis.
C) Financial reporting.
D) Horizontal analysis.
E) Vertical analysis.

F) A) and B)
G) A) and C)

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Question 33

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

A company with a low inventory turnover requires a smaller investment in inventory than one producing the same sales with a higher turnover.

A financial statement analysis report helps to reduce uncertainty in business decisions through a rigorous and sound evaluation.

Describe ratio analysis including its purpose, application, and interpretation.

The building blocks of financial statement analysis do not include:

A company with a high inventory turnover requires a smaller investment in inventory than one producing the same sales with a lower turnover.

The building blocks of financial statement analysis include (1)liquidity, (2)salability, (3)solvency, and (4)profitability.

Measures taken from a selected competitor or a group of competitors are often excellent standards of comparison for analysis.

Refer to the following selected financial information from Shakley's Incorporated. Compute the company's return on total assets for Year 2. $\begin{array}{|l|r|r|}\hline & \text { Year 2 } & \text { Year 1 } \\\hline \text { Net sales } & \$ 478,500 & \$ 426,250 \\\hline \text { Cost of goods sold } & 276,300 & 250,120 \\\hline \text { Interest expense } & 9,700 & 10,700 \\\hline \text { Net income before tax } & 67,250 & 52,680 \\\hline \text { Net income after tax } & 46,050 & 39,900 \\\hline \text { Total assets } & 317,100 & 288,000 \\\hline \text { Total liabilities } & 181,400 & 167,300 \\\hline \text { Total equity } & 135,700 & 120,700 \\\hline\end{array}$

Which of the following items is typically not included as a separate item after normal revenues and expenses?

The percent change of a comparative financial statement item is computed by subtracting the analysis period amount from the base period amount, dividing the result by the base period amount and multiplying that result by 100.

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

An advantage of common-size statements is that they reflect the dollar magnitude (size)of the different companies under analysis.

Working capital is computed as current liabilities minus current assets.

Powers Company reported Net sales of $1,200,000 and Accounts Receivable, net of $78,500. The Day's sales uncollected (rounded to whole days) is:

Trend analysis is a form of horizontal analysis that can reveal patterns in data across successive periods.

Market prospects are the ability to generate positive market expectations.

A ratio expresses a mathematical relation between two quantities and can be expressed as a percent, rate, or proportion.