Question 1

Explain the difference between vertical and horizontal analysis.

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Question 2

Explain why ratios that compare an income statement account with a balance sheet account should express the balance sheet account as an average of the beginning and ending balances.

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Question 3

Perform a horizontal analysis on the following information providing both the dollar amount and percentage change: $$\begin{array} { l r r | } 
\hline \text { Cash } &  { \frac { \mathbf { 2 0 1 3 } } { 500,000 } } & \stackrel { \underline { \mathbf { 2 0 1 2 } } } { 200,000 } \
\text { Accounts receivable } & 900,000 & 800,000 \
\text { Inventory } & 700,000 & 500,000 \
\text { Long-term assets } & 2,200,000 & 2,500,000 \
\text { Total assets } & \$ 4,300,000 & \$ 4,000,000 \
\hline
\end{array}$$

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Question 4

Sideline Sports Products reports a return on assets of 6%, and a return on equity of 10%. Why do these two ratios differ?

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Question 5

United Products began the year with an Inventory balance of $180,000, and had a year-end balance of $200,000. Sales of $800,000 generated a gross profit of $150,000. Calculate the inventory turnover ratio for the year.

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Question 6

The following income statement and balance sheets for Laser World are provided: $$\begin{array} { | l r | } 
\hline { \begin{array} { c } 
\text { Laser World } \
\text { Income Statement }
\end{array} } \
 { \text { For the year-ended December 31, 2012 } } \
\hline & \
\text { Sales revenue } & \$ 2,200,000 \
\text { Cost of goods sold } & 1,500,000 \
\text { Gross profit } & 700,000 \
\text { Expenses: } &  \
\quad \text { Operating expenses } & 350,000\
\quad \text { Depreciation expense } &  70,000 \
\quad \text { Loss on sale of land } & 5,000 \
\quad \text { Interest expense } & 25,000 \
\quad \text { Income tax expense } &60,000 \
\quad \text { Total expenses } & 510,000  \
\hline \text { Net income } & \$ 190,000\
\hline
\end{array}$$  Assuming that all sales were on account, calculate the following risk ratios for 2012:

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Question 7

Assume a company's sales are $1.6 million in 2011, $1.8 million in 2012, and $1.7 million in 2013. What is the percentage change from 2011 to 2012? What is the percentage change from 2012 to 2013? Be sure to indicate whether the percentage change is an increase or a decrease.

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Question 8

Barry's BBQ had sales revenue for the year of $200 million and net income of $20 million. Total assets were $70 million at the beginning of the year, and $80 million at the end of the year. Calculate Barry's return on assets, profit margin, and asset turnover ratios.

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Question 9

United Products began the year with an Accounts Receivable balance of $250,000, and had a year-end balance of $280,000. Credit sales of $800,000 generated a gross profit of $150,000. Calculate the receivables turnover ratio for the year.

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Question 10

LeBron's Kids Camps has a current ratio of 0.75 to 1, based on current assets of $3 million and current liabilities of $4 million. How, if at all, will a $500,000 cash purchase of inventory affect the current ratio? How, if at all, will a $500,000 purchase of inventory on account affect the current ratio?

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Question 11

BC Training reports sales revenue of $2,200,000. Average inventory during the year was $200,000. The inventory turnover ratio for the year is 8.0. What amount of gross profit would the company report in its income statement?

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Question 12

Paul Pierce Enterprises reports net income of $800,000, average total assets of $2,400,000, and average total liabilities of $400,000. Calculate the return on asset and return on equity ratios.

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Question 13

If a company's sales are $648,000 in 2012, and this represents an 8% increase over sales in 2011, what were sales in 2011?

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Question 14

The following income statement and balance sheets for Laser World are provided: $$\begin{array} { | l r | } 
\hline { \begin{array} { c } 
\text { Laser World } \
\text { Income Statement } \
\text { For the year-ended December  31 , 2012}
\end{array} } \

\hline \text { Sales revenue } & \$ 2,200,000 \
\text { Cost of goods sold } & 1,500,000 \
\text { Gross profit } & 700,000 \
\text { Expenses: } & \
\text { Operating expenses } & 350,000 \
\text { Depreciation expense } & 70,000 \
\text { Loss on sale of land } & 5,000 \
\text { Interest expense } & 25,000 \
\text { Income tax expense } & 60,000 \
\text { Total expenses } & 510,000 \
\hline \text { Net income } & \$ 190,000 \
\hline
\end{array}$$  Earnings per share for the year-ended December 31, 2012, is $1.90. The closing stock price on December 31, 2012, is $30.40.
Calculate the following profitability ratios for 2012: $\begin{array}{ll}
\text { 1. Gross profit ratio } & \text { 4. Asset turnover } \
\text { 2. Return on assets } & \text { 5. Return on equity } \
\text { 3. Profit margin } & \text { 6. Price-earnings ratio }
\end{array}$

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Question 15

Define earnings persistence. How does earnings persistence relate to the reporting of discontinued operations and extraordinary items?

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Question 16

Phillip's Fun Center has go-karts, miniature golf, bumper boats, paintball, and laser tag. Determine whether the company should report each of the following items as discontinued operations, extraordinary items, or other expenses:
1. Extraordinary items.
2. Other expenses.
3. Discontinued operations.
4. Other expenses.

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Question 17

Classify each of the following accounting practices as conservative or aggressive.
1. Choosing a shorter life for calculating depreciation.
2. The write-down of inventory.
3. Decrease the allowance for uncollectible accounts.
4. Recording revenues sooner.

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Question 18

Explain the difference between conservative and aggressive accounting practices. Provide an example of a conservative accounting practice and explain why this practice is conservative. Provide an example of an aggressive accounting practice and explain why this practice is aggressive.

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Question 19

Classify each of the following accounting practices as conservative or aggressive:
1. Increase the allowance for uncollectible accounts.
2. When costs are rising, change from FIFO to LIFO.
3. Increase the estimated useful life of equipment.

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Question 20

Match between columns
                        Premises:    Practices that result in reporting higher income, higher assets, and lower liabilities. 
   An event that is (1) unusual in nature and (2) infrequent in occurrence. 
   Practices that result in reporting lower income, lower assets, and higher liabilities. 
   The sale or disposal of a significant component of a company's operations. 
   Refers to the ability of reported earnings to reflect the company's true earnings, as well as the usefulness of reported earnings to predict future earnings.

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Quiz 12: Financial Statement Analysis

Explain the difference between vertical and horizontal analysis.

Explain why ratios that compare an income statement account with a balance sheet account should express the balance sheet account as an average of the beginning and ending balances.

Sideline Sports Products reports a return on assets of 6%, and a return on equity of 10%. Why do these two ratios differ?

United Products began the year with an Inventory balance of $180,000, and had a year-end balance of $200,000. Sales of $800,000 generated a gross profit of $150,000. Calculate the inventory turnover ratio for the year.

Assume a company's sales are $1.6 million in 2011, $1.8 million in 2012, and $1.7 million in 2013. What is the percentage change from 2011 to 2012? What is the percentage change from 2012 to 2013? Be sure to indicate whether the percentage change is an increase or a decrease.

Barry's BBQ had sales revenue for the year of $200 million and net income of $20 million. Total assets were $70 million at the beginning of the year, and $80 million at the end of the year. Calculate Barry's return on assets, profit margin, and asset turnover ratios.

United Products began the year with an Accounts Receivable balance of $250,000, and had a year-end balance of $280,000. Credit sales of $800,000 generated a gross profit of $150,000. Calculate the receivables turnover ratio for the year.

BC Training reports sales revenue of $2,200,000. Average inventory during the year was $200,000. The inventory turnover ratio for the year is 8.0. What amount of gross profit would the company report in its income statement?

Paul Pierce Enterprises reports net income of $800,000, average total assets of $2,400,000, and average total liabilities of $400,000. Calculate the return on asset and return on equity ratios.

If a company's sales are $648,000 in 2012, and this represents an 8% increase over sales in 2011, what were sales in 2011?

Define earnings persistence. How does earnings persistence relate to the reporting of discontinued operations and extraordinary items?

Classify each of the following accounting practices as conservative or aggressive. 1. Choosing a shorter life for calculating depreciation. 2. The write-down of inventory. 3. Decrease the allowance for uncollectible accounts. 4. Recording revenues sooner.

Explain the difference between conservative and aggressive accounting practices. Provide an example of a conservative accounting practice and explain why this practice is conservative. Provide an example of an aggressive accounting practice and explain why this practice is aggressive.

Classify each of the following accounting practices as conservative or aggressive: 1. Increase the allowance for uncollectible accounts. 2. When costs are rising, change from FIFO to LIFO. 3. Increase the estimated useful life of equipment.

Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term placing in the space provided.