Deck 12: Financial Statement Analysis and Decision Making

Question 1

Analyses that provide information about an entity's relative position within an industry are known as:

A) company standards.
B) industry boundaries.
C) industry averages.
D) comparative advantages.

Answer 1

industry averages.

Question 2

Comparisons with other entities that provide insight into an entity's competitive position are:

A) intra-industry analyses.
B) competitor data.
C) industry averages.
D) inter-entity comparisons.

Answer 2

inter-entity comparisons.

Question 3

Liquidity ratios are used to assess:

A) short-term ability of an entity to pay maturing obligations.
B) long-term solvency.
C) short-term sales levels.
D) ability of an entity to survive over a long term.

Answer 3

short-term ability of an entity to pay maturing obligations.

Question 4

The current ratio is calculated by dividing:

A) current liabilities by current assets.
B) current creditors by current accounts receivable.
C) current assets by current liabilities.
D) cash by inventory.

Question 5

Radiance Limited has cash of $35,000, marketable securities totaling $15,000, net receivables amounting to $20,000, and current liabilities of $55,000. The quick ratio for this company is:

A) 1.000.
B) 0.780.
C) 1.273.
D) 1.875.

Question 6

Return on ordinary shareholders' equity is driven by:

A) gross profit rate.
B) profit margin and free cash flow.
C) times interest earned.
D) return on assets and leverage.

Question 7

Examples of estimates normally found in financial statements include all of the following except:

A) cash.
B) provision for warranties.
C) depreciation expense.
D) allowance for doubtful debts.

Question 8

Traditional financial statements are normally based on:

A) market values.
B) net present values.
C) cost.
D) exit prices.

Question 9

In a traditional set of financial statements, the values of items found in a statement of financial position will be:

A) lower than their current market value.
B) higher than their current market value.
C) the same as their current market value.
D) stated at a premium to their market value.

Question 10

Comparative information taken from the Rugby Ltd's financial statements is shown below:
Required: Using horizontal analysis, show the percentage change from 2019 to 2020 with 2019 as the base year.

Question 11

Button Ltd reported profit of $4,000,000 in 2019. Using 2019 as the base year, profit decreased by 70% in 2020 and increased by 180% in 2021.
Compute the profit reported by Button Ltd for 2020 and 2021.

Question 12

The following items were taken from the financial statements of James Limited, over a three-year period:
Required: Using horizontal analysis and 2019 as the base year, compute the trend percentages for net sales, cost of sales and gross profit. Explain whether the trends are favourable or unfavourable for each item.

Question 13

The following items were taken from the financial statements of Greenley Ltd over a three-year period:
Required: Compute the following for each of the above time periods.
a. The amount and percentage change from 2019 to 2020.
b. The amount and percentage change from 2020 to 2021.

Question 14

The comparative statement of financial position of Grange Wine Ltd appears below:
Instructions:
(a) Using horizontal analysis, show the percentage change for each statement of financial position item using 2019 as a base year.
(b) Using vertical analysis, prepare a common-size comparative statement of financial position.

Question 15

The following information was taken from the financial statements of Genesis Ltd:
Required:
(a) Compute the net sales for each year.
(b) Compute the cost of sales in dollars and as a percentage of net sales for each year.
(c) Compute operating expenses in dollars and as a percentage of net sales for each year. (Income taxes are not operating expenses).

Question 16

Selected information from the comparative financial statements of Dryman Ltd for the year ended 31 December appears below:
Required: Answer the following questions relating to the year ended 31 December 2020. Show computations.
1. Inventory turnover for 2020 is __________.
2. The number of times interest earned ratio in 2020 is __________.
3. The debt to total assets ratio for 2020 is __________.
4. Receivables turnover for 2020 is __________.
5. Return on assets for 2020 is __________.
6. The cash return on sales ratio for 2020 is __________.
7. Current cash debt coverage for 2020 is __________.

Question 17

The financial statements of Bloggs Ltd appear below:
Additional information:
a. Cash dividends of $57,000 were declared and paid in 2020.
b. Weighted-average number of shares of ordinary shares outstanding during 2020 was 60,000 shares.
c. Market value of ordinary shares on 31 December 2020 was $18 per share.
d. Net cash provided by operating activities for 2020 was $63,000.
Required:Using the financial statements and additional information, compute the following ratios for the Boggs Ltd for 2020. Show all computations.

Question 18

The following ratios have been computed for the Bently Bicycle Company for 2020
The 2020 financial statements for James Ltd with missing information follows:
Required: Use the above ratios and information from The Bently Bicycle Company financial statements to fill in the missing information on the financial statements. Follow the sequence indicated. Show computations that support your answers.

Question 19

Selected data for Marcy's Apparel appear below.
Compute the following for 2020:
(a) Gross profit percentage
(b) Inventory turnover
(c) Receivables turnover

Question 20

Willow Ltd has issued ordinary shares only. The company has been successful and has a gross profit rate of 20%. The information shown below was taken from the company's financial statements.
Compute the following:
(a) Receivables turnover and the average number of days required to collect the accounts receivable.
(b) The inventory turnover and the average days in inventory.
(c) Return on ordinary shareholders' equity.

Question 21

Birch Ltd had the following comparative current assets and current liabilities:
During 2020, credit sales and cost of sales were $450,000 and $250,000, respectively. Net cash provided by operating activities for 2020 was $134,000.
Compute the following liquidity measures for 2020:
1. Current ratio
2. Quick ratio
3. Current cash debt coverage
4. Receivables turnover
5. Inventory turnover

Question 22

The income statement for the Yarrah Ltd for the year ended 31 December 2020 appears below.
*Includes $30,000 of interest expense and $16,000 of income tax expense.
Additional information:
1. Ordinary shares outstanding on 1 January 2020 was 50,000 shares. On 1 July 2020
10,000 more shares were issued.
2. The market price of Yarrah shares was $12 at the end of 2020.
3. Cash dividends of $30,000 were paid, $6,000 of which were paid to preferred shareholders.
Compute the following ratios for 2020:
(a) earnings per share
(b) price-earnings ratio
(c) times interest earned.

Question 23

Complete the following statements:
-If the inventory turnover ratio is 5 times, and the average inventory was $600,000, the cost of goods sold during the year was $______________ and the average days to sell the inventory was ______________ days.

Question 24

Complete the following statements:
-Hansen Company reported profit for the year of $300,000 and profit margin of 25%. If total average assets were $200,000, the asset turnover ratio was ____________ times.

Question 25

For each of the ratios listed , select the appropriate code letter, whether it is a liquidity ratio, a profitability ratio or a solvency ratio:

-Cash return on sales ratio

A) Liquidity ratio (L)
B) Profitability ratio(P)
C) Solvency ratio(S)

Question 26

For each of the ratios listed , select the appropriate code letter, whether it is a liquidity ratio, a profitability ratio or a solvency ratio:

-Return on assets

A) Liquidity ratio (L)
B) Profitability ratio(P)
C) Solvency ratio(S)

Question 27

For each of the ratios listed , select the appropriate code letter, whether it is a liquidity ratio, a profitability ratio or a solvency ratio:

-Receivables turnover

A) Liquidity ratio (L)
B) Profitability ratio(P)
C) Solvency ratio(S)

Question 28

For each of the ratios listed , select the appropriate code letter, whether it is a liquidity ratio, a profitability ratio or a solvency ratio:

-Current cash debt coverage

A) Liquidity ratio (L)
B) Profitability ratio(P)
C) Solvency ratio(S)

Question 29

For each of the ratios listed , select the appropriate code letter, whether it is a liquidity ratio, a profitability ratio or a solvency ratio:

-Acid-test ratio (Quick ratio)

A) Liquidity ratio (L)
B) Profitability ratio(P)
C) Solvency ratio(S)

Question 30

For each of the ratios listed , select the appropriate code letter, whether it is a liquidity ratio, a profitability ratio or a solvency ratio:

-Debt to total assets ratio

A) Liquidity ratio (L)
B) Profitability ratio(P)
C) Solvency ratio(S)

Question 31

For each of the ratios listed , select the appropriate code letter, whether it is a liquidity ratio, a profitability ratio or a solvency ratio:

-Inventory turnover

A) Liquidity ratio (L)
B) Profitability ratio(P)
C) Solvency ratio(S)

Question 32

Communication: Fast Express specialises in the transportation of medical equipment and laboratory specimens overnight. The company has selected the following information from its most recent annual report to be the subject of an immediate press release.
• The financial statements are being released.
• Profit this year was $2.1 million. Last year's profit had been $1.8 million.
• The current ratio has changed to 2:1 from last year's 1.5:1.
• The debt/total assets ratio has changed to 4:5 from last year's 3:5.
• The company expanded its truck fleet substantially by purchasing ten new delivery vans.
• The company already had twelve delivery vans. The company is now the largest medical courier on the Eastern seaboard.
Required: Prepare a brief press release incorporating the information above. Include all information. Think carefully which information (if any) is good news for the company, and which (if any) is bad news.