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Financial statement analysis is the application of analytical tools to general-purpose financial statements and related data for making business decisions.

A) True
B) False

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A company can change from one acceptable accounting principle to another as long as the change improves the usefulness of information in its financial statements.

A) True
B) False

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Simple Simon's balance sheet and income statement accounts follow:  At December 31201120102009 Assets  Cash $30,872$36,086$37,974 Accounts receivable, net 89,47663,15150,632 Merchandise inventory 112,49983,45054,467 Prepaid expenses 9,9429,4734,219 Plant assets, net 291,143268,126244,108 Total assets $533,932$460,286$391,400 Liabilities and Equity  Accounts payable $130,290$76,233$50,632 Long-term notes payable secured by 98,372103,748107,769 mortgages on plant assets 142,500132,500102,500 Common stock, $10 par value 182,770147,805130,499 Total liabilities and equity $533.932$460,286$391,400\begin{array}{lrrr}\text { At December } 31&2011&2010&2009\\\text { Assets }\\\text { Cash } & \$ 30,872 & \$ 36,086 & \$ 37,974 \\\hline \text { Accounts receivable, net } & 89,476 & 63,151 & 50,632 \\\hline \text { Merchandise inventory } & 112,499 & 83,450 & 54,467 \\\hline \text { Prepaid expenses } & 9,942 & 9,473 & 4,219 \\\hline \text { Plant assets, net } & 291,143 & 268,126 & 244,108 \\\text { Total assets } & \$ 533,932 & \$ 460,286 & \$ 391,400\\\text { Liabilities and Equity }\\\text { Accounts payable } & \$ 130,290 & \$ 76,233 & \$ 50,632 \\\hline \text { Long-term notes payable secured by } & 98,372 & 103,748 & 107,769 \\\text { mortgages on plant assets } & 142,500 & 132,500 & 102,500 \\\hline \text { Common stock, } \$ 10 \text { par value } & 182,770 & 147,805 & 130,499\\\text { Total liabilities and equity }&\$533.932&\$460,286&\$391,400\end{array} Simple Simon's balance sheet and income statement accounts follow: \begin{array}{lrrr}\text { At December } 31&2011&2010&2009\\ \text { Assets }\\ \text { Cash } & \$ 30,872 & \$ 36,086 & \$ 37,974 \\ \hline \text { Accounts receivable, net } & 89,476 & 63,151 & 50,632 \\ \hline \text { Merchandise inventory } & 112,499 & 83,450 & 54,467 \\ \hline \text { Prepaid expenses } & 9,942 & 9,473 & 4,219 \\ \hline \text { Plant assets, net } & 291,143 & 268,126 & 244,108 \\ \text { Total assets } & \$ 533,932 & \$ 460,286 & \$ 391,400\\ \text { Liabilities and Equity }\\ \text { Accounts payable } & \$ 130,290 & \$ 76,233 & \$ 50,632 \\ \hline \text { Long-term notes payable secured by } & 98,372 & 103,748 & 107,769 \\ \text { mortgages on plant assets } & 142,500 & 132,500 & 102,500 \\ \hline \text { Common stock, } \$ 10 \text { par value } & 182,770 & 147,805 & 130,499\\ \text { Total liabilities and equity }&\$533.932&\$460,286&\$391,400 \end{array} What is Simple Simon's gross margin ratio for 2010? A) 65% B) 35% C) 67% D) 33% E) 39% What is Simple Simon's gross margin ratio for 2010?


A) 65%
B) 35%
C) 67%
D) 33%
E) 39%

F) A) and B)
G) A) and D)

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Extraordinary items:


A) Are not reported on a corporate income statement
B) Are included in income from operations
C) Are unusual and infrequent
D) Include changes in accounting principle
E) Are disclosed before discontinued operations on the income statement

F) A) and C)
G) All of the above

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Financial statement analysis can be used for personal investment decisions.

A) True
B) False

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A company has sales of $2,458,422,a gross profit ratio of 23%,a days' sales in inventory ratio of 12.4,and total current assets of $539,600.What is the ending inventory for the year?


A) $46,013
B) $58,000
C) $64,310
D) $61,715
E) $55,951

F) A) and D)
G) A) and C)

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Vertical analysis is a tool to evaluate individual financial statement items or groups of items in terms of a specific base amount.

A) True
B) False

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Extraordinary items are reported in the operating section of the income statement.

A) True
B) False

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The comparison of a company's financial condition and performance to a base amount is known as _____________________________.

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Trend percentage is calculated by dividing _________________________ by ___________________________ and multiplying the result by 100.

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Analysis p...

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Match each term with its definition

Premises
Solvency
Comparative financial statement
Equity ratio
Common-size financial statement
Vertical analysis
Market prospects
Horizontal analysis
Liquidity and efficiency
Profitability
Financial statement analysis
Responses
A statement with data for two or more successive accounting periods placed in side-by-side columns, often with changes shown in dollar amounts and percents.
Examination of financial data across time.
The availability of resources to meet short-term obligations and to efficiently generate revenues.
The comparison of a company's financial condition and performance to a base amount.
The application of analytical tools to general-purpose financial statements and related data for making business decisions.
A company's ability to generate positive market expectations.
A company's ability to generate future revenues and meet long-term obligations.
The portion of total assets provided by equity, computed as total equity divided by total assets.
A company's ability to provide financial rewards sufficient to attract and retain capital.
A statement where each amount is expressed as a percent of a base amount to reveal the relative importance of each financial statement item.

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Solvency
Comparative financial statement
Equity ratio
Common-size financial statement
Vertical analysis
Market prospects
Horizontal analysis
Liquidity and efficiency
Profitability
Financial statement analysis

Simple Simon's balance sheet and income statement accounts follow:  At December 31201120102009 Assets  Cash $30,872$36,086$37,974 Accounts receivable, net 89,47663,15150,632 Merchandise inventory 112,49983,45054,467 Prepaid expenses 9,9429,4734,219 Plant assets, net 291,143268,126244,108 Total assets $533,932$460,286$391,400 Liabilities and Equity  Accounts payable $130,290$76,233$50,632 Long-term notes payable secured by 98,372103,748107,769 mortgages on plant assets 142,500132,500102,500 Common stock, $10 par value 182,770147,805130,499 Total liabilities and equity $533.932$460,286$391,400\begin{array}{lrrr}\text { At December } 31&2011&2010&2009\\\text { Assets }\\\text { Cash } & \$ 30,872 & \$ 36,086 & \$ 37,974 \\\hline \text { Accounts receivable, net } & 89,476 & 63,151 & 50,632 \\\hline \text { Merchandise inventory } & 112,499 & 83,450 & 54,467 \\\hline \text { Prepaid expenses } & 9,942 & 9,473 & 4,219 \\\hline \text { Plant assets, net } & 291,143 & 268,126 & 244,108 \\\text { Total assets } & \$ 533,932 & \$ 460,286 & \$ 391,400\\\text { Liabilities and Equity }\\\text { Accounts payable } & \$ 130,290 & \$ 76,233 & \$ 50,632 \\\hline \text { Long-term notes payable secured by } & 98,372 & 103,748 & 107,769 \\\text { mortgages on plant assets } & 142,500 & 132,500 & 102,500 \\\hline \text { Common stock, } \$ 10 \text { par value } & 182,770 & 147,805 & 130,499\\\text { Total liabilities and equity }&\$533.932&\$460,286&\$391,400\end{array} Simple Simon's balance sheet and income statement accounts follow: \begin{array}{lrrr}\text { At December } 31&2011&2010&2009\\ \text { Assets }\\ \text { Cash } & \$ 30,872 & \$ 36,086 & \$ 37,974 \\ \hline \text { Accounts receivable, net } & 89,476 & 63,151 & 50,632 \\ \hline \text { Merchandise inventory } & 112,499 & 83,450 & 54,467 \\ \hline \text { Prepaid expenses } & 9,942 & 9,473 & 4,219 \\ \hline \text { Plant assets, net } & 291,143 & 268,126 & 244,108 \\ \text { Total assets } & \$ 533,932 & \$ 460,286 & \$ 391,400\\ \text { Liabilities and Equity }\\ \text { Accounts payable } & \$ 130,290 & \$ 76,233 & \$ 50,632 \\ \hline \text { Long-term notes payable secured by } & 98,372 & 103,748 & 107,769 \\ \text { mortgages on plant assets } & 142,500 & 132,500 & 102,500 \\ \hline \text { Common stock, } \$ 10 \text { par value } & 182,770 & 147,805 & 130,499\\ \text { Total liabilities and equity }&\$533.932&\$460,286&\$391,400 \end{array} What is Simple Simon's return on common stockholders' equity ratio for 2010? A) 27.5% B) 25.4% C) 12.6% D) 29.4% E) 19.5% What is Simple Simon's return on common stockholders' equity ratio for 2010?


A) 27.5%
B) 25.4%
C) 12.6%
D) 29.4%
E) 19.5%

F) D) and E)
G) B) and D)

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The following information is from Omega Corporation's balance sheets as of December 31,2010 and 2011 and its income statement for 2011: 20112010 Assets:  Cash $18,000$22,000 Marketable securities 25,0000 Accounts receivable 38,00042,000 Inventory 61,00052,000 Prepaid insurance 6,0009,000 Long-term investments 49,00020,000 Plant assets, net 218,000225,000 Total assets $415,000$370,000 Net income $62,250 Sales (all on credit) 305,000 Cost of goods sold 123,000 Interest expense 15,600 Income tax expense 27,000\begin{array}{|l|r|r|}\hline&2011&2010\\\hline\text { Assets: }\\\hline\text { Cash } & \$ 18,000 & \$ 22,000 \\\hline \text { Marketable securities } & 25,000 & 0 \\\hline \text { Accounts receivable } & 38,000 & 42,000 \\\hline \text { Inventory } & 61,000 & 52,000 \\\hline \text { Prepaid insurance } & 6,000 & 9,000 \\\hline \text { Long-term investments } & 49,000 & 20,000 \\\hline \text { Plant assets, net } & 218,000 & 225,000 \\\hline \text { Total assets } & \$ 415,000 & \$ 370,000\\\hline\\\hline\text { Net income } & \$ 62,250 \\\hline \text { Sales (all on credit) } & 305,000 \\\hline \text { Cost of goods sold } & 123,000 \\\hline \text { Interest expense } & 15,600 \\\hline \text { Income tax expense } & 27,000\\\hline\end{array} From the above information,calculate the following ratios for 2011: (a)Inventory turnover. (b)Accounts receivable turnover. (c)Return on total assets. (d)Times interest earned. (e)Total asset turnover.

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(a) Inventary turnover:
blured image times...

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Explain the form and content of a complete income statement.

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A complete income statement has five pot...

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Net sales divided by average accounts receivable is equal to the:


A) Days' sales uncollected
B) Average accounts receivable ratio
C) Current ratio
D) Profit margin
E) Accounts receivable turnover ratio

F) None of the above
G) B) and E)

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Match each of the following terms with the appropriate definitions.

Premises
Net income /Net sales
Cost of goods sold /Average inventory
Net sales/ Average total assets
Total liabilities /Total assets
(Net income - preferred dividends)/ Average common stockholders' equity
(Accounts receivable x Net Sales) x 365
Income before interest expense and income taxes/ Interest expense
(Net sales - Cost of goods sold)/ Net sales
Annual cash dividends per share /Market price per share
(Ending inventory/ cost of goods sold) x 365
Responses
Times interest earned
Total asset turnover
Days' sales uncollected
Profit margin ratio
Days' sales in inventory
Inventory turnover
Dividend yield
Return on common stockholders' equity
Gross margin ratio
Debt ratio

Correct Answer

Net income /Net sales
Cost of goods sold /Average inventory
Net sales/ Average total assets
Total liabilities /Total assets
(Net income - preferred dividends)/ Average common stockholders' equity
(Accounts receivable x Net Sales) x 365
Income before interest expense and income taxes/ Interest expense
(Net sales - Cost of goods sold)/ Net sales
Annual cash dividends per share /Market price per share
(Ending inventory/ cost of goods sold) x 365

The use of horizontal and vertical analysis eliminates many differences between GAAP and IFRS,but the user must exercise some caution when drawing conclusions from these reports.

A) True
B) False

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A company's sales in 2009 were $280,000 and its sales in 2010 were $341,600.Using 2009 as the base year,what is the sales trend percent for 2010?

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$341,600/$...

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What is the purpose of a good financial statement analysis report? What are the key components?

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A good financial statement analysis repo...

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Which of the following financial statements sections includes information on the background on a company,its industry and its economic setting?


A) Executive summary
B) Analysis overview
C) Evidential conclusions
D) Factor analysis
E) Inferences

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

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