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Exam 13: Analyzing and Interpreting Financial Statements

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Question 1

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Capital structure refers to a company's long-run financial viability and its ability to cover long-term obligations.

A) True
B) False

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Question 2

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Given the following information about a corporation's current year activities,answer the questions below: $\begin{array}{|l|r|r|}\hline&\text { Debit } & \text { Credit }\\\hline \text { Sales } & & \$ 250,000 \\\hline \text { Cost of goods sold } & \$ 90,000 & \\\hline \text { Other operating expenses } & 54,000 & \\\hline \begin{array}{l}\text { Income from operation of discontinued Division W (net } \\\text { of } \$ 9.200 \mathrm{tax} \text { ) }\end{array} & & 30,800 \\\hline \begin{array}{l}\text { Extraordinary loss from hurricane damage (net of } \\\$ 11,000 \text { tax benefit) }\end{array} & 37,000 \\\hline \begin{array}{l}\text { Loss from disposal of Division W (net of } \$ 15,000 \operatorname{tax} \\\text { benefit) }\end{array} & 45,000 \\\hline \begin{array}{l}\text { Unusual loss on sale of equipment }\end{array} \\\hline \begin{array}{l}\text { Correction of error made in recording depreciation last } \\\text { year (net of } \$ 3,000 \text { tax) }\end{array} & 9,500 \\\hline \begin{array}{l}\text { Effect on prior years' income of changing depreciation } \\\text { methods (net of } \$ 4,000 \mathrm{tax} \text { ) }\end{array} & 13,500 \\\hline\end{array}$ Compute the amounts that should be reported on the income statement as: (1)Income from continuing operations. (2)Income before extraordinary items and cumulative effect of changes in accounting principles. (3)Net income.

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(1)$94,000* (2)$79,8...

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Question 3

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Intracompany standards for financial statement analysis:

Corona Company's balance sheet accounts follow: $\begin{array}{lrrr} \text { At December 31}&2011&2010&2009\\ \text { Assets}\\ \text { Cash } & \$ 25,868 & \$ 31,163 & \$ 31,182 \\ \text { Accounts receivable, net } & 78,034 & 53,995 & 41,152 \\ \text { Merchandise inventory } & 95,120 & 73,491 & 46,095 \\\text { Prepaid expenses } & 8,330 & 8,099 & 3,429 \\ \text { Plant assets,net } & 241,854 & 218,932 & 199,542 \\ \text { Total assets } & \$ 449,206 & \$ 385,680 & \$ 321,400 \\\text { Liabilities and Equity } & & & \\\text { Accounts payable } & \$ 108,058 & \$ 67,135 & \$ 42,849 \\\text { Long-term notes payable secured by mortgages on } & & & \\\text { plant assets } & 85,791 & 87,819 & 71,029 \\ \text { Common stock, } \$ 10 \text { par value } & 162,500 & 162,500 & 162,500 \\\text { Retained earnings } &92,857 & 68,226 & 45,022 \\\text { Total liabilities and equity } &\$449,206 & \$ 385,680 & \$ 321,400 \\\end{array}$ What is Corona Company's accounts receivable turnover ratio for 2010 assuming net sales for the period were $1,236,783?

Trend analysis is also called:

A company reports the following comparative income statements: $\begin{array}{|l|r|r|}\hline&2011&2010\\\hline \text { Net sales } & \$ 736,000 & \$ 840,000 \\\hline \text { Cost of goods sold } & 518,880 & 571,200 \\\hline \text { Gross profit } & \$ 217,120 & \$ 268,800 \\\hline \text { Operating expenses } & 104,800 & 130,000 \\\hline \text { Net income } & \$ 112,320 & \$ 138,800 \\\hline\end{array}$ What are the costs of goods sold in common-size percents for 2010 and 2011,respectively?

Profitability is the ability to generate positive market expectations.

Financial statements with data for two or more successive accounting periods placed in columns side by side,sometimes with changes shown in dollar amounts and percents,are referred to as:

Calculate the percent increases for each of the following selected balance sheet items. $\begin{array} { | l | r | r | } \hline & \underline { 2011 } & { \underline { 2010 } } \\\hline \text { Cash } & \$ 569 & \$4 4 8 \\\hline \text { Accounts receivable } & 2,234 & 2,337 \\\hline \text { Merchardise irveritory } & 1,062 & 1,071 \\\hline \text { Plant assets } & 2 , 4 3 2&2 , 1 3 8 \\\hline \text { Bonds payable } & 1,164 & 1,666 \\\hline \text { Equity } & 2 , 777 & 2 , 8 9 4 \\\hline\end{array}$

Current assets minus current liabilities is equal to:

Current assets divided by current liabilities is equal to the:

The evaluation of company performance and financial condition includes evaluation of (1)past and current performance, (2)current financial position and (3)future performance and risk.

Comparative financial statements in which each amount is expressed as a percentage of a base amount and in which the base amount is expressed as 100%,are called:

The four building blocks of financial analysis are (1)____________________, (2)__________________________, (3)____________________ and (4)_____________________.

Explain where each of the following items should appear in the financial statements of a corporation: (1)The accounting department discovered that an entry was made last year to Prepaid Insurance instead of to Insurance Expense.The after-tax effect of the charge to Prepaid Insurance was $11,000. (2)One of the company's plants was destroyed by an earthquake.The area has never reported an earthquake.The amount of the loss,net of tax,was $850,000.

Financial reporting refers to:

The current ratio is calculated as current liabilities divided by current assets.

A company had a market price of $37.50 per share,earnings per share of $1.25 and dividends per share of $0.40.Its price-earnings ratio is equal to:

Selected comparative income statement amounts for a company are shown below.Using 2010 as the base year for a horizontal analysis,compute the account with the most significant change. $\begin{array}{|l|r|r|}\hline&2010&2011\\\hline \text { Sales } & \$ 400,000 & \$ 520,000 \\\hline \text { General and Administrative Expenses } & \$ 27,000 & \$ 29,700 \\\hline \text { Interest Expense } & \$ 1,000 & \$ 1,700 \\\hline \text { Miscellaneous Expense } & \$ 100 & \$ 200\\\hline \end{array}$

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 profit margin ratio for 2011?