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financial statement analysis

Financial Statement Analysis 11th Edition K. R. Subramanyam - Solutions

What is the days’ sales in receivables? What does it measure?
What does accounts receivable turnover measure?
How can we measure “quality” of current assets?
What are cash-based ratios of liquidity? What do they measure?
What is the appropriate use of the current ratio as a measure of liquidity?
What are the limitations of the current ratio as a measure of liquidity?
What are management’s objectives in determining a company’s investment in inventories and receivables?
Is there a relation between level of inventories and sales? Are inventories a function of sales? If there is a relation between inventories and sales, is it proportional?
Since cash generally does not yield a return, why does a company hold cash?
What is the current ratio? What does the current ratio measure? What are reasons for using the current ratio for analysis?
Your analysis of two companies reveals identical levels of working capital. Are you confident in concluding their liquidity positions are equivalent?
Certain industries are subject to peculiar financing and operating conditions calling for special consideration in drawing distinctions between current and noncurrent. How should analysis recognize this in evaluating short-term liquidity?
Assume a company under analysis has few current liabilities but substantial long-term liabilities. Notes to the financial statements report the company has a “revolving loan agreement” with a bank. Is this disclosure relevant to your analysis?
What is the justification for including prepaid expenses in current assets?
Are all inventories included in current assets? Why or why not?
Certain installment receivables are not collectible within one year. Why are these receivables sometimes included in current assets?
Are fixed assets potentially includable in current assets? Explain. If your answer is yes, describe situations where inclusion is possible.
Working capital equals current assets less current liabilities. Identify and describe factors impairing the usefulness of working capital as an analysis measure.
Why is liquidity important in analysis of financial statements? Explain its importance from the viewpoint of more than one type of user.
Refer to the following financial statements of Quaker Oats Company Using Quaker’s financial statements and the analysis guidance from the chapter, prepare a forecasted statement of cash flows for Year 12 using the following information:Selected Forecast Data ($ millions) Year 12 Sources of cash
Telnet Corporation is a newly formed computer manufacturer. Telnet plans to begin operations on January 1, Year 2. Selected financial information is available for the preparation of Telnet’s six-month forecasted performance covering the period January 1 to June 30 of Year 2.Required:a. Prepare a
Following are financial statement information for Welmark Corporation as of Year 2 and Year 3.Required:Using the residual income model, prepare a valuation of the common stock of Welmark Corporation as of Year 3 under the following assumptions:a. Forecast horizon of five years.b. Sales growth of
Comparative income statements and balance sheets for Merck ($ millions)follow:Required:a. Use the following ratios to prepare a projected income statement, balance sheet, and statement of cash flows for Year 3.Sales growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comparative income statements and balance sheets for Best Buy are shown below ($ millions).Required:a. Use the following ratios to prepare a projected income statement, balance sheet, and statement of cash flows for Year 3.
Comparative income statements and balance sheets for shown below ($ millions).Required:a. Use the following ratios to prepare a projected income statement, balance sheet, and statement of cash flows for Year 3.b. Based on your initial projections, how much external financing (long-term debt and/or
The Lyon Corporation is a merchandising company. Prepare a short-term cash forecast for July of Year 6 following the format of Exhibit 9A.4. Selected financial data from Lyon Corporation as of July 1 of Year 6 are reproduced below ($ thousands):Cash, July 1, Year 6 . . . . . . . . . . . . . . . . .
In Year 2006, Cough.com is in its second year of operations. Cough.com produces children’s cough medicine. Industry sales of children’s cough medicine for 2005 totaled $3 billion. For 2005, Cough.com had sales totaling $2.4 million (0.08% market share).Required:a. Explain how predictions of the
Quarterly sales and net income data for General Electric for Year 1 through Year 9 are shown below ($ millions).Required:Use these data and any other historical information available to forecast sales and net income for each of the quarters ending September Year 9, December Year 9, March Year 10,
Refer to the financial statements of Quaker Oats Company in Problem 9–6. Prepare a forecasted income statement for Year 12 using the following assumptions ($ millions):1. Revenues are forecast to equal $6,000.2. Cost of sales forecast uses the average percent relation between cost of sales and
What is the usual first step in preparing cash forecasts, and what considerations are required in this step?
Describe the primary difference between “funds flow” analysis and ratio analysis. Which analysis technique is preferred and why?
The following is often asserted: From an operational point of view, management focuses on cash rather than working capital. Do you agree with this statement? Why or why not?
Describe the relation between inflows of cash and outflows of cash.
What limitations are associated with short-term cash forecasting?
Why are short-term cash forecasts important for the analysis of financial statements?
Describe the typical trend of value drivers over time.
What are value drivers?
Describe the two-step process of forecasting the balance sheet.
Describe the steps in forecasting the income statement.
What assumption is usually made about sales growth at the end of the forecast horizon?
What is the forecast horizon?
In addition to recent trends, what other items of information might be brought to bear in the projection of sales?
What steps must usually take place before the forecasting process can begin?
What are some of the uses for prospective analysis?
Huckleberry Finn was an analyst with Twain Investments. He was analyzing two comparable companies in the Twilight industry: Alpha Corporation and Beta Corporation. The two companies had very similar earnings growth prospects, both paid no dividends, and both had identical net income and ROE. Alpha
Selected data from Kemp Corporation are reproduced below:Required:a. For Year 4, compute the following ratios:(1) Inventory/Sales.(2) Inventory/Income contribution.b. Compute the percentage of each product line’s income contribution to the total for each year. Interpret this evidence.c. Comment
At a meeting of your company’s Investment Policy Committee the possibility of investing in ZETA Corporation (see Case CC-2 in the Comprehensive Case chapter) is considered. During discussions, a committee member asked about the major factors explaining the change in ZETA Corporation’s income
Comparative income statements of Spyres Manufacturing Company for Years 9 and 8 are reproduced below:Year 9 Year 8 Net sales. . . . . . . . . . . . . . . . . $600,000 $500,000 Cost of goods sold. . . . . . . . . . 490,000 430,000 Gross margin . . . . . . . . . . . . . 110,000 70,000 Operating
Johnson Corporation sells primarily two products: (A) consumer cleaners and (B) industrial purifiers. Its gross margin and components for the past two years are as follows:In Year 6, the selling price of A is $5 per unit, while in Year 7 it is $6 per unit. Product B sells for $50 per unit in both
Selected financial statement data from Texas Telecom, Inc., for Years 5 and 9 are reproduced below ($ millions):Required:a. Calculate return on common equity and disaggregate ROCE for Years 5 and 9 using end-of-year values for computations requiring an average (assume fixed assets and working
As a financial analyst at a debt-rating agency, you are asked to analyze return on invested capital and asset utilization (turnover) measures for ZETA Corporation. Selected financial information for Years 5 and 6 of ZETA Corporation are reproduced in the Comprehensive Case chapter (see Case
Selected income statement and balance sheet data from Merck & Co.for Year 9 are reproduced below:Required:a. Calculate return on common equity for Year 9 using year-end amounts and assuming no preferred dividends.b. Disaggregate Merck’s ROCE into operating (RNOA) and nonoperating components.
Zear Company produces an electronic processor and sells it wholesale to manufacturing and retail outlets at $10 each. In Zear’s Year 8 fiscal period, it sold 500,000 processors. Fixed costs for Year 8 total $1,500,000, including interest costs on its 7.5% debentures. Variable costs are $4 per
Quaker Oats, in its annual report, discloses the following:Financial Objectives: Provide total shareholder returns (dividends plus share price appreciation) that exceed both the cost of equity and the S&P 500 stock index over time.Quaker’s total return to shareholders for Year 11 was 34%. That
A press report carried the following news item: General Motors, Ford, and Chrysler are expected to post losses on fourth-quarter operations despite sales gains. Automakers’ revenues are based on factory output rather than retail sales by dealers, and last quarter’s sales increases were from the
A machine that produces hockey pucks costs $20,500 and produces 10 pucks per hour. Two similar companies purchase the machine and begin producing and selling pucks. The first company, Northern Sales, is located in International Falls, Minnesota. The second company, Southern Sales, is located in
Two auto dealers, Legend Auto Sales and Reliable Auto Sales, compete in the same area. Both purchase autos for $10,000 each and sell them for $12,000 each. Both maintain 10 cars on the lot at all times. A local basketball legend owns Legend Auto Sales. As a result, Legend sells 100 cars each year,
Return on net operating assets is a function of both profit margin and net operating asset turnover.Required:How do you believe that knowledge of operating profit margin and operating asset turnover would contribute to analysis of the reported return on net operating assets for the following
1. Which of the following situations best correspond with a ratio of “sales to average net tangible assets”exceeding the industry norm? (Choose one answer.)a. A company expanding plant and equipment during the past three years.b. A company inefficiently using its assets.c. A company with a
Rose Corporation’s condensed balance sheet for Year 2 is reproduced below:Assets Current assets . . . . . . . . . . . . . . . . . $ 250,000 Noncurrent assets . . . . . . . . . . . . . . 1,750,000 Total assets . . . . . . . . . . . . . . . . . . . $2,000,000 Liabilities and Equity Current
Selected financial information for ADAM Corporation is reproduced below:1. NOA turnover (average NOA equals ending NOA) is 3.2. NOPAT margin is 7%.3. Leverage ratio (average NFO to average common equity) is 1.667, and the spread is 8.4%.Required:a. Compute return on net operating assets (RNOA).b.
Refer to the financial data in Case 10–5 (on page 611). In analyzing this company, you feel it is important to differentiate between operating success and financing decisions.Required:a. Explain the difference between ABEX’s ROCE in Year 5 and in Year 9. Your analysis should include computation
Selected financial information from Syntex Corporation is reproduced below:1. NOA turnover (average NOA equals ending NOA) is 2.2. NOPAT margin equals 5%.3. Leverage ratio (average NFO/average common equity) is 1.786, and the spread is 4.4%.Required:a. Compute return on net operating assets
Roll Corporation’s return on net operating assets (RNOA) is 10% and its tax rate is 40%. Its net operating assets ($10 million) are financed entirely by common shareholders’ equity. Management is considering using bonds to finance an expansion costing $6 million. It expects return on net
FIT Corporation’s return on net operating assets (RNOA) is 10% and its tax rate is 40%. Its net operating assets ($4 million) are financed entirely by common shareholders’ equity. Management is considering its options to finance an expansion costing $2 million. It expects return on net
What circumstances justify including convertible debt as equity capital when computing return on shareholders’ equity?
a. Equity turnover is sales divided by average shareholders’ equity. What does equity turnover measure?How is it related to return on common equity? (Hint: Look at the components of ROCE.)b. “Growth in earnings per share from an increase in equity turnover is unlikely to continue
a. How do return on net operating assets and return on common equity differ?b. What are the components of return on common shareholders’ equity? What do the components measure?
How is the equity growth rate computed? What does it measure?
What factors (limitations) enter into our evaluation of return on net operating assets?
What is the purpose of measuring asset turnover for different asset categories?
Company X’s NOPAT margin is 2% of sales. Company Y has a net operating asset turnover of 12. Both companies’ RNOA are 6% and are considered unsatisfactory by industry norms. What is the net operating asset turnover of Company X? What is the NOPAT margin for Company Y? What strategic actions do
Company A acquires Company B because the latter has a NOPAT margin exceeding the industry norm. After acquisition, a shareholder complains that the acquisition lowered return on net operating assets. Discuss possible reasons for this occurrence.
What is the relation between return on net operating assets and sales? Consider both NOPAT sales and sales to net operating assets in your response.
Why must income used in computing return on invested capital be adjusted to reflect the capital base(denominator) used in the computation?
Discuss the motivation for excluding “nonproductive” assets from invested capital when computing return. What circumstances justify excluding intangible assets from invested capital?
Why is interest expense ignored when computing return on net operating assets (RNOA)?
Why is return on invested capital one of the most relevant measures of company performance? How do we use this measure in our analysis of financial statements?
How is return on invested capital used as an internal management tool?
Refer to the financial statements of ZETA Corporation reproduced in assignment Case CC–2 of the Comprehensive Case (following Chapter 11).Required:a. Prepare a schedule computing cash flows from operations using the direct method. Include revenues and expenses of discontinued operations. Include
Following the acquisition of Kraft during Year 8, the Philip Morris Companies released its Year 8 financial statements. The Year 8 financial statements and other data are reproduced on the next page.Required:a. Prepare a statement of cash flows (indirect method) for Philip Morris. (Hint:
Your banker confides to you after looking at a number of financial statements that she is confused about the difference between two operating measures, net income and cash from operations.Required:a. Explain the purpose and significance of these two operating measures.b. Several financial
Indicate whether the following independent transactions increase (), decrease (), or do not affect (NE) the current ratio, the amount of working capital, and cash from operations. Also indicate the amounts of any effects. The company presently has a current ratio of 2 to 1 along with current
While on assignment you discover that you have misplaced the balance sheet of Bird Corpora-tion as of January 1, Year 1. However, you do have the following data on Bird Corporation:Required:Using the available data and information, prepare the balance sheet of Bird Corporation as of January 1, Year
Complete the requirements of Problem 7–6 using the business activities listed below:Part Ia. An annual installment of $100,000 due on long-term debt is paid on its due date.b. Equipment originally costing $12,000 with $7,000 of accumulated depreciation is sold for $4,000 cash.c. Obsolete
An ability to visualize quickly the effect of a transaction on the cash resources of a company is a useful analytical skill. This visualization requires an understanding of the economics underlying transactions and how they are accounted for. Expressing transactions in entry form can help one
Using the income statement and balance sheets of Niagara Company below, prepare a statement of cash flows for the year ended December 31, Year 9, using the direct method.
Dax Corporation’s genetically engineered flowers have rapidly gained market acceptance and shipments to customers have increased dramatically. The company is preparing for significant increases in production. Management notes that despite increasing profits the cash balance has declined, and it
A colleague who is aware of your understanding of financial statements asks for help in analyzing the transactions and events of Zett Corporation. The following data are provided:Additional data for the period January 1, Year 2, through December 31, Year 2, are:1. Sales on account, $70,000.2.
Refer to Campbell Soup Company’s statement of cash Campbell Soup flows in Appendix A.Required:Convert Campbell’s statement of cash flows for Year 10 to report its cash from operations under the direct method. (For purposes of this assignment only, assume Campbell disposed of a division in Year
Refer to Campbell Soup Company’s statement of cash flows in Appendix A.Required:Convert Campbell’s statement of cash flows for Year 11 to show cash flows from operations(CFO) using the direct method.For purposes of this problem only, assume the following:PROBLEM 7–1A Converting Cash from
Analysts often exploit the relation between a company’s life cycle (see Exhibit 2.3) and its cash flows to better understand company performance and financial condition.Required:a. Explain how a company’s transition from the growth stage to “cash cow” is reflected in the statement of cash
In reviewing the financial statements of NanoTech Co., you discover that net income increased while operating cash flows decreased for the most recent two consecutive years.Required:a. Explain how net income could increase for NanoTech while its operating cash flows decrease. Your answer should
Refer to the financial statements of Campbell Soup Company in Appendix A.Required:a. How much cash does Campbell Soup collect from customers during Year 10? (Hint: Use the statement of cash flows to derive the beginning balance of receivables.)b. How much is paid in cash dividends on common stock
An economics book has the following statement: “For the business firm there are, typically, three EXERCISE 7–8 major sources of funds. Two of these, depreciation reserves and retained earnings, are internal.The third is external, consisting of funds obtained either by borrowing, or by the sale
During a meeting of the management committee of Edsel Corporation, a number of proposals are made to alleviate its weak cash position and improve income. Evaluate and comment on both the immediate and long-term effects of the following proposals on the measures indicated. Indicate increase (),
Indicate if each transaction and event is (1) a source of cash, (2) a use of cash, and/or (3) an adjustment leading to a source or use of cash (assume an indirect format). List also its placement in the statement of cash flows: operations (O), financing (F), investing (I), noncash significant(NCS),
Indicate if each transaction and event is (1) a source of cash, (2) a use of cash, and/or (3) an adjustment leading to a source or use of cash (assume an indirect format). List also its placement in the statement of cash flows: operations (O), financing (F), investing (I), noncash significant(NCS),
The balance sheets of Barrier Corporation as of December 31, Year 2, and Year 1, and its statement of income and retained earnings for the year ended December 31, Year 2, follow:Additional information:• Capital stock is issued to provide additional cash.• All accounts receivable and payable
The following data are taken from the records of Saro Corporation and subsidiaries for Year 1:Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000 Depreciation, depletion, and amortization . . . . . . . . . . . . . . . . . . . . . . 8,000

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