Financial Statement Analysis 10th International Edition John Wild - Solutions

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What variable does recent research reveal to be most important of all in doing business? Explain why this variable is so important.
Why do you believe SWOT analysis is so commonly used by businesses in doing strategic planning?
The so-called Internet Bubble gripped stock markets in 1998, 1999, and 2000, as discussed in the chapter. Internet stocks traded at multiples of earnings and sales rarely seen in stock mar kets. Start-ups, some with not much more than an idea, launched initial public offerings (IPOs) that sold for
E1.6. Identifying Operating, Investing, and Financing Transactions: Microsoft (Easy) Microsoft Corp. reported the following in its annual report to the Securities and Exchange Commission for fiscal year 2004. Classify each item as involving an operating, investing, or financing activity. Amounts
E1.5. Enterprise Market Value: General Mills and Hewlett-Packard (Medium)a. General Mills, Inc., the large manufacturer of packaged foods, reported the following in its annual report for the year ending May 25, 2008 (in millions): Short-term borrowing Long-term debt Stockholders' equity $442.0
E1.4. Finding Information on the Internet: Dell, Inc. General Motors, and Ford (Easy) This chapter compared Dell, Inc., and General Motors Corp., and Ford Motor Co. Go to the Internet and find sources that will help research these firms. One site to start with is Yahoo! Finance:
E1.3. Buy or Sell? (Easy) A firm reports book value of shareholders' equity of $850 million with 25 million shares outstanding. Those shares trade at $45 each in the stock market. An analyst values the equity by following the scheme: Value Book value + Extra value. She calculates extra value of
E1.2. Calculating Value per share (Easy) An analyst estimates that the enterprise value of a firm is $2.7 billion. The firm has $900 million of debt outstanding. If there are 500 million shares outstanding. What is the analyst's estimated value per share?
E1.14 Calculating Enterprise Value (Easy) The shares of a firm trade on the stock market at a total of $1.2 billion and its debt trades at $600 million. What is the value of the firm (its enterprise value)?
C1.8. Consider the case whereall investors are passive investors: Theybuy index funds.What is your prediction about how stock prices will behave overtime? Will they follow a random walk? Hint: Priceswould notincorporate anyinformation.
C1.7. Somecommentators argue that stock prices"follow a random walk." By this they meanthatchanges instockpricesinthe future are notpredictable, so noonecanearn an abnormal retum. Would stockpricesfollow a random walkif all investors were fundamental investors whouse all available information to
Cl.6. Should a shareholder be indifferent between sellingher shares on the open market andsellingthemto the finn ina stockrepurchase?
C1.5. In the late 1990s, PIEratioswerehighby historical standards. The PIE ratio for the S&P 500stockswasas highas 33 in 1999. In the 1970s it was8.Whatdo youthink would bea "normal"PIE ratio-s-that is, where multiples higherthannormal couldbe called"high" and multiples less thannormal couldbe
CIA. 'What is the difference between a passive investor andan active investor?
CIJ. Critique the following statement: Holdstocksforthelongrun,forinthe longrun,the returnto stocksis always higherthanbondreturns.
Cl.2. Whatis the difference between an alphatechnology anda beta technology?
CI.I. Whatis the difference between fundamental riskand pricerisk?
E14.11. A Simple Valuation and Reverse Engineering: IBM (Easy) The following are key numbers from IBM's financial statements for 2004. Net operating assets, end of year Net financial obligations, end of year Common equity, end of year Common shares outstanding, end of year Core return on net
E11.7. Analysis of Profitability: The Coca-Cola Company (Easy) Here is a reformulated income statement for the Coca-Cola Company for 2007 (in millions): Sales Cost of sales Gross margin Advertising expone General and administrative experses Other expenses (net) $28,857 10,406 18,451 2,800 8.145 _81
E10.11. Extracting Information from the Cash Flow Statement with a Reformulation: Microsoft Corporation (Medium) For many years, Microsoft has generated considerable free cash flow. Up to 2004, it paid no dividends and had no debt to pay off, so it invested the cash in interest-bearing securities.
CASE 2–3 Canada Steel Co. produces steel casting and metal fabrications for sale to manufacturers of heavy construction machinery and agricultural equipment. Early in Year 3, the company’s president sent the following memorandum to the financial vice president:TO: Robert Kinkaid, Financial Vice
CASE 2–2 Two potential methods of accounting for the cost of oil drilling are full cost and successful efforts.Under the full-cost method, a drilling company capitalizes costs both for successful wells and dry holes. This means it classifies all costs as assets on its balance sheet. A company
PROBLEM 2–17 Answer the following questions using the annual report of Colgate in Appendix A.a. Who is responsible for the preparation and integrity of Colgate’s financial statements and notes? Where is this responsibility stated in the annual report?b. In which note does Colgate report its
PROBLEM 2–17 The following is an excerpt from a quarterly earnings announcement by American Express:American Express Reports Record Quarterly Net Income of $648 Million QUARTER ENDED SEPTEMBER 30 Percentage($ millions except per share amounts) 20X9 20X8 Inc./(Dec.)Net income $ 648 $ 574 13.0%Net
PROBLEM 2–10 Consider the following: While accrual accounting information is imperfect, ignoring it and making cash flows the basis of all analysis and business decisions is like throwing the baby out with the bath water.Required:a. Do you agree or disagree with this statement? Explain.b. How
PROBLEM 2–10 A finance textbook likens accrual accounting information to “nail soup.” The recipe for nail soup includes the usual soup ingredients such as broth and noodles, but it also includes nails. This means with each spoonful of nail soup, one gets nails with broth and noodles.
PROBLEM 2–10 Emerson Electric is engaged in design, manufacture, and sale of a broad range of electrical, electromechanical, and electronic products and systems. The following shows Emerson’s net income and net income before extraordinary items for the past 20 years(in millions):Net Income Net
PROBLEM 2–10 The following information is taken from Marsh Supermarkets fiscal 20X7 annual report:During the first quarter, we made several decisions resulting in a $13 million charge to earnings. A new accounting pronouncement, FAS 121, required the Company to take a$7.5 million charge. FAS 121
PROBLEM 2–10 The following information is extracted from the annual report of Lands’ End (in millions, except per share data):Fiscal year Year 9 Year 8 Year 7 Year 6 Year 5 Year 4 Net income $31.2 $64.2 $ 51.0 $30.6 $36.1 $43.7 Cash from (used by) operations 74.3 (26.9) 121.8 41.4 34.5 22.4 Net
PROBLEM 2–10 The FASB in SFAS No. 123, “Accounting for Stock-Based Options,” encourages (but does not require) companies to recognize compensation expense based on the fair value of stock options awarded to their employees and managers. Early drafts of this proposal required the recognition
PROBLEM 2–10 According to an article in TheWall Street Journal, a European filmmaking studio, Polygram, is considering funding movie production by selling securities.These securities will yield returns to investors based on the actual cash flows of the movies that are financed from the sale of
PROBLEM 2–1 In a discussion of corporate income, a user of financial statements alleges that “One of the real problems with income is that you never really know what it is. The only way you can find out is to liquidate a company and reduce everything to cash. Then you can subtract what went
PROBLEM 2–1 Consider the following claim from a business observer:An accountant’s job is to conceal, not to reveal. An accountant is not asked to give outsiders an accurate picture of what’s going on in a company. He is asked to transform the figures on a company’s operations in such a way
PROBLEM 2–1 A standard setter recently made a private remark that conservatism was a “barbaric relic” that violated the “neutrality” requirement of accounting information and that financial statements would be far more informative without conservatism.Required:a. What is conservatism?
PROBLEM 2–1 Consider the following excerpt from the Financial Analysts Journal:Strictly speaking, the objectives of financial reporting are the objectives of society and not of accountants and auditors, as such. Similarly, society has objective law and medicine—namely, justice and health for
PROBLEM 2–1 A FASB member expressed the following view:Are we going to set accounting standards in the private sector or not? . . . Part of the answer depends on how the business community views accounting standards. Are they rules of conduct, designed to restrain unsocial behavior and arbitrate
PROBLEM 2–1 An editor of the Financial Analysts Journal reviewed an earlier edition of this book and asserted:Broadly speaking, accounting numbers are of two types: those that can be measured and those that have to be estimated. Investors who feel that accounting values are more real than market
PROBLEM 2–1 Financial reporting has been likened to cartography:Information cannot be neutral—it cannot therefore be reliable—if it is selected or presented for the purpose of producing some chosen effect on human behavior. It is this quality of neutrality which makes a map reliable; and the
PROBLEM 2–1 Financial statement users often liken accounting standard setting to a political process. One user asserted that: My view is that the setting of accounting standards is as much a product of political action as of flawless logic or empirical findings. Why? Because the setting of
EXERCISE 2–1 In the past decade, several large “money center” banks recorded huge additions to their loan loss reserve. For example, Citicorp recorded a one-time addition to its loan loss reserve totaling about $3 billion. These additions to loan loss reserves led to large net losses for
EXERCISE 2–1 A former Chairman of the SEC refers to hidden reserves on the balance sheet as “cookie-jar”reserves. These reserves are built up in periods when earnings are strong and drawn down to bolster earnings in periods when earnings are weak.Required:Reserves for (1) bad debts and (2)
EXERCISE 2–1 Accrual accounting requires estimates of future outcomes. For example, the reserve for bad debts is a forecast of the amount of current receivables that will ultimately prove uncollectible.Required:Identify and explain three reasons why accounting information might deviate from the
EXERCISE 2–1 Analysts produce forecasts of accounting earnings along with other forward-looking information.This information has strengths and weaknesses versus financial statement information.Required:a. Discuss whether you believe analysts forecasts are more relevant for business decision
EXERCISE 2–1a. Identify at least two reasons why an accrual accounting income statement is more useful for analyzing business performance than a cash flow based income statement.b. Describe what would be reported on the asset side of a cash flow based balance sheet versus the asset side of an
EXERCISE 2–1 Financial statements are inexorably moving to a model where all assets and liabilities will be measured on the basis of fair value rather than historical cost.Required:a. Discuss the conceptual differences between historical cost and fair value.b. Discuss the merits and demerits of
EXERCISE 2–1 Financial statements are a major source of information about a company. Forecasts, reports, and recommendations from analysts are popular alternative sources of information.Required:a. Discuss the strengths of financial statement information for business decision makers.b. Discuss
EXERCISE 2–1 There are various motivations for managers to make voluntary disclosures. Identify whether you believe managers are likely to release the following information in the form of voluntary disclosure(examine each case independently):a. A company plans to sell an underperforming division
EXERCISE 2–1 Managers are responsible for ensuring fair and accurate financial reporting. Managers also have inside information that can aid their estimates of future outcomes. Yet, managers face incentives to strategically report information in their best interests.Required:Assume a manager of a
EXERCISE 2–1 The SEC requires various statutory reports from companies with publicly traded securities.Required:Identify which SEC report is the best place to find the following information.a. Management’s discussion of the financial results for the fiscal year.b. Terms of the CEO’s
EXERCISE 2–1 The SEC requires companies to submit statutory financial reports on both a quarterly and an annual basis. The quarterly report is called the 10-Q.Required:What are two factors about quarterly financial reports that can be misleading if the analyst does not consider them when
EXERCISE 2–1 Some financial statement users criticize the timeliness of annual financial statements.Required:a. Explain why summary information in the income statement is not new information when the annual report is issued.b. Describe the types of information in the income statement that are new
EXERCISE 2–2 Announcements of good news or bad news earnings for the recently completed fiscal quarter usually create fairly small abnormal stock price changes on the day of the announcement.Required:a. Discuss how stock price changes over the preceding days or weeks help explain this
EXERCISE 2–1 Some financial statement users maintain that despite its intrinsic intellectual appeal, uniformity in accounting seems unworkable in a complex modern society that relies, at least in part, on economic market forces.Required:a. Discuss at least three disadvantages of national or
CASE 1–8 Kimberly-Clark is a household products company that produces and sells various paper products under popular brand names such as Kleenex and Scott. In many respects, Kimberly-Clark is similar to Colgate: both are mature and profitable consumer products’ companies that are of similar
CASE 1–7 As controller of Tallman Company, you are responsible for keeping the board of directors informed about the company’s financial activities. At the recent board meeting, you presented the following financial data:2006 2005 2004 2006 2005 2004 Sales trend percent.......................
CASE 1–6 Explain and interpret the major business activities—namely, planning, financing, investing, and operating. Aim your report at a general audience such as shareholders and employees. Include concrete examples for each of the business activities.
CASE 1–5 Refer to Campbell Soup Company’s financial statements in Appendix A.Required:Compute the following ratios for Year 11.Liquidity ratios: Asset utilization ratios:*a. Current ratio n. Cash turnoverb. Acid-test ratio o. Accounts receivable turnoverc. Days to sell inventory p. Inventory
CASE 1–4 Jose Sanchez owns and operates Western Gear, a small merchandiser in outdoor recreational equipment. You are hired to review the three most recent years of operations for Western Gear.Your financial statement analysis reveals the following results:2006 2005 2004 Sales index-number trend
CASE 1–3 Two companies competing in the same industry are being evaluated by a bank that can lend money to only one of them. Summary information from the financial statements of the two companies follows:Datatech Sigma Datatech Sigma Company Company Company Company Data from the current year-end
PROBLEM 1–12 Key comparative figures ($ millions) for both NIKE and Reebok follow:Key Figures NIKE Reebok Key Figures NIKE Reebok Cash and equivalents . . . . . . . $ 108.6 $ 209.8 Income taxes . . . . . . . . . . . $ 253.4 $ 12.5 Accounts receivable . . . . . . . . 1,674.4 561.7 Revenues (Nike)
PROBLEM 1–12 Key comparative figures ($ millions) for both NIKE and Reebok follow:Key Figures NIKE Reebok Financing (liabilities equity) . . . . . . $5,397.4 $1,756.1 Net income (profit) . . . . . . . . . . . . . . . . 399.6 135.1 Revenues (sales) . . . . . . . . . . . . . . . . . 9,553.1
PROBLEM 1–12 Ace Co. is to be taken over by Beta Ltd. at the end of year 2007. Beta agrees to pay the shareholders of Ace the book value per share at the time of the takeover. A reliable analyst makes the following projections for Ace (assume cost of capital is 10% per annum):($ per share) 2002
PROBLEM 1–11 The Tristar Mutual Fund manager is considering an investment in the stock of Best Computer and asks for your opinion regarding the company. Best Computer is a computer hardware sales and service company. Approximately 50% of the company’s revenues come from the sale of computer
EXERCISE 1–1 Selected ratios for three different companies that operate in three different industries (merchandising, pharmaceuticals, utilities) are reported in the table below:Ratio Co. A Co. B Co. C Gross profit margin ratio . . . . . . . . . . . . . . . 18% 53% n.a.Net profit margin ratio . .
EXERCISE 1–1 As a consultant to MCR Company, you are told it is considering the acquisition of Lakeland Corporation. MCR Company requests that you prepare certain financial statistics and analysis for Year 5 and Year 4 using Lakeland’s financial statements that follow:LAKELAND CORPORATION
PROBLEM 1–8 The balance sheet and income statement for Chico Electronics are reproduced below (tax rate is 40%).CHICO ELECTRONICS Balance Sheet ($ thousands)As of December 31 Year 4 Year 5 Assets Current assets Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EXERCISE 1–1 You are planning to analyze Voltek Company’s December 31, Year 6, balance sheet. The following information is available:1. Beginning and ending balances are identical for both accounts receivable and inventory.2. Net income is $1,300.3. Times interest earned is 5 (income taxes are
EXERCISE 1–1 You are an analyst reviewing Foxx Company. The following data are available for your financial analysis (unless otherwise indicated, all data are as of December 31, Year 2):Current ratio . . . . . . . . . . . . . . . . . . . . . . . 2 Days’ sales in inventory . . . . . . . . . . .
EXERCISE 1–1 Assume you are an analyst evaluating Mesco Company. The following data are available in your financial analysis (unless otherwise indicated, all data are as of December 31, Year 5):Retained earnings, December 31, Year 4 . . . . . $98,000 Gross profit margin ratio . . . . . . . . . .
PROBLEM 1–4 Compute increases (decreases) in percents for both Years 6 and 7 by entering all the missing data in the table below. Analyze and interpret any significant results revealed from this trend analysis.YEAR 7 YEAR 6 YEAR 5 Index Change in Index Change in Index Statement Item No. Percent
PROBLEM 1–3 Perform a comparative analysis of Eastman Corporation by completing the analysis below.Describe and comment on any significant findings in your comparative analysis.EASTMAN CORPORATION Income Statement ($ millions)For Years Ended December 31 Average Cumulative Annual Year 6 Year 5
EXERCISE 1–1 Kampa Company and Arbor Company are similar firms that operate in the same industry. Arbor began operations in 2001 and Kampa in 1995. In 2006, both companies pay 7% interest on their debt to creditors. The following additional information is available:KAMPA COMPANY ARBOR COMPANY
EXERCISE 1–15 On January 1, Year 1, you are considering the purchase of Nico Enterprises’ common stock. Based on your analysis of Nico Enterprises, you determine the following:1. Book value at January 1, Year 1, is $50 per share.2. Predicted net income per share for Year 1 through Year 5 is $8,
EXERCISE 1–14 On January 1,Year 1, you are considering the purchase of $10,000 ofColinCompany’s 8%bonds.The bonds are due in 10 years, with interest payable semiannually on June 30 and effective December 31.Based on your analysis of Colin, you determine that a 6% (required) interest rate is
EXERCISE 1–13 Compute the present value for each of the following bonds:a. Priced at the end of its fifth year, a 10-year bond with a face value of $100 and a contract (coupon) rate of 10%per annum (payable at the end of each year) with an effective (required) interest rate of 14% per annum.b.
EXERCISE 1–12 Compute the percent of increase or decrease for each of the following account balances:Year 2 Year 1 Short-term investments . . . . . . $217,800 $165,000 Accounts receivable . . . . . . . . . 42,120 48,000 Notes payable . . . . . . . . . . . . . . 57,000 0
EXERCISE 1–11 Compute index-number trend percents for the following accounts, using Year 1 as the base year.State whether the situation as revealed by the trends appears to be favorable or unfavorable.Year 5 Year 4 Year 3 Year 2 Year 1 Sales . . . . . . . . . . . . . . . . . . $283,880 $271,800
EXERCISE 1–10 Huff Company and Mesa Company are similar firms that operate in the same industry. The following information is available:HUFF MESA 2006 2005 2004 2006 2005 2004 Current ratio . . . . . . . . . . . . . . . . . 1.6 1.7 2.0 3.1 2.6 1.8 Acid-test ratio . . . . . . . . . . . . . . . 0.9
EXERCISE 1–1 Common-size and trend percents for JBC Company’s sales, cost of goods sold, and expenses follow:COMMON-SIZE PERCENTS TREND PERCENTS 2006 2005 2004 2006 2005 2004 Sales . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 104.4% 103.2% 100.0%Cost of goods sold . . . . . . 62.4 60.9
EXERCISE 1–1 Refer to the financial statements of Mixon Company in Exercises 1–3 and 1–5. The following additional information about the company is known:Common stock market price, December 31, 2006 . . . . . . $15.00 Common stock market price, December 31, 2005 . . . . . . 14.00 Annual cash
EXERCISE 1–1 Refer to the financial statements of Mixon Company in Exercises 1–3 and 1–5. Evaluate the efficiency and profitability of the company by computing the following: (a) net profit margin,(b) total asset turnover, and (c) return on total assets. Comment on these ratio results.
EXERCISE 1–1 Refer to the information in Exercises 1–3 and 1–5 about Mixon Company. Compare the long-term risk and capital structure positions of the company at the end of 2006 and 2005 by computing the following ratios: (a) total debt ratio and (b) times interest earned. Comment on these
EXERCISE 1–1 Refer to the information in Exercise 1–3 about Mixon Company. The company’s income statements for the years ended December 31, 2006 and 2005 show the following:2006 2005 Sales . . . . . . . . . . . . . . . . . . . . . . $672,500 $530,000 Cost of goods sold . . . . . . . . . . . .
EXERCISE 1–1 Refer to Mixon Company’s balance sheets in Exercise 1–3. Express the balance sheets in common-size percents. Round to the nearest one-tenth of a percent.
EXERCISE 1–2 Express the following income statement information in common-size percents and assess whether this company’s situation is favorable or unfavorable.HARBISON CORPORATION Comparative Income Statement For Years Ended December 31, 2006 and 2005 2006 2005 Sales . . . . . . . . . . . . .
EXERCISE 1–1 The preparation and analysis of comparative balance sheets and income statements are commonly applied tools of financial statement analysis and interpretation.Required:a. Discuss the inherent limitations of analyzing and interpreting financial statements for a single year. Include in
2–70B. What factors and incentives motivate companies (management) to engage in earnings management?What are the implications of these incentives for financial statement analysis?
2–69B. Identify and explain three types of earnings management that can reduce earnings quality.
2–68B. Explain how earnings management affects earnings quality. How is earnings management distinguished from fraudulent reporting?
2–67B. What is the effect of external factors on earnings quality?
2–66B. How does a balance sheet analysis provide a check on the validity and quality of earnings?
2–65B. What is the relation between the reported value of assets and reported earnings? What is the relation between the reported values of liabilities, including provisions, and reported earnings?
2–64B. What are discretionary expenses? What is the importance of discretionary expenses for analysis of earnings quality?
2–63B. What is meant by earnings quality? Why do users assess earnings quality? What major factors determine earnings quality?
2–62A. Public accounting firms are being implored to assess a company’s reported earnings per share relative to the market expectation of earnings per share (e.g., consensus analysts’ forecast) when establishing the level of misstatement that is considered acceptable (the materiality
2–61A. Citigroup is currently audited by KPMG. Who pays KPMG for its audit of Citigroup? To whom is KPMG providing assurance regarding the fair presentation of the Citigroup financial statements? List two market forces faced by KPMG that increase the probability that the firm effectively
2–60A. What are some circumstances suggesting higher audit risk? Explain.
2–59A. What does the auditor’s reference to generally accepted accounting principles imply for our analysis of financial statements?
2–58A. An auditor does not prepare financial statements but instead samples and investigates data to render a professional opinion on whether the statements are “fairly presented.” List the potential implications of the auditor’s responsibility to users that rely on financial statements.
2–57A. What are some implications to financial analysis stemming from the audit process?

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Financial Statement Analysis 10th International Edition John Wild - Solutions

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