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business
financial statement analysis
Financial Statement Analysis 10th International Edition John Wild - Solutions
EXERCISE 11–1 Refer to the financial statements of Quaker Oats Company in Problem 9-6 along with the following footnotes.SUPPLEMENTARY EXPENSE DATA($ millions) Year 11 Year 10 Year 9 Advertising, media and production ............................... $ 277.5 $ 282.8 $ 256.5 Merchandising
EXERCISE 11–1 You are considering the purchase of all outstanding preferred and common stock of Finex, Inc., for $700,000 on January 2, Year 2. Finex’s financial statements for Year 1 are reproduced below.FINEX, INC.Balance Sheet As of December 31, Year 1
PROBLEM 11–4 Income statements of Ferro Corporation, along with its note 7 on income taxes and selected information from its Form 10-K, are reproduced below:CONSOLIDATED STATEMENT OF INCOME Years Ended December 31, Year 6 and Year 5($ thousands) Year 6 Year 5 Net
PROBLEM 11–4 Canada Steel, Ltd., produces steel castings 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,
PROBLEM 11–4 After careful financial statement analysis, we obtain these predictions for Colin Technology:Beginning Beginning Year Net Income Book Value Year Net Income Book Value 1............. $1,034 $5,308 5 ................. $1,278 $6,728 2............. 1,130 5,292 6 .................. 1,404
PROBLEM 11–4 IT service companies develop Web storefronts that are integrated with back-end implementation systems. Only a small number of companies offer such extensive e-business integration. The industry continues to grow because of customer demand. Unlike traditional valuation, companies in
CC–2. What type of investigation should precede analysis of financial statements?
CC–3. What are the analytical implications of recognizing that financial statements are an abstraction of a company’s underlying business transactions and events?
CC–4. What additional knowledge and analytical skills must an analysis of financial statements bring to bear on companies operating in specialized or regulated industries?
CC–5. What are the attributes of a good financial analysis report? What distinct sections constitute a complete financial analysis report?
PROBLEM 11–4 The following financial data are available for each of two manufacturers of mountain bikes.AXEL BIKE Capital structure 5%, 20-year notes ............................................. $10,000,000 —Common equity .................................................. $20,000,000
PROBLEM 11–4 Reproduced below are condensed common-size financial statements of companies operating in nine different industries. The nine industries represented are:a. Tobacco manufacturingd. Utilities g. Grocery storesb. Pharmaceuticalse. Investment advising h. Computer equipmentc. Health
PROBLEM 11–4 Selected financial ratios from the(i) S&P 400, (ii) the brewing industry, and (iii) Anheuser-Busch Companies (BUD), for Years 2 through 6 are reproduced below.Required:a. Using these financial ratios, analyze the relative credit position of:(1) Brewing industry compared with the S&P
PROBLEM 11–4 You are the portfolio manager of a highyield bond portfolio at Solomon Group.You are concerned about the financial stability of Florida Gypsum Corporation (FGC), whose bonds represent one of the holdings in your portfolio at the middle of Year 6. The bonds you hold, 13.25% senior
PROBLEM 11–4 Select a company from a nonregulated industry for which you can obtain complete financial statements for at least the most recent six years.Required:Based on these financial statements, the company’s background, industry statistics, and other market and company information, prepare
PROBLEM 11–4 The financial statements and notes of ZETA Corporation are reproduced over the next several pages.Required:Answer the following questions and provide supporting calculations. Explain the accounts and amounts used in each analysis.a. What transactions and events explain the $7,000
PROBLEM 11–4 The Policy Committee of your company decides to change investment strategies. This change entails an increase in exposure to the stocks of large companies producing consumer products dominated by leading brands. The committee decides the soft drink industry, specifically Coca-Cola
1. Explain the relevance of cash flows in analyzing business activities.
1. Describe the reporting of cash flows by business activities.
1. Describe the preparation and analysis of the statement of cash flows.
1. Interpret cash flows from operating activities.
1. Analyze cash flows under alternative company and business conditions.
1. Describe alternative measures of cash flows and their usefulness.
1. Illustrate an analytical tool in evaluating cash flows(Appendix 7A).
7–1. What is the meaning of the term cash flow? Why is this term subject to confusion and misrepresentation?
7–2. What information can a user of financial statements obtain from the statement of cash flows?
7–4. Explain the three categories of adjustments in converting net income to cash flows from operations.
7–5. Describe the two methods of reporting cash flow from operations.
7–6. Contrast the purpose of the income statement with that of cash flow from operations.
7–8. Describe the computation of free cash flow. What is its relevance to financial analysis?
7–9. List insights that the statement of cash flows can provide to our analysis.
EXERCISE 7–1 Refer to the financial statements of Campbell Soup Company in Appendix A.Required:Explain how Campbell Soup Company can have net income of $401.5 million, but generate$805.2 million in cash from operations in Year 11. Explain this in language understood by a general businessperson.
EXERCISE 7–1 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:BARRIER CORPORATION Balance Sheets December 31, Year 2 and Year 1 Increase Year 2 Year 1 (decrease)Assets
EXERCISE 7–1 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
EXERCISE 7–1 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
EXERCISE 7–1 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
EXERCISE 7–1 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,
EXERCISE 7–1 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
EXERCISE 7–1 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
EXERCISE 7–1 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
EXERCISE 7–1 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:Campbell Soup Companya.
EXERCISE 7–1 Refer to Campbell Soup Company’s state- Campbell Soup Company ment of cash 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
EXERCISE 7–1 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:ZETT CORPORATION Balance Sheets December 31, Year 1 and Year 2 Year 1 Year 2 Cash
EXERCISE 7–1 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
EXERCISE 7–1 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.NIAGARA COMPANY Income Statement For Year Ended December 31, Year 9 Sales ......................................
EXERCISE 7–1 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 $4,000 cash.c.
PROBLEM 7–8 While on assignment you discover that you have misplaced the balance sheet of Bird Corpora-tion as of January 1, Year 1. However, you do have the following data on Bird Corporation:BIRD CORPORATION Postclosing Trial Balance December 31, Year 1 Debit balances Cash
EXERCISE 7–1 Indicate whether the following independent transactions increase (), decrease (), or do not affect (NE) the current ratio, the amount of working capital, and cash from operations. Also indicate the amounts of any effects.The company presently has a current ratio of 2 to 1 along
EXERCISE 7–1 Your banker confides to you after looking at a number of financial statements that she is confused about the difference between two operating measures, net income and cash from operations.Required:a. Explain the purpose and significance of these two operating measures.b. Several
PROBLEM 7–8 Following the acquisition of Kraft during Year 8, the Philip Morris Companies released its Year 8 financial statements. The Year 8 financial statements and other data are reproduced on the shown below.PHILIP MORRIS COMPANIES, INC.Balance Sheets ($ millions)December 31, Year 8 and Year
PROBLEM 7–8 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
PROBLEM 7–8 The statement of cash flows for Lands’ End is reproduced here: CASE 7–1 LANDS’ END, INC. & SUBSIDIARIES Consolidated Statements of Cash Flows FOR PERIOD ENDED($ in thousands) Year 9 Year 8 Year 7 Cash flows from operating activities Net
PROBLEM 7–8 The statement of cash flows for Yahoo! is reproduced here:YAHOO! INC.Consolidated Statements of Cash Flows YEAR ENDED DECEMBER 31,(in thousands) Year 8 Year 7 Year 6 Cash flows from operating activities Net income (loss)
PROBLEM 7–8 The management of Wyatt Corporation is frustrated because its parent company, SRW Corpora- CASE 7–3 tion, repeatedly rejects Wyatt’s capital spending requests. These refusals led Wyatt’s management to conclude its operations play a limited role in the parent’s long-range
PROBLEM 7–8 The management of Dover Corporation claims that the securities market undervalues shares of its company. They propose to take it private by means of a leveraged buyout. Management’s proposal contains the following features:1. The leveraged buyout is expected to yield additional
EXERCISE 5–1 The diagram below portrays Company X (the parent or investor company), its two subsidiaries C1 and C2, and its “50 percent or less owned” affiliate C3. Each of the companies has only one type of stock outstanding, and there are no other significant shareholders in either C2 or
CASE 6–5A The R. Lott Company’s net income for the year ended December 31, Year 6, is $10,000.During Year 6, R. Lott declares and pays $1,000 cash dividends on preferred stock and $1,750 cash dividends on common stock. At December 31, Year 6, 12,000 shares of common stock are issued and
CASE 6–5A Information concerning the capital structure of Dole Corporation is reproduced below:DECEMBER 31 Year 5 Year 6 Common stock.......................... 90,000 shares 90,000 shares Convertible preferred stock ...... 10,000 shares 10,000 shares 8% convertible bonds .............. $1,000,000
CASE 6-4 The officers of Environmental, Inc., considered themselves fortunate when the company sold a$9,000,000 subordinated convertible debenture issue on June 30, Year 1, with a 6% coupon. They had the alternative of refunding and enlarging the outstanding term loan, but the interest cost would
PROBLEM 6–4 On September 16, 20X8, Toys “R” Us [ToysRUs.Com], the world’s largest toy seller, announced strategic initiatives to restructure its business. The total cost to implement these initiatives yielded a charge of $508 million, which exceeded operating earnings from the prior year.
PROBLEM 6–4 Refer to the annual report of Campbell Soup in Appendix A.Required:a. Compute all of the expense categories as a percentage of sales for each of the three years shown. Analyze and comment on the percentages computed.b. Comment on the extent to which each component in (a) is expected
PROBLEM 6–4 BIKE Company starts with $3,000 cash to finance its business plan of producing bike helmets using a simple assembly process. During the first month of business, the company signs sales contracts for 1,300 units (sales price of $9 per unit), produces 1,200 units (production cost of $7
PROBLEM 6–4 The financial data below should be used to answer the following two questions. PROBLEM 6–8A WRESTLING FEDERATION OF AMERICA, INC.Capital Structure and Earnings for Year 7 Number of common shares outstanding on December 31, Year 7 .............................. 2,700,000 Number of
PROBLEM 6–4 Playgrounds, Inc., is granted a distribution franchise by Shady Products in Year 1. Operations are profitable until Year 4 when some of the company’s inventories are confiscated and large legal expenses are incurred. Playgrounds’ tax rate is 50% each year (all expenses and costs
PROBLEM 6–4 Stead Corporation is formed in Year 4 to take over the operations of a small business. This business proved very stable for Stead, as is evidenced here ($ in thousands):Year 4 Year 5 Year 6 Sales.................................... $10,000 $10,000 $10,000 Expenses (except
PROBLEM 6–4 Big-Deal Construction Company specializes in building dams. During Years 3, 4, and 5, three dams were completed. The first dam was started in Year 1 and completed in Year 3 at a profit before income taxes of $120,000. The second and third dams were started in Year 2. The second dam
EXERCISE 6–1 7. R. Lott Corporation, which began business on January 1, Year 7, uses the installment sales method of accounting.The following data are available for December 31, Year 7 and Year 8:Year 7 Year 8 Balance of deferred gross profit on sales account Year
EXERCISE 6–1 6. In accounting for long-term contracts, how does the percentage-of-completion method of revenue recognition differ from the completed contract method? (Choose one answer froma, b,c, or d below.)i. Present value of income tax payments is minimized.ii. Revenue for each period
EXERCISE 6–1 5. In October, a company shipped a new product to retailers. Which one of the following conditions would prohibit immediate recognition of revenue?a. Terms of the sale require the company to provide extensive promotional materials to retailers before December 1.b. Retailers are not
EXERCISE 6–1 4. Revenue can be recognized at the time of:a. Production.c. Collection.b. Sale.d. All of the above.
EXERCISE 6–1 3. Using the percentage-of-completion method in accounting for long-term projects, a company can increase reported earnings by:a. Accelerating recognition of project expenditures.c. Switching to completed-contract accounting.b. Delaying recognition of project expenditures.d.
EXERCISE 6–1 2. The Sutton Construction Company entered into a contract in early Year 8 to build a tunnel for the city at a price of $11 million. The company estimated total cost of the project at $10 million and three years to complete.Actual costs incurred (on budget) and billings to the city
EXERCISE 6–1 1. In preparing its Year 9 adjusting entries, the Singapore Company neglected to adjust rental fees received in advance for the amount of rental fees earned during Year 9. What is the effect of this error?a. Net income is understated, retained earnings are understated, and
EXERCISE 6–1 The unaudited income statements of Disposo Corporation are reproduced below.Year 8 Year 7 Sales................................... $1,100 $900 Costs and expenses ............ 990 860 Loss on asset disposal........ 10 —Income before taxes............ 100 40 Tax
EXERCISE 6–17A Accounting requires presentation of earnings per share data along with the income statement.Required:a. Explain the meaning of basic earnings per share.b. Explain how diluted earnings per share differs from basic earnings per share.
EXERCISE 6–16A Publicly traded companies are required to report earnings per share data on the face of the income statement.Required:Compare and contrast basic earnings per share with diluted earnings per share for each of the following:a. The effect of dilutive stock options and warrants on the
EXERCISE 6–1 Companies sometimes use earnings management techniques to increase reported earnings per share by as little as 1 cent.Required:Explain why a 1 cent change in reported earnings per share would be insignificant for some companies but significant for other companies. Include in your
EXERCISE 6–1 Some research shows that the price of stock is likely to fall in the days leading up to the fixing of the exercise price for employee stock options. It is suggested that the price decreases are the result of selective news releases from managers. Specifically, managers are asserted
EXERCISE 6–1 The annual research and development costs for Frontier Biotech for years 2002 through 2006 are shown here ($ millions):2002 2003 2004 2005 2006$5.1 $5.9 $6.0 $6.2 $3.3 Required:a. Comment on the manner in which research and development costs impact net income in both the current year
EXERCISE 6–4 Harvatin Group reported net income totaling $1,000,000 for the year 2006. The following is additional information obtained from the Harvatin Group’s financial reports:The Company purchased 100,000 shares of Micron Specialists for $10 per share during the fourth quarter of 2006. The
EXERCISE 6–1 There are various types of accounting changes requiring different types of reporting treatments.Understanding the different changes is important to analysis of financial statements.Required:a. Under what category of accounting changes is the change from sum-of-the-years’-digits
EXERCISE 6–1 Many companies report discontinued operations in their income statements and balance sheets.Required:a. What is your best estimate of the summary journal entry recording the disposal of discontinued operations.b. What is included in the income (expense) items relating to discontinued
EXERCISE 5–1 On December 31, Year 8, U.S. Dental Supplies (USDS) created a wholly owned foreign subsidiary, Funi, Inc. (FI), located in the country of Lumbaria. The condensed balance sheet of Funi as of December 31, Year 8, reported in local currency (the pont), follows:FUNI, INC.Balance Sheet
EXERCISE 5–1 The December 31, Year 8, trial balance of SwissCo Ltd., a Swiss company, follows (in euros, €).Debit Credit Cash........................................................ € 50,000 Accounts receivable................................. 100,000 Allowance for doubtful accounts
EXERCISE 5–1 Newmont Mining is the largest gold producer in North America and second largest in the world, with mining interests in the U.S., Mexico, Peru, Uzbekistan, and Indonesia. In 1998, Newmont produced 4.07 million ounces of gold and its proven and probable reserves total 52.6 million
EXERCISE 5–1 Axel Corporation acquires 100% of the stock of Wheal Company on December 31, Year 4. The following information pertains to Wheal Company on the date of acquisition:Book Value Fair Value Cash......................................................... $ 40,000 $ 40,000 Accounts
EXERCISE 5–1 Your supervisor asks you to analyze the potential purchase of Drew Company by your firm, Pierson, Inc. You are provided the following information (in millions):DREW COMPANY Pierson, Inc., Historical Historical Fair Cost-Based Cost-Based Value Current
EXERCISE 5–1 The following data are from the annual report of Francisco Company, a specialized packaging manufacturer:Year 6 Year 7 Year 8 Sales................................................. $25,000 $30,000 $35,000 Net income........................................ 2,000 2,200 2,500 Dividends
EXERCISE 5–1 Burry Corporation acquires 80% of Bowman Company for $40 million on January 1, Year 6. At the time of acquisition, Bowman has total net assets with a fair value of $25 million. For the years ended December 31, Year 6, and December 31, Year 7, Bowman reports net income (loss) and pays
EXERCISE 5–1 The following data are taken from the December 31 annual report of Bailey Company:($ in thousands) 2004 2005 2006 Sales.......................... $50,000 $60,000 $70,000 Net income................. 2,000 2,200 2,500 Dividends paid........... 1,000 1,200 1,500 Bailey had 1,000,000
EXERCISE 5–1 Munger.Com began operations on January 1, 2006. The company reports the following information about its investments at December 31, 2006:Current assets ($ in thousands) Cost Market Investments in marketable debt securities:Able Corp. bonds (held-to-maturity) ................ $ 330 $
EXERCISE 5–1 Bethel Company has a foreign wholly owned subsidiary, Home Brite Company. The parent uses the current rate method to compute the cumulative translation adjustment.Required:Explain how the use of the current rate method affects each of the following:a. Reported sales and income of
EXERCISE 5–1 A company can have passive interest (noninfluencial) investments, significant influential investments, or controlling interests. Passive interest investments can be trading, available-for-sale, or held-to-maturity securities.Required:a. Describe the valuation basis at which each of
EXERCISE 5–1 Refer to Exhibit 5.5 to answer the following ques- Microsoft Corporation tions about Microsoft Corporation investments.a. Microsoft reports unrealized gains and unrealized losses on securities. Accordingly, the investment cost basis is marked to market. What type of account is
EXERCISE 5–1 An important element in accounting for investment securities concerns the distinction between its noncurrent and current classification.Required:a. Why do most companies maintain an investment portfolio consisting of both current and noncurrent securities?b. What factors should an
5–28A. Identify and discuss at least three implications for analysis of financial statements that result from the accounting for foreign currency translation.
5–27A. Discuss the major objectives of current accounting practice involving foreign currency translation.
5–26A. Identify and discuss the major provisions of accounting for foreign currency translation.
5–25. Indicate factors that can alter estimates for the benefit periods of intangible assets.
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