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Understanding Financial Statements 8th Edition Lyn M Fraser, Aileen Ormiston - Solutions
. Eastman Kodak Comprehensive Analysis Problem Using the Financial Statement Analysis Template Each chapter in the textbook contains a continuation of this problem. The objective is to learn how to do a comprehensive financial statement analysis in steps as the content of each chapter is learned.
. Intel Problem The 2004 Intel Annual Report can be found at the following Web site: www.prenhall. com/fraser. (a) Using the Intel Annual Report, calculate key financial ratios for all years presented. (b) Using the library, find industry averages to compare to the calculations in (a). (e) Write a
. Research Problem Using the articles referenced in footnote 4 in this chapter regarding cash flow ratios, create a list of cash flow ratios that you believe would be a good set of ratios to assess the cash flows. of a firm. Choose an industry and locate four companies in that industry. Calculate
. Writing Skills Problem R.E.C. Inc.'s staff of accountants finished preparing the financial statements for 2007 aud will meet next week with the company's CEO as well as the Director of Investor Relations and representatives from the marketing and art departments to design the current year's
. Determine the effect on the current ratio, the quick ratio, net working capital (current assets less current liabilities), and the debt ratio (total liabilities to total assets) of each of the follow- ing transactions. Consider each transaction separately and assume that prior to each transac-
. Eastman Kodak Company and Canon, Inc. are competitors in the camera manufacturing industry. The following ratios and financial information have been compiled for these two companies: Financial ratios (2000) Kodak Canon Liquidity Current (times) Quick (times) Cash flow liquidity (times) Cash flow
. RareMetals, Inc. sells a rare metal found only in underdeveloped countries overseas. As a result of unstable governments in these countries and the rarity of the metal, the price fluctuates significantly. Financial information is given assuming the use of the first- in, first-out (FIFO) method of
. Eleanor's Computers is a retailer of computer products. Using the financial data provided, complete the financial ratio calculations for 2007. Advise management of any ratios that indicate potential problems and provide an explanation of possible causes of the problems Financial Ratios 2005 2006
. Eastman Kodak Comprehensive Analysis Problem Using the Financial Statement Analysis Template The 2004 Eastman Kodak Annual Report and Form 10-K can be found at the following Web site: www.prenhall.com/fraser. (a) Using the checklist and the quality of financial reporting sections of Chapter 5,
. Intel Problem The 2004 Intel report can be found at the following Web site: www.prenhall.com/fraser. Review the quality of financial reporting for Intel. Write a summary explaining whether the quality is good or poor.
. Internet Problem Look up the SEC homepage on the Internet at the following address: www.sec.gov/. Research and locate links related to accounting issues. Write a short summary of the types of items related to accounting that can be found on the SEC's Web site.
. The following calculations have been made using Metro Tech's income statement: Sales growth, current year Gross profit margin, current year Gross profit margin, last year 20% 64% 52% Discuss all the reasons you can think of to explain the 12% change in gross profit margin. Which reasons would be
. From 1998 until the third quarter of fiscal 2000, WorldCom, Inc. did not write off numer ous accounts of customers who were in default and unlikely to pay their bills. In the third quarter of 2000, WorldCom management, who had earlier refused to approve any write- offs, told the accounting area
. Eastman Kodak Comprehensive Analysis Problem Using the Financial Statement Analysis Template Each chapter in the textbook contains a continuation of this problem. The objective is to learn how to do a comprehensive financial statement analysis in steps as the content of each chapter is learned.
. Intel Problem The 2004 Intel Annual Report can be found at the following Web site: www.prenhall.com/ fraser. (a) Prepare a summary analysis of the Statements of Cash Flows for all three years. (b) Analyze the Consolidated Statements of Cash Flows for Intel for 2004, 2003, and 2002.
. The following cash flows were reported by Techno Inc. in 2008 and 2007. (In thousands) Net income 2008 $316,354 2007 $242,329 Noncash charges (credits) to income Depreciation and amortization 68,156 62,591 Deferred taxes 15,394 22,814 $399,904 $327,734 Cash Provided (Used) by Operating Assets and
. The following comparative balance sheets and income statement are available for Little Bit Inc. Prepare a statement of cash flows for 2009 using the indirect method and analyze the statement. Cash Accounts receivable (net) Inventory Prepaid expenses December 31, 2009 2008 $ 40,000 $ 24,000 48,000
. Intel Problem The 2004 Intel Annual Report can be found at the following Web site: www.prenhall.com/ fraser. (a) Using the consolidated statements of operations, analyze the profitability of Intel by preparing a common-size income statement and by calculating any other ratios deemed necessary for
. Income statements for Yarrick Company for the years ending December 31, 2007, 2006, and 2005 are shown below. Prepare a common-size income statement and analyze the profitability of the company. (in millions) Yarrick Company Income Statements for the Years Ending December 31, 2007, 2006, and 2005
. Big Company purchased 25% of the voting common stock of Little Company on January 1 and paid $500,000 for the investment. Little Company reported $250,000 of earnings for the year and paid $50,000 in cash dividends. Calculate investment income and the balance sheet investment account for Big
. Using the information below for Dean Corporation, calculate the amount of dividends Dean most likely paid to common stockholders in 2007, 2008, and 2009. Retained earnings balances January 1, 2007 December 31, 2007 December 31, 2008 December 31, 2009 Net income $760 1,026 2007 $330 1,171 2008 200
. An excerpt from the Sun Company's annual report is presented below. Calculating any profit measures deemed necessary, discuss the implications of the profitability of the company. Sun Company Income Statements for the Years Ended December 31, 2007, 2006, and 2005 Net sales Cost of goods sold
. Discuss the differences among depreciation, amortization, and depletion.
. Eastman Kodak Comprehensive Analysis Problem Using the Financial Statement Analysis Template Each chapter in the textbook contains a continuation of this problem. The objective is to learn how to do a comprehensive financial statement analysis in steps as the content of each chapter is learned.
. Internet Problem Choose a publicly held corporation (unless your teacher assigns a particular corporation for this assignment) and find the balance sheet and notes to the financial statements in the most recent Form 10-K. The Form 10-K can be located by going to the homepage of the Securities and
. Research Problem Locate a library that carries "The Risk Management Association, Annual Statement Studies" Choose three industries from Annual Statement Studies (different from those illustrated in Exhibits2.4 and2.5 in Chapter 2) and create a table with the percentages for the following items:
. The F.L.A.C. Corporation sells a single product. The following is information on inventory, purchase, and sales for the current year: Number of units Unit cost Sale price January 1 Inventory 10,000 $3.00 January 10 Purchase 4,0003.50 January 1-March 31 Sales 8,000 $5.00 April 25 Purchase
. Eastman Kodak Comprehensive Analysis Problem Using the Financial Statement Analysis Template Each chapter in the textbook contains a continuation of this problem. The objective is to learn how to do a comprehensive financial statement analysis in steps as you learn the content of each chapter.
. Intel Problem The 2004 Intel Annual Report can be found at the following Web site: www.prenhall.com/ fraser. Using the annual report, answer the following questions: (a) Describe the type of business in which Intel operates. (b) Read the "Letter to our stockholders" and discuss any information
. Internet Problem Arthur Levitt, chairman of the SEC, gave a speech entitled "The Numbers Game" on September 28, 1998, at the New York University Center for Law and Business. The com- plete text of the Levitt speech is available at www.prenhall.com/fraser. Read the speech and then answer the
. Research Problem Locate the Sarbanes-Oxley Act of 2002. In a concise essay (no more than one to two pages, single-spaced, double-spaced between paragraphs) outline the key components of the act.
. Writing Skills Problem Staff members from the marketing department of your firm are doing a splendid job selling products to customers. Many of the customers are so pleased, in fact, they are also buying shares in the company's stock, which means that they receive a copy of the firm's annual
. R-M Corp. An earnings quality problem. C. Stern, chief financial officer of R-M Corp., has just reviewed the current year's third- quarter financial results with company president R. Macon. R-M Corp. sets an annual tar- get for earnings growth of 12%. It now appears likely that the company will
What does the price to earnings ratio measure? (a) The "multiple" that the stock market places on a firm's earings (b) The relationship between dividends and market prices (c) The earnings for one common share of stock. (d) The percentage of dividends paid to net earnings of the firm
Which profit margin measures the overall operating efficiency of the firm? (a) Gross profit margin. (b) Operating profit margin. (c) Net profit margin. (d) Return on equity. 25, which ratio or ratios measure the overall efficiency of the firm in managing its investment in assets and in generating
Why is the fixed charge coverage ratio a broader measure of a firm's coverage capabilities than the times interest earned ratio? (a) The fixed charge ratio indicates how many times the firm can cover interest payments (b) The times interest earned ratio does not consider the possibility of higher
Why is the amount of debt is a company's capital structure important to the financial analyst (a) Debt implies risk.(b) Debt is less costly than equity (c) Equity is riskier than deb (d) Debt is equal to total assets.
What do the asset turnover ratios measure? (a) The liquidity of the firm's current assets. (b) Management's effectiveness in generating sales from investments inets (c) The overall efficiency and profitability of the firm (d) The distribution of assets in which funds are invested.
What does an increasing collection period for sooounts receivable suggest about a firm's credit policy? (a) The credit policy is too restrictive (b) The firm is probably losing qualified customers (e) The credit policy may be too lenient (d) The collection period has no relationship to a firm's
Why is the quick ratio a more rigorous test of short-run solvency than the current ratio? (a) The quick ratio considers only cash and marketable securities a current assets (b) The quick ratio eliminates prepaid expenses for the numerator. (c) The quick ratio eliminates prepaid expenses for the
What is a limitation common to both the current and the quick ratio? (a) Accounts receivable may not be truly liquid Inventories may not be truly liquid. (b) (c) Marketable securities are not liquid. (d) Prepaid expenses are potential sources of cash.
What is the most widely used liquidity ratio? (a) Quick ratio (b) Current ratio (c) Inventory terr (d) Debt ratio
What is a serious limitation of financial ratio? (a) Ratios are screening devices (b) Ratios can be used only by themselves (c) Ratios indicate weaknesses only. (d) Ratios are not predictive.
What do liquidity ratio measure? (a) A firm's ability to meet cash needs as they arise. (b) The liquidity of fixed (c) The overall performance of a firm. (d) The extent of a firm's financing with debt relative to equity
Which of the following is not a tool or technique used by a financial statement analys? (a) Common-size financial statements (b) Trend analysis (c) Random sampling analysis (d) Industry compariso
What information can be gained from sources such as Industry Norms and Key Business Ratios, Annual Statement Studies, Analyst's Handbook, and Industry Surveys? (a) The general economic condition. (b) Forecasts of earnings (c) Elaborations of financial statement discurs (d) A company's relative
What type of information found in supplementary schedules is required for inclusion in an annual report? (a) Segmental data (b) Inflation data.(c) Material litigation and management photographs. (d) Management remuneration and segmental data. & What is Form 10-K? (a) A document filed with the
Which of the following would be helpful to an analyst evaluating the performance of a firm? (a) Understanding the economic and political environment in which the company operates (b) Reviewing the annual reports of a company's suppliers, customers, and competito (c) Preparing common-size financial
What information does the auditor's report contain? (a) The results of operations (b) An unqualified opinion (c) An opinion as to the fairness of the financial statements (4) A detailed coverage of the firm's liquidity, capital resources, and operations
What is an investor's objective in financial statement analysis? (a) To determine if the firm is risky. (b) To determine the stability of earings (c) To determine changes necessary to improve future performance. (d) To determine whether an investment is warranted by estimating a company's future
What is a creditor's objective is performing an analysis of financial statements? (a) To decide whether the borrower has the ability to repay interest and principal on borrowed funds. (b) To determine the firm's capital structure. (c) To determine the company's future earnings stream (d) To decide
What is the first step in an analysis of financial statement? (a) Check the auditor's report (b) Check references containing financial information (c) Specify the objectives of the analysis (d) Do a common size analysis.
How have companies been able to manipulate the information on the statement of cash flows? (a) Companies cannot manipulate cash flow information. (b) Some companies recorded vendor financing transactions as investing. rather than operating activities (c) Some companies recorded increases to
Which of the following statements is false? (a) If a firm uses operating leases extensively, the analyst should investigate the impact of those leases on leverage ratios (b) The analyst should read the "Commitments and Contingencies" disclosures to learn of any off-balance-sheet financing or other
Why would a firm repurchase its own common stock? (a) The firm believes their stock is undervaleed and purchases it as an investment (b) The firm purchase stock to be used in employee stock option programs (e) The firm is trying to reduce the number of shares outstanding in order to boost the
What must be true for an item to be classified as an extraordinary item? (a) The item must be both unusual and infrequent in nature. (b) The item must be either unusual or infrequent in nature. (c) The item must be registered as extraordinary with the FASB (d) The item must be approved as
What information cannot be found in the notes to the financial statements regarding income taxes? (3) A reconciliation of the United States federal statutory tax rate to the company's effective tax rate (h) Year to year changes in deferred tax accounts (e) A reconciliation of any foreign statutory
Which of the following is not classified as a nonoperating revenue or expense? (a) Interest income. (b) Equity income or loss (c) Gains or losses on the sales of assets (d) Salaries expense
If the assumed pension interest rate assumption is lowered, the anal pension cost will increase (c) If the assumed pension interest rate assumption is increased, the annual pension cost will increase (d) Due to the accounting reles for pension plans, most companies have underfunded pension plans
Which of the following statements is true? (a) (b) The quality issues of pension accounting have been largely eliminated by the issuance of FASB Statement No.
What is meant by the term "cookie-jar accounting"? (a) The abuse that occurs when companies create reserve accounts for the purpose of setting aside funds in good years and then shifting the reserve amounts to the income statement in poor years. (b) The abuse that occurs when companies use
Which of the following statements is fake? (a) The straight-line method of depreciation is lower in quality than other methods, in most cases, because it does not reflect the economic reality of product usefulness (b) Poor quality of financial reporting results when firms misclassify operating
How does the recording of fulfillment costs cause a quality of financial reporting issue? (a) Many companies record fulfillment costs as operating expenses when they should be recorded as miscellaneous expenses. (b) Bad debt expenses are recorded is fulfillment costs. (c) Fulfillment costs can
Which method of inventory is generally thought to produce the highest quality of earnings? (A) FIFO (b) LIFO (c) Average col (d) All of the above 6 When does a base LIFO layer liquidation occ (a) A base LIFO layer liquidation occurs during a deflationary environment. (b) A bene LIFO layer
Where can information about sales price and volume changes be found? (a) On the face of the income statement. (b) In the notes to the financial statements (c) On the balance sheet. (d) In the management's discussion and analysis
Which of the following is a technique for boosting revenues? (a) Follow the "35-day month practice" in which the books are kept open longer than the month end in ceder to record est sales (b) Record transactions at the net amount. (c) Delay shipment of goods (d) Increase the allowance for doubtful
When should revenue be recognized, assuming generally accepted accounting principles are followed? (a) Revenue should be recognized when cash is collected from the customer (b) Revenue should be recognized based on the company's individual policy (c) Revenue should be recognised when delivery of
What is the change in cash? (a) ($3,000) (b) $3,000 (c) $2,000 ($2,000) (4)
What is net cash flow from financing activities? (a) $15,000 (b) ($15,000) (c) $17,000 (d) ($14,000)
What is net cash flow from investing activities? (a) $14,000 (b) ($14,000) (c) $21,000 (d) ($16,000)
What is net cash flow from operating activities? 4,000 (a) ($3,000) (b) ($1,000) (c) $5,000 (d) $13,000
Which of the following could lead to cash flow problems? (a) Obsolete inventory, accounts receivable of inferior quality, casing of credit by suppliers. (b) Slow-moving inventory, accounts receivable of inferior quality, tightening of credit by suppliers (c) Obsolete inventory, increasing notes
Why has cash flow from operations become increasingly important as an analytical tool? (a) Inflation has distorted the meaningfulness of net income (b) High interest rates can put the cost of borrowing to cover short-term cash needs out of reach for many firms (c) Finns may have uncollected
How is it possible for a firm to be profitable and still go bankrupt? (a) Eamings have increased more rapidly than sales. (b) The firm has positive net income but has failed to generate cash from operations (c) Net income has been adjusted for inflation. (d) Sales have not improved even though
Which of the following current assets is included in the adjustment of net income to obtain cash flow from operating activities? (a) Accounts receivable (b) laventory (c) Prepaid expenses (d) All of the above.
Which statement is true for gains and losses from capital asset sales? (a) They do not affect cash and are excluded from the statement of cash flows (b) They are included in cash flows from operating activities (e) They are included in cash flows from investing activities (d) They are included in
Which of the following items is included in the adjustment of net income to obtain cash flow from operating activities? (a) Depreciation expense for the period. (b) The change in deferred taxes (e) The amount by which equity income recognized exceeds cash received (d) All of the above,
What are internal sources of cash? Cash inflows from operating activities. Cash inflows from investing activities. (c) Cash inflows from financing activities. (d) All of the above. (b)
An outflow of coh would result from which of the following? (a) The decrease in an asset account other than cash. (b) The increase in a liability account. (c) The decrease in a liability account. (d) The increase in an equity account.(a)
As inflow of cash would result from which of the following? (a) The increase in an asset account other than cash. (b) The decrease in an asset account other than cash. (c) The decrease in an equity account. (d) The decrease in a liability account.
Which method of calculating cash flow from operations requires the adjustment of net income for deferrals, accruals, noncash, and nonoperating expenses? (a) The direct method. (b) The indirect method. (e) The inflow method. (d) The outflow method.
How would the repayment of debt principal be classified? (a) Operating outflow (b) Operating info (e) Investing outflow (d) Financing outflow.
How would the sale of a building be classified? (a) Operating outflow (b) Operating inflow. (c) Investing info (d) Financing inflow.
Which of the following statements is false? (a) Publicly held companies may choose to prepare either a statement of cash flows or a statement of changes in financial position. (b) The statement of cash flows was mandated by the FASB in the late 1980s. (c) Understanding how to prepare a statement of
Match the following terms with the correct definitions: (a) Depreciation. (b) Depletion. (c) Amortization. (d) Gross profit. (e) Operating profit. (f) Net profit. (g) Equity method. (h) Cost method. (i) Single-step format. (j) Multiple-step format. (k) Basic earnings per share. (1) Diluted earnings
Which of the following cause(s) a change in the retained earnings account balance? (a) Prior period adjustment.pero (b) Payment of dividends. (c) Net profit or loss. (d) All of the above.
What accounts can be found on a statement of stockholders' equity? (a) Investments in other companies. (b) Treasury stock, accumulated other comprehensive income, and retained earnings. (c) Market value of treasury stock. (d) Both (a) and (c).
What causes a firm to record a change in accounting principle? (a) Voluntary changes in accounting principles and changes mandated by the FASB or the SEC when new rules are implemented. (b) Selling a segment of the business. (c) Unusual and infrequent events. (d) All of the above.
Why should the effective tax rate be evaluated when assessing earnings? (a) It is important to understand if earnings have increased due to tax techniques as opposed to positive changes in core operations. (b) Effective tax rates are irrelevant because they are mandated by law. (c) Effective tax
Why is it important to evaluate increases and decreases in operating expenses?(a) Increases in operating expenses may indicate inefficiencies and decreases in operating expenses may be detrimental to long-term sales growth. (b) It is important to determine if companies are spending at least 10
How are companies required to report total comprehensive income? (a) On the face of the income statement. (b) In a separate statement of comprehensive income. (c) In its statement of stockholders' equity. (d) All of the above.
Match the following terms to the correct definitions. |||| (a) Consolidated financial statements. (b) Current assets. (c) Depreciation. (d) Deferred taxes. (e) Allowance for doubtful accounts. (f) Prepaid expenses. (g) Current maturities. (1) Used up within one year or operating cycle, whichever is
Dot's Delicious Donuts has the following accounts on its balance sheet: (1) Current assets. (2) Property, plant, and equipment. (3) Intangible assets. (4) Other assets. (5) Current liabilities. (6) Deferred federal income taxes. (7) Long-term debt. (8) Stockholders' equity. How would each of the
Listed below are balance sheet accounts for Elf's Gift Shop. Mark current accounts with "C" and noncurrent accounts with "NC." (a) Long-term debt. (b) Inventories. (c) Accounts payable. (d) Prepaid expenses. (e) Equipment. (f) Accrued liabilities. Accounts receivable. (h) Cash. (i) Bonds payable.
What does the additional paid-in capital account represent? (a) The difference between the par and the stated value of common stock.stock. (b) The price changes that result for stock trading subsequent to its original issue. (c) The market price of all common stock issued. (d) The amount by which
Which statement is false? (a) Deferred taxes are the product of temporary differences in the recognition of revenue and expense for taxable income relative to reported income. (b) Deferred taxes arise from the use of the same method of depreciation for tax and reporting purposes. (c) Deferred taxes
How can a reserve account be abused by management? (a) Management can intentionally overestimate the reserve account to decrease earnings or underestimate the reserve account to increase earnings.(b) Management can charge the estimates of obligations to be paid in the future to a reserve account.
Which group of items would most likely be included in the other assets account on the balance sheet? (a) Inventories, marketable securities, bonds. (b) Land held for investment purposes and long-term prepayments. (c) One-year prepaid insurance policy, stock investments, copyrights. (d) Inventories,
As of January 1, 2002, how is goodwill evaluated? (a) Goodwill must be amortized over a 40-year period. (b) No goodwill is to be recognized after January 1, 2002. (c) Companies should determine if goodwill has lost value, and if so, loss in value should be written off. (d) Goodwill is to be written
Why is the method of valuing inventory important? (a) Inventory valuation is based on the actual flow of goods. (b) Inventories always account for more than 50% of total assets and therefore have a considerable impact on a company's financial position. (c) Companies desire to use the inventory
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