Deck 5: Analyzing and Interpreting Financial Statements

Question 1

Asset turnover measures a company's profitability.

Answer 1

False

Question 2

NOPAT is equivalent to income from operating activities.

Answer 2

False

Question 3

If Company A is more profitable than Company B, then Company A will have a higher RNOA than Company B.

Answer 3

False

Question 4

Highly leveraged firms have higher ROE than lower leveraged firms.

Question 5

All else being equal, a higher financial leverage will increase a company's debt rating and decrease the interest rate it must pay.

Question 6

Return on assets can be disaggregated into profit margin and an expense-to-sales ratio.

Question 7

The times interest earned ratio reflects the number of times that the company earned interest during the year.

Question 8

Charlie Plumbing Supplies has a return on assets (ROA) of 24%, while the industry average of similar companies is 13%. This means that Charlie Plumbing Supplies' asset turnover is higher than the industry average.

Question 9

When determining forecasted revenues for proforma purposes, managers should consider economic conditions, potential company changes, and changes in the company's competitive environment.

Question 10

All things equal, increasing turnover, increases:

A) Sales
B) Expenses
C) Assets
D) Shareholder value

Question 11

Which one of the following ratios does not involve assets?

A) Account receivable turnover
B) Current ratio
C) Profit margin
D) Inventory turnover

Question 12

Which ratio provides an indication of the salability of the company's products?

A) Account receivable turnover
B) Current ratio
C) Inventory turnover
D) Gross profit margin

Question 13

What does the current ratio measure?

A) Solvency
B) Profitability
C) Short-term debt paying ability
D) Leverage

Question 14

Liquidity analysis of a company includes the following useful measures: (select all that apply)

A) Current ratio
B) Quick ratio
C) Times interest earned
D) Working capital

Question 15

Which one of the following is removed from net income when determining NOPAT?

A) Cost of goods sold
B) Taxes on operating income
C) Selling, general and administrative expenses
D) Interest expense

Question 16

K Grocers' 2016 balance sheet shows average shareholders' equity of $9,264 million, net income of $1,505 million, and common shares issued of $1,918 million.
The company has no preferred shares issued. K Grocers' return on common equity for the year is:

A) 16.25%
B) 2.74%
C) 36.5%
D) There is not enough information to calculate the ratio

Question 17

K Grocers' 2016 financial statements show average shareholders' equity of $9,264 million, net income of $1,505 million, interest expense of $870 million, and average total assets of $ 46,982 million.
How much is K Grocers' return on assets for the year? Assume that the statutory tax rate is 35%.

A) 16.2%
B) 5.1%
C) 4.4%
D) There is not enough information to calculate the ratio

Question 18

K Grocers' 2016 financial statements show total operating assets of $45,004 million, total operating liabilities of $22,690 million, and net income totaling $1,505 million.
How much are K Grocers' net operating assets (NOA) for the year?

A) $45,004 million
B) $22,314 million
C) $67,694 million
D) There is not enough information to calculate the value

Question 19

Into what two measures can return on net operating assets be disaggregated?

A) Profit margin and Return on equity
B) Net operating profit margin and Asset turnover
C) Net operating asset turnover and Return on equity
D) Net operating profit margin and Net operating asset turnover

Question 20

Which one of the following is not true concerning return on net operating assets?

A) An infinite number of combinations of net operating profit margin and net operating asset turnover will yield a given RNOA
B) When comparing companies in different industries, a higher profit margin always indicates which company has better management performance
C) In industries with relatively low operating asset turnover, a higher profit margin must be maintained to achieve sufficient RNOA
D) When analyzing conglomerates, analysts use a weighted average of margin and turnover rates to look at RNOA

Question 21

K Grocers' 2016 financial statements show net income of $1,505 million, sales of $225,935 million, and average total assets of $46,982 million.
How much is K Grocers' asset turnover for the year?

A) 0.67
B) 4.81
C) 3.2
D) There is not enough information to calculate the ratio

Question 22

K Grocers' 2016 financial statements show interest expense of $870 million, net income of $1,505 million, sales of $225,935 million, and average total assets of $23,491 million. Assume that the statutory tax rate is 35%.
How much is K Grocers' profit margin for the year?

A) 0.92%
B) 1.05%
C) 8.81%
D) There is not enough information to calculate the ratio

Question 23

Use the following selected balance sheet and income statement information for Sirius Supply Co. to compute the profit margin, to the nearest hundredth of a percent.

A) 6.85%
B) 32.38%
C) 13.71%
D) 9.19%

Question 24

Use the following selected balance sheet and income statement information for Sirius Supply Co. to compute ROA, to the nearest hundredth.

A) 27.30%
B) 13.71%
C) 16.17%
D) 32.38%

Question 25

Use the following selected balance sheet and income statement information for Sirius Supply Co. to compute asset turnover, to the nearest hundredth of a percent.

A) 0.32
B) 0.16
C) 2.36
D) 1.53

Question 26

Walkie Enterprises reported sales revenue totaling $1,120,000, $1,340,000, and $1,675,000 in the years, 2014, 2015, and 2016, respectively.
Performing horizontal analysis, what is the percentage change for 2016?

A) 25.00%
B) 38.16%
C) 47.16%
D) 14.11%

Question 27

Selected balance sheet and income statement information from the 2016 fiscal year end for American Symbol Outfitters follows in thousands:
A. Calculate the company's return on equity (ROE).
B. Explain what information this provides to management.

Question 28

Peter Gilgen & Co.'s (PG & Co.) recent balance sheet (fiscal year 2016) reported average equity of $112,036 and average total assets of $240,598. Assume that the company's statutory tax rate is 35%. PG & Co.'s recent income statement showed the following):
A. Calculate the income tax rate on earnings before income taxes.
B. How much is EWI?
C. Calculate ROE and ROA.

Question 29

Selected balance sheet and income statement information from the 2016 fiscal year end for Arrows follows:
A. Compute return on net operating profit (RNOA).
B. Show that RNOA = Net operating profit margin (NOPM) × Net operating asset turnover (NOAT)

Question 30

Selected balance sheet and income statement information from Edward Electric for fiscal years 2014 through 2016 follows:
A. Compute times interest earned for each year and discuss any trends.
B. What concerns about Edward Electric's ability to meet its interest obligations might creditors have? Explain.

Question 31

Selected 2016 balance sheet and income statement information for Cloud 9 Super Store and Big T follow:
A. Calculate the current ratio and quick ratio for both companies.
B. Which company is more liquid?
C. Calculate the times interest earned and debt-to-equity ratio for both companies.
D. Which company is more solvent? Explain.

Question 32

Selected 2016 balance sheet and income statement information for two manufacturing companies: Canyonlands, Inc. and Bryce Corporation follows:
A. Calculate the current ratio and quick ratio for both companies.
B. Which company is more liquid?
C. Calculate the times interest earned and debt-to-equity ratio for both companies.
D. Which company is more solvent?

Question 33

Selected recent balance sheet and income statement information for Shepherd, Inc. follows:
A. Calculate accounts receivable turnover (ART) for 2016 and 2015. Has ART improved during the year or worsened?
B. Calculate inventory turnover (INVT) for 2016 and 2015. Has INVT improved during the year or worsened?

Question 34

Selected recent balance sheet and income statement information for Holiday Corporation follows:
A Calculate accounts receivable turnover (ART) for 2016 and 2015. Has ART improved during the year or worsened?
B. Calculate inventory turnover (INVT) for 2016 and 2015. Has INVT improved during the year or worsened?

Question 35

Selected recent balance sheet and income statement information for Catnip, Inc. follows:
A. Calculate accounts receivable turnover (ART) for 2016 and 2015. Has ART improved during the year or worsened?
B. Calculate inventory turnover (INVT) for 2016 and 2015. Has INVT improved during the year or worsened?

Question 36

Use the selected balance sheet and income statement information below for Brahtz, Inc. to compute the times interest earned ratio. Explain what information this ratio provides.

Question 37

Use the selected balance sheet and income statement information below for Brahtz, Inc. to compute the current ratio. Explain what information this ratio provides.

Question 38

Selected 2016 balance sheet and income statement information for two large communication companies, Vista Communication, Inc., and American Phone, Inc., follow:
A. Compute accounts receivable turnover for Vista Communications Inc. and American Phone.
B. Interpret and comment on the differences between the receivables turnover rates between each company assuming the industry average is 9.0 times.

Question 39

Selected 2016 balance sheet and income statement information for an office supply retailer, Office Supply, Inc., follows (in $ millions):
Compute accounts receivable turnover and inventory turnover for Office Supply, Inc.

Question 40

Selected balance sheet and income statement information for Peter Gilgen & Co. for 2014 through 2016 follows (millions):
Compute the return on financial leverage for each year. Interpret these values for Peter Gilgen & Co.

Question 41

Selected balance sheet and income statement information for jewelry retailer, Sparkle & Co. for 2014 through 2016 follows:
A. Compute the current ratio for each year and discuss any trends. Do you feel that the company is sufficiently liquid? Explain. What additional information might be helpful in analyzing the liquidity?
B. Compute times interest earned for each year and discuss any trends. Do you have any concerns about its level of financial leverage and its ability to meet interest obligations? Explain.

Question 42

Selected 2016 balance sheet and income statement information from Trunk, Inc. and Taylor S. follows:
A. Compute the following turnover rates for each company:
1. Accounts receivable turnover
2. Inventory turnover
3. Asset turnover
B. Interpret and comment on any differences you observe between the turnover rates for these two companies. What are some characteristics of their respective businesses that would likely lead to the differences identified?

Question 43

The balance sheets and income statements for Omni Communications follow:
A. Compute the company's current ratio for 2016 and 2015. Comment on any observed trend.
B. Compute the company's times interest earned and debt-to-equity ratio for 2016 and 2015. Comment on any observed trend.
C. Summarize your findings in a conclusion about the company's liquidity and solvency. Do you have any concerns about the company's ability to meet its debt obligations?

Question 44

Selected balance sheet and income statement information for the office supply retailer, Office Supply, Inc., for FY 2014 through FY 2016 follows:
A. Compute the current ratio for each year and discuss any trends. Do you feel that the company is sufficiently liquid? Explain. What additional information might be helpful in analyzing the liquidity?
B. Compute times interest earned ratio for each year and discuss any trends. Do you have any concerns about its level of financial leverage and its ability to meet interest obligations? Explain.

Question 45

The partial balance sheets and income statements for Peter Gilgen & Co. for fiscal years ending June 30, 2016 and 2015 follow:
A. Calculate accounts receivable turnover (ART) for 2016 and 2015. Accounts receivable in 2014 totaled $10,670 million. Has ART improved during the year or worsened?
B. Calculate inventory turnover (INVT) for 2016 and 2015. Inventories in 2014 were $12,768 million. Has INVT improved during the year or worsened?
C. Calculate asset turnover (AT) for 2016 and 2015 considering that 2014 total assets are $256,344 million. Has AT improved during the year or worsened?

Question 46

The income statements for Bullseye Corporation for fiscal years 2015, 2014, and 2013 (years ending January 30, 2016, January 31, 2015, and February 1, 2014, respectively) follow:
A. Prepare a common-size income statement for 2015 and 2014.
B. Comment on the most significant changes.

Question 47

The income statements for Bullseye Corporation for fiscal years 2015, 2014, and 2013 follow:
Prepare a pro-forma income statement for 2016 for Bullseye assuming the following:
A. Total revenues are $142,000 million.
B. Cost of sales is 68% of net sales.
C. Selling, general and administrative expenses increase by 10% from 2015. Credit card expense increases by 12%.
D. Depreciation increases by 5%
E. There is no gain on receivables held for sale.
F. Interest costs remain the same.
G. The effective income tax rate is 35%.

Question 48

The balance sheets for Bullseye Corporation for the fiscal years 2015 and 2014, (years ending January 30, 2016 and January 31, 2015, respectively) follow:
A. Prepare a common-size statements for the asset section of Bullseye's balance sheet for FY 2015 and FY 2014.
B. Comment on the most significant changes.

Question 49

Explain the trade-off between profit margin and asset turnover.

Question 50

Discuss factors that limit the usefulness of financial accounting information for ratio analysis.

Question 51

Ratio analysis is more complicated when a company is a conglomerate. Why?