Deck 6: Financial Statement Analysis

Question 1

Last year, Moss Receiving Inc. had positive net cash flow, yet cash on the balance sheet decreased. Which of the following could explain the company's financial performance?

A) The company issued new common stock.
B) The company issued new long-term debt.
C) The company paid off some of its assets.
D) The company purchased a lot of new fixed assets.
E) The company eliminated its dividend.

Answer 1

The company purchased a lot of new fixed assets.

Question 2

On its 2003 balance sheet, Ward Fencing had retained earnings equal to $510 million. On its 2004 balance sheet, retained earnings were also equal to $510 million. Which of the following statements is most correct?

A) The company must have had net income equal to zero in 2004.
B) The company did not pay dividends in 2004.
C) If the company's net income in 2004 was $200 million, dividends paid must have also equaled $200 million.
D) If the company lost money in 2004, they must have paid dividends.
E) None of the statements above is correct.

Answer 2

If the company's net income in 2004 was $200 million, dividends paid must have also equaled $200 million.

Question 3

Easton Tech and Ellis Integrated each have the same total assets, the same level of sales, and the same return on equity (ROE). Easton Tech, however, has less equity and a higher debt ratio than does Ellis Integrated. Which of the following statements is most correct?

A) Ellis Integrated has a higher net income than Easton Tech.
B) Ellis Integrated has a higher profit margin than Easton Tech.
C) Ellis Integrated has a higher return on assets (ROA) than Easton Tech.
D) All of the statements above are correct.
E) None of the statements above is correct.

Answer 3

All of the statements above are correct.

Question 4

Ferdinand Inc. and the Silvestre Company have the same tax rate, total assets, and basic earning power. Both companies have positive net incomes. Ferdinand has a higher debt ratio, and therefore, higher interest expense than Silvestre. Which of the following statements is correct?

A) Ferdinand has a higher ROA than Silvestre.
B) Ferdinand has a higher times interest earned (TIE) ratio than Silvestre.
C) Ferdinand has a higher net income than Silvestre.
D) Ferdinand pays less in taxes than Silvestre.
E) Ferdinand has a lower equity multiplier than Silvestre.

Question 5

Which of the following statement is most correct?

A) A self-sustaining foreign entity is required to use the temporal method for translating its statements into the reporting currency and gains and losses flow through the income statement.
B) An integrated foreign entity is required to use the current rate method for translating its statements into the reporting currency and gains and losses flow through the income statement.
C) A self-sustaining foreign entity is required to use the current rate method for translating its statements into the reporting currency and gains and losses are recorded in the cumulative translation adjustment (CTA) account without flowing through the income statement.
D) An integrated foreign entity is required to use the temporal method for translating its statements into the reporting currency and gains and losses are recorded in the cumulative translation adjustment (CTA) account without flowing through the income statement.
E) None of the statements above is correct.

Question 6

Which of the following statements is most correct?

A) With the temporal method for translating foreign currency financial statements, current assets and current liabilities are translated at the current spot exchange rate and fixed assets and long-term capital are translated at historical rates.
B) With the current rate method for translating foreign currency financial statements, all balance sheet entries are translated at the current spot exchange rate except for equities that are translated at the appropriate historical rates.
C) The cumulative translation adjustment (CTA) account in the equity section of the balance sheet is used in the temporal method.
D) Flow through accounting where currency gains and losses are recognized in the income statement for the reporting period is used by the current rate method.
E) None of the statements above is correct.

Question 7

Reynolds Travel has $2 billion in total assets. The other side of its balance sheet consists of $0.2 billion in current liabilities, $0.6 billion in long-term debt, and $1.2 billion in common equity. The company has 300 million shares of common stock outstanding, and its stock price is $20 per share. What is Reynolds' market/book ratio?

A) 1.25
B) 2.65
C) 3.15
D) 4.40
E) 5.00

Question 8

Dillard Industries is expanding its operations throughout the Southeast United States. Dillard anticipates that the expansion will increase sales by $1,000,000 and increase operating costs (excluding depreciation and amortization) by $700,000. Depreciation and amortization expenses will rise by $50,000, interest expense will increase by $150,000, and the company's tax rate will remain at 40 percent. If the company's forecast is correct, how much will net income increase or decrease, as a result of the expansion?

A) no change
B) $40,000 increase
C) $60,000 increase
D) $80,000 increase
E) $180,000 increase

Question 9

Craig Company currently has $1,000,000 in accounts receivable. Its days sales outstanding (DSO) is 50 days. The company wants to reduce its DSO to the industry average of 32 days by pressuring more of its customers to pay their bills on time. The company's CFO estimates that if this policy is adopted the company's average sales will fall by 10 percent. Assuming that the company adopts this change and succeeds in reducing its DSO to 32 days and does lose 10 percent of its sales, what will be the level of accounts receivable following the change? Assume a 365-day year.

A) $576,000
B) $633,333
C) $750,000
D) $900,000
E) $966,667

Question 10

Taravella Industries reported net income of $75 million in 2004. The company's corporate tax rate was 40 percent and its interest expense was $25 million. The company had $500 million in sales and its cost of goods sold was $350 million. Taravella's goal is for its net income to increase by 20 percent (to $90 million) in 2005. It forecasts that the tax rate will remain at 40 percent, interest expense will increase by 40 percent, and cost of goods sold will remain at 70 percent of sales. What level of sales (to the closest million) will Taravella have to produce in 2005 in order to meet its goal for net income?

A) $550 million
B) $583 million
C) $600 million
D) $617 million
E) $650 million

Question 11

Taft Technologies has the following relationships:
The company's current assets consist of cash, inventories, and accounts receivable. How much cash does Taft have on its balance sheet?

A) -$8,333
B) $68,493
C) $125,000
D) $200,000
E) $316,667

Question 12

Explain what an annual report is, what it contains, and who uses it.

Question 13

What are notes to financial statements?

Question 14

Explain how trend analysis is used in financial statement analysis.

Question 15

What does financial statement analysis mean?

Question 16

What qualitative factors should an analyst consider when conducting financial statement analysis

Question 17

Describe the five primary categories of financial ratios.

Question 18

What is benchmarking and is it important? Explain.

Question 19

What are some potential problems with ratio analysis?

Question 20

Are financial analysts more concerned with accounting income or cash flow?

Question 21

What is free cash flow and how can it be used?

Question 22

What are economic value added and market value added?

Question 23

Pompano Beach Surf Co. has $400 million of common equity on its balance sheet and 7 million shares of common stock outstanding. The company's Market Value Added (MVA) is $181 million. What is the company's stock price?

Question 24

Wick Hair Products has $3 billion in total assets. The other side of its balance sheet consists of $0.6 billion in current liabilities, $0.8 billion in long-term debt, and $1.6 billion in common equity. The company has 400 million shares of common stock outstanding, and its stock price is $30 per share. What is Wick's market/book ratio?

Question 25

Fortison Mechanics is a relatively small, privately owned firm. Last year the company had net income of $25,000 and 20,000 shares were outstanding. The owners were trying to determine the equilibrium market value for the stock prior to taking the company public. A similar firm that is publicly traded had a price/earnings ratio of 12.0. Using only the information given, what is the estimated market value of one share of Fortison's stock?

Question 26

Deerfield Industries is expanding its operations throughout the Southeast United States. Deerfield anticipates that the expansion will increase sales by $1,200,000 and increase operating costs (excluding depreciation and amortization) by $800,000. Depreciation and amortization expenses will rise by $100,000, interest expense will increase by $150,000, and the company's tax rate will remain at 40 percent. If the company's forecast is correct, how much will net income increase or decrease, as a result of the expansion?

Question 27

Tillinghouse Industries reported net income of $84 million in 2004. The company's corporate tax rate was 40 percent and its interest expense was $40 million. The company had $600 million in sales and its cost of goods sold was $420 million. Tillinghouse's goal is for its net income to increase by 25 percent in 2005. It forecasts that the tax rate will remain at 40 percent, interest expense will increase by 40 percent, and cost of goods sold will remain at 70 percent of sales. What level of sales (to the closest million) will Tillinghouse have to produce in 2005 in order to meet its goal for net income?

Question 28

Curtain Industries currently has $1,500,000 in accounts receivable. Its days sales outstanding (DSO) is 60 days. The company wants to reduce its DSO to the industry average of 36 days by pressuring more of its customers to pay their bills on time. The company's CFO estimates that if this policy is adopted the company's average sales will fall by 15 percent. Assuming that the company adopts this change and succeeds in reducing its DSO to 36 days and does lose 15 percent of its sales, what will be the level of accounts receivable following the change? Assume a 365-day year.

Question 29

McGarry Technologies has the following relationships:
The company's current assets consist of cash, inventories, and accounts receivable. How much cash does McGarry have on its balance sheet?