Corporate Financial Accounting Study Set 3

Business

Quiz 14 :

Financial Statement Analysis

Quiz 14 :

Financial Statement Analysis

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Vertical analysis of income statement The following comparative income statement (inthousands of dollars) for two recent fiscal years was adapted from the annual report of Speedway Motorsports, Inc. , owner and operator of several major motor speedways, such as the Atlanta, Texas, and Las Vegas Motor Speedways. img A. Perpare a comparative income statement for these two years in vertical form, stating each item as a percent of revenues. (Round percentages to one decimal place.) B. Comment on the significant changes.
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Vertical analysis:
Vertical analysis is an analysis that presents each item in the financial statements as percentage of a base amount. For example, in an assets section of the balance sheet total assets amount is taken as base and the items in the assets section is presented as a percentage of the amount of total assets.
Comparative income statement:
Comparative statement is generally prepared to compare the amounts for a particular account in income statement for a given period with previous period. It is generally prepared to compare and to calculate the percentage change in the amounts for the given period.
a.Prepare a schedule showing vertical analysis for the years 2015 and 2014 as shown below:
img b.Comments:
1. Admissions and event-related revenues have decreased in the current year when compared with the previous year. NASCAR broadcasting revenue and other operating revenues have increased in the current year when compared with the previous year.
2. Direct expense of events and other direct expenses have decreased in the current year when compared with the previous year. NASCAR purse and sanction fees have increased in the current year. General and administrative expenses have decreased significantly in the current year when compared with the previous year.
3. Income from continuing operations has increased significantly in the current year when compared with the previous year because the general and administrative expenses are decreased significantly.

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Briefly explain the difference between liquidity, solvency, and profitability analysis.
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The financial statements of a company represent the information regarding the financial performance of the company for a period of time and its financial position on a particular date to its users. These users like investors, creditors, suppliers and shareholders of financial information evaluate these financial statements in mainly three areas which are profitability, liquidity and solvency.
Liquidity: It means how well the company is able to convert its current assets into cash. For example, the sold inventory would convert into accounts receivable and after that into cash. So, it is the ability of the company to meet the requirement of cash in day-to-day operating activities. Short term creditors, suppliers are always interested in liquidity of the business. For the analysis of liquidity, use the following formula. img Simply, it defines the relationship between the current assets and current liabilities of the company.
Solvency: It is the ability of the company to pay its long-term creditors like debenture holders, banks both interest amount and the principal of the time period. For the analysis of solvency, use the following formula. img Simply, it defines the relationship between the total debt and total equity of the company.
Profitability: It is the ability of the company to earn its profit from its operations. The shareholders and investors of the company are vigilant regarding the profitability of the company. As the stock price of the company in the market depends on the current and future earning capability of the company, the profitability ratio provides information about the earning capacity of the firm. For the analysis of profitability, use the following formula. img Simply, it defines the relationship between the net income and total assets of the company.
Major distinction among the three is related to its content that is current items for the liquidity ratio, income and assets for the profitability ratio and the debt and equity for the solvency ratio. Hence, the analysis of the liquidity, profitability and solvency can be interpreted by the separate computation of the assets, liabilities and equity from the balance sheet of the company.

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Vertical analysis of income statement Revenue and expense data for Innovation Quarter Inc. for two recent years are as follows: img A. Perpare an income statement in comparative form, stating each item for both year as a percent of sales. (Round to the nearest whole percentage.) B. Comment on the significant changes disclosed by the comparative income statement.
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Vertical Analysis of income statement
Under this, each item of income statement and balance sheet is expressed as a percentage of the total of items or a certain item. For example, in vertical analysis, the total administrative expenses are expressed as a percentage of sales in the vertical analysis of income statement and likewise, the fixed assets are expressed as a percentage of total assets in the balance sheet. This type of analysis executed for various companies of the industry simultaneously to evaluate their performance.
a.The income statement of IQ Company in a comparative form is shown below. Here the annual sales are considered as a base in order to calculate the respective percentage.
img b.In the above comparative Income statement, when a vertical analysis is done, it can be noticed that the IQ company's Cost of goods sold 52% increased from the previous year to current year 57% ( an increase of 5%) and therefore, gross profit has decreased 5% from previous year to current year.
Though selling and administrative expenses remained same at 28%, total operating expenses in actual figures has increased over previous year. The net income of the IQ Company has fallen 5% (14%-9%) from previous year to current year because of increase in cost of goods sold. Decrease of 5% in percentages is a huge amount in actual dollars.

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The current year's amount of net income (after income tax) is 25% larger than that of the preceding year. Does this indicate an improved operating performance? Discuss
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Ethics in Action Rodgers Industries Inc. completed its fiscal year on December 31. Near the end of the fiscal year, the company's internal audit department determined that an important internal control procedure had not been functioning properly. The head of internal audit, Dash Riprock, reported the internal control failure to the company's chief account, Todd Barleywine. Todd reported the failure to the company's chief financial officer, Josh McCoy. After discussing the issue, Josh instructed Todd not to inform the external auditors of the internal control failure and to fix the problem quietly after the end of the fiscal year. The external auditors did not discover the internal control failure during their audit. In March, after the audit was complete, the company released its annual report, including associated reports by management. As chief financial officer, Josh authorized the release the management's Report on Internal Control, which stated that the management team believed that the company's internal controls were effective during the period covered by the annual report. Did Josh behave ethically in this situation? Explain your answer.
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What is the advantage of using comparative statements for financial analysis rather than statements for a single date or period?
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Current position analysis The following items are reported on a company's balance sheet: img Determine (A) the current ratio and (B) the quick ratio. (Round to one decimal place.)
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Common-sized income statement Revenue and expense data for the current calendar year for Tannenhill Company and for the electronics industry are as follows. The Tannenhill Company data are expressed in dollars. The electronics industry averages are expressed in percentages. img a. Prepare a common-sized income statement comparing the results of operations for Tannenhill Company with the industry average. Round to one decimal place. b. As far as the data permit, comment on significant relationships revealed by the comparisons.
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Horizontal analysis of income statement For 20Y2, Macklin Inc, reported a significant increase in net income. At the end of the year, John Mayer, the president, is presented with the following condensed comparative income statement: img Instructions 1. Prepare a comparative income statement with horizontal analysis for the two-year period, using 20Y1 as the base year. (Round percentages to one decimal place.) 2. To the extent the data permit, comment on the significant relationships revealed by the horizontal analysis prepared in (1).
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Marriott and Hyatt: Solvency and profitability analysis Marriott International, Inc. , and Hyatt Hotels Corporation are two major owners and managers of lodging and resort Properties in the United States. Abstracted income statement information for the two companies is as follows for a recent year (in millions): img Balance sheet information is as follows: img The average liabilities, average stockholders' equity, and average total assets are as follows: img 1. Determine the following ratios for both companies (round ratio and percentages to one decimal place): A. Return on total assets B. Return on stockholders' equity C. Times interest earned D. Ratio of total liabilities to stockholders' equity 2. Based on the information in (1), analyze and compare the two companies' solvency and profitability.
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Effect of transactions on current position analysis Data pertaining to the current position of Forte Company follow: img Instructions 1. Compute (a) the working capital, (b) the current ratio, and (c) the quick ratio. Round ratios in parts b through j to one decimal place. 2. List the following captions on a sheet of paper: img Compute the working capital, the current ratio, and the quick ratio after each of the following transactions and record the results in the appropriate columns. Consider each transaction separately and assume that only that transaction affects the data given. Round to one decimal place. a. Sold marketable securities at no gain or loss, $70,000. b. Paid accounts payable, $125,000. c. Purchased goods on account, $110,000. d. Paid notes payable, $100,000. e. Declared a cash dividend, $150,000. f. Declared a common stock dividend on common stock, $50,000. g. Borrowed cash from bank on a long-term note, $225,000. h. Received cash on account, $125,000. i. Issued additional shares of stock for cash, $600,000. j. Paid cash for prepaid expenses, $10,000.
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Deere: Profitability analysis Deere Company manufactures and distributes farm and construction machinery that it sells around the world. In addition to its manufacturing operations, Deere's credit division loans money to customers to finance the purchase of their farm and construction equipment. The following information is available for three recent years (in millions except per-share amounts): img 1. Calculate the following ratios for each year (round ratios and percentages to one decimal place, except for per-share amounts): A. Return on total assets B. Return on stockholders' equity C. Earnings per share D. Dividend yield E. Price-earnings ratio 2. Based on these data, evaluate Deere's profitability.
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Vertical analysis Income statement information for Einsworth Corporation follows: img Prepare a vertical analysis of the income statement for Einsworth Corporation.(Round percentages to one decimal place.)
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Vertical analysis of income statement For 20Y2, Tri-Comic Company initiated a sales promotion campaign that included the expenditure of an additional $50,000 for advertising. At the end of the year, Lumi Neer, the president, is presented with the following condensed comparative income statement: img Instructions 1. Prepare a comparative income statement for the two-year period, presenting an analysis of each item in relationship to sales for each of the years. (Round percentages to one decimal of place.) 2. To the extent the data permit, comment on the significant relationships revealed by the vertical analysis prepared in (1).
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Horizontal analysis The comparative accounts payable and long-term debt balances for a company follow. img Based on this information, what is the amount and percentage of increase or decrease that would be shown on a balance sheet with horizontal analysis?
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Horizontal analysis of income statement For 20Y2, McDade Company reported a decline in net income. At the end of the year, T. Burrows, the president, is presented with the following condensed comparative income statement: img Instructions 1. Prepare a comparative income statement with horizontal analysis for the two-year period, using 20Y1 as the base year. (Round percentages to one decimal place.) 2. To the extent the data permit, comment on the significant relationships revealed by the horizontal analysis prepared in (1).
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Team Activity In teams, select a public company that interests you. Obtain the company's most recent annual report on Form 10-K. The Form 10-K is a company's annually required filing with the Securities an Exchange Commission (SEC). It includes the company's financial statements and accompanying notes. The Form 10-K can be obtained either (A) from the investor relations section of the company's Web site or (B) by using the company search feature of the SEC's EDGAR database service found at www.sec.gov/edgar/searchedgar/companysearch.html. 1. Based on the information in the company's annual report, compute the following for the most recent year (round ratios and percentages to one decimal place, except for per-share amounts): A. Liquidity analysis: (1) Working capital (2) Current ratio (3) Quick ratio (4) Accounts receivable turnover (5) Number of days' sales in receivables (6) Inventory turnover (7) Number of days' sales in inventory B. Solvency analysis: (1) Ratio of liabilities to stockholders' equity (2) Times interest earned C. Profitability analysis: (1) Asset turnover (2) Return on total assets (3) Return on stockholders' equity (4) Earnings per share (5) price-earnings ratio 2. Evaluate the company's liquidity, solvency, and profitability.
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Vertical analysis of income statement For 20Y2, Fielder industries Inc. initiated a sales promotion compaign that included the expenditure of an additional $40,000 for advertising. At the end of the year, Leif Grando, the president, is presented with the following condensed comparative income statement: img Instructions 1. Prepare a comparative income statement for the two-year period, presenting an analysis of each item in relationship to sales for each of the years. (Round percentages to one decimal place.) 2. To the extent the data permit, comment on the significant relationships revealed by the vertical analysis prepared in (1).
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Continuing Company Analysis? Amazon, Best Buy. and Walmarh Common-sized income statements The condensed income statement through income from operation for Amazon.com, Inc. , Best Buy, Inc. , and Walmart stores, Inc. for a recent fiscal year follow (in millions): img 1. Prepare comparative common-sized income statements for each company. (Round percentages to one decimal place.) 2. Use the common-sized analysis to compare the financial performance of the three companies.
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Financial Statement Analysis The financial statement for Nike, Inc. , are presented in Appendix E at the end of the text. The following additional information is available (in thousands): img Instructions 1. Determine the following measure for the fiscal year ended May 31, 2015, and May 31, 2014. (Round ratios and percentages to one decimal place.) A. Working capital B. Current ratio C. Quick ratio D. Accounts receivable turnover E. Number of days' sales in receivables F. Inventory turnover G. Number of days' sales in inventory H. Ratio of liabilities to stockholders' equity I. Asset turnover J. Return on total assets, assuming interest expense is $28 million for the year ending May 31, 2015, and $24 million for the year ending May 31, 2014 K. Return on common stockholders' equity L. Price-earnings ratio, assuming that the market price was $101.67 per share on May 29, 2015, and $76.91 per share on May 30, 2014 M. Percentage relationship of net income to sales 2. What conclusions can be drawn from these analyses?
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