财务会计英文版课后习题答案Ch14.docx

财务会计英文版课后习题答案Ch14.docx

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财务会计英文版课后习题答案Ch14

CHAPTER14

DISCUSSIONQUESTIONS

1.Onepurposeoffinancialstatementanalysisistoevaluatetheperformanceofacompanywithaneyetowardidentifyingproblemareas.Anotherpurposeoffinancialstatementanalysisistousethepastperformanceofacompanytopredicthowitwilldointhefuture.

2.Disagree.Ananalysisofacompany’sfinancialratiosusuallydoesnotprovidedetailedinformationaboutwhatthecausesofacompany’sproblemsare,butitdoesidentifyareasinwhichmoredetaileddatashouldbegathered.

3.Theusefulnessoffinancialratiosisgreatlyenhancedwhentheyarecomparedwithpastvaluesforthesamecompanyandwithvaluesforotherfirmsinthesameindustry.

4.Currentratioisameasureofacompany’sliquidity,whichisthecompany’sabilitytopayitsdebtsintheshortrun.

5.ItisimpossibletotellwhetherCompanyA’sreturnonsalesof6%ishighorlow.Thereturnonsalesvaluemustbeanalyzedinlightoftheappropriateindustry.Forexample,anormalreturnonsalesforsupermarketsisaround1%or2%,whereasthereturnonsalesforahigh-techcompanysuchasMicrosoftcanbeinexcessof20%.

6.Theprice-earningsratiodiffersfrommostotherfinancialratiosinthatitisnottheratiooftwofinancialstatementnumbers.Instead,thePEratioisacomparisonofafinancialstatementnumbertoamarketvaluenumber.

7.Acommon-sizefinancialstatementisafinancialstatementwithallnumbersforagivenyeardividedbysalesfortheyear.Thus,allamountsforagivenyearareshownasapercentageofsalesforthatyear.Common-sizefinancialstatementsmakeitpossibletomakecomparisonsevenwhenthesizeofcompaniesisdifferent.Inaddition,common-sizefinancialstatementsallowcomparisonofacompany’snumberstoequivalentnumbersinprioryearswhenthesaleslevelmayhavebeenmuchdifferent.

8.Ifananalysisofcommon-sizefinancialstatementssuggeststhatacompanyhasproblems,thewaytofindoutwhatiscausingtheseproblemsistogatherinformationfromoutsidethefinancialstatements—askmanagement,readpressreleases,talktofinancialanalystswhofollowthefirm,readindustrynewsletters,anddigintothenotestothefinancialstatements.

9.Themostinformativesectionofthe

common-sizebalancesheetistheassetsection.Thissectioncanbeusedtodeterminehowefficientlyacompanyisusingitsassets.

10.TheDuPontframeworkprovidesasystematicapproachtoidentifyinggeneralfactorscausingROEtodeviatefromnormal.TheDuPontsystemalsoprovidesaframeworkforcomputationoffinancialratiostoyieldmorein-depthanalysisofacompany’sareasofstrengthandweakness.

11.WiththeDuPontframework,ROEisdecomposedintothreecomponents—profitability,efficiency,andleverage.Theratiossummarizingacompany’sperformanceineachareaareasfollows:

∙Profitability:

Returnonsales=Net

income/Sales

∙Efficiency:

Assetturnover=Sales/Assets

∙Leverage:

Assets-to-equityratio=

Assets/Equity

12.IfaDuPontanalysissuggestsproblemsinanyofthethreeROEcomponents,furtherratios,specifictoeacharea,canbecomputedtoshedmorelightontheexactnatureoftheproblem.Forexample,acommon-sizeincomestatementcanshedfurtherlightonthecauseofaprofitabilityproblem.

13.Theinventoryturnoverratioindicateshowlonginventoryisbeingheldbeforeitissold.Holdingotherthingsconstant,theinventoryturnoverratiocanprovideapreliminaryindicationofhowwelltheorganizationismanagingitsinventory.

14.Fixedassetturnoveriscomputedassalesdividedbyaverageproperty,plant,andequipment（fixedassets）andisinterpretedasthenumberofdollarsinsalesgeneratedbyeachdollaroffixedassets.

15.Thedebt-to-equityratioiscalculatedbydividingtotalliabilitiesbytotalequity.Itreflectstheamountofacompany’sborrowingrelativetoitsstockholderinvestment.

16.Fromthestandpointofalender,ahightimesinterestearnedratioismoreattractivethanalowtimesinterestearnedratio.Themagnitudeofthetimesinterestearnedratioindicateshowmuchcushionacompanyhasinmakingitsinterestpayments;thehighertheratio,thelesslikelythecompanywillbeunabletomakeitsinterestpayments.

17.Therequirementthatcompaniesprovideacashflowstatementisrelativelyrecent.Becauseofthis,cashflowratiosoftendonotgettheemphasistheydeserveinfinancialanalysismodels.

18.Accrualaccountinginvolvesmakingassumptionsinordertoadjusttherawcashflowdataintoabettermeasureofeconomicperformancecallednetincome.Forcompaniesenteringphaseswhereitiscriticalthatreportedearningslookgood,suchasafirm

thatispreparingtomakeanapplicationforalargeloan,thoseaccountingassumptionsandadjustmentscanbestretched.Accordingly,cashflowfromoperations,whichisnotimpactedbyaccrualassumptions,providesanexcellentrealitycheckforreportedearnings.

19.Whenthevalueofacompany’scashflowadequacyratioislessthanone,thatcompanyisnotgeneratingenoughcashfromoperationstopayforallnewplantandequipmentpurchases.Accordingly,thecompanyhasnocashleftovertorepayloansortodistributetoinvestors.

20.Comparabilityamongfinancialstatementsisreducedwhencompaniesclassifyitemsdifferentlyinthefinancialstatementsandwhencompaniesusedifferentaccountingpractices.Inaddition,whenacompanyiscomposedofavarietyofdivisions,eachoperatinginadifferentlineofbusiness,itisdifficulttofindappropriateindustrycomparisonvalueswithwhichtobenchmarkthecompany’sratios.

21.Onedangerinfocusingafinancialanalysissolelyonthedatafoundinthehistoricalfinancialstatementsisthatonemightthentendtofocusonthecompany’spastperformanceandignorecurrentyearinformation.

PRACTICEEXERCISES

PE14–1（LO1）WhatIsaFinancialRatio?

ThecorrectanswerisB.

PE14–2（LO1）UsefulnessofFinancialRatios

ThecorrectanswerisC.

PE14–3（LO2）FinancialRatiosDefined

a.Debtratio=

b.Currentratio=

c.Returnonsales=

d.Assetturnover=

e.Returnonequity=

f.Price-earningsratio=

PE14–4（LO2）DebtRatio

Debtratio:

=

=45.5%

PE14–5（LO2）CurrentRatio

Currentratio:

=

=1.32

PE14–6（LO2）ReturnonSales

Returnonsales:

=

=10.5%

PE14–7（LO2）AssetTurnover

Assetturnover:

=

=0.94

PE14–8（LO2）ReturnonEquity

Returnonequity:

=

=17.9%

PE14–9（LO2）Price-EarningsRatio

PEratio:

=

=11.4

PE14–10（LO3）Common-SizeIncomeStatement

Sales$75,000100.0%

Costofgoodssold40,00053.3

Grossprofit$35,00046.7%

Operatingexpenses:

Salesandmarketing$3,0004.0%

Generalandadministrative8,00010.7

Totaloperatingexpenses11,00014.7

Operatingincome$24,00032.0%

Interestexpense4,0005.3

Incomebeforeincometaxes$20,00026.7%

Incometaxexpense3,5004.7

Netincome$16,50022.0%

PE14–11（LO3）ComparativeCommon-SizeIncomeStatements

1.Year2Year1

Sales$100,000100.0%$80,000100.0%

Costofgoodssold70,00070.050,00062.5

Grossprofit$30,00030.0%$30,00037.5%

Operatingexpenses25,00025.020,00025.0

Operatingincome$5,0005.0%$10,00012.5%

Interestexpense2,0002.02,0002.5

Incomebeforeincometaxes$3,0003.0%$8,00010.0%

Incometaxexpense1,2001.22,4003.0

Netincome$1,8001.8%$5,6007.0%

2.Thebiggestreasonforthedeclineinthereturnonsalesfrom7.0%inYear1to1.8%inYear2isthedeclineinthegrossprofitasapercentageofsales,from37.5%inYear1to30.0%inYear2.InterestexpenseasapercentageofsalesactuallydeclinedinYear2;itappearsthatthecompanywasabletoincreaseitssales（from$80,000to$100,000）withoutborrowinganyadditionalmoney.IncometaxexpenseasapercentageofsalesalsodeclinedinYear2,butthisnewsisnotasgoodasitfirstappears.Thereasonthatincometaxexpenseisdownisthatincomebeforeincometaxesisdown.Youmaynotethattheincometaxrate（incometaxexpensedividedbyincomebeforeincometaxes）actuallyincreasesinYear2—from30%inYear1（$2,400/$8,000）to40%inYear2（$1,200/$3,000）.

PE14–12（LO3）Common-SizeBalanceSheet

Assets

Currentassets:

Cash$4,8006.4%

Accountsreceivable9,30012.4

Inventory6,0008.0

Totalcurrentassets$20,10026.8%

Property,plant,andequipment（net）33,00044.0

Goodwill5,7007.6

Totalassets$58,80078.4%

PE14–12（LO3）（Concluded）

Liabilitiesandstockholders’equity

Currentliabilities:

Accountspayable$7,2009.6%

Unearnedrevenue3,8005.1

Totalcurrentliabilities$11,00014.7%

Long-termdebt18,00024.0

Totalliabilities$29,00038.7%

Capitalstock15,00020.0

Retainedearnings14,80019.7

Totalliabilitiesandstockholders’equity$58,80078.4%

PE14–13（LO3）Common-SizeBalanceSheetStandardizedUsingTotalAssets

Assets

Currentassets:

Cash$4,8008.2%

Accountsreceivable9,30015.8

Inventory6,00010.2

Totalcurrentassets$20,10034.2%

Property,plant,andequipment（net）33,00056.1

Goodwill5,7009.7

Totalassets$58,800100.0%

Liabilitiesandstockholders’equity

Currentliabilities:

Accountspayable$7,20012.2%

Unearnedrevenue3,8006.5

Totalcurrentliabilities$11,00018.7%

Long-termdebt18,00030.6

Totalliabilities$29,00049.3%

Capitalstock15,00025.5

Retainedearnings14,80025.2

Totalliabilitiesandstockholders’equity$58,800100.0%

PE14–14（LO3）ComparativeCommon-SizeBalanceSheets

1.AssetsYear2Year1

Cash$4,0004.0%$3,2004.0%

Accountsreceivable8,0008.06,4008.