财务会计英文版课后习题答案Ch14.docx

1、财务会计英文版课后习题答案Ch14CHAPTER 14DISCUSSION QUESTIONS1. One purpose of financial statement analysis is to evaluate the performance of a company with an eye toward identifying problem areas. Another purpose of financial statement analysis is to use the past performance of a company to predict how it will d

2、o in the future.2. Disagree. An analysis of a companys financial ratios usually does not provide detailed information about what the causes of a companys problems are, but it does identify areas in which more detailed data should be gathered.3. The usefulness of financial ratios is greatly enhanced

3、when they are compared with past values for the same company and with values for other firms in the same industry.4. Current ratio is a measure of a companys liquidity, which is the companys ability to pay its debts in the short run.5. It is impossible to tell whether Company As return on sales of 6

4、% is high or low. The return on sales value must be analyzed in light of the appropriate industry. For example, a normal return on sales for supermarkets is around 1% or 2%, whereas the return on sales for a high-tech company such as Microsoft can be in excess of 20%.6. The price-earnings ratio diff

5、ers from most other financial ratios in that it is not the ratio of two financial statement numbers. Instead, the PE ratio is a comparison of a financial statement number to a market value number.7. A common-size financial statement is a financial statement with all numbers for a given year divided

6、by sales for the year. Thus, all amounts for a given year are shown as a percentage of sales for that year. Common-size financial statements make it possible to make comparisons even when the size of companies is different. In addition, common-size financial statements allow comparison of a companys

7、 numbers to equivalent numbers in prior years when the sales level may have been much different.8. If an analysis of common-size financial statements suggests that a company has problems, the way to find out what is causing these problems is to gather information from outside the financial statement

8、sask management, read press releases, talk to financial analysts who follow the firm, read industry newsletters, and dig into the notes to the financial statements.9. The most informative section of the common-size balance sheet is the asset section. This section can be used to determine how efficie

9、ntly a company is using its assets.10. The DuPont framework provides a systematic approach to identifying general factors causing ROE to deviate from normal. The DuPont system also provides a framework for computation of financial ratios to yield more in-depth analysis of a companys areas of strengt

10、h and weakness.11. With the DuPont framework, ROE is decomposed into three componentsprofitability, efficiency, and leverage. The ratios summarizing a companys performance in each area are as follows: Profitability: Return on sales = Net income/Sales Efficiency: Asset turnover = Sales/Assets Leverag

11、e: Assets-to-equity ratio = Assets/Equity12. If a DuPont analysis suggests problems in any of the three ROE components, further ratios, specific to each area, can be computed to shed more light on the exact nature of the problem. For example, a common-size income statement can shed further light on

12、the cause of a profitability problem.13. The inventory turnover ratio indicates how long inventory is being held before it is sold. Holding other things constant, the inventory turnover ratio can provide a preliminary indication of how well the organization is managing its inventory.14. Fixed asset

13、turnover is computed as sales divided by average property, plant, and equipment (fixed assets) and is interpreted as the number of dollars in sales generated by each dollar of fixed assets.15. The debt-to-equity ratio is calculated by dividing total liabilities by total equity. It reflects the amoun

14、t of a companys borrowing relative to its stockholder investment.16. From the standpoint of a lender, a high times interest earned ratio is more attractive than a low times interest earned ratio. The magnitude of the times interest earned ratio indicates how much cushion a company has in making its

15、interest payments; the higher the ratio, the less likely the company will be unable to make its interest payments.17. The requirement that companies provide a cash flow statement is relatively recent. Because of this, cash flow ratios often do not get the emphasis they deserve in financial analysis

16、models.18. Accrual accounting involves making assumptions in order to adjust the raw cash flow data into a better measure of economic performance called net income. For companies entering phases where it is critical that reported earnings look good, such as a firm that is preparing to make an applic

17、ation for a large loan, those accounting assumptions and adjustments can be stretched. Accordingly, cash flow from operations, which is not impacted by accrual assumptions, provides an excellent reality check for reported earnings.19. When the value of a companys cash flow adequacy ratio is less tha

18、n one, that company is not generating enough cash from operations to pay for all new plant and equipment purchases. Accordingly, the company has no cash left over to repay loans or to distribute to investors.20. Comparability among financial statements is reduced when companies classify items differ

19、ently in the financial statements and when companies use different accounting practices. In addition, when a company is composed of a variety of divisions, each operating in a different line of business, it is difficult to find appropriate industry comparison values with which to benchmark the compa

20、nys ratios.21. One danger in focusing a financial analysis solely on the data found in the historical financial statements is that one might then tend to focus on the companys past performance and ignore current year information.PRACTICE EXERCISESPE 141 (LO1) What Is a Financial Ratio?The correct an

21、swer is B.PE 142 (LO1) Usefulness of Financial RatiosThe correct answer is C.PE 143 (LO2) Financial Ratios Defineda. Debt ratio = b. Current ratio = c. Return on sales = d. Asset turnover = e. Return on equity = f. Price-earnings ratio = PE 144 (LO2) Debt RatioDebt ratio: = = 45.5%PE 145 (LO2) Curre

22、nt RatioCurrent ratio: = = 1.32PE 146 (LO2) Return on SalesReturn on sales: = = 10.5%PE 147 (LO2) Asset TurnoverAsset turnover: = = 0.94PE 148 (LO2) Return on EquityReturn on equity: = = 17.9%PE 149 (LO2) Price-Earnings RatioPE ratio: = = 11.4PE 1410 (LO3) Common-Size Income StatementSales $75,000 1

23、00.0%Cost of goods sold 40,000 53.3Gross profit $35,000 46.7%Operating expenses: Sales and marketing $3,000 4.0% General and administrative 8,000 10.7Total operating expenses 11,000 14.7Operating income $24,000 32.0%Interest expense 4,000 5.3Income before income taxes $20,000 26.7%Income tax expense

24、 3,500 4.7Net income $16,500 22.0%PE 1411 (LO3) Comparative Common-Size Income Statements1. Year 2 Year 1 Sales $100,000 100.0% $80,000 100.0% Cost of goods sold 70,000 70.0 50,000 62.5 Gross profit $ 30,000 30.0% $30,000 37.5% Operating expenses 25,000 25.0 20,000 25.0 Operating income $ 5,000 5.0%

25、 $10,000 12.5% Interest expense 2,000 2.0 2,000 2.5 Income before income taxes $ 3,000 3.0% $ 8,000 10.0% Income tax expense 1,200 1.2 2,400 3.0 Net income $ 1,800 1.8% $ 5,600 7.0%2. The biggest reason for the decline in the return on sales from 7.0% in Year 1 to 1.8% in Year 2 is the decline in th

26、e gross profit as a percentage of sales, from 37.5% in Year 1 to 30.0% in Year 2. Interest expense as a percentage of sales actually declined in Year 2; it appears that the company was able to increase its sales (from $80,000 to $100,000) without borrowing any additional money. Income tax expense as

27、 a percentage of sales also declined in Year 2, but this news is not as good as it first appears. The reason that income tax expense is down is that income before income taxes is down. You may note that the income tax rate (income tax expense divided by income before income taxes) actually increases

28、 in Year 2from 30% in Year 1 ($2,400/$8,000) to 40% in Year 2 ($1,200/$3,000).PE 1412 (LO3) Common-Size Balance Sheet AssetsCurrent assets: Cash $ 4,800 6.4% Accounts receivable 9,300 12.4 Inventory 6,000 8.0Total current assets $20,100 26.8%Property, plant, and equipment (net) 33,000 44.0Goodwill 5

29、,700 7.6 Total assets $58,800 78.4%PE 1412 (LO3) (Concluded) Liabilities and stockholders equityCurrent liabilities: Accounts payable $ 7,200 9.6% Unearned revenue 3,800 5.1Total current liabilities $11,000 14.7%Long-term debt 18,000 24.0 Total liabilities $29,000 38.7%Capital stock 15,000 20.0Retai

30、ned earnings 14,800 19.7 Total liabilities and stockholders equity $58,800 78.4%PE 1413 (LO3) Common-Size Balance Sheet Standardized Using Total Assets AssetsCurrent assets: Cash $ 4,800 8.2% Accounts receivable 9,300 15.8 Inventory 6,000 10.2Total current assets $20,100 34.2%Property, plant, and eq

31、uipment (net) 33,000 56.1Goodwill 5,700 9.7 Total assets $58,800 100.0% Liabilities and stockholders equityCurrent liabilities: Accounts payable $ 7,200 12.2% Unearned revenue 3,800 6.5Total current liabilities $11,000 18.7%Long-term debt 18,000 30.6 Total liabilities $29,000 49.3%Capital stock 15,000 25.5Retained earnings 14,800 25.2 Total liabilities and stockholders equity $58,800 100.0%PE 1414 (LO3) Comparative Common-Size Balance Sheets1. Assets Year 2 Year 1 Cash $ 4,000 4.0% $ 3,200 4.0% Accounts receivable 8,000 8.0 6,400 8.