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Exam 17: Analysis of Financial Statements

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Question 31

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A financial statement analysis report helps to reduce uncertainty in business decisions through a rigorous and sound evaluation.

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B) False

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Question 32

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Trend analysis is a form of horizontal analysis that can reveal patterns in data across successive periods.

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Question 33

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Refer to the following selected financial information from Shakley's Incorporated. Compute the company's return on total assets for Year 2. $\begin{array}{|l|r|r|}\hline & \text { Year 2 } & \text { Year 1 } \\\hline \text { Net sales } & \$ 478,500 & \$ 426,250 \\\hline \text { Cost of goods sold } & 276,300 & 250,120 \\\hline \text { Interest expense } & 9,700 & 10,700 \\\hline \text { Net income before tax } & 67,250 & 52,680 \\\hline \text { Net income after tax } & 46,050 & 39,900 \\\hline \text { Total assets } & 317,100 & 288,000 \\\hline \text { Total liabilities } & 181,400 & 167,300 \\\hline \text { Total equity } & 135,700 & 120,700 \\\hline\end{array}$

A high level of expected risk suggests a low price-earnings (PE)ratio.

An advantage of common-size statements is that they reflect the dollar magnitude (size)of the different companies under analysis.

The comparison of a company's financial condition and performance across time is known as:

The building blocks of financial statement analysis include (1)liquidity, (2)salability, (3)solvency, and (4)profitability.

Measures taken from a selected competitor or a group of competitors are often excellent standards of comparison for analysis.

A company with a low inventory turnover requires a smaller investment in inventory than one producing the same sales with a higher turnover.

The building blocks of financial statement analysis do not include:

Market prospects are the ability to generate positive market expectations.

The percent change of a comparative financial statement item is computed by subtracting the analysis period amount from the base period amount, dividing the result by the base period amount and multiplying that result by 100.

Working capital is computed as current liabilities minus current assets.

The return on common stockholder's equity measures a company's success in earning net income for its owners.

A ratio expresses a mathematical relation between two quantities and can be expressed as a percent, rate, or proportion.

Describe ratio analysis including its purpose, application, and interpretation.

A company with a high inventory turnover requires a smaller investment in inventory than one producing the same sales with a lower turnover.

Powers Company reported Net sales of $1,200,000 and Accounts Receivable, net of $78,500. The Day's sales uncollected (rounded to whole days) is:

Use the following selected information from Wheeler, LLC to determine the 2017 and 2016 trend percentages for net sales using 2016 as the base. $\begin{array}{|l|r|r|}\hline & \mathbf{2 0 1 7} &2016 \\\hline \text { Net sales } & \$ 276,200 & \$ 231,400 \\\hline \text { Cost of goods sold } & 151,900 & 129,590 \\\hline \text { Operating expenses } & 55,240 & 53,240 \\\hline \text { Net earnings } & 27,820 & 19,820\\\hline\end{array}$

Which of the following items is typically not included as a separate item after normal revenues and expenses?