Financial statement analysis lessens the need for expert judgment

Module Exam III Chapters 16 and 17

True / False Questions

1. The primary purpose of the statement of cash flows is to report all major cash receipts (inflows) and cash payments (outflows) during a period.

2. The statement of cash flows reports and proves the net change in cash for a reporting period.

3. To be classified as a cash equivalent, the only criterion an item must meet is that it must be readily convertible to a known amount of cash.

4. The statement of cash flows explains the difference between the beginning and ending balances of cash and cash equivalents.

5. Internal users of the statement of cash flows often use cash flow information to plan day-to-day operating activities and make long-term investment and financing decisions.

6. A cash equivalent must be readily convertible to a known amount of cash, and must be sufficiently close to its maturity so its market value is unaffected by interest rate changes.

7. Business activities that generate or use cash are classified as operating, investing, or financing activities on the statement of cash flows.

8. Financing activities include (a) the purchase and sale of long-term assets, (b) the purchase and sale of short-term investments, and (c) lending and collecting on loans.

9. Cash paid for merchandise is an operating activity.

10. The purchase of stock in another company is classified as a financing activity.

11. Use the following income statement and information about selected current assets and current liabilities to calculate the net cash provided or used by operating activities using the direct method.

Peters Company

Income Statement

For Year Ended December 31, 2011

Sales.................................. $180,000

Cost of goods sold......... 104,000

Gross Profit from sales.... $ 76,000

Operating expenses:

Salaries and wages expense $25,000

Depreciation expense............. 5,000

Rent expense........................... 7,200

Interest expense....................... 1,900 39,100

Income from operations............ $36,900

Gain on sale of land ................. 2,000

Net Income................................. $38,900

Selected beginning and ending balances of current asset and current liability accounts, all of which relate to operating activities, are as follows:

Dec. 31, 2011 Dec 31, 2010

Accounts Receivable............................. $27,600 $24,000

Merchandise inventory........................... 18,200 20,000

Prepaid rent.......................................... 550 400

Accounts payable................................. 27,100 31,000

Salaries and wages payable.................. 10,400 9,000

Interest payable................................... 300 250

12. Based on the following income statement and balance sheet for Rashid Corporation, determine the cash flows from operating activities using the indirect method.

Rashid Corporation
Income Statement
For the Year Ended December 31, 2010

Sales……………………………………………………………… $ 504,000
Cost of goods sold $........................ 327,600
Depreciation……………………………….…. 42,000
Other Operating expenses…………….. 125,500 (495,100)
Other gains (losses):
Gain on sale of equipment 7,200
Income before taxes $ 16,100
Income tax expense (4,800)
Net income $ 11,300

Rashid Corporation
Balance Sheets
At December 31
2010 2009

Assets
Cash $ 64,650 $ 55,800
Accounts receivable 21,000 29,000
Inventory 58,000 52,100
Equipment 240,000 222,000
Accumulated Depreciation (106,000) (96,000)
Total assets $277,650 $262,900
Liabilities
Accounts payable $ 28,400 $ 23,700
Income taxes payable 1,050 1,200
Total liabilities $ 29,450 $ 24,900
Equity
Common stock $ 106,000 $ 106,000
Contributed capital in excess of par value 18,000 18,000
Retained earnings 124,200 114,000
Total equity $ 248,200 $ 238,000
Total liabilities and equity $ 277,650 $ 262,900

13. Financial statement analysis is the application of analytical tools to general-purpose financial statements and related data for making business decisions.

14. Financial statement analysis lessens the need for expert judgment.

15. Financial statement analysis may be used for personal investment decisions.

16. The evaluation of company performance and financial condition includes evaluation of (1) past and current performance, (2) current financial position, and (3) future performance and risk.

17. External users of accounting information make the strategic and operating decisions of a company.

18. One purpose of financial statement analysis for internal users is to provide information helpful in improving the company's efficiency and effectiveness in providing products and services.

19. Evaluation of company performance does not include analysis of (1) past and current performance, (2) current financial position, and (3) future performance and risk.

20. A company's board of directors analyzes financial statements to assess future company prospects for making operating decisions.

21. Financial analysis only refers to the communication of relevant financial information to decision makers.

22. Profitability is the ability to generate future revenues and meet long-term obligations.

23. Comparative statements for Kool Corporation are shown below:

KOOL CORPORATION
Comparative Income Statement
For the Years Ended December 31

2012 2011 2010
Sales $14,800 $13,229 $13,994
Cost of goods sold 8,225 8,661 8,375
Gross profit 6,575 4,568 5,619
Operating expenses 3,664 3,576 3,487
Operating income $ 2,911 $ 992 $ 2,132

Calculate trend percentages for all income statement amounts shown and comment on the results. Use 2010 as the base year.

24. Calculate the percent increases for each of the following selected balance sheet items.

2012 2011

Cash 569 448

Account receivable 2,234 2,337

Merchandise Inventory 1,062 1,071

Plant assets 2,432 2,138

Bonds payable 1,164 1,666

Equity 2,777 2,894

25. The comparative balance sheet for Golden Co. is shown below. Express the balance sheet in common-size percents

Golden Company

Comparative Balance Sheets (in $000)

December 31, 2010-2012

2012

2011

2010

Cash

$49.6

$34.2

$35.7

Accounts receivable

74.4

85.5

76.5

Merchandise Inventory

148.8

125.4

91.8

Plant assets (net)

347.2

324.9

306

Total assets

$620

$570

$510

Accounts payable

$117.8

$51.3

$76.5

Bonds payable

130.2

159.6

107.1

Common stock

266.6

279.3

265.2

Retained earnings

105.4

79.8

61.2

Total liabilities and equity

$620

$570

$510