© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

ExErcisEs: sEt BIssues in Financial Performance Evaluation: Objectives, Standards, Sources of Information, and Executive CompensationE1B. concEpt ▶  Identify each of the following as (a) an underlying concept, (b) an objective of financial statement analysis, (c) a standard for financial statement analysis, (d) a source of information for financial statement analysis, or (e) an executive compen-sation issue: 1. Average ratios of other companies in the same industry 2. Assessment of the future potential of an investment 3. Interim financial statements 4. Relevance 5. Past ratios of the company 6. SEC Form 10-K 7. Rules of thumb 8. Predictive value 9. A company’s annual report 10. Linking performance to shareholder value

Trend AnalysisE2B. Accounting connEction ▶ Using 2010 as the base year, prepare a trend analy-sis of the data that follow, and tell whether the situation shown by the trends is favorable or unfavorable. (Round to one decimal place.)

2014 2013 2012 2011 2010Net sales $25,520 $23,980 $24,200 $22,880 $22,000Cost of goods sold 17,220 15,400 15,540 14,700 14,000General and administrative expenses 5,280 5,184 5,088 4,896 4,800Operating income 3,020 3,396 3,572 3,284 3,200

Horizontal AnalysisE3B. Accounting connEction ▶ Compute the amount and percentage changes for Mason Company’s comparative balance sheets, and comment on the changes from 2013 to 2014. (Round to one decimal place.)

Mason CompanyComparative Balance SheetsDecember 31, 2014 and 2013

2014 2013Assets

Current assets $ 18,600 $ 12,800Property, plant, and equipment (net) 109,464 97,200Total assets $128,064 $110,000

Liabilities and Stockholders’ Equity

Current liabilities $ 11,200 $ 3,200Long-term liabilities 35,000 40,000Stockholders’ equity 81,864 66,800Total liabilities and stockholders’ equity $128,064 $110,000

Vertical AnalysisE4B. Accounting connEction ▶ Express Mason Company’s partial comparative income statements as common-size statements, and comment on the changes from 2013 to 2014.

LO 1

LO 2

LO 2

LO 2

Chapter Assignments 1

(Continued)

CHE-NEEDLES_MA-12-0109-014-WEB.indd 1 03/01/13 7:17 PM

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

2 Chapter 14: Financial Statement Analysis

Mason CompanyPartial Comparative Income Statements

For the Years Ended December 31, 2014 and 2013

2014 2013Net sales $212,000 $184,000Cost of goods sold 127,200 119,600Gross margin $ 84,800 $ 64,400Selling expenses $ 53,000 $ 36,800General expenses 25,440 18,400Total operating expenses $ 78,440 $ 55,200Operating income $ 6,360 $ 9,200

Operating Asset Management AnalysisE5B. Accounting connEction ▶ Partial comparative balance sheet and income state-ment information for Meier Company follows.

2014 2013Cash $ 27,200 $ 20,800Marketable securities 14,400 34,400Accounts receivable (net) 89,600 71,200Inventory 108,800 99,200Total current assets $240,000 $225,600Accounts payable $ 80,000 $ 56,400Net sales $645,120 $441,440Cost of goods sold 435,200 406,720Gross margin $209,920 $ 34,720

In 2012, the year-end balances for Accounts Receivable and Inventory were $64,800 and $102,400, respectively. Accounts Payable was $61,200 in 2012 and is the only cur-rent liability. Compute the current ratio, quick ratio, receivables turnover, days’ sales uncollected, inventory turnover, days’ inventory on hand, payables turnover, days’ paya-ble, and financing period for each year. (Round to one decimal place.) Comment on the change in the company’s liquidity position, including its operating cycle and required days of financing from 2013 to 2014.

Turnover AnalysisE6B. Accounting connEction ▶ Style Suits Rental has been in business for four years. Because the company has recently had a cash flow problem, management wonders whether there is a problem with receivables or inventories. Selected figures from the company’s financial statements (in thousands) follow.

2014 2013 2012 2011Net sales $288.0 $224.0 $192.0 $160.0Cost of goods sold 180.0 144.0 120.0 96.0Accounts receivable (net) 48.0 40.0 32.0 24.0Merchandise inventory 56.0 44.0 32.0 20.0Accounts payable 26.0 20.0 16.0 10.0

Compute the receivables turnover, inventory turnover, and payables turnover for each of the four years, and comment on the results relative to the cash flow problem that the firm has been experiencing. Merchandise inventory was $22,000, accounts receivable were $22,000, and accounts payable were $8,000 in 2010. (Round to one decimal place.)

Profitability and Total Asset Management AnalysisE7B. Accounting connEction ▶ Indigo Company had total assets of $320,000 in 2012, $340,000 in 2013, and $380,000 in 2014. In 2013, Indigo had net income of

LO 3

LO 3

LO 3

CHE-NEEDLES_MA-12-0109-014-WEB.indd 2 03/01/13 7:17 PM

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter Assignments 3

$38,556 on revenues of $612,000. In 2014, it had net income of $49,476 on revenues of $798,000. Compute the profit margin, asset turnover, and return on assets for 2013 and 2014. Comment on the apparent cause of the increase or decrease in profitability. (Round to one decimal place.)

Financial Risk and Market Strength RatiosE8B. Accounting connEction ▶ An investor is considering investing in the long-term bonds and common stock of Companies P and R. Both firms operate in the same industry. Both also pay a dividend per share of $8 and have a yield of 10 percent on their long-term bonds. Other data for the two firms follow.

Company P Company RTotal assets $2,400,000 $1,080,000Total liabilitiesPrior year stockholders’ equity

1,080,0001,170, 000

594,000380,000

Income before income taxes 288,000 129,600Interest expense 97,200 53,460Net income 195,000 91,600Earnings per share 3.20 5.00Market price of common stock 40.00 47.50

Compute the debt to equity ratio, return on equity, interest coverage ratio, and price/earnings (P/E) ratio, as well as the dividend yield, and comment on the results. (Round to one decimal place.)

Liquidity AnalysisE9B. Using the data from the financial statements of Bellagio, Inc., that follow, compute the company’s cash flow yield, cash flows to sales, cash flows to assets, and free cash flow. (Round to one decimal place.)

Net sales $1,600,000Net income 176,000Net cash flows from operating activities 228,000Total assets, beginning of year 1,445,000Total assets, end of year 1,560,000Cash dividends 60,000Net capital expenditures 149,000

Effect of Alternative Accounting MethodsE10B. BusinEss ApplicAtion ▶  At the end of its first year of operations, a company calculated its ending merchandise inventory according to three different accounting methods, as follows: FIFO, $95,000; average-cost, $90,000; LIFO, $86,000. If the company used the average-cost method, its net income for the year would be $34,000. 1. Determine net income if the company used the FIFO method. 2. Determine net income if the company used the LIFO method. 3. Which method is more conservative? 4. concEpt ▶  Will the consistency convention be violated if the company chooses to

use the LIFO method? Why or why not? 5. concEpt ▶  Does the full-disclosure convention require disclosure of the inventory

method used in the financial statements?

Corporate Income StatementE11B. BusinEss ApplicAtion ▶  Assume that Downey Corporation’s chief financial officer gave you the following information: net sales, $1,900,000; cost of goods sold, $1,050,000; extraordinary gain (net of income taxes of $3,500), $12,500; loss from dis-continued operations (net of income tax benefit of $30,000), $50,000; loss on disposal

LO 3

LO 3

LO 4

LO 4

(Continued)

CHE-NEEDLES_MA-12-0109-014-WEB.indd 3 03/01/13 7:17 PM

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

4 Chapter 14: Financial Statement Analysis

of discontinued operations (net of income tax benefit of $13,000), $35,000; selling expenses, $50,000; administrative expenses, $40,000; income taxes expense on continu-ing operations, $300,000. From this information, prepare the company’s income state-ment for the year ended June 30, 2014. (Ignore earnings per share information.)

Corporate Income StatementE12B. BusinEss ApplicAtion ▶  Components of Winston Corporation’s income state-ment for the year ended December 31, 2014, follow. Recast the income statement in proper multistep form, including allocating income taxes to appropriate items (assume a 30 percent income tax rate) and showing earnings per share figures (100,000 shares outstanding). (Round earnings per share figures to the nearest cent.)

Sales $ 555,000Cost of goods sold (275,000)Operating expenses (112,500)Restructuring (55,000)Total income taxes expense for period (89,550)Income from discontinued operations 80,000Gain on disposal of discontinued operations 70,000Extraordinary gain 36,000Net income $ 208,950Earnings per share $ 2.09

LO 4

CHE-NEEDLES_MA-12-0109-014-WEB.indd 4 03/01/13 7:17 PM