CHAPTER 14 Financial Statement Analysis ASSIGNMENT CLASSIFICATION TABLE Learning Objectives Discuss the need for comparative analysis Identify the tools of financial statement analysis Questions 1 2 3 5 2 3 5 6 1 2 Brief Exercises Do It Exercises Problems Explain and apply horizontal analysis 3 4 25 2 3 5 6 7 1 4 Describe and apply vertical analysis 3 4 25 2 4 8 1 3 4 2 3 4 1 Identify and compute ratios used in analyzing a firm s liquidity profitability and solvency 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2 9 10 11 12 13 5 6 7 8 9 10 11 1 2 3 4 5 6 7 20 21 22 23 14 15 3 4 12 13 8 9 Understand the concept of earning power and how irregular items are presented Understand the concept of quality of earnings 24 4 2 4 4 1 2 3 4 5 6 7 14 1 Copyright 2012 John Wiley Sons Inc Weygandt Managerial Accounting 6 e Solutions Manual For Instructor Use Only ASSIGNMENT CHARACTERISTICS TABLE Problem Number Description Difficulty Level Time Allotted min 1 2 3 4 5 6 7 8 9 Prepare vertical analysis and comment on profitability Simple Compute ratios from balance sheet and income statement Simple Perform ratio analysis and evaluate financial position and operating results Simple 20 30 20 30 20 30 Compute ratios and comment on overall liquidity and profitability Moderate 30 40 Compute selected ratios and compare liquidity profitability and solvency for two companies Moderate 50 60 Compute numerous ratios Compute missing information given a set of ratios Prepare income statement with discontinued operations and extraordinary loss Simple Complex Moderate 30 40 30 40 30 40 Prepare income statement with nontypical items Moderate 30 40 14 2 Copyright 2012 John Wiley Sons Inc Weygandt Managerial Accounting 6 e Solutions Manual For Instructor Use Only B L O O M S T A X O N O M Y T A B L E Correlation Chart between Bloom s Taxonomy Learning Objectives and End of Chapter Exercises and Problems Learning Objective 1 Discuss the need for comparative analysis Knowledge Comprehension Q14 5 BE14 1 Application Analysis Synthesis Evaluation 2 Identify the tools of financial statement analysis 3 Explain and apply horizontal analysis Q14 6 BE14 2 BE14 2 Q14 25 4 Describe and apply vertical analysis BE14 2 Q14 25 Q14 3 DI14 4 5 Identify and compute ratios used in analyzing a firm s liquidity profitability and solvency Q14 6 Q14 8 BE14 2 6 Understand the concept of earning power and how irregular items are presented 7 Understand the concept of quality of earnings Broadening Your Perspective Q14 1 Q14 2 Q14 3 Q14 2 Q14 3 Q14 3 DI14 4 Q14 5 Q14 7 Q14 9 Q14 10 Q14 11 Q14 12 Q14 13 Q14 20 Q14 21 Q14 22 Q14 23 Q14 24 DI14 4 Q14 5 BE14 2 Q14 4 BE14 2 BE14 3 BE14 5 BE14 6 Q14 4 BE14 2 BE14 4 BE14 8 Q14 19 BE14 2 BE14 9 BE14 10 DI14 2 E14 6 E14 7 Q14 14 Q14 15 Q14 16 Q14 17 Q14 18 DI14 4 DI14 4 BE14 14 BE14 15 DI14 3 E14 12 BE14 7 DI14 1 E14 1 E14 3 E14 4 E14 2 E14 3 E14 4 E14 8 E14 9 E14 10 P14 2 P14 3 P14 5 P14 6 E14 13 P14 8 P14 9 P14 1 BE14 11 BE14 12 BE14 13 E14 5 E14 11 P14 1 P14 2 P14 3 P14 4 P14 7 BYP14 4 BYP14 5 BYP14 8 BYP14 1 BYP14 3 BYP14 2 BYP14 6 BYP14 7 C o p y r i g h t 2 0 1 2 i l J o h n W e y S o n s I n c W e y g a n d t M a n a g e r i a l A c c o u n t i n g 6 e S o u l t i o n s M a n u a l F o r I n s t r u c t o r U s e O n y l 1 4 3 ANSWERS TO QUESTIONS 1 2 4 5 a Kurt is not correct There are three characteristics liquidity profitability and solvency b The three parties are not primarily interested in the same characteristics of a company Short term creditors are primarily interested in the liquidity of the enterprise In contrast long term creditors and stockholders are primarily interested in the profitability and solvency of the company a Comparison of financial information can be made on an intracompany basis an intercompany basis and an industry average basis or norms 1 An intracompany basis compares an item or financial relationship within a company in the current year with the same item or relationship in one or more prior years 2 The industry averages basis compares an item or financial relationship of a company with industry averages or norms published by financial rating services 3 An intercompany basis compares an item or financial relationship of one company with the same item or relationship in one or more competing companies b The intracompany basis of comparison is useful in detecting changes in financial relationships and significant trends within a company The industry averages basis provides information as to a company s relative performance within the industry The intercompany basis of comparison provides insight into a company s competitive position 3 Horizontal analysis also called trend analysis measures the dollar and percentage increase or decrease of an item over a period of time In this approach the amount of the item on one statement is compared with the amount of that same item on one or more earlier statements Vertical analysis also called common size analysis expresses each item within a financial statement in terms of a percent of a base amount a 350 000 X 1 224 428 400 2014 net income b 350 000 05 7 000 000 2013 revenue A ratio expresses the mathematical relationship between one quantity and another The relationship is expressed in terms of either a percentage 200 a rate 2 times or a simple proportion 2 1 Ratios can provide clues to underlying conditions that may not be apparent from individual financial statement components The ratio is more meaningful when compared to the same ratio in earlier periods or to competitors ratios or to industry ratios 6 a Liquidity ratios Current ratio acid test ratio receivables turnover and inventory turnover b Solvency ratios Debt to total assets and times interest earned 7 Gordon is correct A single ratio by itself may not be very meaningful and is best interpreted by comparison with 1 past ratios of the same company 2 ratios of other companies or 3 industry norms or predetermined standards In addition other ratios of the enterprise are necessary to determine overall financial well being 8 a Liquidity ratios measure the short term ability of the enterprise to pay its maturing obligations and …