BKM_Sol_Ch_14 - Chapter 14 - Financial Statement Analysis...

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Chapter 14 - Financial Statement Analysis Chapter 14 Financial Statement Analysis 1. ROA = (EBIT/Sales) × (Sales/Total Assets) = ROS × ATO The only way that Crusty Pie can have an ROS higher than the industry average and an ROA equal to the industry average is for its ATO to be lower than the industry average. 2. ABC’s asset turnover must be above the industry average. 3. Since ROE is a function of net profit and equity, it is possible to maintain a stable ROE, while net profits decline so long as equity also declines proportionally. 4. (c) Old plant and equipment is likely to have a low net book value, making the ratio of “net sales to average net fixed assets” higher. 5. This transaction would increase the current ratio. The transaction reduces both current assets and current liabilities by the same amount, but the reduction has a larger proportionate impact on current liabilities than on current assets. Therefore, the current ratio would increase. This transaction would increase the asset turnover ratio. Sales should remain unaffected, but assets are reduced. 6. SmileWhite has the higher quality of earnings for several reasons: SmileWhite amortizes its goodwill over a shorter period than does QuickBrush. SmileWhite therefore presents more conservative earnings because it has greater goodwill amortization expense. SmileWhite depreciates its property, plant and equipment using an accelerated method. This results in earlier recognition of depreciation expense, so that income is more conservatively stated. SmileWhite’s bad debt allowance, as a percent of receivables, is greater. SmileWhite therefore recognizes higher bad-debt expense than does QuickBrush. If the actual collection experience for the two firms is comparable, then SmileWhite has the more conservative recognition policy. 14-1
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Chapter 14 - Financial Statement Analysis 7. equity profit Net ROE = = 5.5% × 2.0 × 2.2 = 24.2% 8. Par value 20,000 × $20 = $ 400,000 Retained earnings 5,000,000 Addition to Retained earnings 70,000 Book value of equity $5,470,000 Book value per share = $5,470,000/20,000 = $273.50 9. a. Palomba Pizza Stores Statement of Cash Flows For Year Ended December 31, 2007 Cash flows from operating activities Cash collections from customers $250,000 Cash payments to suppliers (85,000) Cash payments for salaries (45,000) Cash payments for interest (10,000) Net cash provided by operating activities $110,000 Cash flows from investing activities
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This note was uploaded on 08/25/2009 for the course FNCE 4330 taught by Professor Jianyang during the Fall '09 term at University of Colorado Denver.

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BKM_Sol_Ch_14 - Chapter 14 - Financial Statement Analysis...

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