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**Unformatted text preview: **CHAPTER 13 Financial Analysis: The Big Picture Study Objectives 1. Understand the concept of sustainable income. 2. Indicate how irregular items are presented. 3. Explain the concept of comprehensive income. 4. Describe and apply horizontal analysis. 5. Describe and apply vertical analysis. 6. Identify and compute ratios used in analyzing a company’s liquidity, solvency, and profitability. 7. Understand the concept of quality of earnings. Summary of Questions by Study Objectives and Bloom’s Taxonomy Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT Questions 1. 1 C 6. 4, 5 C 11. 6 K 16. 6 C 21. 7 C 2. 2 C 7. 4, 5 C 12. 6 C 17. 6 C 22. 7 AN 3. 1 C 8. 4, 5 AP 13. 6 C 18. 6 C 4. 2 C 9. 6 K 14. 6 C 19. 6 C 5. 6 C 10. 6 C 15. 6 C 20. 6 AP Brief Exercises 1. 2 AP 4. 4 AP 7. 4 AP 10. 6 AP 13. 6 AN 2. 2 AP 5. 5 AP 8. 5 AP 11. 6 AN 14. 6 AN 3. 2 C 6. 4 AP 9. 4 AP 12. 6 AN 15. 6 AN Exercises 1. 2 AP 3. 4 AP 6. 4, 5 AP 9. 6 AP 12. 6 AP 2. 1, 2, 6 C 4. 5 AP 7. 6 AP 10. 6 AP 5. 4, 5 AP 8. 6 AP 11. 6 AP Problems: Set A 1. 5, 6 AN 2. 6 AP 3. 6 AN 4. 6 AN 5. 6 E Problems: Set B 1. 5, 6 AN 2. 6 AP 3. 6 AN 4. 6 AN 5. 6 E 13-1 ASSIGNMENT CHARACTERISTICS TABLE Problem Number Description Difficulty Level Time Allotted (min.) 1A Prepare vertical analysis and comment on profitability. Simple 20–30 2A Compute ratios from balance sheet and income statement. Simple 20–30 3A Perform ratio analysis, and discuss change in financial position and operating results. Simple 20–30 4A Compute ratios; comment on overall liquidity and profitability. Moderate 30–40 5A Compute selected ratios, and compare liquidity, profitability, and solvency for two companies. Moderate 50–60 1B Prepare vertical analysis and comment on profitability. Simple 20–30 2B Compute ratios from balance sheet and income statement. Simple 20–30 3B Perform ratio analysis, and discuss change in financial position and operating results. Simple 20–30 4B Compute ratios; comment on overall liquidity and profitability. Moderate 30–40 5B Compute selected ratios, and compare liquidity, profitability, and solvency for two companies. Moderate 50–60 13-2 ANSWERS TO QUESTIONS 1. Sustainable income is defined as the most likely level of income to be obtained in the future. It is the amount of regular income that a company can expect to earn from its normal operations. In order to distinguish a company’s net income from its sustainable income, irregular items, such as a once-in-a lifetime gain or discontinued operations, are reported separately on the income state- ment. 2. Items (a), (d), and (g) are extraordinary items; item (h) is debatable. 3. This would not be considered a favorable trend for Top Drawer Inc. The relevant earnings per share figures are the $3.26 in 2006 and the $2.99 in 2007. These figures indicate that, unless there was a sale of common stock, the earnings from the continuing operations of the company decreased during 2007. This should give the company’s management some concern because decreased during 2007....

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