Chapter_17_Solutions_7e

# Chapter_17_Solutions_7e - Chapter 17 Financial Statement...

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Chapter 17 Financial Statement Analysis Quick Check Answers: 1. b 3. d 5. a 7. b 9. c 2. c 4. a 6. b 8. d 10. a Explanations: 1. b. 21% increase in Cash = (\$2,345 \$1,934) / \$1,934 = .21 2. c. Cash = 9.6% of total assets = \$2,345 / \$24,501 = .096 3. d. a, b, and c are all true. 4. a. Acid-test ratio for 2002 = 0.61 [(\$2,345 + \$2,097) / \$7,341]. This value is less than 1. 5. a. Inventory turnover = 6 times [\$7,105 / (\$1,294 + \$1,055) / 2] 6. b. Days’ sales in receivables = 37 days, computed as follows: One day’s sales = \$54 (\$19,564 / 365 days) Average receivables [(\$2,097 + \$1,882) / 2]. . \$ 1,990 One day’s sales………………………………… ÷ \$54 Days’ sales in average receivables………… 37 days Chapter 17 Financial Statement Analysis 41

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7. b. Times-interest-earned ratio = 27 times, computed as follows: Operating income / Interest expense (\$5,458 / \$199 = 27 times) 8. d. Strong return on common stockholders’ equity— for Liberty, Return on common equity = Net income / Average common equity 0.263 = \$3,050 / (\$11,800 + \$11,366) / 2 A 26% return on common stockholders’ equity is strong. 9. c. EPS = \$1.22 = Net income / Number of common shares outstanding = \$3,050 / 2,500 shares 10. a. Price/earnings ratio = 36 = Market price of stock / EPS = \$44 / \$1.22 Accounting 7/e Solutions Manual 42
Short Exercises (5-10 min.) S 17-1 Increase (Decrease) ( Amounts in millions ) 2006 2005 2006 2005 2004 Amount Percent Amount Percent Revenues \$9,993 \$9,489 \$8,995 \$504 5.3% \$494 5.5% Cost of sales 5,905 5,785 5,404 Gross profit \$4,088 \$3,704 \$3,591 \$384 10.4% \$113 3.1% (5-10 min.) S 17-2 1. Trend percentages: 2006 2005 2004 2003 Revenues………… 114% 108% 102% 100% Net income………. 141 131 128 100 2. Net income increased far faster than revenues. Chapter 17 Financial Statement Analysis 43

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(10-15 min.) S 17-3 Vertical analysis of assets: 2006 Amount Percent Cash \$ 48,000 26.4% Inventory 38,000 20.9 Property, plant, and equipment, net 96,000 52 .7 Total assets \$182,000 100 .0 % (10 min.) S 17-4 Sanchez Alioto Amount Percent Amount Percent Net sales \$9,489 100 .0 % \$19,536 100.0 % Cost of goods sold 5,785 61.0 14,101 72.2 Other expense 3,114 32 .8 4,497 23.0 Net income \$ 590 6 .2 % \$ 938 4.8 % Alioto earns more net income. Sanchez’s net income is a higher percentage of net sales. These data show how common-size financial statements enable us to compare companies of different sizes. Accounting 7/e Solutions Manual 44
(5-10 min.) S 17-5 1. ( Dollar amounts in billions ) 2006 2005 Total current assets \$6.7 \$5.6 Total current liabilities \$4.4 \$3.6 = 1.52 = 1.55 2. Lowe’s current ratio deteriorated a little during 2006. Chapter 17 Financial Statement Analysis 45

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S 17-6 (Dollar amounts in billions) a. Inventory turnover = Cost of goods sold = \$21.2 Average inventory (\$4.6 + \$4.0) / 2 = \$21.2 = 4.9 times \$ 4.3 b. Days’ sales in receivables: One day’s = \$30.8 = \$.084 sales 365 Average net Days’ sales in = receivables
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Chapter_17_Solutions_7e - Chapter 17 Financial Statement...

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