# CHAPTER 13 - CHAPTER 13 Financial Analysis The Big Picture...

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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. 6 C 11. 6 C 16. 6 C 20. 6 C 2. 2 C 7. 4, 5 C 12. 6 K 17. 6 C 21. 6 AP 3. 1 C 8. 4, 5 C 13. 6 C 18. 6 C 22. 7 C 4. 2 C 9. 4, 5 AP 14. 6 C 19. 6 C 23. 7 AN 5. 3 AP 10. 6 K 15. 6 C 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 Do It! Review Exercises 1. 2 AP 2. 3 AP 3. 5 AP 4. 3–7 K Exercises 1. 2 AP 3. 4 AP 6. 4, 5 AP 9. 6 AP 11. 6 AP 2. 1, 2, 6 C 4. 5 AP 7. 6 AP 10. 6 AP 12. 6 AP 5. 4, 5 AP 8. 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

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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
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 statement. 2. Items (a), (d), and (g) are extraordinary items; item (h) is debatable. 3. This would not be considered a favorable trend for McDonell Inc. The relevant earnings per share figures are the \$3.26 in 2009 and the \$2.99 in 2010. These figures indicate that, unless there was a sale of common stock, the earnings from the continuing operations of the company decreased during 2010. This should give the company’s management some

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## This note was uploaded on 01/18/2011 for the course FINANCE AC acct200 taught by Professor Hamdibilici during the Fall '10 term at CSU Long Beach.

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CHAPTER 13 - CHAPTER 13 Financial Analysis The Big Picture...

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