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CHAPTER 17 FINANCIAL STATEMENT ANALYSIS CLASS DISCUSSION QUESTIONS 1. Horizontal analysis is the percentage ana- lysis of increases and decreases in corres- ponding statements. The percent change in the cash balances at the end of the preced- ing year from the end of the current year is an example. Vertical analysis is the per- centage analysis showing the relationship of the component parts to the total in a single statement. The percent of cash as a portion of total assets at the end of the cur- rent year is an example. 2. Comparative statements provide informa- tion as to changes between dates or peri- ods. Trends indicated by comparisons may be far more significant than the data for a single date or period. 3. Before this question can be answered, the increase in net income should be com- pared with changes in sales, expenses, and assets devoted to the business for the current year. The return on assets for both periods should also be compared. If these comparisons indicate favorable trends, the operating performance has improved; if not, the apparent favorable increase in net income may be offset by unfavorable trends in other areas. 4. You should first determine if the expense amount in the base year (denominator) is significant. A 100% or more increase of a very small expense item may be of little concern. However, if the expense amount in the base year is significant, then over a 100% increase may require further investig- ation. 5. Generally, the two ratios would be very close, because most service businesses sell services and hold very little inventory. 6. The amount of working capital and the change in working capital are just two in- dicators of the strength of the current posi- tion. A comparison of the current ratio and the quick ratio, along with the amount of working capital, gives a better analysis of the current position. Such a comparison shows: Current Preceding Year Year Working capital. ...... $42,500 $37,500 Current ratio. ........... 2.0 2.5 Quick ratio. .............. 0.8 1.2 It is apparent that, although working capital has increased, the current ratio has fallen from 2.5 to 2.0, and the quick ratio has fallen from 1.2 to 0.8. 7. The bulk of Wal-Mart sales are to final cus- tomers that pay with credit cards or cash. In either case, there is no accounts receiv- able. Procter and Gamble, in contrast, sells almost exclusively to other businesses, such as Wal-Mart. Such sales are “on ac- count,” and thus, create accounts receiv- able that must be collected. A recent finan- cial statement showed Wal-Mart’s accounts receivable turning 109 times, while Procter and Gamble’s turned only 13 times. 8. No, an accounts receivable turnover of 6 with sales on a n/30 basis is not satisfact- ory. It indicates that accounts receivable are collected, on the average, in one-sixth of a year, or approximately 60 days from the date of sale. Assuming that some cus- tomers pay within the 30-day term, it indic- ates that other accounts are running bey- ond 60 days. It is also possible that there is
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This note was uploaded on 01/15/2012 for the course ACC 305 taught by Professor Williams during the Spring '11 term at University of Phoenix.

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