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Unformatted text preview: ACCT1511 TUTORIAL PREPARATION QUESTIONS WEEK 10 Chapter 14 Discussion Questions 1 to 3 1. The purpose of financial statement analysis is to use the financial statements to evaluate an enterprise's financial performance and financial position. 2. The preparation of a common size statement is a method of explaining financial results. A common size balance sheet is prepared by calculating all figures on the original statement as percentages of total assets. Similarly a common size profit and loss statement is prepared by expressing all figures in the original statement as a percentage of total revenue. The use of a common size statement is most appropriate when comparing companies of different sizes and in spotting trends over time for a single company. 3. Before calculating ratios the following information about a company should be gathered: The nature of the enterprise, its circumstances and plans. Some of this information may be provided in the descriptive sections of the company's annual report as well as the footnotes to the financial statements. The nature of the decision or evaluation to which the analysis will contribute. Comparative information to provide a frame of reference for the analysis. This could include industry data, reports by other analysts, results for similar companies or the same company in other years. Other possible sources are: a. prospectus relating to new issue of shares or debentures. b. a market research to ascertain acceptability of the company's products. c. a scientific examination of the company's products. d. the financial press for stock exchange valuations of the company's shares and comments on the annual report. e. government or trade statistics, which may indicate share of the market. Problem 14.5 1 Transaction analysis Current Quick Debt/Equity EPS Decrease Decrease Increase No effect Inventory Accounts payable 2 Loan payable Decrease Decrease Decrease No effect Cash 3 Retained profits Decrease Decrease Increase No effect Dividends payable 4 Cash Increase Increase Increase No effect Loan payable 5* Cash Increase Increase Decrease Increase Revenue Investments 6 Cash Increase Increase Decrease Decrease Share capital 7 Cash No effect No effect No effect No effect Accounts receivable 8 Cash Increase Increase Decrease No effect Loan payable * Answer depends on whether they were sold at, above or below book value. Answer given assumes above book value. Problem 14.16 Effect of various transactions on financial statements ratios Transaction Rate of return on shareholders' Current ratio Debt Equity equity ratio a No effect (1) Increase b Increase Increase Decrease c No effect No effect No effect d No effect (2) Decrease e No effect Increase No effect f Increase Decrease Increase g Decrease Increase Decrease H No effect Decrease Increase (1) The current ratio would remain the same if it were one to one prior to the transaction, decrease if it were greater than one, and increase if it were less than one. (2) The current ratio would remain the same if it were one to one prior to the transaction, increase if it were greater than one, and decrease if it were less than one.* ...
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- Three '10