Question: Financial statement analysis
Question 1: Based on the following financial information, which best describes the company's liquidity and quality of its current assets over the past three years?
|
|
20Y1
|
20Y2
|
20Y3
|
|
Current ratio
|
1.4
|
1.4
|
1.4
|
|
Quick ratio
|
0.4
|
0.5
|
0.5
|
|
Working capital (000)
|
$ 66
|
$ 97
|
$ 135
|
|
Accounts receivable days on hand
|
8
|
11
|
18
|
|
Inventory days on hand
|
123
|
126
|
108
|
- Liquidity is trending downward as shown by the declining current and quick ratios. The ratios would be even lower were it not for the 10-day slowdown of the collection period.
- While the company's quick ratio and working capital indicate its liquidity is improving, a substantial part of the improvement is the direct result of the 10-day slowdown in the collection period. Until we know what caused the slowdown, the company's liquidity is unclear and its asset quality may actually be deteriorating.
- Liquidity has doubled as shown by the doubling of working capital. In fact, it may have more than doubled because inventory is reported at a lower value due to a 15-day shortening of the holding period.
- Liquidity is declining as shown by the steady increase in the company's reliance on inventory to cover current liabilities. This, coupled with the decreasing amount of inventory due to a 15-day shortening of the holding period, indicates even less liquidity.
Question 2: What is the trend in the EBITDA-to-total-debt-service and Funded debt-to-EBITDA ratios for the years 20Y2 and 20Y3?
Company Revolutionary Designs, Inc.
- EBITDA-to-Total-debt-service increased from 0.3 to 0.4 and Funded-debt-to-EBITDA decreased from 3.6 to 4.1.
- EBITDA-to-Total-debt-service increased slightly from 0.2 to 0.3, but Funded-debt-to-EBITDA weakened from 4.4 to 3.7.
- EBITDA-to-Total-debt-service increased from 2.8 to 3.1 and Funded-debt-to-EBITDA decreased from 4.4 to 3.7.
- EBITDA-to-Total-debt-service strengthened, increasing from 2.8 to 3.1, but Funded-debt-to-EBITDA weakened, decreasing from 3.6 to 3.1.
The current portion of a company's balance sheets for the past three years are as follows:
|
|
20Y1
|
20Y2
|
20Y3
|
|
Cash
|
$ 100
|
$ 123
|
$ 66
|
|
Accounts receivable
|
240
|
303
|
376
|
|
Inventory
|
417
|
461
|
547
|
|
Other current assets
|
117
|
70
|
107
|
|
Total current assets
|
$ 874
|
$ 957
|
$ 1,096
|
|
|
|
|
|
|
Notes payable
|
$ 0
|
$ 5
|
$ 101
|
|
Current portion LTD
|
67
|
67
|
67
|
|
Accounts payable
|
148
|
204
|
244
|
|
Accrued expenses
|
57
|
64
|
69
|
|
Other current liabilities
|
47
|
28
|
46
|
|
Total current liabilities
|
$ 319
|
$ 368
|
$ 527
|
Question 3:Which of the following best describes the company's liquidity over the past three years?
- Liquidity indicators showed improvement as evidenced by lower current and quick ratios in 20Y3.
- Liquidity indicators deteriorated in each of the three years as evidenced by the consecutive increases in both the current and quick ratios.
- Liquidity indicators were relatively stable from 20Y1 to 20Y2 but then deteriorated in 20Y3 when both the current and quick ratios declined.
- Liquidity indicators were mixed with the quick ratio improving and the current ratio declining over the three year period.
Three years of balance sheets for a very profitable furniture manufacturer at its seasonal low point of accounts receivable and inventory are as follows:
|
|
20Y1
|
20Y2
|
20Y3
|
|
Cash
|
$ 221
|
$ 230
|
$ 310
|
|
Accounts receivable
|
794
|
846
|
1,194
|
|
Inventory
|
871
|
1,176
|
1,099
|
|
Other current assets
|
23
|
41
|
36
|
|
Total current assets
|
1,909
|
2,293
|
2,639
|
|
Net fixed assets
|
612
|
624
|
582
|
|
Patents & trademarks
|
34
|
20
|
40
|
|
Total non-current assets
|
646
|
644
|
622
|
|
Total assets
|
$ 2,555
|
$ 2,937
|
$ 3,261
|
|
|
|
|
|
|
Notes payable
|
945
|
975
|
1010
|
|
Current portion LTD
|
19
|
19
|
19
|
|
Accounts payable
|
551
|
834
|
1053
|
|
Accrued expenses
|
155
|
207
|
288
|
|
Other current liabilities
|
12
|
25
|
11
|
|
Total current liabilities
|
1682
|
2060
|
2381
|
|
Long-term debt
|
178
|
172
|
165
|
|
Total liabilities
|
1,860
|
2,232
|
2,546
|
|
Owners equity
|
695
|
705
|
715
|
|
Total liabilities and equity
|
$ 2,555
|
$ 2,937
|
$ 3,261
|
|
|
|
|
|
|
Total liabilities to Tangible net worth
|
2.8
|
3.3
|
3.8
|
Question 4:Which of the following most accurately describes the company's capital structure?
- Leverage is deteriorating, and long-term debt would be more appropriate than short-term notes payable since the company is at its seasonal low point.
- Leverage is improving, and long-term debt would be more appropriate than short-term notes payable since the company is at its seasonal low point.
- Leverage is improving, and the breakdown of short- and long-term debt is about right.
- Leverage is deteriorating, and the breakdown of short- and long-term debt is about right.
Question 5:What was the company's pretax return on equity in 20Y3?
Company Muebles Mexicanos
- 61.80%
- 48.70%
- 108.90%
- 41.00%
Question 6:Which of the following had a favorable impact on Muebles Mexicanos' gross profit margin in the most recent year?
- Higher selling prices
- Cheaper raw materials
- Better efficiencies
- Higher regional unemployment
Question 7: A company's income statements for the past three years are as follows:
|
|
20Y1
|
20Y2
|
20Y3
|
|
Sales
|
$ 6,515
|
$ 7,506
|
$ 8,010
|
|
Cost of goods sold
|
5,473
|
6,377
|
6,328
|
|
Gross profit
|
1,042
|
1,129
|
1,682
|
|
SG&A expense
|
706
|
858
|
1,315
|
|
Depreciation expense
|
18
|
24
|
26
|
|
Total operating expense
|
724
|
882
|
1,341
|
|
Operating profit
|
318
|
247
|
341
|
|
Loss on sale of fixed assets
|
0
|
0
|
27
|
|
Interest expense
|
54
|
78
|
84
|
|
Other expenses
|
0
|
4
|
22
|
|
Income before taxes
|
264
|
165
|
208
|
|
Taxes
|
130
|
79
|
100
|
|
Net income
|
$134
|
$86
|
$108
|
Which of the following best describes the company's profit margin performance?
- The company's gross profit margin, operating profit margin and net profit margin all trended downward over the three year period.
- All profit margins declined in 20Y2. Gross profit margin improved substantially in 20Y3, but the net profit margin only partially recovered.
- Gross profit margin and operating profit margin both increased in 20Y2 and 20Y3.
- Gross profit margin, operating profit margin and net profit margin all declined in 20Y2 and then fully recovered in 20Y3.
Question 8: The company's leverage is steadily decreasing. Which of the following is the best explanation?
- The company is paying down its long term debt by $400,000 per year while a portion of net income is being retained.
- The company's gross profit margin is steadily increasing and so is the net profit margin.
- The company's total liabilities are steadily decreasing, and net income is steadily increasing.
- Most of the liabilities that are increasing are current, and they don't affect the leverage calculation.
Question 9. In 20Y2, most of Light Touch's profit margins declined; in 20Y3, they leveled off. Company management expects those same margins to return to 20Y1 levels in 20Y4. How realistic is that expectation?
Company: Light Touch
- The company's high income tax rate makes it quite unlikely that the expectation will be realized.
- Light Touch's steadily improving gross profit margin makes it quite likely that the expectation will be realized.
- The company's operating profit margin has leveled off, indicating the company should be able to fulfill its expectations.
- Light Touch's operating expenses are growing faster than sales. The company will need to control those costs better in order to meet its expectations.
Question 10: Review the following year end financial statement excerpts to answer the question below.
|
|
20Y1
|
20Y2
|
20Y3
|
|
Sales
|
$ 2,500
|
$ 3,000
|
$ 3,570
|
|
Cost of goods sold
|
1,773
|
2,093
|
2,467
|
|
Gross profit
|
$ 727
|
$ 907
|
$ 1,103
|
|
|
|
|
|
|
Cash
|
$ 100
|
$ 123
|
$ 66
|
|
Accounts receivable
|
240
|
303
|
376
|
|
Inventory
|
417
|
461
|
547
|
|
Other current assets
|
117
|
70
|
107
|
|
Total current assets
|
$ 874
|
$ 957
|
$ 1,096
|
Which of the following best describes the company's inventory over the past three years?
- Inventory days on hand was stable in 20Y2 and slower in 20Y3.
- Inventory days on hand improved in 20Y2 and lengthened slightly in 20Y3.
- Inventory days on hand was stable in all three years.
- Inventory days on had improved in all three years.