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Financial Statement Analysis

Exam II, Spring 2015




Part I. Please indicate if the answer is True or False for the following questions (10 Points):


1. Liquidity ratios measure the extent of a firm’s financing with debt relative to equity. F


2.  Using comparative statistical ratios to help determine a company's relative position within its industry is misleading due to the many accounting choices and techniques firms choose to report information. F


3. An increasing average collection period (Number of days increases) implies the firm has tightened its credit policies. F


4.  Temporary shortfalls of cash can be satisfied by borrowing or other means, such as selling long-lived assets, but ultimately a company must generate cash from operations.  T


5. Gains and losses from asset sales are considered an operating activity. F


Part II.  Please circle the correct answer for the Multiple Choice Questions 7-9 (8 Points).


6.  Which of the following is not true with regard to the preparation of a cash flow statement?

a. Cash flows are categorized by operating, investing, and financing activities.

b. The changes in all income statement accounts are calculated and then listed as cash inflows or outflows.

c. The direct method or the indirect method may be used to prepare the statement of cash flows.

d. The changes in all of the balance sheet accounts are calculated and then listed as inflows or outflows, except for cash.


7.  Which of the following items are included in the adjustments to net income to obtain cash flow from operating activities?

            a. Payment of dividends and depreciation expense.

            b. The change in accounts receivable and the acquisition of land.

            c. The gain from an asset sale and the payment of dividends.

            d. The change in inventory and depreciation expense.


8. Which of the following could be indicative of cash flow problems or a result of an expansion?


a. Increasing accounts receivable and decreasing inventories.

b. Increasing accounts receivable and increasing inventories.

c. Decreasing accounts receivable and increasing inventories.

d. Decreasing accounts receivable and decreasing inventories.


9.  The following items would be classified as investing activities on the statement of cash flows:

a. Proceeds from borrowing, payment of dividends, receipt of dividends.

b. Sale of goods, receipt of dividends, repurchase of firm's own stock.

c. Sale of property, purchase of equity securities, loans to others.

d. Payment to lenders, proceeds from issuing common stock, revenue.


Part III. Use the indirect method to answer questions 10-11.  The following information is available for Cantor Company (10 points):


Cantor Co.

Balance Sheet

December 31, 2011 and 2010


                                                                                                                                2011                       2010

                Cash                                                                                                        $220                       $110

                A/R                                                                                                             45                           60

                Inventory                                                                                                 110                           90

                Total current assets                                                                             $375                       $260

                Property, plant & equipment                                                            140                          140

                Less: Accumulated depreciation                                                          40                           25

                Property, plant & equipment, net                                                    $100                       $115

                Total assets                                                                                            $475                       $375


                                A/P                                                                                                         $  40                       $  30

                Accrued expenses                                                                                   10                           15

                Total current liabilities                                                                        $  50                       $  45

                Stockholders' equity:

                Common stock                                                                                      200                          200

                Retained earnings                                                                                  225                         130

                Total liabilities and stockholders' equity                                          $475                       $375



Cantor Co.

Income Statement

For the Year Ended December 31, 2011


Sales                                                                                       $600

                                                COGS                                                                                      240

                                                Gross profit                                                                           $360

                                                Operating and other expenses                                           265

                                                Net income                                                                           $  95


10.  Compute cash flow from operating activities.


Net income                                                 $  95


Depreciation                                                  15

Changes in assets/liabilities:

A/R                                                                   15

Inventory                                                        (20)

A/P                                                                     10

Accrued expenses                                                   (  5) 

Cash flow from operating activities               $ 110  



11. Compute cash flow from financing activities.


Cash received from customers (600 + 15)                           $615

            Cash paid to suppliers for inventory (240 + 20 - 10)        (250)

            Cash paid for operating expenses (265 - 15 + 5)                (255)

            Cash flow from operating activities                                       $110



12.  What type of ratios measure the liquidity of specific assets and the efficiency of managing those assets? (2 pts)

            a. Activity ratios.

            b. Liquidity ratios.

            c. Leverage ratios.

            d. Profitability ratios.


13. Using the following list of items, classify each item in the table given below as inflow or outflow and whether it is operating, investing and financing (13 points):


a. Proceeds from borrowing

b. Payments for purchase of inventory

c. Revenues from sales of long-lived assets

d. Payment of dividends

e. Revenue from sales of goods

f. Repayments of debt principal

g. Acquisitions of long-lived assets

h. Payments to lenders (interest)

i. Proceeds from issuing the firm's own equity securities

j. Revenue from services

k. Payments for operating expenses

l. Repurchase of firms own shares

m. Payments for taxes


Operating Activities



e.  Revenue from sales of goods

b.  Payments for purchase of inventory

g.  Returns of equity securities (dividends)

j.  Payments to lenders (interest)

l.  Revenue from services

m. Payments for operating expenses


o.  Payments for taxes

Investing Activities



c.  Revenues from sales of long-lived assets

h.  Loans (principal) to others

p.  Revenue from sales of debt and equity securities of other entities

i.  Acquisitions of long-lived assets





Financing Activities



a.  Proceeds from borrowing

d.  Payment of dividends

k. Proceeds from issuing the firm's own equity securities

f.  Repayments of debt principal


n.  Repurchase of firms own shares




Use the following selected financial data for Crazy A Corporation to answer questions 15-22.

(24 Points)


Use the following selected financial information for Cascabel Corporation to answer questions

Cascabel Corporation

Balance Sheet

December 31, 2012


Assets                                                              Liabilities and stockholders' equity

 Current assets                                                            Current liabilities

            Cash                                     2             Accounts payable                                36

            Short-term investments    10              Accrued liabilities                               25

            Accounts receivable           52             Total current liabilities                       61       

                     Inventory                           57                         Deferred income taxes            20

            Other current assets            8                         Long-term debt                       82

Total current assets                      129                        Total liabilities                                                 163                                                                       

Long-term assets                                                        Stockholders' equity

            Net PPE                                65                       Common stock and PIC             110

            Goodwill                              130                      Retained earnings                      51    

                                                                                    Total stockholders' equity        161    

Total assets                                     324                      Total liabilities and equity        324


Cascabel Corporation

Income Statement

For the Year Ended December 31, 2012


Net sales                                                         $345

Cost of goods sold                                             248

Gross profit                                                     $  97

Operating expenses                                           74

Operating profit                                              $  23

Interest expense                                                   8

Earnings before taxes                                     $  15

Income tax expense                                              4

Net profit                                                        $  11



Cascabel Corporation

Statement of Cash Flow Information

For the Year Ended December 31, 2012


Cash from operating activities                       $20

Investing activities:

            Capital expenditures                           $25

            Acquisitions                                         $  9

Financing activities:                                       

            Proceeds from long-term borrowing $12

            Payments on long-term borrowing    $31

            Payments of cash dividends                $  6

Cash paid for interest                                     $  9

Cash paid for income taxes                            $  5



14.  Cascabel’s current ratio is:

            a.  .47

            b.  2.11

            c.  1.18

            d.  1.79


15.  Cascabel's cash flow liquidity ratio is:

            a.  .52

            b.  .36

            c.  1.91

            d.  .33


16.  Cascabel's cash conversion cycle is:

            a.  82 days

            b.  24 days

            c.  192 days

            d.  86 days


17.  Cascabel's fixed asset turnover ratio is:

            a.  5.31

            b.  .19

            c.  5.91

            d.  .17


18.  Cascabel's cash interest coverage ratio is:

            a.  2.50

            b.  3.50

            c.  3.78

            d.  4.50


19.  Cascabel's cash flow adequacy ratio is:

            a.  3.10

            b.  .32

            c.  .28

            d.  .21


20.  Cascabel's operating profit margin is:

            a.  5.80%

            b.  4.35%

            c.  3.19%

            d.  6.67%


21.  Cascabel's cash flow margin is:

            a.  1.81%

            b.   .58%

            c.  5.80%

            d.  3.48%


22. What is the cash conversion or net trade cycle (3 pts)?

a. The amount of time needed to complete the normal operating cycle of a firm.

b. The amount of time it takes to manufacture or buy inventory.

c. The amount of time it takes to sell inventory.

d. The amount of time it takes to be profitable.



23.  Below is a Statement of cash Flows for Kat Kompany. Using the information explain the company what is the company’s cash flow situation from 2010 through 2012, with specific reference to the three sections of the Cash Flow Statement (15 Points).



Kat Kompany

Statement of Cash Flows

For the Years Ended December 31, 2012, 2011, and 2010


                                                                  2012             2011                2010
Net income (loss)                                                        ($145)              $190                $206
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Depreciation                                                      265                  275                 171

            Deferred income taxes                         (70)                   (40)                   20

            Loss on sale of business assets               45                      0                      0

Changes in assets and liabilities:
            Accounts receivable                                           395                  (10)               (125)
            Inventory                                                             70                  (45)               (145)
            Other current assets                                           (85)                  (25)        &nbs

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Acc 311 Exam II | Complete Solution
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From a liquidity perspective, the company’s liquidity has increased in 2012. The Current ratio is a good indicator of liquidity of the company. An increase in current ratio from 5.19 to 7.47 implies that the current assets as compared to current liabilities have increased in 2012. The Quick ratio is a similar indicator except that it considers quick assets like cash and bank balance which are available to the company. In the case of Maggie’s Crafts, the Quick ratio has...
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