Reference no: EM133095722

Question 1 - The comparative financial statements prepared at December 31, 2017, for Pinnacle Plus showed the following summarized data:

	2017	2016
Income Statement
Sales Revenue*	$112,000	$101,000
Cost of Goods Sold	52,800	48,800
Gross Profit	59,200	52,200
Operating Expenses	36,600	33,600
Interest Expense	4,200	4,200
Income before Income Tax Expense	18,400	14,400
Income Tax Expense (30%)	5,520	4,320
Net Income	$12,880	$10,080
Balance Sheet
Cash	$54,687	$17,500
Accounts Receivable, Net	39,000	33,000
Inventory	26,000	40,000
Property and equipment, Net	99,000	109,000
Total Assets	$218,687	$199,500
Accounts Payable	$50,887	$38,280
Income Tax Payable	1,020	520
Note Payable, Long-Term	42,000	42,000
Total Liabilities	93,907	80,800
Contributed Capital (9,100 shares)	91,000	91,000
Retained Earnings†	33,780	27,700
Total Liabilities and Shareholders' Equity	$218,687	$199,500

*One-half of all sales are on credit.

†During 2017, cash dividends amounting to $6,800 were declared and paid.

Required -

1-a. Compute the gross profit percentage in 2017 and 2016.

1-b. Is the trend going in the right direction?

2-a. Compute the net profit margin for 2017 and 2016.

2-b. Is the trend going in the right direction?

3-a. Compute the earnings per share for 2017 and 2016.

3-b. Does the trend look good or bad?

4-a. Shareholders' equity totalled $100,000 at the end of 2015. Compute the return on equity (ROE) ratios for 2017 and 2016.

4-b. Is the trend going in the right direction?

5-a. Net property and equipment totalled $114,000 at the end of 2015. Compute the fixed asset turnover ratios for 2017 and 2016.

5-b. Is the trend going in the right direction?

6-a. Compute the debt-to-assets ratios for 2017 and 2016.

6-b. Is debt providing financing for a larger or smaller proportion of the company's asset growth?

7-a. Compute the times interest earned ratios for 2017 and 2016.

7-b. Does the outcome of ratio in 2017 appears to be good or bad for the company?

8-a. After Pinnacle Plus released its 2017 financial statements, the company's shares were trading at $35.30. After the release of its 2016 financial statements, the company's share price was $29.50 per share. Compute the P/E ratios for both years.

8-b. Does it appear that investors have become more (or less) optimistic about Pinnacle's future success?

Question 2 - Assume that for the 2017 fiscal year, AstroCo reported sales revenue of $3.1 billion and cost of goods sold of $1.7 billion.

Fiscal Year	2017	2016
Balance Sheet (in millions)
Cash	$88	$58
Accounts Receivable, less allowance of $15 and $15	475	419
Inventories	258	238
Prepaid Expenses	20	15
Other Current Assets	416	363
Accounts Payable	110	69
Wages Payable	50	78
Income Tax Payable	11	72
Other Current Liabilities	228	214

Assuming that all sales are on credit.

Required -

1. Compute the current ratio for 2017.

2. Compute the inventory turnover ratio and accounts receivable turnover ratio for 2017.

3. Which of the following are categories of ratios used in financial statement analyses?

Currency

Liquidity

Profitability

Solvency

Trend

4. Which of the following is measured by profitability ratios?

The company's short-term survival

The company's long-run survival

The company's ability to generate income in the current period

The company's ability to generate income in future periods

The company's long-term survival and its ability to generate income in future periods

5. Which of the following is measured by liquidity ratios?

The company's short-term survival

The company's long-run survival

The company's ability to generate income in the current period

The company's ability to generate income in future periods

The company's long-run survival and its ability to generate income in future periods

6. Which of the following is measured by solvency ratios?

The company's short-term survival

The company's long-run survival

The company's ability to generate income in the current period

The company's ability to generate income in future periods

The company's long-term survival and its ability to generate income in future periods

7. Indicate which of the following financial statement items is needed to compute each ratio.

1. Current ratio

2. Inventory turnover

8. Which of the following statements about solvency ratios are true?

Debt-to-assets = Total liabilities ÷ Total assets

Debt-to-assets = Total long-term debt ÷ Total assets

Times interest earned = (Net income + Interest expense + Income tax expense) ÷ Total liabilities

Times interest earned = (Net income + Interest expense + Income tax expense) ÷ Interest expense

Times interest earned = (Net income - Interest expense - Income tax expense) ÷ Interest expense

9. Which of the following statements about financial statement analysis are true?

Effective financial statement analysis can only be completed by users within the company.

 The user does not necessarily have the information needed to make decisions once the horizontal, vertical, and ratio analyses have been calculated.

The user has all of the information needed to make decisions once the horizontal, vertical, and ratio analyses have been calculated.

The user must be able to interpret, understand, and then evaluate the resulting data in a way that leads to a clear picture of the company's financial results.

10. How would a user determine the details about changes in the nature of a company's financing (for example, from equity to debt financing)?

Review the results of the horizontal analysis of the comparative balance sheets

Review the results of the horizontal analysis of the comparative income statements

Review the results of the horizontal analyses of both the comparative balance sheets and comparative income statements

Refer to the notes to the financial statements

11. How would a user determine the reasons for significant changes that are revealed in horizontal analysis of the income statement?

Refer to the notes to the financial statements

Refer to the Management's Discussion and Analysis (MD&A)

Review the results of the horizontal analysis of the comparative income statements

Review the results of the horizontal analyses of both the comparative balance sheets and comparative income statements

12. Which of the following statements about vertical analyses are true?

The findings from the vertical analyses of the balance sheet serve to underscore findings from the horizontal analyses of this financial statement.

Vertical analyses of a company's balance sheets highlight key elements of the company's assets, liabilities, and equity.

Vertical analyses of a company's balance sheets highlight the most important determinants of the company's profitability.

13. Which of the following statements about vertical analyses are true?

The findings from the vertical analyses of the income statement serve to underscore findings from the vertical analyses of the balance sheet.

Vertical analyses of a company's income statements highlight significant changes in the company's financing strategy.

Vertical analyses of a company's income statements highlight the most important determinants of the company's profitability.

14. Which of the following statements about liquidity ratios is true?

Liquidity ratios focus on the company's ability to survive in the long term, by converting assets to cash that can be used to pay current liabilities as they come due.

The days to collect indicates how many times, on average, the process of selling to and collecting from customers is repeated during the period.

The measure "days to sell" converts the inventory turnover ratio into the average number of days needed to sell inventory.

The current ratio measures the company's ability to pay its long-term liabilities.

15. Which of the following statements about solvency ratios is true?

The debt-to-assets ratio indicates the proportion of total assets that creditors finance.

The lower the debt-to-assets ratio, the riskier is the company's financing strategy.

A times interest earned ratio below 1.0 indicates that net income (before the costs of financing and taxes) is sufficient to cover the company's interest expense.

The times interest earned ratio indicates how many times the company's interest expense was covered by its operating results.

16. Which of the following could affect the financial ratios reported by two different companies?

Company strategies

Business operations

Accounting decisions

All of these choices are correct

17. The ___ states that business is assumed to be capable of continuing its operations long enough to meet its obligations.

conceptual framework

cost principle

full disclosure principle

going concern assumption

unqualified opinion principle