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?

- 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:

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:

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:

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.

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.