Chapter 17, Problem 7BTN

1)

To determine

Introduction:

Analysis of Financial Statements

• Analysis of Financial Statements is a study of several key metrics of a company based on the data presented in its’ financial statements with an objective to evaluate the financial health of a company.

• It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.

The key metrics mentioned above include the following:

• Current Ratio − It is a measure of the relation between the current assets and current liabilities and seeks to measure the ability of the business to fulfill its short term obligations.

• Current assets are assets that are convertible to cash within a period of one year or less. Current liabilities are liabilities that need to be discharged within a period of one year or less.

  $\text{Current Ratio = Current Assets / Current Liabilities}$

Trend Analysis

• Trend Analysis is a technique of performance measurement and evaluation where the performance of the current year is compared to that of a base year and the direction of the results are analyzed.

• The movement of the results can be interpreted as a positive or favorable trend or as a negative or unfavorable trend.

• Favorable trends mean increase in revenues and decrease in costs and are hence subjective in nature. Unfavorable trends mean decrease in revenues and increase in costs and are also subjective in nature.

• Trend analysis helps in evaluation of repetitive behavior as well as evaluation of effectiveness of strategies implemented by allowing analysis of performance over time.

To Determine:

If it is easier for company to meet current liabilities on time and take advantage of cash discounts if any

2)

To determine

Introduction:

Analysis of Financial Statements

• Analysis of Financial Statements is a study of several key metrics of a company based on the data presented in its’ financial statements with an objective to evaluate the financial health of a company.

• It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.

The key metrics mentioned above include the following:

• Accounts receivable turnover − A measure of the relation between the turnover and accounts receivable measured in number of times.

• It seeks to measure the relation of the credit sales in proportion to the total turnover and is an indicator of how much of the receivables are blocked due to credit sales.

  $\text{Accounts Receivable Turnover Ratio = Turnover / Accounts Receivable}$

To Determine:

If company is collecting its’ accounts receivable rapidly.

3)

To determine

Introduction:

Analysis of Financial Statements

• Analysis of Financial Statements is a study of several key metrics of a company based on the data presented in its’ financial statements with an objective to evaluate the financial health of a company.

• It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.

The key metrics mentioned above include the following:

• Accounts receivable turnover − A measure of the relation between the turnover and accounts receivable measured in number of times.

• It seeks to measure the relation of the credit sales in proportion to the total turnover and is an indicator of how much of the receivables are blocked due to credit sales.

  $\text{Accounts Receivable Turnover Ratio = Turnover / Accounts Receivable}$

Trend Analysis

• Trend Analysis is a technique of performance measurement and evaluation where the performance of the current year is compared to that of a base year and the direction of the results are analyzed.

• The movement of the results can be interpreted as a positive or favorable trend or as a negative or unfavorable trend.

• Favorable trends mean increase in revenues and decrease in costs and are hence subjective in nature. Unfavorable trends mean decrease in revenues and increase in costs and are also subjective in nature.

• Trend analysis helps in evaluation of repetitive behavior as well as evaluation of effectiveness of strategies implemented by allowing analysis of performance over time.

To Determine:

If company’s investment in accounts receivable is decreasing.

4)

To determine

Introduction:

Analysis of Financial Statements

• Analysis of Financial Statements is a study of several key metrics of a company based on the data presented in its’ financial statements with an objective to evaluate the financial health of a company.

• It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.

The key metrics mentioned above include the following:

• Sales to Plant assets − A measure of the total turnover of the company in relation to the total investment in plant assets of a company.

• It is an extension of the asset turnover ratio and seeks to measure proportion of plant assets and turnover in particular.

  $\text{Sales to Plant Assets Ratio = Turnover / Plant Assets x 100}$

To Determine:

If investment in plant assets is decreasing

5)

To determine

Introduction:

Analysis of Financial Statements

• Analysis of Financial Statements is a study of several key metrics of a company based on the data presented in its’ financial statements with an objective to evaluate the financial health of a company.

• It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.

The key metrics mentioned above include the following:

• Return on Shareholders’ Equity − A measure of the total earnings of the equity share holders in proportion to the share capital introduced by them.

• It seeks to measure the proportion of the total earnings in relation to the investment made and is an effective way to evaluate how profitable the investment in the company is.

  $\text{Return on Shareholders' Equity = Net Income / Equity Share Capital x 100}$

To Determine:

If owners’ investment is getting more profitable

6)

To determine

Introduction:

Analysis of Financial Statements

• Analysis of Financial Statements is a study of several key metrics of a company based on the data presented in its’ financial statements with an objective to evaluate the financial health of a company.

• It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.

Trend Analysis

• Trend Analysis is a technique of performance measurement and evaluation where the performance of the current year is compared to that of a base year and the direction of the results are analyzed.

• The movement of the results can be interpreted as a positive or favorable trend or as a negative or unfavorable trend.

• Favorable trends mean increase in revenues and decrease in costs and are hence subjective in nature. Unfavorable trends mean decrease in revenues and increase in costs and are also subjective in nature.

• Trend analysis helps in evaluation of repetitive behavior as well as evaluation of effectiveness of strategies implemented by allowing analysis of performance over time.

To Determine:

If dollar amount of selling expenses has decreased over the three year period.