## Practice Problems

Complete these practice problems. Check your answers after you finish.

### Self-test

#### True-false

1. True. Financial statement analysis consists of applying analytical tools and techniques to financial statements and other relevant data to obtain useful information.

2. False. Horizontal analysis provides useful information about the changes in a company's performance over several periods by analyzing comparative financial statements of the same company for two or more successive periods.

3. False. Common-size statements show only percentage figures, such as percentages of total assets and percentages of net sales.

4. True. Liquidity ratios such as the current ratio and acid-test ratio indicate a company's short-term debt-paying ability.

5. True. The accrual net income shown on the income statement is not cash basis income and does not indicate cash flows.

6. True. Analysts must use comparable data when making comparisons of items for different periods or different companies.

#### Multiple-choice

1. b.  Current assets: text { USD } 136,000 + text { USD } 64,000+ text { USD } 184,000+ text { USD } 244,000 + text { USD } 12,000= text { USD } 640,000

Current liabilities: $\text { USD } 256,000 + \text { USD } 64,000 = \text { USD } 320,000$
Current ratio: $\frac{ \text { USD } 640,000}{ \text { USD } 320,000} = 2:1$

2. c.
Quick assets:

$\text { USD } 136,000 + \text { USD }64,000 + \text { USD }184,000 = \text { USD }384,000$

Current liabilities:

$256,000+ \text { USD } 64,000= \text { USD } 320,000$

Acid-test ratio: $\frac{\text { USD }384,000}{\text { USD }320,000}=1.2:1$

3. a. Net sales: $\text { USD } 4,620,000$

Average accounts receivable: $\frac{ \text { USD } 720,000+\text { USD }9 60,000}{2}= \text { USD } 840,000$

Accounts receivable turnover: $\frac{ \text { USD } 4,620,000}{ \text { USD } 840,000}=5.5$

4. c. Cost of goods sold: $\text { USD } 3,360,000$

Average inventory: $\frac{ \text { USD } 900,000+ \text { USD } 1,020,000}{2}= \text { USD } 960,000$

Inventory turnover:  $\frac{ \text { USD } 3,360,000}{ \text { USD } 960,000}=3.5$

5. b.  Income before interest and taxes, $\text { USD } 720,000$

Interest on bonds, 192,000

Times interest earned ratio: $\text { USD } 720,000/ \text { USD } 192,000=3.75 \text {times}$