Finantial Statement Analysis

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Practice Problems Financial Statement Analysis

Topics

1. Introduction

2. Review of Financial Statements

3. Quality of Earnings

4. Ratios

5. Credit & Equity Analysis

6. Receivables and Investments

7. Capital Assets

8. Investments

9. Liabilities and Leases

10. Future Taxes

11. Pensions

12. Equity

1. Introduction

1-14 (Application of qualitative characteristics)
The BMAC Company purchased land many years ago for $100,000 as a potential site for a new building. No building was ever constructed. A comparable lot near the site was recently sold for $350,000. Required:

a. At what value should BMAC carry the land on its balance sheet? Support your answer with consideration for the conservatism, relevance, and reliability of the information that would result.

b. If BMAC wanted to borrow money from a bank, what information about the land would the bank want to know? Explain your answer. c. What information about the land would potential investors in BMAC want to know? Explain your answer.

1-16 (Application of qualitative characteristics)
Matrix Technologies designs and installs computer software for businesses. Recently, it learned that one of its major customers, representing 20% of annual sales, is in financial difficulty and is unlikely to be ordering for some time. Matrix is about to issue its quarterly report to shareholders. Required:

a. Do you think the information about the customer should be disclosed in the quarterly report? Support your answer by referring to the qualitative characteristics described in this chapter.

1-44 (Information for decision-making)
How does the preparation of a classified balance sheet assist the user of the financial statement in predicting a company’s future cash flows? What qualitative characteristic(s) is/are illustrated?

2. Review of Financial Statements

3-56 (Income statement items)
Use the financial statements for Le Château Inc. in Appendix A to answer the following questions. a. Explain whether Le Château has presented a single-step or multi-step income statement. b. Le Château Inc. reports “basic” and “diluted” earnings per share (EPS). Briefly explain what these two terms mean, and why the figures for diluted EPS are lower than those for basic EPS. c. Le Château’s consolidated statements of earnings show that both its sales and its net earnings increased from fiscal 2006 to 2007. For each of these years, calculate the company’s rate of return on its sales, or profit margin ratio, and comment briefly on the results. 3-57 (Income statement items)

Intrawest Corporation (now called Intrawest ULC) is a North American resort and adventure-travel company and real estate developer. Its properties include Panorama in British Columbia, Mont Tremblant in Quebec, and several resorts in the United States. It also has a 50% interest in Blue Mountain in Ontario and a 77% interest in Whistler Blackcomb in B.C., a major venue for the 2010 Winter Olympics. Use the consolidated statements of operations for Intrawest and the excerpt from Note 3 accompanying the statements, which are presented in Exhibit 3-38, to answer the following questions. a. Has Intrawest Corporation used a single-step or a multi-step income statement? What aspects of the statement influenced your answer? b. Intrawest shows three main categories of revenues and expenses, and the net “contribution” generated by each of these components of its operations. Which of these business lines generated the largest contribution or profit margin (1) during the year ended June 30, 2005, and (2) during the year ended June 30, 2006? c. Intrawest Corporation also reported significant profits from discontinued operations in both years, with a particularly large amount in fiscal 2006. Using the information that is provided in the excerpt from Note 3, summarize...
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