Special Topics in Accounting Studies
Part 1. Discuss the following questions. Use examples to reinforce your responses.
1. What is the difference between horizontal and vertical analysis of financial statements? (Income Statement and Balance Sheet)
2. What is the advantage of using comparative statements for financial analysis rather than statements for a single date or period?
3. The current year’s amount of net income (after income tax) is 25% larger than that of the preceding year. Does this automatically indicate an improved operating performance?
4. Why is it advantageous to have a high inventory turnover?
5. What do the following data taken from a comparative balance sheet indicate about the company’s ability to borrow additional funds on a long-term basis in the current year as compared to the preceding year?
Part 2. Prepare an Income Statement with the template provided. using the following data. There are several unknowns to solve for and note that all the data given will not appear on income statement. Use proper form!
Company Bubba’s Baseballs
Sales Revenue (gross) 234,500
Net Sales 232,000
Sales Discounts 1,500
Sales Returns & Allowances ??
Cost of Goods Sold ??
Beginning Merchandise Inventory 80,500
Purchases (Inventory) 120,700
Ending Merchandise Inventory 84,900
Selling Expenses 27,200
Administrative Expenses ??
Interest Expense 2,300
Profit Margin Ratio 30.776%
Clues! Use the “Financial Statement Examples” handout as your guideline to this problem. I have included a copy. The answers lie in the TAYLOR ELECTRONICS COMPANY Income Statement and Cost of Goods Sold calculation. Note that the above data does not have individual expense account balances to use, just totals for Selling and Administrative Expenses.
Solving for Sales Returns and Allowances – look at your Income Statement example.
Solving for Cost of Goods Sold – look at the Cost of Goods calculation and use some of the information above.
Solving for Administrative Expenses – Hmmm…perhaps the toughest. I would suggest filling in the Income Statement template with all the information that we have so far. There is a piece of information in the data above that will provide the final clue…
Revenue and expense data for the current calendar year for Tannenhill Company and for the electronics industry are as follows. The Tannenhill Company data are expressed in dollars. The electronics industry averages are expressed in percentages.
• Prepare a common-sized income statement comparing the results of operations for Tannenhill Company with the industry average. Round to one decimal place.
• As far as the data permit, comment on significant relationships revealed by the comparisons.
Common-sized Income Statement format can be found in the financial analysis presentation. I have included a copy in the Unit 1 Exam folder.
Part 4. Calculate and discuss as instructed in #1 & #2
• Xavier Stores Company and Lestrade Stores Inc. are large retail department stores. Both companies offer credit to their customers through their own credit card operations. Information from the financial statements for both companies for two recent years is as follows (all numbers are in millions):
Compute Accounts Receivable Turnover Ratio and Days’ Sales in Receivables and compare the credit card policies of each company
• Dell Inc. and Hewlett-Packard Company (HP) compete with each other in the personal computer market. Dell’s primary strategy is to assemble computers to customer orders, rather than for inventory. Thus, for example, Dell will build and deliver a computer within four days of a customer entering an order on a Web page. Hewlett-Packard, on the other hand, builds some computers prior to receiving an order, then sells from this inventory once an order is received. Selected financial information for both companies from a recent year’s financial statements follows (in millions):
Compute Inventory Turnover for both companies. Interpret the inventory ratios by considering Dell’s and Hewlett-Packard’s operating strategies.
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