Intermediate Accounting Volume 2,
9th Canadian Edition by
Thomas H. Beechy
Complete Chapter Solutions Manual
are included (Ch 12 to 22)
** Immediate Download
** Swift Response
** All Chapters included
,Table of Contents are given below
VOLUME 2
Chapter 12: Financial Liabilities and Provisions
Chapter 13: Financial Instruments: Long-Term Debt
Chapter 14: Shareholders’ Equity
Chapter 15: Financial Instruments: Complex Debt and Equity
Chapter 16: Corporate Income Tax
Chapter 17: Tax Losses
Chapter 18: Leases
Chapter 19: Post-Employment Benefits
Chapter 20: Earnings per Share
Chapter 21: Accounting Changes
Chapter 22: Financial Statement Analysis
,Solutions Manual organized in reverse order, with the last chapter displayed first, to ensure
that all chapters are included in this document. (Complete Chapters included Ch22-12)
Concept Review Solutions
CHAPTER 22: FINANCIAL STATEMENT ANALYSIS
Ratio Analysis
1. In analyzing financial statements, it is important to understand the decision to be made,
as different decisions will require different approaches and different sets of priorities with
respect to financial information. For example, a trade creditor will be concerned primarily
with short-run liquidity, while a prospective equity investor may be concerned with long-
run profitability.
2. An analyst may be able to find out the accounting policies of a company in the notes to
the financial statements. In the notes, a company must describe the basis of
presentation, significant accounting policies as well as areas of significant judgement and
estimates. Then, the company provides a further breakdown of the accounts by cross
referencing to the numbers on the financial statement. For example, the statement of
financial position will show the net balance for PP&E, but the notes will provide relevant
information such as the types of assets, their original cost, any impairments and the
depreciation methods used. Additionally, an analyst may find implicit clues to the
policies of a company may also be found in the individual financial statements. For
example, a comparison of the cash flow statement to the income statement may reveal
revenue and expense recognition strategies. An analyst looks in the notes to gain an
understanding of how assets, liabilities, revenue, and expenses have been recognized.
3. Analysts may seek to recast financial statements before performing an analysis in order
to (insofar as a reasonable amount of information exists) revise the financial statements
to suit their needs. Examples: the SCI may be revised to remove non-recurring items; and
necessary recurring investments may be reclassified from the investing section to the
operating section of the cash flow statement. This may allow the analyst to compare
other companies that they are tracking / reviewing.
4. Vertical analysis involves a cross-sectional analysis of ratios in which the components of
one year’s individual financial statements are computed as a percentage of a base
amount. This involves comparing various components of one year’s statements to a
reference amount of the same period. For example, items of the SCI are computed as a
percentage of revenue. Horizontal analysis refers to the longitudinal analysis of a single
financial statement component compared with a base year’s amount. Such analysis
compares the changes in a specific financial statement account over several periods. For
example, revenues over several years may be computed relative to a base year to
measure relative growth or decline.
5. There are many more ratios that analysts use, some of which are specific to certain
industries. For example, in the retail industry, sales-per-square-foot is a key ratio that is
used to assess how effectively and efficiently retail floor space is used.
Concept Review Solutions Intermediate Accounting, 9e, Volume 2
, liquidity Ratios and Other Ratio Issues
1. The essential relationship between the numerator and the denominator in any
profitability ratio is that of measuring a return on invested capital. Thus, a profitability
ratio will consist of a numerator from the SCI (measuring return) and a denominator from
the SFP (measuring invested capital). It is critical that the numerator and the
denominator be logically consistent.
2. While a high turnover ratio is often presumed to be better than a low ratio, because it
implies that less investment is needed to generate sales, it may not necessarily be a
positive indicator. Consider: a high turnover of inventory may be the result of carrying
very low levels of inventory. The risk of low levels of inventory is that products may not
be available when customers demand them so that potential sales are lost. Therefore, the
low level of invested capital is achieved with the opportunity cost of lost sales.
3. Some analysts prefer to use debt-service ratios as opposed to times interest earned
because they relate to a company’s ability to service its full debt load, including interest
and principal. The times interest earned ratio implicitly assumes that the debt can be
refinanced; therefore the principal repayment may be deferred and the company may
only be required to service its interest obligation. However, the times debt service earned
ratio will measure a company’s ability to repay its principal borrowings as well.
4. A creditor or lender should be wary of basing lending decisions on consolidated financial
statements, as such statements aggregate the financial results of all entities under
common control (the economic entity). The lender’s recourse lies only with the legal
entity to which it has extended credit; consolidated statements show economic entity
information and therefore do not indicate what assets may be available as security or
collateral.
Concept Review Solutions Intermediate Accounting, 9e, Volume 2
9th Canadian Edition by
Thomas H. Beechy
Complete Chapter Solutions Manual
are included (Ch 12 to 22)
** Immediate Download
** Swift Response
** All Chapters included
,Table of Contents are given below
VOLUME 2
Chapter 12: Financial Liabilities and Provisions
Chapter 13: Financial Instruments: Long-Term Debt
Chapter 14: Shareholders’ Equity
Chapter 15: Financial Instruments: Complex Debt and Equity
Chapter 16: Corporate Income Tax
Chapter 17: Tax Losses
Chapter 18: Leases
Chapter 19: Post-Employment Benefits
Chapter 20: Earnings per Share
Chapter 21: Accounting Changes
Chapter 22: Financial Statement Analysis
,Solutions Manual organized in reverse order, with the last chapter displayed first, to ensure
that all chapters are included in this document. (Complete Chapters included Ch22-12)
Concept Review Solutions
CHAPTER 22: FINANCIAL STATEMENT ANALYSIS
Ratio Analysis
1. In analyzing financial statements, it is important to understand the decision to be made,
as different decisions will require different approaches and different sets of priorities with
respect to financial information. For example, a trade creditor will be concerned primarily
with short-run liquidity, while a prospective equity investor may be concerned with long-
run profitability.
2. An analyst may be able to find out the accounting policies of a company in the notes to
the financial statements. In the notes, a company must describe the basis of
presentation, significant accounting policies as well as areas of significant judgement and
estimates. Then, the company provides a further breakdown of the accounts by cross
referencing to the numbers on the financial statement. For example, the statement of
financial position will show the net balance for PP&E, but the notes will provide relevant
information such as the types of assets, their original cost, any impairments and the
depreciation methods used. Additionally, an analyst may find implicit clues to the
policies of a company may also be found in the individual financial statements. For
example, a comparison of the cash flow statement to the income statement may reveal
revenue and expense recognition strategies. An analyst looks in the notes to gain an
understanding of how assets, liabilities, revenue, and expenses have been recognized.
3. Analysts may seek to recast financial statements before performing an analysis in order
to (insofar as a reasonable amount of information exists) revise the financial statements
to suit their needs. Examples: the SCI may be revised to remove non-recurring items; and
necessary recurring investments may be reclassified from the investing section to the
operating section of the cash flow statement. This may allow the analyst to compare
other companies that they are tracking / reviewing.
4. Vertical analysis involves a cross-sectional analysis of ratios in which the components of
one year’s individual financial statements are computed as a percentage of a base
amount. This involves comparing various components of one year’s statements to a
reference amount of the same period. For example, items of the SCI are computed as a
percentage of revenue. Horizontal analysis refers to the longitudinal analysis of a single
financial statement component compared with a base year’s amount. Such analysis
compares the changes in a specific financial statement account over several periods. For
example, revenues over several years may be computed relative to a base year to
measure relative growth or decline.
5. There are many more ratios that analysts use, some of which are specific to certain
industries. For example, in the retail industry, sales-per-square-foot is a key ratio that is
used to assess how effectively and efficiently retail floor space is used.
Concept Review Solutions Intermediate Accounting, 9e, Volume 2
, liquidity Ratios and Other Ratio Issues
1. The essential relationship between the numerator and the denominator in any
profitability ratio is that of measuring a return on invested capital. Thus, a profitability
ratio will consist of a numerator from the SCI (measuring return) and a denominator from
the SFP (measuring invested capital). It is critical that the numerator and the
denominator be logically consistent.
2. While a high turnover ratio is often presumed to be better than a low ratio, because it
implies that less investment is needed to generate sales, it may not necessarily be a
positive indicator. Consider: a high turnover of inventory may be the result of carrying
very low levels of inventory. The risk of low levels of inventory is that products may not
be available when customers demand them so that potential sales are lost. Therefore, the
low level of invested capital is achieved with the opportunity cost of lost sales.
3. Some analysts prefer to use debt-service ratios as opposed to times interest earned
because they relate to a company’s ability to service its full debt load, including interest
and principal. The times interest earned ratio implicitly assumes that the debt can be
refinanced; therefore the principal repayment may be deferred and the company may
only be required to service its interest obligation. However, the times debt service earned
ratio will measure a company’s ability to repay its principal borrowings as well.
4. A creditor or lender should be wary of basing lending decisions on consolidated financial
statements, as such statements aggregate the financial results of all entities under
common control (the economic entity). The lender’s recourse lies only with the legal
entity to which it has extended credit; consolidated statements show economic entity
information and therefore do not indicate what assets may be available as security or
collateral.
Concept Review Solutions Intermediate Accounting, 9e, Volume 2
