Managerial Accounting - Chapter 15 Exam verified solutions and explanations.

Managerial Accounting - Chapter 15 Exam verified solutions and explanations to determine the financial performance of a company, we compare its performance in the following ways: - Correct Answers: -From year to year -With a competing company -With the same industry as a whole 3 main ways to analyze financial statements - Correct Answers: -Horizontal analysis provides a year-to-year comparison of a company's performance in different periods; study of percentage changes in line items from comparative financial statements; many decisions hinge on whether the numbers are increasing or decreasing & sales may have increased, but considered in isolation, this fact is not very helpful -Vertical analysis provides a way to compare different companies. -Ratio analysis can be used to provide information about a company's performance. Corporate Financial Reports - Correct Answers: •Annual report: provides information about a company's financial condition. -Management's discussion and analysis of financial conditions and results of operations (MD&A): is written by the company to help investors understand the results of operations and the financial condition of the company -Report of the independent auditors (registered public accounting firm): attests to the fairness of the presentation of the financial statements -Financial statements: includes the income statement, balance sheet, statement of stockholders' equity, and statement of cash flows -Notes to financial statements: includes a summary of significant accounting policies and explanations of specific items on the financial statements net income increased by a higher % than total net sales revenue because - Correct Answers: revenues increased at a higher rate than total expenses horizontal analysis - Correct Answers: dollar amount of change = last period amount - earlier period amount & THEN (dollar amount of change / base period amount) x 100; round to nearest tenth = x.x% trend analysis (another form of horizontal analysis) - Correct Answers: trend % = (any period amount / base period amount) x 100 vertical analysis - Correct Answers: % = (specific item / base amount) x 100 Common-Size Statements - Correct Answers: •compare one company to another company (uses vertical analysis) •reports only percentages which removes the dollar value bias we see when comparing numbers in absolute terms (dollars) Benchmarking - Correct Answers: •the practice of comparing a company with other leading companies. •2 main types: -Benchmarking against a key competitor -Benchmarking against the industry average How Do We Use Ratios to Analyze a Business? - Correct Answers: •Different ratios explain different aspects of a company. •Ratios are used for the following purposes: -Evaluating the ability to pay current liabilities and long-term debt -Evaluating the ability to sell merchandise inventory and collect receivables -Evaluating profitability -Evaluating stock as an investment trading on the equity - Correct Answers: when a company has a higher rate of return on stockholders' equity than its rate of return on total assets which earns more income on borrowed money than the related interest expense, thereby increasing the earnings for the owners of the business 3 evaluations for stock as an investment - Correct Answers: •Investors purchase stock to earn a return on their investment. •This return consists of two parts: -Gains (or losses) from selling the stock at a price above (or below) purchase price -Dividends Analysts look for red flags in financial statements that may signal financial trouble - Correct Answers: -Movement of sales, merchandise inventory, and receivables -Earnings problems -Decreased cash flow -Too much debt -Inability to collect receivables -Buildup of merchandise inventories 10-k form - Correct Answers: financial statement or company's report