SOLUTIONS MANUAL
** All Chapters included
** Discussion Questions
** Exercises & Problems
,Table of Contents are given below
Chapter 1. Introduction to Accounting and Business
Chapter 2. Analyzing Transactions
Chapter 3. The Adjusting Process
Chapter 4. Completing the Accounting Cycle
Chapter 5. Accounting for Merchandising Businesses
Chapter 6. Inventories
Chapter 7. Internal Control and Cash
Chapter 8. Receivables
Chapter 9. Long-Term Operating Assets
Chapter 10. Liabilities: Current, Notes, and Contingencies
Chapter 11. Liabilities: Bonds Payable
Chapter 12. Accounting for Partnerships and Limited Liability Companies
Chapter 13. Corporations: Organization, Stock Transactions, and Dividends
Chapter 14. Statement of Cash Flows
Chapter 15. 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 Ch15-1)
CHAPTER 15
FINANCIAL STATEMENT ANALYSIS
DISCUSSION QUESTIONS
1. Liquidity is the ability of a company to convert assets into cash. Short-term creditors such as
banks and financial institutions are most concerned with liquidity. Solvency is the ability
of a company to pay its debts. Long-term creditors, such as bondholders, are primarily concerned
with a company’s solvency. Profitability is the ability of a company to generate earnings.
Investors, such as stockholders, are primarily concerned with profitability since it determines
whether the company’s stock price will increase.
2. Comparative statements provide information about changes between dates or periods. Trends
indicated by comparisons may be far more significant than the data for a single date or
period.
3. Before this question can be answered, the increase in net income should be compared with
changes in sales, expenses, and assets for the current year. The return on total assets for both
periods should also be compared. If these comparisons indicate favorable trends, the operating
performance has improved. If not, the apparent favorable increase in net income may be offset
by unfavorable trends in other areas.
4. Generally, the two ratios would be very close since most service businesses sell services
and hold very little inventory.
5. a. A high inventory turnover minimizes the amount invested in inventories, thus freeing
funds for other uses. Storage costs, administrative expenses, losses caused by obsolescence,
and potential decreases in selling prices are also kept to a minimum when inventory
turnover is high.
b. Yes. Inventory turnover measures the “turnover” of inventory during the year, while
the days’ sales in inventory measures the amount of inventory on hand at the
beginning and end of the year. Therefore, a business could have a high inventory turnover
during the year, yet have a high days’ sales in inventory based on the beginning and
end-of-year inventory amounts.
6. The ratio of fixed assets to long-term liabilities increased from 3.4 ($1,360,000 ÷ $400,000) in
the preceding year to 4.2 ($1,260,000 ÷ $300,000) in the current year. This indicates that the
company is in a stronger position this year to borrow additional long-term debt.
7. a. The return on total assets measures the profitability of the total assets, without regard for how
the assets are financed. The return on stockholders’ equity measures the profitability of the
stockholders’ investment, focusing exclusively on the return to shareholders.
b. The return on stockholders’ equity is normally higher than the return on total assets. This
is because of leverage, which compensates stockholders for the higher risk of their investments.
8. The price-earnings ratio measures the market’s expectations of a company’s future earnings
prospects. Kroger’s lower price-earnings ratio compared to the industry average suggests that
the market has lower expectations about the company’s future earnings.
15-1
, CHAPTER 15 Financial Statement Analysis
DISCUSSION QUESTIONS (Concluded)
9. The dividend yield measures the return common stockholders receive from a cash dividend.
The high dividend yield for Suburban Propane indicates that a significant portion of the return to
its shareholders comes in the form of a cash dividend. The lower dividend yield for Alphabet
indicates that the return to shareholders comes mainly from stock price appreciation.
10. One report is the Report on Internal Control, which verifies management’s conclusions on
internal control. Another report is the Report on Fairness of the Financial Statements of
Independent Registered Public Accounting Firm, where the Certified Public Accounting
(CPA) firm that conducts the audit renders an opinion on the fairness of the statements.
15-2
** All Chapters included
** Discussion Questions
** Exercises & Problems
,Table of Contents are given below
Chapter 1. Introduction to Accounting and Business
Chapter 2. Analyzing Transactions
Chapter 3. The Adjusting Process
Chapter 4. Completing the Accounting Cycle
Chapter 5. Accounting for Merchandising Businesses
Chapter 6. Inventories
Chapter 7. Internal Control and Cash
Chapter 8. Receivables
Chapter 9. Long-Term Operating Assets
Chapter 10. Liabilities: Current, Notes, and Contingencies
Chapter 11. Liabilities: Bonds Payable
Chapter 12. Accounting for Partnerships and Limited Liability Companies
Chapter 13. Corporations: Organization, Stock Transactions, and Dividends
Chapter 14. Statement of Cash Flows
Chapter 15. 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 Ch15-1)
CHAPTER 15
FINANCIAL STATEMENT ANALYSIS
DISCUSSION QUESTIONS
1. Liquidity is the ability of a company to convert assets into cash. Short-term creditors such as
banks and financial institutions are most concerned with liquidity. Solvency is the ability
of a company to pay its debts. Long-term creditors, such as bondholders, are primarily concerned
with a company’s solvency. Profitability is the ability of a company to generate earnings.
Investors, such as stockholders, are primarily concerned with profitability since it determines
whether the company’s stock price will increase.
2. Comparative statements provide information about changes between dates or periods. Trends
indicated by comparisons may be far more significant than the data for a single date or
period.
3. Before this question can be answered, the increase in net income should be compared with
changes in sales, expenses, and assets for the current year. The return on total assets for both
periods should also be compared. If these comparisons indicate favorable trends, the operating
performance has improved. If not, the apparent favorable increase in net income may be offset
by unfavorable trends in other areas.
4. Generally, the two ratios would be very close since most service businesses sell services
and hold very little inventory.
5. a. A high inventory turnover minimizes the amount invested in inventories, thus freeing
funds for other uses. Storage costs, administrative expenses, losses caused by obsolescence,
and potential decreases in selling prices are also kept to a minimum when inventory
turnover is high.
b. Yes. Inventory turnover measures the “turnover” of inventory during the year, while
the days’ sales in inventory measures the amount of inventory on hand at the
beginning and end of the year. Therefore, a business could have a high inventory turnover
during the year, yet have a high days’ sales in inventory based on the beginning and
end-of-year inventory amounts.
6. The ratio of fixed assets to long-term liabilities increased from 3.4 ($1,360,000 ÷ $400,000) in
the preceding year to 4.2 ($1,260,000 ÷ $300,000) in the current year. This indicates that the
company is in a stronger position this year to borrow additional long-term debt.
7. a. The return on total assets measures the profitability of the total assets, without regard for how
the assets are financed. The return on stockholders’ equity measures the profitability of the
stockholders’ investment, focusing exclusively on the return to shareholders.
b. The return on stockholders’ equity is normally higher than the return on total assets. This
is because of leverage, which compensates stockholders for the higher risk of their investments.
8. The price-earnings ratio measures the market’s expectations of a company’s future earnings
prospects. Kroger’s lower price-earnings ratio compared to the industry average suggests that
the market has lower expectations about the company’s future earnings.
15-1
, CHAPTER 15 Financial Statement Analysis
DISCUSSION QUESTIONS (Concluded)
9. The dividend yield measures the return common stockholders receive from a cash dividend.
The high dividend yield for Suburban Propane indicates that a significant portion of the return to
its shareholders comes in the form of a cash dividend. The lower dividend yield for Alphabet
indicates that the return to shareholders comes mainly from stock price appreciation.
10. One report is the Report on Internal Control, which verifies management’s conclusions on
internal control. Another report is the Report on Fairness of the Financial Statements of
Independent Registered Public Accounting Firm, where the Certified Public Accounting
(CPA) firm that conducts the audit renders an opinion on the fairness of the statements.
15-2
