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4/9/24, 11:48 AM

Solution Manual Financial Accounting 8th Edition by Libby Libby and Short …

Chapter 13 - Analyzing Financial Statements

Chapter 13
Analyzing Financial Statements

ANSWERS TO QUESTIONS
1
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2
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The notes call attention to such items as pending
problems, contingent liabilities, and circumstances surrounding certain
judgments that were made in measuring and reporting
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3
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For example, the trends of such
factors as sales, expenses, income, amount of debt, retained earnings, and
earnings per share are particularly important in assessing the record of the
company in the past and the present
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Comparative
statements usually report only two consecutive periods which often is too
short to assess adequately certain trends
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Statement users are interested especially in financial summaries covering
several years because the long-term trends of the business are revealed
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Long-term financial
summaries provide particularly useful information in making these
projections
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The primary limitation of unusually long-term summaries is that early years
may not be useful because of changes in the business, industry, and
environment
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Ratio analysis is a technique for computing and pinpointing certain
significant relationships in the financial statements
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This is proprietary material solely for authorized instructor use
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This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part
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A ratio is computed by dividing one
amount by another amount; the divisor is known as the base amount
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Ratio analysis is particularly useful because it may reveal critical
relationships that are not readily apparent from absolute dollar amounts
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Component percentages are representations, as ratios or percents, of the
relationships between each of the several individual amounts that make up a
single total
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The resulting ratios or percentages will sum to
100 percent
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7
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The
two concepts of return on investment are:
(a) Return on equity (net income divided by owners’Gross Profit

=

$732,600

Revenue

$1,665,000

Cost of Goods Sold

(X)

Gross Profit

$732,600

Cost of Goods Sold

$932,400

M13–2
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054 = $31,198

Gross Profit %: $22,091 ÷ $31,198 = 70
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$183,000 / [($1,100,000 + $1,250,000) ÷ 2] = 15
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21% - 6% = 15%
M13–5
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If the inventory decreases by 25%, the inventory
turnover ratio will increase
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This is proprietary material solely for authorized instructor use
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This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part
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In most circumstances, a change from FIFO to LIFO will cause inventory to
decrease and cost of goods sold to increase
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This is proprietary material solely for authorized instructor use
...
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part
...

1
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3
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Car manufacturer (high inventory; high property & equipment; lower
inventory turnover)
Wholesale candy company (high inventory turnover)
Retail fur store (high gross profit; high inventory)
Advertising agency (low inventory; absence of gross profit)

E13–2
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2
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4
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1
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3
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Cable T
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Company (no gross profit; high property & equipment)
Accounting firm (high receivables; no gross profit)
Retail jewelry store (high inventory; high gross profit)
Grocery store (high inventory turnover)

E13–4
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2
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4
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This is proprietary material solely for authorized instructor use
...
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part
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Lowe's Companies, Inc
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00 %$ 48,815
Cost of sales
32,858 65
...
56
17,152
Expenses:
Selling, general and
administrative
12,593 25
...
95
1,586
Interest - net
371
0
...
77
13,924
Pre-tax earnings
2,906
5

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