Chapter 15: Q1SE (page 835)
Explaining financial statements
Caleb King is interested in investing in Orange Corporation. What types of tools should Caleb use to evaluate the company?
Answer
Horizontal analysis, vertical analysis, and ratio analysis
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Measuring ability to pay liabilities
Requirements
1. Compute the debt ratio and the debt-to-equity ratio at May 31, 2018, for Accel’s
Companies.
2. Is Accel’s ability to pay its liabilities strong or weak? Explain your reasoning.
Theta Designs, Inc. has the following data:
| Theta Designs INC | ||
| Vertical Analysis | ||
| For the year ended December 31, 2017, and 2018 | ||
Assets | 2018 (\() | 2017 (\)) |
Total current assets | 25,000 | 73,440 |
Property, Plant and Equipment, Net | 153,600 | 168,300 |
Other Assets | 21,400 | 64,260 |
Total Assets | 200,000 | 306,000 |
Liabilities | ||
Total current liabilities | 27,600 | 49,266 |
Long term debt | 72,400 | 208,998 |
Total Liabilities | 100,000 | 258,264 |
Stockholders’ Equity | ||
Total stockholders’ Equity | 100,000 | 47,736 |
Total liabilities and stockholders’ equity | 200,000 | 306,000 |
Perform a vertical analysis of Theta Designs’s balance sheet for each year.
Question:Theater by Design and Show Cinemas are asking you to recommend their stock to your clients. Because Theater by Design and Show Cinemas earn about the same net income and have similar financial positions, your decision depends on their statement of cash flows, summarized as follows:
Theater by Design Show Cinemas
Net Cash Provided by Operating Activities \( 30,000 \) 70,000
Cash Provided by (Used for) Investing Activities:
Purchase of Plant Assets \( (20,000) \) (100,000)
Sale of Plant Assets 40,000 20,000 10,000 (90,000)
Cash Provided by (Used for) Financing Activities:
Issuance of Common Stock 0 30,000
Payment of Long-term Debt (40,000) 0
Net Increase (Decrease) in Cash \( 10,000 \) 10,000
Based on their cash flows, which company looks better? Give your reasons.
Match the different parts of the annual report with the appropriate description.
1..Includes the income statement, balance sheet, statement of stockholders’ equity, and statement of cash flows | a. Notes to financial statements |
2. Attests to the fairness of the presentation of the financial statements. | b. Report of independent registered public accounting firm |
3. Includes a summary of significant accounting policies and explanations of specific items on the financial statements. | c. Management’s discussion and analysis of financial condition and results of operations (MD&A) |
4. Is written by the company to help investors understand the results of operations and the financial condition of the company. | d. Financial statements |
Briefly describe the ratios that can be used to evaluate a company’s ability to pay long-term debt.
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