ANDI NUR INDAH MENTARI - 014201900061

MID SEMESTER EXAMINATION

Academic Year2021
Subject : Financial Statement Analysis
Time and Date: 07.30 – 10.00 A.M., Wednesday, 10 March 2021
Lecturer : Dr.,Drs. Chandra Setiawan,M.M.,Ph.D
Study Program : Management (MGT-2019 HRM)

SECTION I (TRUE/FALSE) (No. 1 – 10) Give a rational of each answer

FULL MARKS = 20

1. A balance sheet shows a company’s position over a period of time, whereas an income statement,
statement of stockholders’ equity, and statement of cash flows show its position at a point in time.
FALSE
The statement is reversed: A balance sheet shows a company's position at a point in time,
whereas an income statement, statement of equity, and statement of cash flows show its
position over a period of time.

2. The income statement reports net income which is defined as the company’s profit after all expenses
and dividends have been paid.
FALSE
The statement contains two errors. First, net income does not include any dividends during
the period; these are a distribution of profits and not part of its calculation. Second, the
income statement is prepared on an accrual basis and thus includes expenses incurred (as
opposed to paid).

3. The financial statement effects template captures the effects of transactions on all four financial
statements.
TRUE
The balance sheet accounts are all on the left side of the template and the income statement
accounts on the right. In addition, the cash column provides the statement of cash flows, and
the two equity columns can be used to construct the statement of shareholders' equity.

4 Revenues and expenses affect the income statement but not the balance sheet.
FALSE
Revenue and expense recognition increases retained earnings on the balance sheet.

5. A current ratio greater than 1.0 is generally desirable for a company.

TRUE
A company with a current ratio greater than 1.0 indicates positive working capital. In general,
companies prefer greater levels of current assets than current liabilities.

6. The DuPont analysis disaggregates return on equity into profitability, productivity, and leverage
components.
TRUE
The DuPont disaggregation of return on equity is:
ROE = Profit margin (PM) × Asset turnover (AT) × Financial leverage (FL).
These three terms measure profitability, efficiency and leverage respectively.

7. Revenues from discontinued operations of a company are reported separately from revenues from
continuing operations in the income statement.
TRUE
Discontinued operations refer to any identifiable business unit that the company intends to
sell. The income (loss) of the discounted operation (net of tax), and the after-tax gain (loss) on

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 sale of the unit, are reported in a separate section of the income statement below income from
continuing operations.

8. In order to report accounts receivable, net, companies estimate the amount they do not expect to
collect from their credit customers.
TRUE
Companies must report the amount of accounts receivable that they expect to collect. To do
this, they estimate the amount they expect to not collect.

9. The gain or loss on the sale of the asset is computed by:

Gain/(Loss) on sale = Market value of asset – Net book value of asset

FALSE
The correct equation involves the proceeds received, which may differ from the asset's market
value.

10. Companies using LIFO are required to disclose the amount at which inventory would have been
reported had it used FIFO. Similarly, companies using FIFO are required to disclose what their
inventory would have been if the company had used LIFO.
FALSE
Only the first sentence is true. The disclosure of the LIFO reserve is required for those
companies using LIFO inventory costing. This disclosure allows analysts to adjust the
balance sheet and income statement for LIFO effects when comparing LIFO and FIFO
companies.

SECTION II (MULTIPLE CHOICES) (NO. 1 -12) Give a rational of each answer

FULL MARKS = 24

1. A company’s net cash flow will equal its net income …

A) Almost always
B) Rarely
C) Occasionally
D) Only when the company has no investing cash flow for the period
E) Only when the company has no investing or financing cash flow for the period

Explanation : Net income reflects the company’s revenue minus expenses for the given period
Cash flow represents the amount of money received (spent) on operating, investing and financing
activities for the given period. The values are rarely the same.

2. In its 2019 annual report, Snap-Tite Incorporated reported the following (in millions):

Current assets $1,884.0

Total shareholders’ equity $2,635.2
Total liabilities $2,088.0

What did Snap-Tite report as total assets at year-end?

A) $6,607.2 million
B) $2,839.2million
C) $3,972.0 million
D) $4,723.2 million
E) None of these are correct.
Explanation : Asset = Liability + Stockholders Equity. Assets = 2,088.0 + 2,635.2 = 4,723.2

2. A statement of cash flows usually does not include which of the following?
A) Net income

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 B) Increase in accounts receivable
C) Contributed Capital
D) Depreciation expense
E) All of the above
Explanation : A cash flow statement is a financial report that a company creates and completely
details where the company's is receiving money from as well as how that money is being spent
throughout a certain time period. Based on the answers provided, it can be said that all of them
are part of a cash flow statement except for Contributed Capital. This is a the total value of the
stocks that shareholders purchased from the company. Even though this is a money input for the
company it does not get included in the cash flow statement.

3. During the year, Sparkle Inc. had Sales of $2,850.6million, Gross profit of $1,307.7 million and
Selling, general, and administrative expenses of $1,022.4million.

What was Sparkle’s Cost of sales for the year?

A) $1,828.2million
B) $1,542.9 million
C) $2,330.1million
rD) $ 285.3 million
E) There is not enough information to calculate the amount.

4. The cash conversion cycle is computed as

A) Days sales outstanding + Days inventory outstanding – Days payable outstanding
B) Days sales outstanding – Days payable outstanding
C) Days sales outstanding – Days inventory outstanding
D) Days sales outstanding – Days inventory outstanding +Days payable outstanding
E) None of these are correct.
Explanation : The cash conversion cycle is calculated by adding the days inventory outstanding to
the days sales outstanding and subtracting the days payable outstanding.

5. Liquidity refers to:

A) A company’s operating cycle
B) A company’s ability to generate sales from use of its assets
C) A company’s ability to meet its debt obligations
D) A company’s amount of financial leverage
E) A company’s cash availability
Explanation : Liquidity refers to cash, the amount on hand, the amount generated from operating
activities, and the amount that can be raised on relatively short notice.

6. Selected ratios follow for Barron, Inc. for the year ended December 31 (in millions). What is the
company’s return on equity (ROE) for the year?

Return on net Profit Net operating Asset Financial

operating assets Margin profit margin turnover leverage
(RNOA) (PM) (NOPM) (AT) (FL)

43.6% 11.6% 11.4% 1.51 1.72

A) 13.1%
B) 29.6%
C) 17.5%
D) 30.1%

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 E) None of these are correct.
Explanation : ROE = PM x AT x FL = 11.6% x 1.51 x 1.72 = 30.1%

7. When considering the results of an Altman Z-Score analysis a score of 3.85 would suggest?
A) The company is in financial distress and there is a high probability of bankruptcy in the short term
future.
B) The company is exposed to some risk of bankruptcy.
C) The company is healthy and there is a low bankruptcy potential in the short-term.
D) The company is healthy and there is a low bankruptcy potential in both the short and long-term.

8. A credit limit is:

A) A company’s total debt
B) The maximum that a company can borrow
C) The maximum that a creditor will allow a customer to owe at any point in time
D) The property that a company pledges to guarantee repayment
Explanation : Credit limits are established by creditors to probability of non-payment

9. Apple, Inc. reported research and development expense of $10,045 million on its 2016 income
statement. This expense included many types of costs.

Which of the following types of costs would not be included in the $10,045 million?
A) Salaries and wages for R&D personnel
B) Costs of applying for FDA approval
C) Depreciation on equipment used in experiments
D) Supplies and inventory related to R&D activities and new-product sales
E) None of these are correct.
Explanation : in the given scenario apple has reported a research and development expenses of
$10,045 million in 2016

10. The income statement of Pratt Inc. reports net sales of $3,749.9 million for the current year. The
balance sheet reports accounts receivable, net of $535.3 million at December 31 of the current year
and $572.2 million at December 31of the previous year.

The days sales outstanding in the current year are:

A) 54 days
B) 7 days
C) 52 days
D) 9 days
E) None of these are correct.
Explanation:
Days sales outstanding is
= Average accounts receivable ÷ Credit sales × 365  days
= (($572.2 million + $535.3 million) ÷ 2) ÷ $3,749.9 million × 365  days
= 54 Days

11. Assume that Barber Co. uses the LIFO inventory costing method for both tax and financial reporting
purposes. The balance sheet reports inventories at $297 million. Then, in its footnotes, the company
reports that inventories would have been $327 million had the company used the FIFO method.

The difference between these two numbers ($30 million) is referred to as:

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 A) LIFO reserve
B) LIFO conformity rule
C) LIFO holding gain
D) Inventory temporary difference
E) None of these are correct.

12. Other than raw materials and manufacturing overhead, what is the third component of inventories for
manufacturing companies?
A) Direct labor
B) Indirect labor
C) Equipment cost
D) Processing cost
E) All of the above
Explanation : Three components of manufacturing costs are materials, direct labor, and overhead

SECTION III QUESTIONS FULL MARKS = 52

1. Describe a decision that requires financial statement information, other than a stock
investment decision. How is financial statement information useful in making this decision?

ANSWER: Financing Activities. A company requires financing to carry out its business plan.
Financing activities are the means companies use to pay for these ventures.
Because of their magnitude, and their potential to determine success or failure of a
venture, companies take care in acquiring and managing their financial resources.
There are two main sources of business financing: equity investors (sometimes
referred to as owners or shareholders) and creditors.

Investing Activities. Investing activities are the means a company uses to acquire and maintain
investments for obtaining, developing, and selling products or services. Financing
provides the funds necessary for acquisition of investments needed to carry out
business plans. Investments include land, buildings, equipment, legal rights (patents,
licenses, and copyrights), inventories, human capital (managers and employees),
accounting systems, and all components necessary for the company to operate.

Operating Activities. Operating activities represent the "carrying out" of the business plan, given
necessary financing and investing. These activities usually involve at least five basic
components--research, purchasing, production, marketing, and labor. Operating
activities are a company's primary source of income. Income measures a company's
success in buying from input markets and selling in output markets. How well a
company does in devising business plans and strategies, and with decisions on
materials comprising the mix of operating activities, determines business success or
failure.

2. One of Warren Buffett’s acquisition criteria is to invest in businesses “earning good return on
equity.” The ROE formula uses both net income and stockholders’ equity. Why is it important
to relate net income to stockholders’ equity? Why isn’t it sufficient to merely concentrate on
companies with the highest net income?

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ANSWER: Net income is an important measure of financial performance. It indicates that the
market values the company's products or services, that is, it is willing to pay a price
for the products or services enough to cover the costs to bring them to market and to
provide the company's investors with a profit. Net income does not tell the whole
story, however. A company can always increase its net income with additional
investment in something as simple as a bank savings account. A more meaningful
measure of financial performance comes from measuring the level of net income
relative to the investment made. One investment measure is the balance of
stockholders' equity, and the comparison of net income to average stockholders'
equity (ROE) is a fundamental measure of financial performance.

3. The balance sheet consists of assets, liabilities, and equity. Define each category, and
provide minimum four examples of accounts reported within each category (Assets,
Liabilities, Equity). 12 MARKS

ANSWER: Liabilities: A liability is a legally binding obligation payable to another entity.

Liabilities are incurred in order to fund the ongoing activities of a business. Examples
of liabilities are accounts payable, accrued expenses, wages payable, and taxes
payable. These obligations are eventually settled through the transfer of cash or
other assets to the other party. They may also be written off through bankruptcy
proceedings.ex: Wages/payroll,Accounts payable,Taxes,Dividends
• Equity: Image result for equity definition and example
Equity is the ownership of any asset after any liabilities associated with the asset are
cleared.ex: if you own a car worth $25,000, but you owe $10,000 on that vehicle, the
car represents $15,000 equity. It is the value or interest of the most junior class of
investors in assets.
• Assets: Things that are resources owned by a company and which have future
economic value that can be measured and can be expressed in dollars. Examples
include cash, investments, accounts receivable, inventory, supplies, land, buildings,
equipment, and vehicles.

4. Explain in general terms the concept of return on investment. Why is this concept important in
the analysis of financial performance?

ANSWER: Return on investment measures profitability in relation to the amount of investment

that has been made in the business. A company can always increase dollar profit by
increasing the amount of investment (assuming it is a profitable investment). So,
dollar profits are not necessarily a meaningful way to look at financial performance.
Using return on investment in our analysis, whether as investors or business
managers, requires us to focus not only on the income statement, but also on the
balance sheet.

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5. Explain in general terms, the Altman bankruptcy prediction model. What do each of the five
model variables measure?

ANSWER: The Z-score model was introduced as a way of predicting the probability that a
company would collapse in the next two years. The model proved to be an accurate
method for predicting bankruptcy on several occasions. According to studies, the
model showed an accuracy of 72% in predicting bankruptcy two years before it
occurred, and it returned a false positive of 6%. The false-positive level was lower
compared to the 15% to 20% false-positive returned when the model was used to
predict bankruptcy one year before it occurred.When creating the Z-score model,
Altman used a weighting system alongside other ratios that predicted the chances of
a company going bankrupt. In total, Altman created three different Z-scores for
different types of businesses. The original model was released in 1968, and it was
specifically designed for public manufacturing companies with assets in excess of $1
million. The original model excluded private companies and non-manufacturing
companies with assets less than $1 million.Later in 1983, Altman developed two
other models for use with smaller private manufacturing companies. Model A Z-score
was developed specifically for private manufacturing companies, while Model B was
created for non-publicly traded companies. The 1983 Z-score models comprised
varied weighting, predictability scoring systems, and variables.
• Working Capital/Total Assets
Working capital is the difference between the current assets of a company and its current
liabilities. The value of a company’s working capital determines its short-term
financial health. A positive working capital means that a company can meet its short-
term financial obligations, and still make funds available to invest and grow.
In contrast, negative working capital means that a company will struggle to meet its short-term
financial obligations because there are inadequate current assets.
• Retained Earnings/Total Assets
The retained earnings/total assets ratio shows the amount of retained earnings or losses in a
company. If a company reports low retained earnings to total assets ratio, it means
that the company is financing its expenditure using borrowed funds rather than funds
from its retained earnings. It increases the probability of a company going
bankrupt.On the other hand, a high retained earnings to total assets ratio shows than
a company uses its retained earnings to fund capital expenditure. It shows that the
company achieved profitability over the years, and it does not need to rely on
borrowings.
• Earnings Before Interest and Tax/Total Assets
EBIT, a measure of a company’s profitability, refers to the ability of a company to generate
profits solely from its operations. The EBIT/Total Assets ratio demonstrates a
company’s ability to generate enough revenues to stay profitable and fund ongoing
operations and make debt payments.

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• Market Value of Equity/Total Liabilities
The market value, also known as market capitalization, is the value of a company’s equity. It is
obtained by multiplying the number of outstanding shares by the current price of
stocks.
The market value of the equity/total liabilities ratio shows the degree to which a company’s
market value would decline when it declares bankruptcy before the value of liabilities
exceeds the value of assets in the balance sheet. A high market value of equity to
total liabilities ratio can be interpreted to mean high investor confidence in the
company’s financial strength.
• Sales/Total Assets
The sales to total assets ratio shows how efficiently the management uses assets to generate
revenues vis-à-vis the competition. A high sales to total assets ratio is translated to
mean that the management requires a small investment to generate sales, which
increases the overall profitability of the company.
In contrast, a low or falling sales to total assets ratio means that the management will need to
use more resources to generate enough sales, which will reduce the company’s
profitability.

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SECTION I (TRUE/FALSE) = 20
SECTION II (MULTIPLE CHOICES) = 22
SECTION III QUESTIONS = 43

TOTAL POINTS = 85 Points