Financial Statement Analysis Practice Problems

PROBLEM 1 MULTIPLE CHOICE

1. A company's computes its debt/equity ratio by dividing its long-term debt by its shareholders'
equity. Its debt/equity ratio will decrease when it
a) Collects accounts receivable
b) Borrows cash giving a short-term note payable
c) Purchases land for cash
d) Issues stock for cash
e) None of the above

2. A company's computes its debt/equity ratio by dividing its long-term debt by its shareholders'
equity. Its debt/equity ratio will increase when it
a) Collects accounts receivable
b) Borrows cash giving a short-term note payable
c) Purchases land for cash
d) Issues stock for cash
e) None of the above

3. Which of these transactions would result in an increase in a companys current ratio (current
assets/current liabilities)? Assume current assets are equal to current liabilities before the
transactions below take place.
a) declaring a cash dividend
b) issuing long-term debt
c) making a mortgage payment
d) collecting an accounts receivable
e) none of the above

4. One measure of profitability used by the business is EBITA/average assets, where EBITA is
earnings before interest, taxes and amortization. If the business were to operate exactly the
same in 2004 as in 2003 (same sales, same product costs) EXCEPT that on January 1, 2004
additional common shares are issued and the proceeds are used to repay half the mortgage,
then for 2004 as compared to 2003 EBITA/average assets would
a) increase
b) decrease
c) stay the same
d) can not be determined from the information given

5. If the business had the opportunity to triple sales and maintain the same profit margin by
increasing plant capacity at a cost of $380,000, then, ignoring changes in the risk, to
maximize the return to the shareholders (measured by net income / shareholders' equity)
the business should finance this expansion by
a) not paying dividends for 2 years and using the savings at the end of that time
b) issuing more shares
c) borrowing at a lower rate of interest than it earns on shareholders equity
d) none of the above
6.On December 31, 2003 AG Inc. had a working capital ratio (current ratio) of 2, and reported
the following accounts;

Cash $13,000 Accounts Payable $2,000

Accounts Receivable $4,000 Wages Payable $5,500
Allowance for Uncollectible ? Utilities Payable $500
Accounts
Inventory $6,600 Interest Payable $4,000
Prepaid Insurance $600 Bonds Payable $13,000
Equipment (net) $24,000 Retained Earnings $3,600

Therefore, the balance in the Allowance for Uncollectible Accounts was:

a) $600
b) $300
c) $200
d) $0
e) none of the above

7. Liquidity ratios

a) measures the companys short-run ability to pay its current and maturing obligations.
b) measures how effectively the company is using the assts employed.
c) measures the degree of success or failure of a given company for a given time period.
d) measures the degree of protection form long-term creditors and investors.
e) none of the above.

8. Which one of the following is an inherent limitation of using financial statement data for ratio
analysis?

a) Requires a comparator such as data about another time period, another company or
industry average.
b) Similar companies employ different accounting method.
c) Different companies compute some ratios slightly differently.
d) All of the above.
e) None of the above.

9. Which of the following is not a liquidity ratio?

a) Current ratio
b) Quick ratio
c) Return on Sales ratio
d) All of the above are liquidity ratios
e) None of the above are liquidity ratios
PRACTICE PROBLEM 2

Research in Motion Limited (RIM) introduced Blackberry, a wireless email solution in January of
1999. Palm Inc. (Palm) introduced its first personal information management handheld device in
March, 1996. The article by Simon Avery, RIM rise continues on stellar results, upgraded
analyst targets, published in the Globe and Mail on Thursday July 1, 2004 speaks of the
above forecasted performance and growth of Research in Motion as well as the risks and
affects of competitors like PalmOne and RIMs recent appeal on patent infringement charges.

Extracts from Simon Averys article, RIM rise continues on stellar results, upgraded analyst
targets are as follows:

We believe that the market will support a premium valuation for RIM as the company is in an
extraordinary growth mode"

Amid the high praise for RIM's performance and prospects, analysts are warning of several
risk factors ahead for the company. The two largest are litigation and new competitors...

Some analysts expect RIM and NTP to reach a settlement [of an ongoing patent infringement
dispute], thereby significantly reducing any costs to RIM. If RIM loses its [patent] appeal and
pays the full royalty, earnings would fall about 20 per cent in fiscal 2005

Access to the full article titled RIM rise continues on stellar results, upgraded analyst
targets is available at eresources at York Library.

REQUIRED

Use the information from the financial statements in the annual reports of Research in Motion
Limited for the year ended March 31, 2003 (www.rim.net click investors) and Palm Inc. for the
year ended May 31, 2003 (www.palmone.com click about PalmOne, choose Investor Relations
and then Annual Reports)

(a) List the formula and describe the purpose/use for the ratios selected.

(b) Compare the (i) profitability (operating performance), (ii) liquidity (working capital position),
and (iii) financial strength of Research in Motion for the year ended March 1, 2003 and Palm
for the year ended May 31, 2003 making reference to the financial ratios explained in the
course materials.

(c) Based on the ratios used determine, if possible, which company is in better standing for the
fiscal year 2003?

(d) What other factor(s) might also be considered by an analyst comparing the two companies?

.
PROBLEM 3

Financial analysis is often based on information reported by the financial press: identifying the
relevant facts in financial press articles is therefore important in financial statement analysis.

The following information has been extracted from a 1999 press release posted by CAE on its
website:

CAE Inc., with headquarters in Toronto, Canada, and facilities throughout Canada, the United
States, Europe, Asia and Australia, is an advanced technology company serving several very
specific markets. The CAE Electronics Group is the world leader in the design and production of
commercial and military flight simulation systems, land-based simulation, and control systems
for marine and energy applications. CAE Fiber Processing Technologies is the world leader in
optimizing fiber use in the forest products sector. CAE Cleaning Technologies is the world's
leading supplier of highly specific cleaning and waste minimization equipment and services.
Together, CAE's companies employ more than 7,000 people in ten countries. CAE's fiscal 1999
revenue was $1.1 billion

Revenue for the first six months of fiscal 2000 was up 21 percent to $583.1 million, compared
with $482.7 million during the same period last year. CAE's net earnings for the six month
period rose 23 percent to $37.4 million or 34 cents per share compared with $30.5 million or 28
cents per share in the same period last year.

``CAE had a strong second quarter and first half of the year'', said Derek H. Burney, CAE Inc.'s
newly appointed President and Chief Executive Officer. ``Continued growth in the commercial
simulation market and in our fiber processing and railway technologies businesses provided
solid top and bottom line increases.''

CAE continued to maintain its leading market position for commercial flight simulators, capturing
27 of 27 full flight simulator orders and 3 out of 4 flight training devices thus far in fiscal year
2000. CAE also experienced continued success in the visual systems marketplace, winning 20
out of 30 orders, or a 67 percent market share.

REQUIRED
Use the information in the article to determine whether an investor who owned 5,000 CAE
common shares owned more or less than 5% of the company?