LESSON 9
Assignment
Question 1 (25 marks)
Computer question
All the information to do this problem is in the data folder. The condensed balance sheet
figures for Forest Products Inc. for the years ending December 31, 20X8, 20X7, 20X6, and
20X5, have been pre-entered in the worksheet file.
Required
a. (7 marks)
Perform a vertical percentage analysis on the comparative condensed balance sheets.
Round to the nearest percent.
Note:
Your printed solutions may not add to 100% due to rounding errors. Do not adjust rounded numbers.
b. (7 marks)
Perform a horizontal percentage analysis on the comparative condensed balance sheets.
Round to the nearest percent.
Note:
For the two balance sheet items that did not exist in 20X5, use 20X6 as the base year (assets and liabilities
of discontinued operations). For all other items, 20X5 is the base year.
c. (8 marks)
Create pie charts for the net assets of 20X8 and 20X7, emphasizing working capital in
each graph by dragging out this section of the pie chart.
d. (3 marks)
What conclusions would you draw from the data? That is, explain any trends that you
see.
Procedure
1. Open the file FA3L9Q1. This file contains three worksheets, L9Q1, PIE20X8, and
PIE20X7. The last two worksheets are blank and have been set up for you to place the
pie charts.
Financial Accounting: Liabilities & Equities
Assignment 9  1
2. Study the layout of the worksheet. In rows 5 to 23, columns B, D, F, and H contain the
condensed balance sheet figures to be used in the problem. Columns C, E, G, and I are
set up for you to perform a vertical analysis for 20X8 to 20X5. Rows 27 to 43 are set
up for you to perform a horizontal analysis for years 20X8 to 20X6. Cells A46 to B49
and A52 to B55 contain labels and amounts for the net asset accounts that you will use
to construct your pie charts.
Part (a)
3. In rows 10 to 23, enter in columns C, E, G, and I the necessary formulas to present a
vertical analysis for the balance sheets for years 20X8 to 20X5.
Part (b)
4. Enter in columns C, E, G, and I the formulas to calculate the percentages in order to
present a horizontal analysis. In rows 30 to 43, the earliest year (20X5) should be set as
the base year (that is, equal to 100%) and all amounts from other years as a percentage
of 20X5. For the two balance sheet amounts that did not exist in 20X5, use 20X6 as the
base year.
5. Save your completed worksheet. Copy and paste into a word-processing document the
balance sheet and analysis in the range A1 to I44.
6. Display the formulas for the vertical and horizontal analysis. Copy and paste the
formulas in row 10 (cells A10 to I10) and row 30 (cells A30 to I30) only into your
word-processing document. Close the Excel file without saving. Reopen it before
proceeding.
Part (c)
The range A46 to B49 has been set up for the pie chart for 20X8. The range A52 to B55
has been set up for the pie chart for 20X7. Use the following instructions to create two pie
charts, one for the 20X8 net assets and one for the 20X7 net assets.
7. Select the range A46 to B49. Click the ChartWizard on the toolbar.
8. Click Pie and select the first chart sub-type (top left). Click next and follow the steps
in the ChartWizard, including a legend and setting an appropriate chart title.
9. In the last step of the ChartWizard, select Place chart as object in PIE20X8.
10. Drag out the slice for working capital to draw attention to it.
11. Repeat steps 7 to 10 for the 20X7 net assets in the range A52 to B55, placing the
chart in the PIE20X7 worksheet.
12. Copy and paste each chart into your word-processing document.
Part (d)
Answer Part (d) in your word-processing document.
Assignment 9  2
Financial Accounting: Liabilities & Equities
Question 2 (26 marks)
Computer question
The information required to do this problem is in the data folder. The annual consolidated
financial statements of Lafarge Canada Inc. for the year 20X7 have been pre-entered on the
worksheet file and are not reproduced here.
Note:
Assume that all sales were on credit, and the cost of sales was €550,000. Cost of sales is included in the
€927,729 total operating expenses. Omit times interest earned, times debt service earned, and the
defensive interval ratios. (Either inadequate information is provided for these ratios, or they are largely
irrelevant for Lafarge.) Round to the same number of decimal points as the industry data. Use average
balances where appropriate.
Required
a. (6 marks)
Using a worksheet, compute the ratios that measure efficiency for 20X7.
b. (5 marks)
Compute the ratios that measure solvency for 20X7.
c. (3 marks)
Compute the ratios that measure liquidity for 20X7.
d. (12 marks)
Provide a commentary on the ratios calculated in parts (a) to (c). Refer to the assumed
industry data on your computer file as a standard of reference.
Procedure
1. Open the file FA3L9Q2.
2. Study the layout of the worksheet. Rows 4 to 63 contain the consolidated balance sheet
and income statement for 20X7with comparative figures for 20X6. Rows 65 to 80 are
set up to calculate the efficiency, solvency, and liquidity ratios necessary to satisfy
parts (a) to (c) of the problem.
3. In rows 68 to 80 of column B, enter the appropriate formulas to calculate the financial
ratios for 20X7. Use averages where appropriate.
4. Save your completed worksheet, and copy and paste your ratio analysis in the range
A65 to B80 into a word-processing document.
Financial Accounting: Liabilities & Equities
Assignment 9  3
5. Display the formulas in the range A67 to B80, and copy and paste this range into your
word-processing document. Close up column A so the formulas are large enough to
read.
6. Submit the analysis for requirement (d), done manually in your word-processing
document, with your solution to parts (a) to (c).
Question 3 (24 marks)
Multiple choice (2 marks each)
a. Which of the following ratios best provides an indication of the immediate liquidity
of a company?
1)
2)
3)
4)
Accounts receivable turnover
Acid test ratio
Current ratio
Defensive-interval ratio
b. If inventories increase over a period and the current ratio decreases, which of the
following is true?
1)
2)
3)
4)
The acid test ratio must have declined.
The acid test ratio must have increased.
Inventory turnover must have declined.
Inventory turnover must have increased.
c. If a firm has a current ratio of 0.7 to 1, which of the following transactions would
decrease the ratio?
1)
2)
3)
4)
Borrowed money from the bank for six months.
Bought inventory from a supplier, to be paid for in two months.
Sold a long-term asset for cash.
Paid cash dividend payable (declared at end of previous year).
d. Which one of the following is true?
1)
2)
3)
4)
In vertical analysis of the balance sheet, shareholders’ equity is the base.
Horizontal analysis looks at trends over time.
Analysts should focus on the items with the largest change when reviewing
horizontal analysis.
Financial statement analysis is not reflected in market prices in a semi-strong
financial market.
e. Which one of the following is true?
1)
2)
3)
4)
A higher asset turnover is typically better.
A lower times interest earned is typically better.
A lower accounts receivable turnover ratio is typically better.
A higher age of accounts receivable is typically better.
f. A firm has an inventory turnover of 6. How could this ratio be increased?
Assignment 9  4
Financial Accounting: Liabilities & Equities
1)
2)
3)
4)
Keeping inventory the same and decreasing cost of sales
Doubling average inventory and at the same time doubling the cost of sales
Increasing inventory and decreasing cost of sales
Reducing inventory while cost of sales increases by 20%
g. What conclusion is not consistent with a very high receivable turnover ratio relative
to the industry average?
1)
2)
3)
4)
The firm may have excessively tight credit policies.
The firm manages collections very effectively.
The firm may be different, and thus not comparable, with the industry.
The firm is highly profitable compared to the industry.
h. According to R. M. Skinner, which of the following is a correct description of some
aspects of the traditional historical cost model?
1)
2)
3)
4)
There are specific but arbitrary revenue recognition criteria, typically satisfied
at the point of sale.
Measurement of financial position has been accepted as the primary goal of
financial reporting.
Market value is never used as a measurement attribute in an historical cost
model.
Costs are recognized as expenses on the income statement in order to match.
i. There are many problems associated with the traditional historical cost model. Which
of the following is not a problem with the model?
1)
2)
3)
4)
Revenue recognition point is an arbitrary point in the production/sales
process.
The model does not reflect changes in specific prices and general prices
(inflation).
The model is complicated and difficult to learn.
Accounting information produced will reflect transactions but not events,
some of which are significant.
j. If the stock market is efficient in the semi-strong form, which of the following is
true?
1)
2)
3)
4)
Knowledgeable investors cannot lose money.
Public information will be carefully considered by the market and will cause
appropriate stock market reactions.
All changes in income will cause stock market prices to increase.
Only past price information is reflected in stock market prices; these past
prices cannot be used to predict future stock market price.
k. Why does ratio analysis have importance even in a semi-strong efficient market?
1)
2)
3)
The semi-strong efficient market is not proven.
Ratios provide information on risk.
Only past price information is reflected in stock market price; ratios provide
information about future trends.
Financial Accounting: Liabilities & Equities
Assignment 9  5
4)
Ratio analysis can be used to find stocks that are undervalued by the market
and thus identify investment targets.
l. Why is financial statement analysis limited?
1)
2)
3)
4)
Many financial statements have inadequate disclosure, making analysis
invalid.
The information is not presented soon enough to be timely.
It takes too long to gather appropriate information.
There is so much diversity of accounting practices that comparisons are very
difficult.
Question 4 (25 marks)
(17 marks for Requirement 1; 5 marks for Requirement 2; and 3 marks for
Requirement 3)
MAPLE LEAF COMPANY
Balance Sheet
December 31
20X7
20X6
ASSETS
Cash
Accounts receivable
Inventories
Land
Plant and equipment (net of accumulated depreciation)
Patents
TOTAL
50.0
105.0
130.0
162.5
245.0
15.0
707.5
45.0
70.0
110.0
100.0
266.5
16.5
608.0
LIABILITIES AND EQUITY
Accounts payable
Staff expense payable
Future income tax liability
Borrowings, bonds
Ordinary shares
Retained earnings
TOTAL
130.0
100.0
70.0
65.0
241.5
101.0
707.5
100.0
105.0
50.0
90.0
190.0
73.0
608.0
Assignment 9  6
Financial Accounting: Liabilities & Equities
MAPLE LEAF COMPANY
Income Statement
20X7
Sales
Cost of sales
Gross margin
500.0
280.0
220.0
Staff expense
Depreciation
Amortization of patents
Interest expense
Gain on retirement of bonds
Miscellaneous expense
Loss on sale of equipment
Profit before income tax
95.0
10.0
1.5
8.0
(10.0)
3.5
2.0
110.0
Income tax — current
Income tax — future
Profit
29.5
20.0
60.5
Additional information
 On March 3, 20X7, the company issued a 10% stock dividend. The market price per
share of the ordinary stock was €7.50 on March 3, 20X3.
 On April 2, 20X7, the company issued 3,800 shares of ordinary stock for land. The
ordinary stock and land had current market value of approximately €20,000.
 On May 16, 20X7, the company retired borrowings, bonds with a face value of
€25,000.
 On July 31, 20X7, the company sold equipment costing €26,500 with a book value of
€11,500 for €9,500.
 On October 31, 20X7, the company declared and paid a €0.02 per share cash dividend.
 On November 10, 20X7, the company purchased land for €42,000 cash.
 The future income tax liability represents a temporary difference relating to the use of
depreciation allowed for income tax reporting and straight-line depreciation allowed
for financial statement reporting.
 Borrowings, bonds mature December 31, 20X9.
 Ordinary shares issued and outstanding on December 31, 20X6, were 42,000 and at
December 31, 20X7, were 50,000.
 Round ratios to two decimal places.
Financial Accounting: Liabilities & Equities
Assignment 9  7
Required
1. Prepare a statement of cash flow in good form using the direct method to present the
operating activities section.
2. Compute the 20X7 ratios to evaluate solvency, omit times debt service cost earned.
3. Provide an assessment of the company’s solvency and liquidity based on the two
above requirements.
100
Assignment 9  8
Financial Accounting: Liabilities & Equities