✍️Ratio Analysis and Financial Statement Analysis Exercises(4 exercises)

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George Issa 17 April 2024

Hello, my question is on exercise 4. Would the calculation of EBIT also remove interest revenue as well or would it only remove interest expense? Thank you.

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1. Deleted User 22 April 2024
  
  Hello George,
  
  For question 4 , Interest revenue is not removed from Net income. 2017 Earnings are adjusted for income tax expense and interest expense.
  
  Farhat Lectures Support Team
  
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Cheryl Orticke 5 May 2024

EPS -How was it determined the WAOS equals 30,000?

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1. Deleted User 11 May 2024
  
  Hello Cheryl,
  
  Under stockholder’s equity section of the balance sheet, we know that there is no change in common stock between year 2016 and 2017. Therefore, simply we divide the 300,000 USD common stock value obtained from the balance sheet by the 10 USD par value which equates 30,000 shares.
  
  Hope this makes sense !
  
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James Nelson 20 August 2024

Hi-
Question 1 – (B) –
Given the purchase of 2 year prepaid rent (50% Long term Asset [LT Prepaid Expense] and 50% current assets [Prepaid Expense]). As such, I would expect this would result in a decline of current Ratio as 50% is no longer current assets.

I would expect that this would result in a decline of current assets hence a decline in the current ratio.

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1. Maroun, CPA 23 August 2024
  
  Hi James,
  
  You’re correct in thinking that the classification of a prepaid expense affects the current ratio. However, the timing of when the prepaid expense is paid plays a significant role in how it affects the current ratio.
  
  If the prepaid rent is paid at the beginning of the year, the entire amount of the prepaid rent would initially be classified as a current asset since it’s expected to be consumed within the operating cycle (the current and next fiscal year).
  
  If the prepaid rent is paid later during the year, a portion of the prepaid rent will be classified as a long-term asset, depending on when it will be expensed. This would result in a decline of current assets and thus a decline in the current ratio.
  
  Since the question was not clear about the date of the payment, I updated the given to a one-year rent payment.
  Thank you for bringing this to our attention!
  
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taegwon lee 16 September 2025

Question 4
Hello, could you explain how to determine the shares outstanding? In the additional information, the shares outstanding in 2017 are 30 million, but under the stockholders’ equity section, I geyt 30,000 shares.

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1. Maroun, CPA 17 September 2025
  
  Hi Taegwon,
  
  If you look again at the provided balance sheet and income statement, you’ll see “(000 omitted)”. That means every number is shown in thousands.
  
  Common stock ($10 par) shows 300,000 → that’s $300,000,000.
  
  Shares issued/outstanding = Common stock ÷ par = $300,000,000 ÷ $10 = 30,000,000 shares.
  There’s no treasury stock listed, so issued = outstanding = 30 million.
  
  In the solution, they write “30,000” because they’re still using the “000 omitted” convention for shares too. It makes the division easier and does not change the result with ratios. You can see the units line up in EPS: $267,000 (000s) ÷ 30,000 (000s of shares) = $8.90.
  
  This “(000) omitted” convention is very common in real life and on exams. Always check the units line at the top and keep everything in the same units.
  
  I hope this helps!
  
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Transaction	Ratio	Effect
a. Purchased merchandise inventory on account.	Acid-test ratio	_______
b. Paid one year’s rent in advance.	Current ratio	_______
c. Net sales remained unchanged, while total cost of operations decreased.	Profit margin on sales	_______
d. Issued 5% nonconvertible preferred stock. No dividends were paid in the first year of issue.	Earnings per share	_______
e. Bonds payable with a face value of $500,000 were converted dollar for dollar for common stock.	Debt to equity ratio	_______
f. Sold marketable securities at a price in excess of original cost.	Current ratio	_______
g. Purchased a building in exchange for a long-term mortgage.	Book value per share	_______

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✍️Ratio Analysis and Financial Statement Analysis Exercises(4 exercises)

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