1. Analyzing Companies commu mation in their Analyzing Financial Statements LO, bies communicate a great deal of infor- in their financial statements. Analyzing statements is a critical step in unders mpanies' operations and performance. The fol wing statements relate to the analysis of financial lowing state statements. a The use of generally accepted accounting prin- ciples eliminates variability in financial reporting by different companies so that financial state- ment analysis is easier to perform. b. Financial statement analysis can be useful for predicting a company's future financial performance. C. Decision makers should use a variety of financial statement ratios, rather than a single ratio, if they wish to understand a company. d. One important tool to use in analyzing a set of financial statements is industry comparisons. e. Inflation should be ignored in conducting finan- cial statement analysis. Required Indicate whether each of the preceding statements is true or false. 2. Horizontal and Vertical Analysis LO2, 3 Financial statement analysis can be performed in a variety of ways. The following statements relate to two of these ways: horizontal and vertical analysis. a. Horizontal analysis should not include more than two years of data. b. Only the balance sheet should be subjected to horizontal analysis. C. A special type of horizontal analysis called trend analysis is useful for identifying patterns over long periods. d. Vertical analysis controls for differences in company size, whereas horizontal analysis does not. e. Common-size financial statements are statements for companies of approximately the same size and in the same industry. f. Liquidity is a measure of a company's ability to meet its immediate financial obligations. Required Indicate whether each of the preceding statements is true or false. 3. Liquidity Ratios LO4 Financial statements of two competing companies report the following data (amounts in millions): Company A Company B Sales $4,500 $2,700 Accounts receivable, January 1 3,000 1,950 Accounts receivable, December 31 1,500 600 Required Compute the accounts receivable turnover for each company. 4. Solvency Ratios L05 A company has the following financial statement data (in millions): Accounts payable $ 1,200 Notes payable 3,120 Capital stock 4,000 Retained earnings 14,000 Required Compute the debt-to-equity ratio for the company. 3. Liquidity Ratios LO4 Financial statements of two competing companies report the following data (amounts in millions): Company A Company B Sales $4,500 $2,700 Accounts receivable, January 1 3 ,000 1,950 Accounts receivable, December 31 1,500 600 Required Compute the accounts receivable turnover for each company. 5. Profitability Ratios LO6 A company has the following financial statement data (in millions): Net income $ 600 Average total assets 12,000 Interest expense (net of taxes) 240 Required Compute the return on assets for the company