Solutions Manual for Managerial Accounting, 9th Edition by Kulp
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Course
Managerial Accounting
Institution
Managerial Accounting
Complete Solutions Manual for Managerial Accounting, 9th Edition 9e by Kulp, Dragoo, Hartgraves, Morse. ISBN-13: 3623
Full Chapters Solutions are included
Chapter 1 Managerial Accounting: Tools for Decision Making (pg. 2)
Chapter 2 Cost Behavior, Activity Analysis, and Cost Estimation (pg....
Appendix A
Managerial Analysis
of Financial Statements
QUESTIONS
QA-1. The general purpose for conducting financial statement analysis is to provide additional
useful information from the statements. Many information needs of users are not met
by general-purpose financial statements.
QA-2. 1. Ratio analysis helps managers to understand the company's overall performance. It
helps them to see how they are contributing to the firm as a whole.
2. It helps managers to compare their company with other similar companies. This
often helps to identify weaknesses that need management attention. For example,
an inventory turnover much lower than that of competing firms can adversely affect
a company's ability to be price competitive.
3. Lending and other contractual agreements often involve financial restrictions.
Analysis of the financial statements may be necessary to determine if all
requirements have been met.
QA-3. The purpose of evaluative standards in financial analysis is to enable users to have a
benchmark against which to measure the financial results. The two most common
methods are vertical analysis and horizontal analysis.
QA-4. The three standards that managers most frequently use are: (1) the firm's past
experience, (2) industry averages or averages for other, similar firms, and (3) the firm's
budgeted measures for the period under evaluation. From management's perspective,
the third standard is the most useful.
Solutions Manual, Appendix A A-1
,QA-5. Managers use vertical and horizontal analyses to identify significant changes that have
taken place during the period and to determine whether the changes have favorable or
unfavorable impacts on solvency and performance. The analyses also show where
shifts occur within major categories such as within current assets on the balance sheet.
The financial statements are usually converted to common size statements where one
account (sales or total assets) or one period (last year) are set at 100 percent (the base)
and all other accounts are stated in percentages against the base.
QA-6. Solvency evaluation refers to analyses that focus on the company's short-run ability to
pay its debts. These include the acid test ratio, current ratio, inventory turnover, and
number of days sales in receivables. Long-term solvency is evaluated by the debt-to-
equity ratio and the times-interest-earned. Performance evaluation includes analyses
that focus on profitability and utilization of resources. These analyses include asset
turnover, return on sales, return on assets, return on equity, and earnings per share.
QA-7. The current ratio (computed as current assets divided by current liabilities) is a measure
of the firm's current solvency. The acid test ratio (computed as cash plus accounts
receivable plus marketable securities divided by current liabilities) is a stricter test of
short-term solvency. It measures the firm's ability to pay its debts over a shorter period
of time.
QA-8. These two measures provide management with information about the amount of time it
takes to convert inventory into cash. The inventory turnover (computed as cost of goods
sold divided by average inventory) indicates the average length of time from purchase
of inventory to sale of inventory. The days sales in receivables (computed as average
accounts receivables divided by average daily credit sales) provides information on the
average age of the receivables.
QA-9. The primary measures of long-term solvency are the debt-to-equity ratio (computed as
total liabilities divided by total stockholders' equity) and times-interest-earned (computed
as the sum of net income, interest expense, and income taxes divided by interest
expense for the period).
QA-10. Asset turnover (sales divided by average total assets) provides information concerning
the sales output a firm’s assets produce.
QA-11. Because it is not related to the use of assets but to the financing of assets, interest
expense is added in the numerator when calculating return on assets.
QA-12. Financial leverage refers to the use of capital that has a fixed interest or dividend rate.
If capital generates a return higher than does the fixed rate, favorable leverage is
created. Conversely, if capital generates a return below the fixed rate, unfavorable
leverage is created.
A-2 Managerial Accounting,9h Edition
,QA-13. Comparisons to industry norms or averages are important because they provide insights
into the firm's relative financial condition and performance and show whether the firm is
keeping pace, moving ahead, or lagging behind its industry.
QA-14. Cautions the manager should take when using industry norms or averages include:
1. Avoid generalizations; every company will not have identical characteristics within
the industry.
2. Avoid using industry averages as guidelines. Your company may be performing
better than the industry, and the industry averages would reduce the efforts of the
organization.
3. Beware of overall industry performance because industries sometimes are not very
profitable and have poor operating efficiencies.
4. Analyze a firm as to its diversity or homogeneity. A firm may not exactly fit into an
industry because its diversity, or complexity, is different from that of any industry.
5. Analyze a firm's size, which influences how a firm should compare to industry
averages. The organization's size is another important factor when using industry
comparisons. Any organization that is not near the norm for other organizations
within the industry may have unique operating conditions that make comparisons to
averages irrelevant.
Solutions Manual, Appendix A A-3
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