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Chapter 17 – Exercises & Cases

Multiple Choice Questions​

  1. Comparative financial statements show: a) Only one period b) Multiple periods side-by-side c) Only percentages d) Only ratios Answer: b) Comparative statements show multiple periods.

  2. Common-size statements express items as: a) Dollar amounts b) Percentages c) Ratios d) Changes Answer: b) Common-size statements use percentages.

  3. ROA measures: a) Only profitability b) Asset efficiency c) Only liquidity d) Only leverage Answer: b) ROA measures how efficiently assets generate profit.

Questions​

  1. Why is financial statement analysis necessary?

  2. How do comparative statements help with analysis?

  3. What are the advantages of common-size statements?

  4. What types of financial ratios are used? Give examples.

  5. How is ROA calculated and interpreted?

Problems Set A​

Problem A-1: Comparative Analysis

Prepare comparative income statement for 2023 and 2024:

  • 2023 Revenue: €200,000, Expenses: €150,000
  • 2024 Revenue: €240,000, Expenses: €170,000
  • Show dollar changes and percentage changes

Problem A-2: Common-Size Statement

Prepare common-size income statement:

  • Revenue: €300,000
  • Cost of Goods Sold: €180,000
  • Operating Expenses: €80,000
  • Net Income: €40,000

Problem A-3: Liquidity Ratios

Calculate liquidity ratios:

  • Current Assets: €120,000
  • Inventory: €40,000
  • Current Liabilities: €60,000
  • Calculate: Current Ratio and Quick Ratio

Problem A-4: Profitability Ratios

Calculate profitability ratios:

  • Revenue: €500,000
  • Gross Profit: €200,000
  • Net Income: €60,000
  • Average Assets: €400,000
  • Average Equity: €250,000
  • Calculate: Gross Margin, Net Margin, ROA, ROE

Problem A-5: Efficiency Ratios

Calculate efficiency ratios:

  • Revenue: €400,000
  • Cost of Goods Sold: €240,000
  • Average Inventory: €60,000
  • Average Receivables: €50,000
  • Average Assets: €500,000
  • Calculate: Inventory Turnover, Receivables Turnover, Asset Turnover

Problems Set B​

Problem B-1: Complete Ratio Analysis

From the following data, calculate all major ratios:

Balance Sheet:

  • Current Assets: €150,000 (Inventory: €50,000)
  • Fixed Assets: €300,000
  • Current Liabilities: €75,000
  • Long-Term Debt: €150,000
  • Equity: €225,000

Income Statement:

  • Revenue: €600,000
  • Cost of Goods Sold: €360,000
  • Operating Expenses: €180,000
  • Net Income: €60,000

Additional:

  • Average Inventory: €45,000
  • Average Receivables: €40,000

Problem B-2: Comparative Analysis

Prepare comparative balance sheets and income statements for 2023 and 2024, showing all changes and trends.

Problem B-3: Common-Size Analysis

Prepare common-size balance sheet and income statement, and analyze the structure.

Problem B-4: DuPont Analysis

Using ROA = Profit Margin × Asset Turnover, analyze:

  • Net Income: €80,000
  • Revenue: €500,000
  • Average Assets: €400,000
  • Calculate and interpret ROA components

Comprehensive Problem​

Comprehensive Problem 17: Complete Financial Statement Analysis

Le Petit Bistro needs a complete financial analysis for 2023 and 2024.

Financial Statements:

2023:

  • Revenue: €400,000
  • Cost of Goods Sold: €240,000
  • Operating Expenses: €120,000
  • Net Income: €40,000
  • Current Assets: €100,000 (Inventory: €30,000)
  • Fixed Assets: €200,000
  • Current Liabilities: €50,000
  • Long-Term Debt: €100,000
  • Equity: €150,000

2024:

  • Revenue: €480,000
  • Cost of Goods Sold: €288,000
  • Operating Expenses: €140,000
  • Net Income: €52,000
  • Current Assets: €120,000 (Inventory: €40,000)
  • Fixed Assets: €250,000
  • Current Liabilities: €60,000
  • Long-Term Debt: €120,000
  • Equity: €190,000

Additional Information:

  • Average Inventory 2023: €28,000
  • Average Inventory 2024: €35,000
  • Average Receivables 2023: €35,000
  • Average Receivables 2024: €42,000

Required:

  1. Prepare comparative income statements (2023 and 2024) showing: a) Dollar changes b) Percentage changes c) Trends

  2. Prepare comparative balance sheets (2023 and 2024) showing: a) Dollar changes b) Percentage changes c) Trends

  3. Prepare common-size income statements for both years.

  4. Prepare common-size balance sheets for both years.

  5. Calculate all major financial ratios for both years: a) Liquidity ratios (Current, Quick) b) Solvency ratios (Debt-to-Equity, Debt-to-Assets) c) Profitability ratios (Gross Margin, Net Margin, ROA, ROE) d) Efficiency ratios (Inventory Turnover, Receivables Turnover, Asset Turnover)

  6. Analyze trends: a) Which ratios improved? b) Which ratios declined? c) What are the implications?

  7. Compare to Luxembourg SME benchmarks: a) How does the business compare? b) What are areas of strength? c) What are areas needing improvement?

  8. Provide recommendations: a) What actions should be taken? b) What are the priorities? c) How can performance be improved?

Cases​

Case 17-1: Performance Evaluation

Marie wants to evaluate her restaurant's performance. She has financial statements but doesn't know how to interpret them.

Questions for Analysis:

  1. What ratios should Marie calculate?

  2. How should she compare her performance?

  3. What benchmarks are relevant for a restaurant in Luxembourg?

  4. What are the key performance indicators?

  5. How can she identify areas for improvement?

  6. What actions should she take based on the analysis?

Case 17-2: Benchmarking

A Luxembourg SME wants to benchmark its performance against industry standards.

Questions for Analysis:

  1. Where can the business find Luxembourg benchmarks?

  2. What ratios are most important for comparison?

  3. How should industry differences be considered?

  4. What are the limitations of benchmarking?

  5. How can benchmarking support decision-making?

  6. What are the Luxembourg-specific considerations?

Solutions are published in supplementary/instructor/solutions/chapter_17_solutions.md.