EXERCISE 110:

Conditions

Analyzing Short-Term Financial

Huff Company and Mesa Company are similar firms that operate in the same industry.
The following information is available:

Write a one-half page report comparing Huff and Mesa using the available information.
Your discussion should include their ability to meet current obligations and to use current
assets efficiently.
Comparative Report
Mesa has a greater amount of working capital. But that by itself does not
indicate whether Mesa is more capable of meeting its current obligations.
Further support is provided by the current ratios and acid-test ratios that show
Mesa is in a more liquid position than Huff. However, this evidence does not
mean that Huff's liquidity is inadequate. Such a conclusion would require more
information such as norms for the industry or its other competitors. Notably,
Huff's acid-test ratios approximate the traditional rule of thumb (1 to 1).
This evidence also shows that Mesa's working capital, current ratio, and acid-test
ratio all increased dramatically over the three-year period. This trend toward
greater liquidity may be positive. But the evidence also may suggest that Mesa
holds an excess amount of highly liquid assets that typically earn a low return.
The accounts receivable turnover and merchandise turnover indicate that Huff
Company is more efficient in collecting its accounts receivable and in generating
sales from available merchandise inventory. However, these statistics also may
suggest that Huff is too conservative in granting credit and investing in inventory.
This could have a negative impact on sales and net income. Mesa's ratios may
be acceptable, but no definitive determination can be made without having
information on industry (or other competitors) standards.

EXERCISE 23:

Timeliness of Financial Statements

Some financial statement users criticize the timeliness of annual financial statements.
Required:
a.
Explain why summary information in the income statement is not new
information when the annual report is issued.
b.
Describe the types of information in the income statement that are new
information to financial statement users when the annual report is issued.

a. Summary earnings information is released well in advance of release of the

annual report. As a result, when the financial statements are released, the
market via the earlier earnings announcement already knows the bottom-line
earnings number.
b. Release of the income statement does contain additional information for the
market because the income statement has much more line item revenue and
expense detail than does the earnings announcement.