1. Explain why financial statements are important to the decision-making process in financial analysis. Also, identify and discuss some of their limitations for analysis purposes.

2. The preparation and analysis of comparative balance sheets and income statements are commonly applied tools of financial statement analysis and interpretation.

Required: a) Discuss the inherent limitations of analyzing and interpreting financial statements for a single year. Include in your discussion the extent that these limitations are overcome by use of comparative financial statements computed over more than one year. b) A year-to-year analysis of comparative balance sheets and income statements is a useful analysis tool. Still, without proper care, such analysis can be misleading. Discuss factors or conditions that contribute to such a possibility. How can additional information and supplementary data (beyond financial statements) help prevent this possibility?

3. Express the following income statement information in common-size percents and assess whether this company’s situation is favorable or unfavorable.

HARBISON CORPORATION
Comparative Income Statement
For Years Ended December 31, 2006 and 2005

| |2006 ($) |2005 ($) |
|Sales |720,000 |535,000 |
|Cost of goods sold |475,200 |280,340 |
|Gross Profit |244,800 |254,660 |
|Operating expenses |151,200 |103,790 |
|Net Income |93,600 |150,870 |
|