Test Bank - Chapter18 FS Analysis

Chapter 18
How Well Am I Doing? Financial Statement Analysis
True/False
1.
F
Medium
Indeterminingwhetheracompany'sfinancialconditionis
improvingordeterioratingovertime,verticalanalysisof
financialstatementdatawouldbemoreusefulthanhorizontal
analysis.
2.
T
Easy
Trendpercentagesstateseveralyears'financialdatainterms
ofabaseyear.Forexample,salesforeveryyearwouldbe
statedasapercentageofthesalesinthebaseyear.
3.
T
Easy
Thegrossmarginpercentageiscomputedtakingthedifference
betweensalesandcostofgoodsandthendividingtheresultby
sales.
4.
F
Medium
Thegrossmarginpercentageiscomputedbydividingnetincome
beforeinterestandtaxesbysales.
5.
F
Easy
Thepriceearningsratioisdeterminedbydividingthepriceof
aproductbyitsprofitmargin.
6.
T
Easy
Thepriceearningsratioiscomputedbydividingthemarket
pricepersharebythecurrentearningspershare.
7.
F
Medium
Whencomputingthereturnontotalassets,theaftertaxeffect
ofinterestexpensemustbesubtractedfromnetincome.
8.
F
Medium
Iftheassetsinwhichfundsareinvestedhavearateofreturn
lowerthanthefixedrateofreturnpaidtothesupplierofthe
funds,thenfinancialleverageispositive.
9.
F
Easy
Ifthemarketvalueofashareofstockisgreaterthanits
bookvalue,thestockisprobablyoverpriced.
10.
T
Hard
Workingcapitalequalscurrentassets,plusnoncurrent
liabilitiesandstockholders'equity,lesstotalassets.
ManagerialAccounting,9/e
152
11.
T
Medium
Assumingthatacompanyhasacurrentratiogreaterthan1.0to
1,repayingashorttermnotepayablewillincreasethecurrent
ratio.
12.
F
Medium
Theacidtestratioisatestofthequalityofaccounts
receivableinotherwords,whethertheyarelikelytobe
collected.
13.
T
Medium
Whencomputingtheacidtestratio,prepaidexpensesare
ignored.
14.
T
Easy
Onlycreditsales(i.e.,salesonaccount)areincludedinthe
computationoftheaccountsreceivableturnover.
15.
F
Easy
Theinventoryturnoverratioisequaltotheaverageinventory
balancedividedbythecostofgoodssold.
Multiple Choice
16.
D
Easy
Horizontalanalysisoffinancialstatementsisaccomplished
through:
a.placingstatementitemsonanaftertaxbasis.
b.commonsizestatements.
c.computingbothearningspershareandthepriceearnings
ratio.
d.trendpercentages.
17.
D
Easy
Thegrossmarginpercentageismostlikelytobeusedto
assess:
a.howquicklyaccountsreceivablescanbecollected.
b.howquicklyinventoriesaresold.
c.theefficiencyofadministrativedepartments.
d.theoverallprofitabilityofthecompany'sproducts.
18.
C
Medium
Earningspershareofcommonstockwillimmediatelyincreaseas
aresultof:
a.thesaleofadditionalsharesofcommonstockbythe
company.
b.anincreaseinthedividendspaidtocommonstockholdersby
thecompany.
c.anincreaseinthecompany'snetincome.
d.theissuanceofbondsbythecompanytofinanceconstruction
ofnewbuildings.
153ManagerialAccounting,9/e
19.
C
Easy
ThemarketpriceofXYZCompany'scommonstockdroppedfrom$25
to$21pershare.Thedividendpaidpershareremained
unchanged.Thecompanysdividendpayoutratiowould:
a.increase.
b.decrease.
c.beunchanged.
d.impossibletodeterminewithoutmoreinformation.
20.
A
Medium
CMA
adapted
Anincreaseinthemarketpriceofacompanyscommonstock
willimmediatelyaffectits:
a.dividendyieldratio.
b.debttoequityratio.
c.earningspershareofcommonstock.
d.dividendpayoutratio.
21.
D
Medium
Whichofthefollowingistrueregardingthecalculationof
returnontotalassets?
a.Thenumeratoroftheratioconsistsonlyofnetincome.
b.Thedenominatoroftheratioconsistsofthebalanceof
totalassetsattheendoftheperiodunder consideration.
c.Thenumeratoroftheratioconsistsofnetincomeplus
interestexpensetimesthetaxrate.
d.Thenumeratoroftheratioconsistsofnetincomeplus
interestexpensetimesoneminusthetaxrate.
22.
D
Medium
Financialleverageisnegativewhen:
a.thereturnontotalassetsislessthantherateofreturn
oncommonstockholders'equity.
b.totalliabilitiesarelessthanstockholders'equity.
c.totalliabilitiesarelessthantotalassets.
d.thereturnontotalassetsislessthantherateofreturn
demandedbycreditors.
23.
D
Medium
Whichofthefollowingisnotasourceoffinancialleverage?
a.Bondspayable.
b.Accountspayable.
c.Preferredstock.
d.Retainedearnings.
24.
A
Medium
Ifacompany'sbondsbearaninterestrateof8%,thetaxrate
is30%,andthecompany'sassetsaregeneratinganaftertax
returnof7%,thentheleveragewouldbe:
a.positive.
b.negative.
c.neitherpositiveornegative.
d.impossibletodeterminewithoutknowingthereturnoncommon
stockholders'equity.
154
25.
D
Medium
CMA
adapted
Acompanyscurrentratioandacidtestratiosarebothgreater
than1.0to1.Ifobsoleteinventoryiswrittenoff,this
would:
a.decreasetheacidtestratio.
b.increasetheacidtestratio.
c.increasenetworkingcapital.
d.decreasethecurrentratio.
26.
D
Medium
Ifacompanyconvertsashorttermnotepayableintoalong
termnotepayable,thistransactionwould:
a.decreaseworkingcapitalandincreasethecurrentratio.
b.decreaseworkingcapitalanddecreasethecurrentratio.
c.decreasethecurrentratioanddecreasetheacidtestratio.
d.increaseworkingcapitalandincreasethecurrentratio.
27.
B
Hard
CMA
adapted
Whichoneofthefollowingwouldincreasetheworkingcapital
ofacompany?
a.Cashpaymentofpayrolltaxespayable.
b.Refinancingashorttermnotepayablewithatwoyearnote
payable.
c.Cashcollectionofaccountsreceivable.
d.Paymentofa20yearmortgagepayablewithcash.
28.
A
Medium
Saleofapieceofequipmentatbookvalueforcashwill:
a.increaseworkingcapital.
b.decreaseworkingcapital.
c.decreasethedebttoequityratio.
d.increasenetincome.
29.
B
Medium
CMA
adapted
Ifafirmhasahighcurrentratiobutalowacidtestratio,
onecanconcludethat:
a.thefirmhasalargeoutstandingaccountsreceivable
balance.
b.thefirmhasalargeinvestmentininventory.
c.thefirmhasalargeamountofcurrentliabilities.
d.thefirm'sfinancialleverageisveryhigh.
30
B
Hard
DesktopCo.presentlyhasacurrentratioof1.2to1andan
acidtestratioof0.8to1.Prepayingnextyear'sofficerent
of$50,000will:
a.havenoeffectoneitherthecompany'scurrentratioorits
acidtestratio.
b.havenoeffectonthecompany'scurrentratiobutwill
decreaseitsacidtestratio.
c.decreasethecompany'scurrentratioanddecreaseitsacid
testratio.
d.increasethecompany'scurrentratioandincreaseitsacid
testratio.
31.
A
Medium
TheMillerCompanypaidoffsomeofitsaccountspayableusing
cash.Thecompany'scurrentratioisgreaterthan1.0to1.The
companyscurrentratiowould:
a.increase.
b.decrease.
c.remainunchanged.
d.impossibletodeterminefromtheinformationgiven.
32.
A
Hard
RahnerCompanyhasacurrentratioof1.75to1.Thisratio
willdecreaseifRahnerCompany:
a.borrowscashusingasixmonthnote.
b.paysthetaxespayablewhichhavebeenacurrentliability.
c.paysthefollowingmonth'srentonthelastdayoftheyear.
d.sellsinventoryformorethantheircost.
33.
D
Easy
Whichofthefollowingaccountswouldbeincludedinthe
calculationoftheacidtestratio:
AccountsReceivablePrepaidExpenseInventory
a.yesyesno
b.noyesyes
c.nonoyes
d.yesnono
34.
C
Medium
AllenCompany'saveragecollectionperiodforaccounts
receivablewas40dayslastyear,butincreasedto60daysthis
year.Whichofthefollowingwouldmostlikelyaccountforthis
change?
a.adecreaseinaccountsreceivablerelativetosales.
b.adecreaseinsales.
c.arelaxationofcreditpolicies.
d.anincreaseinsales.
35.
B
Hard
ThenetaccountsreceivableforAndanteCompanywere$150,000
atthebeginningofthemostrecentyearand$190,000atthe
endoftheyear.Iftheaccountsreceivableturnoverforthe
yearwas8.5,and15%oftotalsaleswerecashsales,thenthe
totalsalesfortheyearwere:
a.$1,445,000.
b.$1,700,000.
c.$1,900,000.
d.$1,500,000.
156
36.
A
Hard
CMA
adapted
SelecteddatafromSheridanCorporationsyearendfinancial
statementsarepresentedbelow.Thedifferencebetweenaverage
andendinginventoryisimmaterial.
Currentratio............2.0
Acidtestratio..........1.5
Currentliabilities......$120,000
Inventoryturnover.......8times
Grossprofitmargin......40%
Sheridan'ssalesfortheyearwas:
a.$800,000.
b.$480,000.
c.$1,200,000.
d.$240,000.
37.
C
Hard
FultonCompany'spriceearningsratiois8.0andthemarket
priceofashareofcommonstockis$32.Thecompanyhas3,000
sharesofpreferredstockoutstandingwitheachsharereceiving
adividendof$3pershare.Theearningspershareofcommon
stockis:
a.$10.
b.$7.
c.$4.
d.$3.
38.
C
Hard
PerlmanCompanyhad100,000sharesofcommonstockand20,000
sharesofpreferredstockattheendoftheyearjust
completed.Preferredstockholdersreceiveddividendstotaling
$140,000.Commonstockholdersreceiveddividendstotaling
$210,000.Ifthedividendpayoutratiofortheyearwas70%,
thenthenetincomefortheyearwas:
a.$300,000.
b.$287,000.
c.$440,000.
d.$147,000.
39.
C
Medium
NOTETOTHEINSTRUCTOR:Questions39,40,and41aredifferent
versionsofthesamequestion.
ArlbergCompany'snetincomelastyearwas$250,000.The
companyhas150,000sharesofcommonstockand80,000sharesof
preferredstockoutstanding.Therewasnochangeinthenumber
ofcommonorpreferredsharesoutstandingduringtheyear.The
companydeclaredandpaiddividendslastyearof$1.30per
shareonthecommonstockand$1.40pershareonthepreferred
stock.Theearningspershareofcommonstockisclosestto:
a.$1.67.
b.$2.41.
c.$0.92.
d.$0.37.
40.
C
Medium
ArgetCompany'snetincomelastyearwas$600,000.Thecompany
has150,000sharesofcommonstockand60,000sharesof
a.$4.24.
b.$4.00.
c.$3.76.
d.$2.90.
41.
D
Medium
ArquandtCompany'snetincomelastyearwas$550,000.The
companyhas150,000sharesofcommonstockand50,000sharesof
a.$3.67.
b.$2.47.
c.$4.23.
d.$3.10.
42.
C
Easy
NOTETOTHEINSTRUCTOR:Questions42and43aredifferent
Thefollowingdatahavebeentakenfromyourcompany's
financialrecordsforthecurrentyear:
Earningspershare......$10
Dividendpershare......$6
Marketpricepershare..$90
Bookvaluepershare....$70
Thepriceearningsratiois:
a.1.67to1.
b.15.0to1.
c.9.0to1.
d.7.0to1.
158
43.
C
Easy
NOTETOTHEINSTRUCTOR:Questions42and43aredifferent
Thefollowingdatahavebeentakenfromyourcompany's
financialrecordsforthecurrentyear:
Earningspershare......$15
Dividendpershare......$9
Marketpricepershare..$120
Bookvaluepershare....$90
Thepriceearningsratiois:
a.12.5to1.
b.6.0to1.
c.8.0to1.
d.7.5to1.
44.
D
Medium
InformationconcerningthecommonstockofMorrisCompanyasof
theendofthecompany'sfiscalyearispresentedbelow.
Numberofsharesoutstanding......460,000
Parvaluepershare...............$5.00
Dividendspaidpershare..........$6.00
Marketpricepershare............$54.00
Earningspershare................$18.00
Thedividendyieldratioisclosestto:
a.50.0%.
b.33.3%.
c.120.0%.
d.11.1%.
45.
D
Hard
CameronCompanyhad50,000sharesofcommonstockissuedand
outstandingduringtheyearjustended.Thefollowing
informationpertainstotheseshares:
Priceoriginallyissued...................$40
Bookvalueatendofcurrentyear.........$70
Marketvalue,beginningofcurrentyear...$85
Marketvalue,endofcurrentyear.........$90
Thetotaldividendoncommonstockfortheyearwas$400,000.
CameronCompany'sdividendyieldratiofortheyearwas:
a.20.00%
b.11.43%.
c.9.41%.
d.8.89%.
46.
C
Medium
BravermanCompany'snetincomelastyearwas$75,000andits
interestexpensewas$10,000.Totalassetsatthebeginningof
theyearwere$650,000andtotalassetsattheendoftheyear
were$610,000.Thecompany'sincometaxratewas30%.The
company'sreturnontotalassetsfortheyearwasclosestto:
a.13.5%.
b.12.4%.
c.13.0%.
d.11.9%.
47.
D
Medium
BrachlanCompany'snetincomelastyearwas$80,000andits
a.12.5%.
b.13.4%.
c.15.6%.
d.14.7%.
48.
A
Medium
BrawerCompany'snetincomelastyearwas$55,000andits
a.10.8%.
b.8.6%.
c.11.7%.
d.9.5%.
49.
C
Medium
ThetotalassetsofthePhilbinCompanyonJanuary1,19x9were
$2.3millionandonDecember31,19x9were$2.5million.Net
incomefor19x9was$188,000.Dividendsfor19x9totaled
$75,000,interestexpensestotaled$70,000,andthetaxrate
was30%.Thereturnontotalassetsfor19x9wasclosestto:
a.9.5%.
b.6.8%.
c.9.9%.
d.10.8%.
160
50.
C
Medium
CPA
adapted
SelectedfinancialdataforIrvingtonCompanyappearbelow:
AccountBalances
o
BeginningEndof
ofyearyear
Preferredstock.........$125,000$125,000
Commonstock.............300,000400,000
Retainedearnings.........75,000185,000
Duringtheyear,thecompanypaiddividendsof$10,000onits
preferredstock.Thecompany'snetincomefortheyearwas
$120,000.Thecompany'sreturnoncommonstockholders'equity
fortheyearisclosestto:
a.17%.
b.19%.
c.23%.
d.25%.
51.
A
Easy
CraslerCompany'snetincomelastyearwas$100,000.The
companypaidpreferreddividendsof$20,000anditsaverage
commonstockholders'equitywas$580,000.Thecompany'sreturn
oncommonstockholders'equityfortheyearwasclosestto:
a.13.8%.
b.3.4%.
c.20.7%.
d.17.2%.
52.
D
Easy
CrawlerCompany'snetincomelastyearwas$80,000.Thecompany
paidpreferreddividendsof$10,000anditsaveragecommon
stockholders'equitywas$400,000.Thecompany'sreturnon
commonstockholders'equityfortheyearwasclosestto:
a.20.0%.
b.22.5%.
c.2.5%.
d.17.5%.
53.
C
Easy
CrabtreeCompany'snetincomelastyearwas$50,000.The
companypaidpreferreddividendsof$20,000anditsaverage
commonstockholders'equitywas$440,000.Thecompany'sreturn
oncommonstockholders'equityfortheyearwasclosestto:
a.15.9%.
b.11.4%.
c.6.8%.
d.4.5%.
54.
A
Medium
Thefollowingaccountbalanceshavebeenprovidedfortheend
ofthemostrecentyear:
Totalassets$150,000
Totalstockholders'equity$120,000
Totalcommonstock$50,000(5,000shares)
Totalpreferredstock$10,000(1,000shares)
Thebookvaluepershareofcommonstockis:
a.$22.
b.$25.
c.$20.
d.$28.
55.
A
Medium
DratifCompany'sworkingcapitalis$33,000anditscurrent
liabilitiesare$80,000.Thecompany'scurrentratioisclosest
to:
a.1.41to1.
b.0.59to1.
c.3.42to1.
d.0.41to1.
56.
D
Medium
DraginCompany'sworkingcapitalis$36,000anditscurrent
to:
a.2.69to1.
b.0.41to1.
c.0.59to1.
d.1.59to1.
162
57.
B
Medium
DrabanCompany'sworkingcapitalis$38,000anditscurrent
to:
a.0.36to1.
b.1.64to1.
c.0.64to1.
d.2.55to1.
58.
C
Hard
Attheendoftheyearjustcompleted,OremCompany'scurrent
liabilitiestotaled$75,000,anditslongtermliabilities
totaled$225,000.Workingcapitalatyearendwas$100,000.If
thecompany'sdebttoequityratiois0.30to1,totallong
termassetsmustequal:
a.$1,000,000.
b.$1,300,000.
c.$1,125,000.
d.$1,225,000.
59.
B
Hard
CMA
adapted
StarrsCompanyhascurrentassetsof$300,000andcurrent
liabilitiesof$200,000.Whichofthefollowingtransactions
wouldincreaseitsworkingcapital?
a.Prepaymentof$50,000ofnextyearsrent.
b.Refinancing$50,000ofshorttermdebtwithlongtermdebt.
c.Acquisitionoflandvaluedat$50,000byissuingnewcommon
stock.
d.Purchaseof$50,000ofmarketablesecuritiesforcash.
60.
C
Hard
CMA
adapted
SelectedyearenddatafortheBrayerCompanyarepresented
below:
Currentliabilities........$600,000
Acidtestratio............2.5to1
Currentratio..............3.0to1
Costofgoodssold.........$500,000
Thecompanyhasnoprepaidexpensesandinventoriesremained
unchangedduringtheyear.Basedonthesedata,thecompany's
inventoryturnoverratiofortheyearwasclosestto:
a.1.20times.
b.2.40times.
c.1.67times.
d.2.33times.
61.
A
Hard
HarwichportCompanyhasacurrentratioof3.5to1andan
acidtestratioof2.8to1.Currentassetsequal$175,000of
which$5,000consistsofprepaidexpenses.Harwichport
Company'sinventorymustbe:
a.$30,000.
b.$40,000.
c.$50,000.
d.$35,000.
62.
A
Hard
BenCompanyhasthefollowingdatafortheyearjustended:
Cash....................?
AccountsReceivable.....$28,000
Inventory...............$35,000
Currentratio...........2.4to1
Acidtestratio.........1.6to1
BenCompany'scurrentliabilitieswere:
a.$43,750.
b.$50,400.
c.$35,000.
d.$63,000.
63.
C
Hard
CMA
adapted
MarcyCorporation'scurrentratioiscurrently1.75to1.The
firmscurrentratiocannotfallbelow1.5to1without
violatingagreementswithitsbondholders.Ifcurrent
liabilitiesarepresently$250million,themaximumnewshort
termdebtthatcanbeissuedtofinanceanequivalentamountof
inventoryexpansionis:
a.$41.67million.
b.$375.00million.
c.$125.00million.
d.$62.50million.
64.
B
Easy
EralCompanyhas$17,000incash,$3,000inmarketable
securities,$36,000incurrentreceivables,$24,000in
inventories,and$45,000incurrentliabilities.Thecompany's
acidtest(quick)ratioisclosestto:
a.1.78to1.
b.1.24to1.
c.0.80to1.
d.0.44to1.
164
65.
C
Easy
EramboCompanyhas$11,000incash,$6,000inmarketable
a.0.75to1.
b.1.02to1.
c.0.86to1.
d.0.53to1.
66.
A
Easy
ErackCompanyhas$15,000incash,$4,000inmarketable
a.1.43to1.
b.0.95to1.
c.1.33to1.
d.1.88to1.
67.
D
Hard
CPA
adapted
EasthamCompany'saccountsreceivablewere$600,000atthe
beginningoftheyearand$800,000attheendoftheyear.Cash
salesfortheyearwere$300,000.Theaccountsreceivable
turnoverfortheyearwas5times.EasthamCompany'stotal
salesfortheyearwere:
a.$800,000.
b.$1,300,000.
c.$3,300,000.
d.$3,800,000.
68.
C
Easy
FranticCompanyhad$130,000insalesonaccountlastyear.The
beginningaccountsreceivablebalancewas$10,000andthe
endingaccountsreceivablebalancewas$16,000.Thecompany's
accountsreceivableturnoverwasclosestto:
a.5.00times.
b.13.00times.
c.10.00times.
d.8.13times.
69.
D
Easy
FracusCompanyhad$100,000insalesonaccountlastyear.The
a.6.25times.
b.7.14times.
c.3.33times.
d.6.67times.
70.
B
Easy
FrabineCompanyhad$150,000insalesonaccountlastyear.The
a.4.69times.
b.9.38times.
c.8.33times.
d.10.71times.
71.
B
Easy
GrangerCompanyhad$180,000insalesonaccountlastyear.The
averagecollectionperiod(ageofreceivables)wasclosestto:
a.20.28days.
b.28.39days.
c.36.50days.
d.56.78days.
72.
A
Easy
GrappCompanyhad$130,000insalesonaccountlastyear.The
a.47.73days.
b.50.54days.
c.44.92days.
d.95.46days.
166
73.
D
Easy
GraveCompanyhad$150,000insalesonaccountlastyear.The
a.24.33days.
b.58.40days.
c.34.07days.
d.29.20days.
74.
B
Easy
HarrisCompany,aretailer,hadcostofgoodssoldof$290,000
lastyear.Thebeginninginventorybalancewas$26,000andthe
endinginventorybalancewas$24,000.Thecompany'sinventory
turnoverwasclosestto:
a.12.08times.
b.11.60times.
c.5.80times.
d.11.15times.
75.
D
Easy
HartonCompany,aretailer,hadcostofgoodssoldof$250,000
a.5.95times.
b.11.36times.
c.12.50times.
d.11.90times.
76.
C
Easy
HarkerCompany,aretailer,hadcostofgoodssoldof$160,000
a.6.15times.
b.8.00times.
c.6.96times.
d.3.48times.
77.
A
Easy
IrawaddyCompany,aretailer,hadcostofgoodssoldof
$230,000lastyear.Thebeginninginventorybalancewas$24,000
andtheendinginventorybalancewas$22,000.Thecompany's
averagesaleperiod(turnoverindays)wasclosestto:
a.36.50days.
b.73.00days.
c.38.09days.
d.34.91days.
78.
D
Easy
IrappaCompany,aretailer,hadcostofgoodssoldof$170,000
endinginventorybalancewas$26,000.Thecompany'saverage
saleperiod(turnoverindays)wasclosestto:
a.55.82days.
b.60.12days.
c.115.94days.
d.57.97days.
79.
A
Easy
IrallyCompany,aretailer,hadcostofgoodssoldof$150,000
endinginventorybalancewas$24,000.Thecompany'saverage
saleperiod(turnoverindays)wasclosestto:
a.60.83days.
b.63.27days.
c.58.40days.
d.121.67days.
80.
C
Hard
CPA
adapted
LastyearDunnCompanypurchased$1,920,000ofinventory.The
costofgoodsoldwas$1,800,000andtheendinginventorywas
$360,000.Whatwastheinventoryturnover?
a.5.0times.
b.5.3times.
c.6.0times.
d.6.4times.
81.
A
Hard
Duringtheyearjustended,JamesCompanypurchased$425,000of
inventory.Theinventorybalanceatthebeginningoftheyear
was$175,000.Ifthecostofgoodssoldfortheyearwas
$450,000,thentheinventoryturnoverfortheyearwas:
a.2.77times.
b.2.57times.
c.3.00times.
d.2.62times.
168
82.
D
Easy
LastyearJaverCompanyhadanetincomeof$200,000,income
taxexpenseof$74,000,andinterestexpenseof$20,000.The
company'stimesinterestearnedwasclosestto:
a.10.00times.
b.11.00times.
c.5.30times.
d.14.70times.
83.
C
Easy
LastyearJabberCompanyhadanetincomeof$180,000,income
a.9.00times.
b.4.90times.
c.13.10times.
d.10.00times.
84.
B
Easy
LastyearJacksonCompanyhadanetincomeof$160,000,income
a.9.00times.
b.12.30times.
c.8.00times.
d.3.70times.
85.
B
Hard
ThetimesinterestearnedratioofMcHughCompanyis4.5times.
Theinterestexpensefortheyearwas$20,000,andthe
company'staxrateis40%.Thecompany'snetincomeis:
a.$22,000.
b.$42,000.
c.$54,000.
d.$66,000.
86.
D
Hard
MariahCompanyhasatimesinterestearnedratioof3.0forthe
yearjustended.Thecompany'staxrateis40%andtheinterest
expensefortheyearwas$25,000.MariahCompany'saftertax
netincomewas:
a.$50,000.
b.$75,000.
c.$25,000.
d.$30,000.
87.
A
Hard
PFMCompanyhassalesof$210,000,interestexpenseof$8,000,
ataxrateof30%,andanetprofitaftertaxof$35,000.PFM
Company'stimesinterestearnedratiois:
a.7.25times.
b.4.375times.
c.5.375times.
d.15.5times.
88.
B
Easy
KarmaCompanyhastotalassetsof$190,000andtotal
liabilitiesof$90,000.Thecompany'sdebttoequityratiois
closestto:
a.0.47to1.
b.0.90to1.
c.0.53to1.
d.0.32to1.
89.
D
Easy
KarlCompanyhastotalassetsof$170,000andtotalliabilities
of$110,000.Thecompany'sdebttoequityratioisclosestto:
a.0.39to1.
b.0.65to1.
c.0.35to1.
d.1.83to1.
90.
A
Easy
KrakovCompanyhastotalassetsof$170,000andtotal
liabilitiesof$80,000.Thecompany'sdebttoequityratiois
closestto:
a.0.89to1.
b.0.32to1.
c.0.47to1.
d.0.53to1.
170
Reference:181
SelectedfinancialdataforBarnstableCompanyappearbelow:
19x919x8
(inthousands)
Sales.........................$1,500$1,200
OperatingExpenses............450400
InterestExpense..............7530
CostofGoodsSold............900720
DividendsDeclaredandPaid...300
91.
D
Easy
ReferTo:
181
For19x9,thegrossmarginasapercentageofsaleswas:
a.5%.
b.60%.
c.10%.
d.40%.
92.
D
Easy
ReferTo:
181
For19x9,thenetincomebeforetaxesasapercentageofsales
was:
a.10%.
b.3%.
c.8%.
d.5%.
93.
C
Easy
ReferTo:
181
For19x9,thenetoperatingincomeasapercentageofsales
was:
a.70%.
b.8%.
c.10%.
d.40%.
94.
B
Medium
ReferTo:
181
Between19x8and19x9,thetimesinterestearnedratio:
a.increased.
b.decreased.
c.remainedthesame.
d.cannotbedeterminedfromthedataprovided.
Reference:182
NOTETOTHEINSTRUCTOR:Questions95to101,102to108,and109to115are
differentversionsofthesamequestion.
FinancialstatementsforLarnedCompanyappearbelow:
LarnedCompany
StatementofFinancialPosition
December31,19X6and19X5
(dollarsinthousands)
19X619X5
Currentassets:
Cashandmarketablesecurities.............$130$100
Accountsreceivable,net...................150130
Inventory..................................100100
Prepaidexpenses...........................2020
Totalcurrentassets.....................400350
Noncurrentassets:
Plant&equipment,net.....................1,6401,600
Totalassets.................................$2,040$1,950
Currentliabilities:
Accountspayable...........................$120$120
Accruedliabilities........................11080
Notespayable,shortterm..................170160
Totalcurrentliabilities...............400360
Noncurrentliabilities:
Bondspayable..............................370400
Totalliabilities........................770760
Stockholders'equity:
Preferredstock,$20par,10%..............120120
Commonstock,$10par......................180180
Additionalpaidincapitalcommonstock...110110
Retainedearnings..........................860780
Totalstockholders'equity...............1,2701,190
Totalliabilities&stockholders'equity.....$2,040$1,950
172
LarnedCompany
IncomeStatement
FortheYearEndedDecember31,19X6
Sales(allonaccount)...................$2,930
Costofgoodssold.......................2,050
Grossmargin.............................880
Operatingexpenses.......................350
Netoperatingincome.....................530
Interestexpense.........................40
Netincomebeforetaxes..................490
Incometaxes(30%).......................147
Netincome...............................$343
Dividendsduring19X6totalled$263thousand,ofwhich$12thousandwere
preferreddividends.
ThemarketpriceofashareofcommonstockonDecember31,19X6was$160.
95.
A
Medium
ReferTo:
182
LarnedCompany'searningspershareofcommonstockfor19X6
wasclosestto:
a.$18.39.
b.$27.22.
c.$19.06.
d.$11.03.
96.
C
Medium
ReferTo:
182
LarnedCompany'spriceearningsratioonDecember31,19X6was
closestto:
a.5.88.
b.14.50.
c.8.70.
d.8.40.
97.
A
Medium
ReferTo:
182
LarnedCompany'sdividendpayoutratiofor19X6wasclosestto:
a.75.8%.
b.28.5%.
c.76.7%.
d.47.4%.
98.
A
Medium
ReferTo:
182
LarnedCompany'sdividendyieldratioonDecember31,19X6was
closestto:
a.8.7%.
b.9.1%.
c.8.3%.
d.5.5%.
99.
C
Medium
ReferTo:
182
LarnedCompany'sreturnontotalassetsfor19X6wasclosest
to:
a.15.8%.
b.17.2%.
c.18.6%.
d.17.8%.
100.
A
Medium
ReferTo:
182
LarnedCompany'sreturnoncommonstockholders'equityfor19X6
wasclosestto:
a.29.8%.
b.26.9%.
c.30.9%.
d.27.9%.
101.
B
Medium
ReferTo:
182
LarnedCompany'sbookvaluepershareattheendof19X6was
closestto:
a.$16.11.
b.$63.89.
c.$70.56.
d.$10.00.
Reference:183
FinancialstatementsforLarocheCompanyappearbelow:
LarocheCompany
19X619X5
Currentassets:
Inventory..................................160180
Noncurrentassets:
Totalassets.................................$1,900$1,880
Currentliabilities:
Bondspayable..............................280300
Commonstock,$10par......................240240
174
LarocheCompany
IncomeStatement
Grossmargin.............................680
Incometaxes(30%).......................114
Netincome...............................$266
Dividendsduring19X6totaled$166thousand,ofwhich$10thousandwere
preferreddividends.
102.
A
Medium
ReferTo:
183
LarocheCompany'searningspershareofcommonstockfor19X6
wasclosestto:
a.$10.67.
b.$15.83.
c.$3.71.
d.$11.08.
103.
C
Medium
ReferTo:
183
LarocheCompany'spriceearningsratioonDecember31,19X6was
closestto:
a.13.53.
b.40.43.
c.14.06.
d.9.47.
104.
C
Medium
ReferTo:
183
LarocheCompany'sdividendpayoutratiofor19X6wasclosest
to:
a.22.9%.
b.62.4%.
c.60.9%.
d.38.0%.
105.
C
Medium
ReferTo:
183
LarocheCompany'sdividendyieldratioonDecember31,19X6was
closestto:
a.4.6%.
b.4.1%.
c.4.3%.
d.1.6%.
106.
B
Medium
ReferTo:
183
LarocheCompany'sreturnontotalassetsfor19X6wasclosest
to:
a.14.1%.
b.15.2%.
c.14.6%.
d.13.0%.
107.
D
Medium
ReferTo:
183
LarocheCompany'sreturnoncommonstockholders'equityfor
19X6wasclosestto:
a.24.0%.
b.21.2%.
c.22.0%.
d.23.1%.
108.
C
Medium
ReferTo:
183
LarocheCompany'sbookvaluepershareattheendof19X6was
closestto:
a.$52.50.
b.$10.00.
c.$48.33.
d.$17.50.
Reference:184
FinancialstatementsforLarosaCompanyappearbelow:
LarosaCompany
19X619X5
Currentassets:
Inventory..................................150150
Noncurrentassets:
Totalassets.................................$2,520$2,450
Currentliabilities:
Bondspayable..............................370400
Commonstock,$10par......................220220
Retainedearnings..........................1,2401,070
176
LarosaCompany
IncomeStatement
Grossmargin.............................570
Incometaxes(30%).......................93
Netincome...............................$217
preferreddividends.
109.
B
Medium
ReferTo:
184
LarosaCompany'searningspershareofcommonstockfor19X6
wasclosestto:
a.$3.09.
b.$9.41.
c.$14.09.
d.$9.86.
110.
C
Medium
ReferTo:
184
LarosaCompany'spriceearningsratioonDecember31,19X6was
closestto:
a.7.10.
b.22.66.
c.7.44.
d.4.97.
111.
B
Medium
ReferTo:
184
LarosaCompany'sdividendpayoutratiofor19X6wasclosestto:
a.21.7%.
b.17.9%.
c.6.5%.
d.10.6%.
112.
C
Medium
ReferTo:
184
LarosaCompany'sdividendyieldratioonDecember31,19X6was
closestto:
a.1.8%.
b.3.1%.
c.2.4%.
d.1.0%.
113.
B
Medium
ReferTo:
184
LarosaCompany'sreturnontotalassetsfor19X6wasclosest
to:
a.8.7%.
b.9.9%.
c.7.6%.
d.9.2%.
178
114.
B
Medium
ReferTo:
184
LarosaCompany'sreturnoncommonstockholders'equityfor19X6
wasclosestto:
a.12.0%.
b.12.7%.
c.13.4%.
d.12.6%.
115.
A
Medium
ReferTo:
184
LarosaCompany'sbookvaluepershareattheendof19X6was
closestto:
a.$77.73.
b.$82.27.
c.$10.00.
d.$21.36.
Reference:185
TheDawsonCorporationprojectsthefollowingfortheupcomingyear:
Earningsbeforeinterestandtaxes.............$35million
Interestexpense...............................$5million
Preferredstockdividends......................$4million
Commonstockdividendpayoutratio.............30%
Averagenumberofcommonsharesoutstanding....2million
Effectivecorporateincometaxrate............40%
116.
A
Hard
CMA
adapted
ReferTo:
185
Theexpecteddividendpershareofcommonstockis
a.$2.10.
b.$2.70.
c.$1.80.
d.$3.90.
117.
B
Hard
CMA
adapted
ReferTo:
185
IfDawsoncorporationscommonstockhasapriceearningsratio
ofeight,themarketpricepershare(tothenearestdollar)
wouldbe
a.$125.
b.$56.
c.$72.
d.$68.
Reference:186
FinancialstatementsforOrangeCompanyappearbelow:
OrangeCompany
19X619X5
Currentassets:
Inventory..................................160160
Noncurrentassets:
Totalassets.................................$2,210$2,130
Currentliabilities:
Bondspayable..............................250300
Preferredstock,$10par,15%...............120120
Commonstock,$5par.......................220220
Retainedearnings..........................1,100920
OrangeCompany
IncomeStatement
Grossmargin.............................850
Incometaxes(30%).......................144
Netincome...............................$336
preferreddividends.
180
118.
A
Medium
ReferTo:
186
OrangeCompany'searningspershareofcommonstockfor19X6
wasclosestto:
a.$7.23.
b.$2.27.
c.$10.91.
d.$7.64.
119.
A
Medium
ReferTo:
186
OrangeCompany'sdividendyieldratioonDecember31,19X6was
closestto:
a.3.1%.
b.1.1%.
c.3.5%.
d.2.7%.
120.
C
Medium
ReferTo:
186
OrangeCompany'sreturnontotalassetsfor19X6wasclosest
to:
a.15.5%.
b.15.9%.
c.16.5%.
d.14.5%.
121.
D
Medium
ReferTo:
186
OrangeCompany'scurrentratioattheendof19X6wasclosest
to:
a.1.24to1.
b.0.55to1.
c.0.44to1.
d.1.71to1.
122.
A
Medium
ReferTo:
186
OrangeCompany'saccountsreceivableturnoverfor19X6was
closestto:
a.15.7times.
b.11.0times.
c.17.7times.
d.12.4times.
123.
B
Medium
ReferTo:
186
OrangeCompany'saveragesaleperiod(turnoverindays)for
19X6wasclosestto:
a.23.2days.
b.29.5days.
c.33.2days.
d.20.6days.
124.
C
Medium
ReferTo:
186
OrangeCompany'stimesinterestearnedfor19X6wasclosestto:
a.16.0times.
b.28.3times.
c.17.0times.
d.11.2times.
Reference:187
FinancialstatementsforOrantesCompanyappearbelow:
OrantesCompany
19X619X5
Currentassets:
Inventory..................................130130
Noncurrentassets:
Totalassets.................................$2,490$2,410
Currentliabilities:
Bondspayable..............................270300
Commonstock,$10par.......................200200
OrantesCompany
IncomeStatement
Grossmargin.............................760
Incometaxes(30%).......................129
Netincome...............................$301
182
preferreddividends.
125.
B
Medium
ReferTo:
187
OrantesCompany'searningspershareofcommonstockfor19X6
wasclosestto:
a.$3.61.
b.$14.45.
c.$15.05.
d.$21.50.
126.
A
Medium
ReferTo:
187
OrantesCompany'sdividendyieldratioonDecember31,19X6was
closestto:
a.3.0%.
b.0.8%.
c.2.8%.
d.3.2%.
127.
C
Medium
ReferTo:
187
OrantesCompany'sreturnontotalassetsfor19X6wasclosest
to:
a.12.3%.
b.11.4%.
c.13.1%.
d.12.7%.
128.
D
Medium
ReferTo:
187
OrantesCompany'scurrentratioattheendof19X6wasclosest
to:
a.0.54to1.
b.1.19to1.
c.0.35to1.
d.1.50to1.
129.
C
Medium
ReferTo:
187
OrantesCompany'saccountsreceivableturnoverfor19X6was
closestto:
a.19.3times.
b.13.5times.
c.14.8times.
d.10.3times.
130.
B
Medium
ReferTo:
187
OrantesCompany'saveragesaleperiod(turnoverindays)for
19X6wasclosestto:
a.24.7days.
b.27.1days.
c.18.9days.
d.35.5days.
131.
B
Medium
ReferTo:
187
OrantesCompany'stimesinterestearnedfor19X6wasclosest
to:
a.10.0times.
b.15.3times.
c.14.3times.
d.25.3times.
Reference:188
FinancialstatementsforOratzCompanyappearbelow:
OratzCompany
19X619X5
Currentassets:
Inventory..................................180180
Noncurrentassets:
Totalassets.................................$1,920$1,860
Currentliabilities:
Bondspayable..............................300300
Commonstock,$15par.......................140140
OratzCompany
IncomeStatement
Grossmargin.............................490
Incometaxes(30%).......................81
Netincome...............................$189
184
preferreddividends.
132.
D
Medium
ReferTo:
188
OratzCompany'searningspershareofcommonstockfor19X6was
closestto:
a.$1.74.
b.$28.93.
c.$20.25.
d.$19.61.
133.
C
Medium
ReferTo:
188
OratzCompany'sdividendyieldratioonDecember31,19X6was
closestto:
a.5.7%.
b.5.2%.
c.5.5%.
d.0.5%.
134.
B
Medium
ReferTo:
188
OratzCompany'sreturnontotalassetsfor19X6wasclosestto:
a.8.9%.
b.11.1%.
c.10.5%.
d.10.0%.
135.
B
Medium
ReferTo:
188
OratzCompany'scurrentratioattheendof19X6wasclosest
to:
a.0.57to1.
b.1.23to1.
c.0.51to1.
d.1.26to1.
136.
B
Medium
ReferTo:
188
OratzCompany'saccountsreceivableturnoverfor19X6was
closestto:
a.9.1times.
b.12.5times.
c.8.8times.
d.6.3times.
137.
D
Medium
ReferTo:
188
OratzCompany'saveragesaleperiod(turnoverindays)for19X6
wasclosestto:
a.29.1days.
b.40.3days.
c.41.6days.
d.57.6days.
138.
C
Medium
ReferTo:
188
OratzCompany'stimesinterestearnedfor19X6wasclosestto:
a.6.3times.
b.16.3times.
c.10.0times.
d.9.0times.
186
Reference:189
SelecteddatafortheMKCompanyfollow:
CurrentYearPriorYear
Preferredstock,8%,parvalue$50.......$250,000$250,000
Commonstock,parvalue$10..............500,000500,000
Retainedearningsatendofyear.........257,000240,000
Netincome...............................102,00090,000
Dividendspaidonpreferredstock........20,00020,000
Dividendspaidoncommonstock...........65,00060,000
Quotedmarketpricepercommon
shareatyearend......................25.0020.00
139.
B
Hard
ReferTo:
179
Thepriceearningsratiofortheprioryearwas:
a.15.8to1.
b.14.3to1.
c.12.2to1.
d.11.1to1.
140.
A
Medium
ReferTo:
179
Thedividendyieldratiooncommonstockforthecurrentyear
was
(roundedtothenearesttenthofapercent):
a.5.2%
b.6.8%.
c.6.6%.
d.7.4%.
141.
D
Hard
ReferTo:
179
MKCompany'sreturnoncommonstockholders'equityforthe
currentyearwas(roundedtothenearesttenthofapercent):
a.10.2%.
b.8.2%.
c.13.6%.
d.10.9%.
142.
D
Medium
ReferTo:
179
Thedividendpayoutratiofortheprioryearwas:
a.55.6%
b.140%.
c.114.3%.
d.85.7%.
143.
C
Medium
ReferTo:
179
Thebookvaluepershareforthecurrentyearis(roundedto
thenearestcent:
a.$22.18.
b.$18.31.
c.$15.14.
d.$20.14.
Reference:1810
LisaInc.'sbalancesheetappearsbelow:
LisaInc.
December31
(inthousands)
19X719X6
Cash...................................$30$25
Marketablesecurities...................2015
Accountsreceivable(net)...............4530
Inventories.............................6050
Prepaidexpenses........................1520
Totalcurrentassets...................170140
Land....................................155125
Building(net)..........................8090
Equipment(net).........................95100
Totallongtermassets.................330315
TotalAssets.........................$500$455
Accountspayable........................$47$28
Accruedinterest........................1515
Shorttermnotespayable................2312
Totalcurrentliabilities..............8555
Longtermotespayable..................1010
Bondspayable...........................1515
Totallongtermliabilities............2525
Totalliabilities......................11080
Preferredstock($100parvalue,5%)....100100
CommonStock($10parvalue)............150150
Additionalpaidincapitalcommonstock7575
Retainedearnings.......................6550
Totalshareholdersequity.............390375
Totalliabilities&equity...........$500$455
Thecompany'ssalesfortheyearwere$300,000,itscostofgoodssoldwas
$220,000,anditsnetincomewas$35,000.Allsaleswereoncredit.
Preferreddividendsfortheyearwere$5,000.
144.
B
Medium
CMA
adapted
ReferTo:
1810
LisaInc.sacidtest(quick)ratioatDecember31,19X7,was
closestto:
a.0.6to1.
b.1.1to1.
c.1.8to1.
d.2.0to1.
188
145.
D
Medium
CMA
adapted
ReferTo:
1810
LisaInc.saccountsreceivableturnoverfor19X7wasclosest
to:
a.4.9times.
b.5.9times.
c.6.7times.
d.8.0times.
146.
B
Medium
CMA
adapted
ReferTo:
1810
LisaInc.sinventoryturnoverfor19X7wasclosestto:
a.3.7times.
b.4.0times.
c.4.4times.
d.5.0times.
147.
C
Medium
CMA
adapted
ReferTo:
1810
LisaInc.sbookvaluepershareofcommonstockatDecember
31,19X7,wasclosestto:
a.$10.00.
b.$11.25.
c.$19.33.
d.$18.33.
148.
B
Medium
CMA
adapted
ReferTo:
1810
LisaInc.sreturnoncommonstockholders'equityfor19X7was
closestto:
a.7.8%.
b.10.6%.
c.10.9%.
d.12.4%.
Reference:1811
FinancialstatementsforMarcellCompanyappearbelow:
MarcellCompany
19X619X5
Currentassets:
Inventory..................................180180
Noncurrentassets:
Totalassets.................................$2,170$2,140
Currentliabilities:
Bondspayable..............................480500
Totalliabilities........................9301,000
Commonstock,$5par.......................140140
MarcellCompany
IncomeStatement
Grossmargin.............................770
Incometaxes(30%).......................126
Netincome...............................$294
190
149.
B
Medium
ReferTo:
1811
MarcellCompany'sworkingcapital(inthousandsofdollars)at
theendof19X6wasclosestto:
a.$470.
b.$20.
c.$520.
d.$1,240.
150.
A
Medium
ReferTo:
1811
MarcellCompany'scurrentratioattheendof19X6wasclosest
to:
a.1.04to1.
b.0.42to1.
c.0.48to1.
d.1.22to1.
151.
C
Medium
ReferTo:
1811
MarcellCompany'sacidtest(quick)ratioattheendof19X6
wasclosestto:
a.0.33to1.
b.1.35to1.
c.0.60to1.
d.0.74to1.
152.
C
Medium
ReferTo:
1811
MarcellCompany'saccountsreceivableturnoverfor19X6was
closestto:
a.16.2times.
b.9.9times.
c.23.2times.
d.14.2times.
153.
B
Medium
ReferTo:
1811
MarcellCompany'saveragecollectionperiod(ageof
receivables)for19X6wasclosestto:
a.22.6days.
b.15.7days.
c.25.8days.
d.36.9days.
154.
D
Medium
ReferTo:
1811
MarcellCompany'sinventoryturnoverfor19X6wasclosestto:
a.16.2times.
b.23.2times.
c.14.2times.
d.9.9times.
155.
C
Medium
ReferTo:
1811
MarcellCompany'saveragesaleperiod(turnoverindays)for
19X6wasclosestto:
a.15.7days.
b.25.8days.
c.36.9days.
d.22.6days.
Reference:1812
FinancialstatementsforMarchCompanyappearbelow:
MarchCompany
19X619X5
Currentassets:
Inventory..................................150150
Noncurrentassets:
Totalassets.................................$2,140$2,090
Currentliabilities:
Bondspayable..............................450500
Commonstock,$5par.......................180180
MarchCompany
IncomeStatement
Grossmargin.............................490
Incometaxes(30%).......................75
Netincome...............................$175
192
156.
C
Medium
ReferTo:
1812
MarchCompany'sworkingcapital(inthousandsofdollars)at
a.$520.
b.$1,290.
c.$180.
d.$580.
157.
D
Medium
ReferTo:
1812
MarchCompany'scurrentratioattheendof19X6wasclosest
to:
a.1.27to1.
b.0.47to1.
c.0.49to1.
d.1.45to1.
158.
A
Medium
ReferTo:
1812
MarchCompany'sacidtest(quick)ratioattheendof19X6was
closestto:
a.0.95to1.
b.0.39to1.
c.1.90to1.
d.0.53to1.
159.
B
Medium
ReferTo:
1812
MarchCompany'saccountsreceivableturnoverfor19X6was
closestto:
a.7.2times.
b.10.4times.
c.7.5times.
d.10.7times.
160.
B
Medium
ReferTo:
1812
MarchCompany'saveragecollectionperiod(ageofreceivables)
for19X6wasclosestto:
a.48.9days.
b.35.1days.
c.34.0days.
d.50.5days.
161.
A
Medium
ReferTo:
1812
MarchCompany'sinventoryturnoverfor19X6wasclosestto:
a.7.5times.
b.10.4times.
c.10.7times.
d.7.2times.
162.
A
Medium
ReferTo:
1812
MarchCompany'saveragesaleperiod(turnoverindays)for19X6
wasclosestto:
a.48.9days.
b.34.0days.
c.35.1days.
d.50.5days.
Reference:1813
FinancialstatementsforMarcialCompanyappearbelow:
MarcialCompany
19X619X5
Currentassets:
Inventory..................................140130
Noncurrentassets:
Totalassets.................................$1,990$1,910
Currentliabilities:
Bondspayable..............................390400
Commonstock,$5par.......................200200
MarcialCompany
IncomeStatement
Grossmargin.............................490
Incometaxes(30%).......................78
Netincome...............................$182
194
163.
D
Medium
ReferTo:
1813
MarcialCompany'sworkingcapital(inthousandsofdollars)at
a.$440.
b.$570.
c.$1,360.
d.$200.
164.
A
Medium
ReferTo:
1813
MarcialCompany'scurrentratioattheendof19X6wasclosest
to:
a.1.83to1.
b.0.38to1.
c.0.35to1.
d.1.22to1.
165.
C
Medium
ReferTo:
1813
MarcialCompany'sacidtest(quick)ratioattheendof19X6
wasclosestto:
a.0.76to1.
b.1.32to1.
c.1.04to1.
d.0.25to1.
166.
B
Medium
ReferTo:
1813
MarcialCompany'saccountsreceivableturnoverfor19X6was
closestto:
a.8.4times.
b.14.8times.
c.12.1times.
d.10.4times.
167.
A
Medium
ReferTo:
1813
MarcialCompany'saveragecollectionperiod(ageof
receivables)for19X6wasclosestto:
a.24.6days.
b.35.2days.
c.43.2days.
d.30.2days.
168.
A
Medium
ReferTo:
1813
MarcialCompany'sinventoryturnoverfor19X6wasclosestto:
a.8.4times.
b.12.1times.
c.14.8times.
d.10.4times.
169.
C
Medium
ReferTo:
1813
MarcialCompany'saveragesaleperiod(turnoverindays)for
19X6wasclosestto:
a.35.2days.
b.30.2days.
c.43.2days.
d.24.6days.
Reference:1814
ThefollowingfinancialdatahavebeentakenfromtherecordsofCPZ
Enterprises.
Accountsreceivable......................$200,000
Accountspayable.........................80,000
Bondspayable,duein10years...........300,000
Cash.....................................100,000
Interestpayable,dueinthreemonths....10,000
Inventory................................440,000
Land.....................................250,000
Notespayable,dueinsixmonths.........50,000
170.
D
Medium
CMA
adapted
ReferTo:
1814
ThecurrentratioforCPZEnterprisesis:
a.1.68.
b.2.14.
c.5.00.
d.5.29.
171.
C
Medium
CMA
adapted
ReferTo:
1814
Whatisthecompanysacidtest(quick)ratio?
a.0.68.
b.1.68.
c.2.14.
d.2.31.
172.
A
Hard
CMA
adapted
ReferTo:
1814
WhatwillhappentotheratiosbelowifCPZEnterprisesuses
cashtopay50%ofitsaccountspayable?
CurrentRatioAcidtestRatio
a.increaseincrease
b.decreasedecrease
c.increasedecrease
d.decreaseincrease
Reference:1815
AtDecember31,CurryCo.hadthefollowingbalancesinselectedasset
accounts:
19x719x6
Cash...........................$300$200
Accountsreceivable,net.......1,200800
Inventory......................500300
Prepaidexpenses...............10060
Otherassets...................400250
Totalassets...................$2,500$1,610
Curryhadcurrentliabilitiesof$1,000atDecember31,19x7,andcredit
salesof$7,200for19x7.
196
173.
A
Medium
CPA
adapted
ReferTo:
1815
CurryCompanysacidtest(quick)ratioatDecember31,19x7
wasclosestto:
a.1.5to1.
b.1.6to1.
c.2.0to1.
d.2.1to1.
174.
C
Medium
CPA
adapted
ReferTo:
1815
DrewCompany'saveragecollectionperiod(ageofreceivables)
for19x7wasclosestto:
a.30.4days.
b.40.6days.
c.50.7days.
d.60.8days.
Reference:1816
FinancialstatementsforNaritaCompanyappearbelow:
NaritaCompany
19X619X5
Currentassets:
Inventory..................................120120
Noncurrentassets:
Totalassets.................................$2,180$2,140
Currentliabilities:
Bondspayable..............................260300
Commonstock,$2par.......................140140
198
NaritaCompany
IncomeStatement
Grossmargin.............................780
Incometaxes(30%).......................132
Netincome...............................$308
175.
D
Medium
ReferTo:
1816
NaritaCompany'stimesinterestearnedfor19X6wasclosestto:
a.14.7times.
b.26.0times.
c.10.3times.
d.15.7times.
176.
D
Medium
ReferTo:
1816
NaritaCompany'sdebttoequityratioattheendof19X6was
closestto:
a.0.17to1.
b.0.58to1.
c.0.25to1.
d.0.42to1.
Reference:1817
FinancialstatementsforNarlockCompanyappearbelow:
NarlockCompany
19X619X5
Currentassets:
Inventory..................................130120
Noncurrentassets:
Totalassets.................................$2,160$2,070
Currentliabilities:
Bondspayable..............................480500
Commonstock,$2par.......................200200
NarlockCompany
IncomeStatement
Grossmargin.............................680
Incometaxes(30%).......................108
Netincome...............................$252
177.
B
Medium
ReferTo:
1817
NarlockCompany'stimesinterestearnedfor19X6wasclosest
to:
a.7.2times.
b.8.2times.
c.13.6times.
d.5.0times.
178.
A
Medium
ReferTo:
1817
NarlockCompany'sdebttoequityratioattheendof19X6was
closestto:
a.0.70to1.
b.0.32to1.
c.0.38to1.
d.1.09to1.
200
Reference:1818
FinancialstatementsforNarumiCompanyappearbelow:
NarumiCompany
19X619X5
Currentassets:
Inventory..................................130130
Noncurrentassets:
Totalassets.................................$1,800$1,750
Currentliabilities:
Bondspayable..............................510500
Commonstock,$2par.......................160160
Totalstockholders'equity...............910830
NarumiCompany
IncomeStatement
Grossmargin.............................620
Incometaxes(30%).......................99
Netincome...............................$231
179.
B
Medium
ReferTo:
1818
NarumiCompany'stimesinterestearnedfor19X6wasclosestto:
a.12.4times.
b.7.6times.
c.6.6times.
d.4.6times.
180.
C
Medium
ReferTo:
1818
NarumiCompany'sdebttoequityratioattheendof19X6was
closestto:
a.2.07to1.
b.0.42to1.
c.0.98to1.
d.0.56to1.
Essay
181.
Medium
CIMA(UK)
adapted
M.K.BerryisthemanagingdirectorofCELtd.asmall,
familyownedcompanywhichmanufacturescutlery.Hiscompany
belongstoatradeassociationwhichpublishesamonthly
magazine.Thelatestissueofthemagazinecontainsavery
briefarticlebasedontheanalysisoftheaccounting
statementspublishedbythe40companieswhichmanufacturethis
typeofproduct.Thearticlecontainsthefollowingtable:
Averageforallcompanies
intheindustry
Returnonstockholders'equity......33%
Returnontotalassets..............29%
Grossmarginpercentage.............30%
Currentratio.......................1.9:1
Averagesaleperiod.................37days
Averagecollectionperiod...........41days
CELtd'slatestfinancialstatementsareasfollows:
CELtd.
IncomeStatement
fortheyearended31October
(inthousands)
Sales......................................900
Costofgoodssold.........................720
Grossmargin...............................180
Sellingandadministrativeexpenses........55
Interest...................................15
Netincome.................................110
Thecountryinwhichthecompanyoperateshasnocorporate
incometax.Nodividendswerepaidduringtheyear.Allsales
areonaccount.
202
CELtd.
BalanceSheets
asof31October
(inthousands)
ThisYearLastYear
Currentassets:
Cash...............................520
Accountsreceivable................120110
Inventories........................9680
Noncurrentassets....................500460
Totalassets.......................721670
Currentliabilities:
Accountspayable...................147206
Bondspayable......................150150
Commonstock.........................100100
Retainedearnings....................324214
Totalliabilitiesand
stockholdersequity............721670
Required:
a.Calculateeachoftheratioslistedinthemagazinearticle
forthisyearforCE,andcommentbrieflyonCELtd's
performanceincomparisontotheindustrialaverages.
b.ExplainwhyitcouldbemisleadingtocompareCELtd's
ratioswiththosetakenfromthearticle.
Answer:
a.
Returnoncommonstockholdersequity:
Netincome=110
Preferreddividends=0
Averagecommonstockholders
equity=[(100+324)+(100+214)]2
=369
Returnoncommonstockholdersequity=(1100)369
=29.8%(rounded)
Returnontotalassets:
Netincome=110
Taxrate=0%
Interestexpense=15
Averagetotalassets=(721+670)2=695.5
Returnontotalassets=[110+15x(10.00)]695.5
=18.0%(rounded)
Grossmarginpercentage:
Grossmargin=180
Sales=900
Grossmarginpercentage=180/900=20%
Currentratio:
Currentassets=5+120+96=221
Currentliabilities=147
Currentratio=221/147=1.5:1(rounded)
Averagesaleperiod:
Costofgoodssold=720
Averageinventorybalance=(96+80)/2=88
Inventoryturnover=720/88=8.2(rounded)
Averagesaleperiod=365days/8.2=45days(rounded)
Averagecollectionperiod:
Salesonaccount=900
Averageaccountsreceivablebalance=(120+110)/2=
115
Accountsreceivableturnover=900/115=7.8(rounded)
Averagecollectionperiod=365days/7.8=47days
(rounded)
CELtd'sreturnonstockholders'equityisnotasgoodasthe
industrysaverage.Foreverypoundinvested,shareholdersare
obtainingareturnwhichissmallerthantheyshouldexpect,
basedonthearticle'sfigures.Similarly,thereturnontotal
assetsismuchlessthantheaverage.Thisindicatesthatthe
companyisunabletomakegooduseofthefundsinvestedinthe
company.
CELtd'sgrossmarginpercentageisalsolowerthanaverage
perhapsbecauseit'ssellingpricesarelowerthantheaverage
oritscostofsalesarehigher.
ThecurrentratioindicatesthatCELtd'scurrentassetsare
greaterthanitscurrentliabilitiesbyafactorof1.5.The
industryaverageshowsanevenhigherfigure,withcurrent
assetsamountingtoalmostdoublecurrentliabilities.
Mostcompaniesaimtoturnoverinventoryasquicklyas
possible,inordertoimprovecashflow.CELtdisnot
managingtodothisasquicklyastheindustry'saverageof
37days.Similarly,companiesshouldtrytoobtainpayment
fromcustomersassoonaspossible.CELtdistakingmuch
longertodothisthantheaveragefortheindustry.
204
b.
CaremustbetakenwhencomparingCELtd'sratioswith
industryaveragesbecausetheremaybedifferencesin
accountingmethods.Althoughaccountingstandardshave
reducedtherangeofacceptableaccountingpolicies,there
isstillscopefordifferentfirmstoapplydifferent
accountingpolicies.Forexample,onefirmmayusestraight
linedepreciation,whileanothermayuseaccelerated
depreciation.Thesevariationsmakecomparisonsdifficult.
Sizedifferencesmayalsomeanthatratiosarenot
comparable.Averylargemanufacturingbusinessshouldbe
abletoachieveeconomiesofscalewhicharenotpossible
forCELtd.Forexample,largecompaniesmaybeableto
negotiatesizablediscountsfromsuppliers.
Athirdproblemarisesfromdifferencesinproductrange.CE
Ltdmayproducecutlerywhichissoldatthetopendofthe
market,forveryhighprices,andinsmallvolumes.
Alternatively,itmaybeproducinghighvolume,lowquality
cutleryforthecateringindustry.Eithersituationwill
reducethevalueofcomparisonswiththeindustryaverage.
182.
Medium
ComparativefinancialstatementsforSpringvilleCompanyfor
thelasttwoyearsappearbelow.Themarketpriceof
Springville'scommonstockwas$25pershareonDecember31,
Year2.DuringYear2,dividendsof$2,000,000werepaidto
preferredstockholdersand$10,000,000tostockholders.
SpringvilleCompany
December31,Year2andYear1
Year2Year1
Currentassets:
Cashandmarketablesecurities...........$6,000$4,800
Accountsreceivable,net.................20,00016,800
Inventory................................28,00028,800
Totalcurrentassets...................54,00050,400
Noncurrentassets:
Investments...............................75,00081,600
Plant&equipment,net...................12,00012,000
Totalassets...............................$141,000$144,000
Currentliabilities:
Accountspayable.........................$7,000$6,000
Accruedliabilities......................1,0001,200
Totalcurrentliabilities.............8,0007,200
Bondspayable............................24,00024,000
Totalliabilities......................32,00031,200
Preferredstock,8%,1,000,000shares.....20,00020,000
Commonstock,nopar,5,000,000shares....30,00030,000
Retainedearnings........................59,00062,800
Totalstockholders'equity.............109,000112,800
Totalliabilities&stockholders'equity...$141,000$144,000
SpringvilleCompany
IncomeStatement
FortheYearEndedDecember31,Year2
Grossmargin.............................$80,000
Operatingexpenses.......................61,333
Netoperatingincome.....................18,667
Interestexpense.........................5,000
Netincomebeforetaxes..................13,667
Incometaxes(40%).......................5,467
Netincome...............................$8,200
206
Required:
ComputethefollowingforYear2:
a.Dividendpayoutratio.
b.Dividendyieldratio.
c.Priceearningsratio.
d.Accountsreceivableturnover.
e.Inventoryturnover.
f.Returnontotalassets.
g.Returnoncommonstockholders'equity.
h.Wasfinancialleveragepositiveornegativefortheyear?
Explain.
Answer:
a.Dividendpayoutratio=Dividendspershare
Earningspershare.
=($10,000,000/5,000,000)(($8,200,000$2,000,000)
/5,000,000))
=$2.00$1.24
=161.3%.
b.Dividendyieldratio=Dividendspaidpershare
Marketpricepershare
=$2.00$25
=8%.
c.Priceearningsratio=Marketpricepershare
Earningspershare
=$25(($8,200,000$2,000,000)/5,000,000))
=20.16.
d.Accountsreceivableturnover=Salesonaccount
Averageaccountsreceivablebalance
=$280,000(($16,800+$20,000)/2))
=15.22times.
e.Inventoryturnover=Costofgoodssold
Averageinventorybalance
=$200,000(($28,800+$28,000)/2))
=7.04times
f.Returnontotalassets
=[Netincome+((Interestexpensex(1Taxrate))]
Averagetotalassets
=[$8,200,000+5,000,000x(10.40)]
[($144,000,000+$141,000,000)/2]
=7.9%
g.Returnoncommonstockholders'equity
=(Netincomepreferreddividends)
Averagecommonstockholders'equity
=($8,200,000$2,000,000)[($92,800,000+$89,000,000)/2]
=6.8%
h.Financialleveragewasnegative,sincetherateofreturnto
thecommonstockholders(6.8%)waslessthantherateofreturn
ontotalassets(7.8%).
183.
Medium
FinancialstatementsforPraegerCompanyappearbelow:
PraegerCompany
19X619X5
Currentassets:
Inventory..................................110110
Noncurrentassets:
Totalassets.................................$2,460$2,430
Currentliabilities:
Bondspayable..............................500500
Preferredstock,$5par,5%................100100
Commonstock,$5par.......................200200
208
PraegerCompany
IncomeStatement
Costofgoodssold.......................770
Grossmargin.............................330
Incometaxes(30%).......................45
Netincome...............................$105
Dividendsduring19X6totalled$45thousand,ofwhich$5
thousandwerepreferreddividends.
ThemarketpriceofashareofcommonstockonDecember31,
19X6was$30.
Required:
Computethefollowingfor19X6:
a.Earningspershareofcommonstock.
b.Priceearningsratio.
c.Dividendpayoutratio.
d.Dividendyieldratio.
e.Returnontotalassets.
f.Returnoncommonstockholders'equity.
g.Bookvaluepershare.
h.Workingcapital.
i.Currentratio.
j.Acidtest(quick)ratio.
k.Accountsreceivableturnover.
l.Averagecollectionperiod(ageofreceivables).
m.Inventoryturnover.
n.Averagesaleperiod(turnoverindays).
o.Timesinterestearned.
p.Debttoequityratio.
Answer:
a.Earningspershare=(NetIncomePreferredDividends)
Averagenumberofcommonshares
outstanding*
=($105$5)40
=$2.50
*Numberofcommon
sharesoutstanding=CommonstockParvalue
=$200$5
=40
b.Priceearningsratio=Marketpricepershare
Earningspershare(seeabove)
=$30$2.50
=12.0
c.Dividendpayoutratio=Dividendspershare*
=$1.00$2.50
=40.0%
*Dividendspershare=CommondividendsCommonshares**
=$4040
=$1.00
**Seeabove
d.Dividendyieldratio=Dividendspershare*
Marketpricepershare
=$1.00$30.00
=3.33%
*Seeabove
e.Returnontotalassets=Adjustednetincome*
Averagetotalassets**
=$140$2,445
=5.73%
*Adjustednetincome=Netincome
+[Interestexpensex(1Taxrate)]
=$105+[$50x(10.30)]
=$140
**Averagetotalassets=($2,460+$2,430)2
=$2,445
f.Returnoncommon
stockholders'equity=(NetincomePreferreddividends)
Averagecommonstockholders'equity*
=($105$5)$1,520
=6.58%
*Averagecommonstockholders'equity=($1,550+$1,490)2
=$1,520
g.Bookvaluepershare=Commonstockholders'equity
Numberofcommonsharesoutstanding*
=$1,55040
=$38.75
*Numberofcommon
=$200$5
=40
210
h.Workingcapital=CurrentassetsCurrentliabilities
=$440$310
=$130
i.Currentratio=CurrentassetsCurrentliabilities
=$440$310
=1.42to1
j.Acidtestratio=Quickassets*Currentliabilities
=$270$310
=0.87to1
*Quickassets=Cash+Marketablesecurities
+Currentreceivables
=$100+$170
=$270
k.Accountsreceivable
turnover=SalesonaccountAverageaccounts
receivable*
=$1,100$170
=6.47times
*Averageaccountsreceivable=($170+$170)2
=$170
l.Averagecollection
period=365daysAccountsreceivableturnover*
=3656.47
=56.4days
*Seeabove
m.Inventoryturnover=CostofgoodssoldAverageinventory*
=$770$110
=7.00times
*Averageinventory=($110+$110)2
=$110
n.Averagesaleperiod=365daysInventoryturnover*
=3657.00
=52.1days
*Seeabove
o.Timesinterestearned=Netoperatingincome
Interestexpense
=$200$50
=4.00times
p.Debttoequityratio=LiabilitiesStockholders'equity
=$810$1,650
=0.49to1
184.
Medium
FinancialstatementsforAARCompanyappearbelow:
AARCompany
December31
Currentassets:
Cashandmarketablesecurities.............$21,000
Accountsreceivable,net...................160,000
Inventory..................................300,000
Prepaidexpenses...........................9,000
Totalcurrentassets.....................490,000
Noncurrentassets:
Plant&equipment,net.....................810,000
Totalassets.................................$1,300,000
Currentliabilities:
Accountspayable...........................$75,000
Accruedliabilities........................25,000
Notespayable,shortterm..................100,000
Totalcurrentliabilities...............200,000
Bondspayable..............................300,000
Totalliabilities........................500,000
Commonstock,$5par.......................100,000
Totalstockholders'equity...............800,000
Totalliabilities&stockholders'equity.....$1,300,000
AARCompany
IncomeStatement
FortheYearEndedDecember31
Sales(allonaccount)..................$2,100,000
Costofgoodssold......................1,770,000
Grossmargin............................330,000
Operatingexpenses......................130,000
Netoperatingincome....................200,000
Interestexpense........................50,000
Netincomebeforetaxes.................150,000
Incometaxes(30%)......................45,000
Netincome..............................$105,000
AARCompanypaiddividendsof$3.15pershareduringtheyear.
Themarketpriceofthecompany'sstockatDecember31was$63
pershare.Assetsatthebeginningoftheyeartotaled
$1,100,000,andstockholders'equitytotaled$725,000.The
balanceofaccountsreceivableatthebeginningoftheyearwas
$150,000.Thebalanceininventoryatthebeginningoftheyear
was$250,000.
212
Required:
Computethefollowing:
a.Currentratio.
b.Acidtest(quick)ratio.
c.Averagecollectionperiod(ageofreceivables).
d.Inventoryturnover.
e.Timesinterestearned.
f.Debttoequityratio.
g.Dividendpayoutratio.
h.Priceearningsratio.
i.Returnontotalassets.
j.Returnoncommonstockholders'equity.
k.Wasfinancialleveragepositiveornegativefortheyear.
Explain.
Answer:
a.Currentratio=CurrentassetsCurrentliabilities
=$490,000$200,000
=2.45to1
b.Acidtestratio=Quickassets*Currentliabilities
=$181,000$200,000
=0.91to1
+Currentreceivables
=$21,000+$160,000
=$181,000
c.Accountsreceivable
turnover=SalesonaccountAverageaccountsreceivable*
=$2,100,000$155,000
=13.55times
*Averageaccountsreceivable=($160,000+$150,000)2
=$155,000.
Averagecollection
period=365daysAccountsreceivableturnover
=36513.55
=26.94days
d.Inventoryturnover=CostofgoodssoldAverageinventory*
=$1,770,000$275,000
=6.4times
*Averageinventory=($300,000+$250,000)2
=$275,000.
e.Timesinterestearned=Netoperatingincome
Interestexpense
=$200,000$50,000
=4.00times
f.Debttoequityratio=LiabilitiesStockholders'equity
=$500,000$800,000
=0.625to1
g.Dividendpayoutratio=Dividendspershare
Earningspershare.
=$3.15($105,000/20,000shares)
=$3.15$5.25
=60%.
h.Dividendyieldratio=Dividendspaidpershare
Marketpricepershare
=$3.15$63.00
=5%.
i.Priceearningsratio=Marketpricepershare
Earningspershare
=$63$5.25
=12.0.
j.Returnontotalassets
=((Netincome+(Interestexpensex(1Taxrate))
Averagetotalassets
=(($105,000+(50,000x(10.30))
(($1,100,000+$1,300,000)/2))
=$140,000$1,200,000
=11.67%.
k.Returnoncommonstockholders'equity
=(NetincomePreferreddividends)
Averagecommonstockholders'equity
=$105,000[($725,000+$800,000)/2]
=13.8%
l.Financialleveragewaspositive,sincetherateofreturnto
thecommonstockholders(13.8%)wasgreaterthantherateof
returnontotalassets(11.67%).
214
185.
Medium
FinancialstatementsforQiangCompanyappearbelow:
QiangCompany
19X619X5
Currentassets:
Inventory..................................130130
Noncurrentassets:
Totalassets.................................$2,390$2,340
Currentliabilities:
Bondspayable..............................400400
Commonstock,$5par.......................180180
QiangCompany
IncomeStatement
Grossmargin.............................450
Incometaxes(30%).......................69
Netincome...............................$161
Dividendsduring19X6totaled$61thousand,ofwhich$12
19X6was$50.
Required:
c.Dividendyieldratio.
d.Returnontotalassets.
e.Returnoncommonstockholders'equity.
f.Bookvaluepershare.
Answer:
Averagenumberofcommon
sharesoutstanding*
=($161$12)36
=$4.14
*Numberofcommon
=$180$5
=36
=$50$4.14
=12.1
216
c.Dividendyieldratio=Dividendspershare*
Marketpricepershare
=$1.36$50.00
=2.72%
=$4936
=$1.36
**Seeabove
d.Returnontotalassets=Adjustednetincome*
=$189$2,365
=7.99%
*Adjustednetincome=Netincome
+[Interestexpensex(1Taxrate)]
=$161+[$40x(10.30)]
=$189
=$2,365
e.Returnoncommon
=($161$12)$1,530
=9.74%
=$1,530
f.Bookvaluepershare=Commonstockholders'equity
=$1,58036
=$43.89
*Numberofcommon
=$180$5
=36
186.
Medium
NOTETOTHEINSTRUCTOR:Questions185,186,and187are
FinancialstatementsforQualleCompanyappearbelow:
QualleCompany
19X619X5
Currentassets:
Inventory..................................170170
Noncurrentassets:
Totalassets.................................$2,330$2,300
Currentliabilities:
Bondspayable..............................470500
Commonstock,$10par......................160160
218
QualleCompany
IncomeStatement
Grossmargin.............................690
Incometaxes(30%).......................111
Netincome...............................$259
19X6was$280.
Required:
Answer:
Averagenumberofcommonshares
outstanding*
=($259$10)16
=$15.56
*Numberofcommon
=$160$10
=16
=$280$15.56
=18.0
Marketpricepershare
=$8.69$280.00
=3.10%
=$13916
=$8.69
**Seeabove
=$294$2,315
=12.70%
*Adjustednetincome=Netincome+[Interestexpense
x(1Taxrate)]
=$259+[$50x(10.30)]
=$294
=$2,315
e.Returnoncommon
Averagecommon
stockholders'equity*
=($259$10)$1,285
=19.38%
=$1,285
Numberofcommon
sharesoutstanding*
=$1,34016
=$83.75
*Numberofcommon
=$160$10
=16
220
187.
Medium
NOTETOTHEINSTRUCTOR:Questions185,186,and187are
FinancialstatementsforQuadeCompanyappearbelow:
QuadeCompany
19X619X5
Currentassets:
Inventory..................................120140
Noncurrentassets:
Totalassets.................................$2,010$1,990
Currentliabilities:
Bondspayable..............................380400
Commonstock,$10par......................160160
QuadeCompany
IncomeStatement
Grossmargin.............................720
Incometaxes(30%).......................120
Netincome...............................$280
19X6was$230.
Required:
Answer:
Averagenumberofcommon
sharesoutstanding*
=($280$18)16
=$16.38
*Numberofcommon
=$160$10
=16
=$230$16.38
=14.0
222
Marketpricepershare
=$12.00$230.00
=5.22%
=$19216
=$12.00
**Seeabove
=$308$2,000
=15.40%
*Adjustednetincome=Netincome+[Interestexpense
x(1Taxrate)]
=$280+[$40x(10.30)]
=$308
=$2,000
e.Returnoncommon
=($280$18)$1,065
=24.60%
=$1,065
=$1,10016
=$68.75
*Numberofcommon
=$160$10
=16
188.
Medium
CondensedfinancialstatementsofMillerCompanyatthe
beginningandattheendofthecurrentyeararegivenbelow:
MillerCompany
BalanceSheet
EndofBeginningof
CurrentYearCurrentYear
Cash...........................$10,000$8,000
Marketablesecurities..........20,00022,000
Accountsreceivable............90,000110,000
Inventories....................150,000100,000
Plantandequipment,net.......280,000260,000
Totalassets................$550,000$500,000
Accountspayable...............$80,000$60,000
Accruedshorttermliabilities20,00025,000
Bondspayable..................75,00075,000
Preferredstock,10%,$100par50,00050,000
Commonstock,$10par..........100,000100,000
Additionalpaidincapital,
commonstock.................50,00050,000
Retainedearnings..............175,000140,000
Totalliabilitiesandequity$550,000$500,000
MillerCompany
CondensedIncomeStatement
FortheCurrentYear
Sales(allonaccount)............$650,000
Lesscostofgoodssold...........350,000
Grossmargin......................300,000
Lessoperatingexpenses...........200,000
Netoperatingincome..............100,000
Lessinterestexpense.............10,000
Netincomebeforeincometaxes....90,000
Lessincometaxes.................40,000
Netincome........................$50,000
Thecompanypaidtotaldividendsof$15,000duringtheyear,of
which$5,000weretopreferredstockholders.Themarketprice
ofashareofcommonstockattheendoftheyearwas$30.
224
Required:
Onthebasisoftheinformationgivenabove,fillintheblanks
withtheappropriatefigures.
Example:Thecurrentratioattheendofthecurrentyearwould
becomputedbydividing$270,000by$100,000
a.Theacidtest(quick)ratioattheendofthecurrentyear
wouldbecomputedbydividing_______________by
_________________.
b.Theinventoryturnoverfortheyearwouldbecomputedby
dividing_______________by_________________.
c.Thedebttoequityratioattheendofthecurrentyear
wouldbecomputedbydividing_______________by
_________________.
d.Theearningspershareofcommonstockwouldbecomputedby
dividing_______________by_________________.
e.Theaccountsreceivableturnoverfortheyearwouldbe
computedbydividing_______________by_________________.
f.Thetimesinterestearnedfortheyearwouldbecomputedby
dividing_______________by_________________.
g.Thereturnoncommonstockholders'equityfortheyearwould
becomputedbydividing_______________by
_________________.
h.Thedividendyieldwouldbecomputedbydividing
_______________by_________________.
Answer:
a.$120,000;$100,000
b.$350,000;$125,000
c.$175,000;$375,000
d.$45,000;10,000shares
e.$650,000;$100,000
f.$100,000;$10,000
g.$45,000;$307,500
h.$1;$30
189.
Hard
CMA
adapted
ShelzoInc.,amanufacturerofconstructionequipmentis
consideringthepurchaseofoneofitssuppliers,Raritron
Industries.Thepurchasehasbeengivenpreliminaryapprovalby
Shelzo'sBoardofDirectors,andseveraldiscussionshavetaken
placebetweenthemanagementofbothcompanies.Raritronhas
submittedfinancialdataforthepastseveralyears.Shelzo's
controllerhasanalyzedRaritron'sfinancialstatementsand
preparedthefollowingratioanalysiscomparingRaritron's
performancewiththeindustryaverages.
Industry
199319921991Average
Returnoncommon
stockholdersequity.........13.0313.0212.9812.96
Averagesaleperiod............51.1647.2942.1538.63
Timesinterestearned..........3.873.463.283.56
Priceearningsratio...........10.9611.2311.3911.54
Debttoequityratio...........0.500.460.480.57
Accountsreceivableturnover...6.987.257.837.78
Currentratio..................1.651.951.702.30
Dividendyieldratio...........2.082.062.122.25
Required:
UsingtheinformationprovidedaboveforRaritronIndustries:
A.1. Identifythetworatiosfromtheabovelistthatwould
beofmostinteresttoshorttermcreditors.
2. Explainwhatthesetworatiosmeasure.
3. WhatdothesetworatiosindicateaboutShelzoInc.?
B.1. Identifythethreeratiosfromtheabovelistthatwould
beofmostinteresttostockholders.
2. Explainwhatthesethreeratiosmeasure.
3. WhatdothesethreeratiosindicateaboutShelzoInc.?
C.1. Identifythetworatiosfromtheabovelistthatwould
beofmostinteresttolongtermcreditors.
2. Explainwhatthesetworatiosmeasure.
3. WhatdothesetworatiosindicateaboutShelzoInc.?
Answer:
A.1. Tworatiosthatwouldbeofmostinteresttoshortterm
creditorswouldbetheaveragesaleperiodandthe
currentratio.
2. Theaveragesaleperiodrelatestheaverageamountof
inventorytothecostofgoodssold.Thisratiomeasures
thelengthoftimeittakesonaveragetosellinventory
andisagaugeofhowwellthecompanymanagesits
inventory.Thecurrentratioiscalculatedbydividing
currentassetsbycurrentliabilities.Thisratio
measuresshortrunsolvency,i.e.,theabilitytomeet
currentobligations.
226
3. ForShelzoInc.,theaveragesaleperiodhasbeen
increasingandiswellabovetheindustryaverage,while
thecurrentratiohasbeenbelowtheindustryaverage.
Bothoftheseratiosindicatethattheremaybeproblems
withthecompanysliquidityposition.Thiscouldbe
causedbypoorinventorycontrol.
B.1. Thethreeratiosthatwouldbeofmostinteresttocommon
stockholdersarethereturnoncommonstockholders
equity,thepriceearningsratio,andthedividendyield
ratio.
2. Thereturnoncommonstockholdersequityisameasureof
howeffectivelythecompanyhasusedthestockholders
investmentinthecompanytogenerateprofits.Theprice
earningsratioprovidesameasureofhowthestockmarket
perceivesthecompanysfutureearningsprospects.The
highertheratio,themorefavorablethefuturelooksfor
thecompany.Thedividendyieldratiotellsuswhat
proportionofthecompanysprofitsarepaidoutascash
dividendstocommonstockholders.
3. Thesethreeratiosareclosetotheindustryaveragesand
therearenodiscerniblesignificanttrends.
C.1. Thetworatiosthatwouldbeofmostinteresttolong
termcreditorsaretimesinterestearnedandthedebtto
equityratio.
2. Timesinterestearnedisearningsbeforeinterestexpense
andtaxesdividedbyinterestexpense.Thisratio
measuresdebtpayingability.Ifstable,thecompanywill
beabletorefinanceorobtainnewfundsatreasonable
rates.Thedebttoequityratiomeasurestherelative
proportionsofdebtandequityinthecompanyscapital
structure.Thelowerthelevelofthedebttoequity
ratio,themoresecuritylongtermdebtorshave.
3. ForShelzoInc.,timesinterestearnedhasbeenimproving
andiscurrentlyabovetheindustryaverage,indicating
thatthecompanyshouldbeabletoborrowadditional
fundsifneeded.Thecompanysdebttoequityratiois
belowtheindustryaveragewhichalsoindicatesthe
companyhasthecapacitytoperhapstakeonadditional
debt.
190.
Medium
FinancialstatementsforLoweCompanyappearbelow:
LoweCompany
December31,Year2andYear1
Year2Year1
Cash........................................$45$30
Inventory..................................6760
Longterminvestments.......................162150
Land........................................128100
Building....................................9850
Totalassets..............................$538$430
Bondspayable...............................3550
Mortgagepayable............................1000
Preferredstock,12%.........................100100
Commonstock................................195170
Totalliabilities&stockholders'equity..$538$430
LoweCompany
IncomeStatement
FortheYearEndedDecember31,Year2
Sales(allonaccount)...................$145
Grossmargin.............................$71
Operatingexpenses(includinginterest
expenseof$5,000)......................16
Incometaxes(40%).......................22
Netincome...............................$33
Dividendstotaled$25,000fortheyear,ofwhich$12,000waspaid
tothepreferredstockholder.
Required:
ComputethefollowingforYear2:
a.Currentratio.
e.Returnontotalassets.
g.Timesinterestearnedratio.
228
Answer:
=($45+$38+$67)($36+$24)
=2.5to1
=$83($36+$24)
=1.38to1
*Quickassets=Cash+Currentreceivables
=$45+$38
=$83
=$145$39
=3.72times
=$39
Averagecollection
=3653.72
=98.1days
=$74$63.5
=1.17times
=$63.5
e.Returnontotalassets
=((Netincome+(Interestexpensex(1taxrate))
Averagetotalassets
=(($33+($5x(10.40))(($538+$430)/2))
=$36$484
=7.4%.
f.Timesinterestearned=Earningsbeforeinterestandtaxes
Interestexpense
=($55+$5)$5
=12.00times
g.Debttoequityratio=LiabilitiesStockholders'equity
=($36+$24+$35+$100)($100+$195+$48)
=$195$343
=0.57to1
191.
Medium
Severalinvestorsareintheprocessoforganizinganew
company.Theinvestorsfeelthat$800,000wouldbeadequateto
financethenewcompany'soperations.Threemethodsare
availabletofinancethenewcompany:
a.All$800,000couldbeobtainedthroughtheissuanceof
commonstock.
b.Commonstockcouldbeissuedtoprovide$400,000withthe
other$400,000obtainedbyissuing$100parvalue,l0%
preferredstock.
c.Commonstockcouldbeissuedtoprovide$40,000withthe
other$400,000obtainedbyissuingbondswithaninterest
rateof10%.
Theinvestorsareconfidentthatthecompanycouldearn
$175,000eachyearbeforeinterestandtaxes.Thetaxrateis
40%.
Required:
a.Assumingthattheestimatesarecorrect,computethenet
incomeavailabletocommonstockholdersundereachofthe
threefinancingmethodsproposedabove.
b.Usingtheincomedatacomputedin(a)above,computethe
returnoncommonstockholdersequityundereachofthe
threemethods.
c.WhydomethodsBandCprovidedagreaterreturnoncommon
equitythandoesmethodA?WhydoesmethodCprovidea
greaterreturnoncommonequitythanmethodB?
Answer:
a.Netincomeavailabletocommonstockholders:
MethodAMethodBMethodC
Incomebeforeinterestandtaxes...$175,000$175,000$175,000
Deductinterestexpense:
0.10x$400,000..................________________40,000
Incomebeforetaxes................$175,000$175,000$135,000
Deductincometaxes(40%)..........70,00070,00054,000
Netincome.........................$105,000$105,000$81,000
Deductpreferreddividends:
0.10x$400,000...................o40,000
o
Netincometocommonstockholders..$105,000$65,000$81,000
230
b.Returnoncommonequity:
MethodAMethodBMethodC
Netincometocommonstockholders$105,000$65,000$81,000
Commonstockholders'investment...$800,000$400,000$400,000
Returnoncommonequity...........13.10%16.25%20.25%
c.MethodsBandCprovideagreaterreturnoncommonequity
thanMethodAduetotheeffectofpositiveleverage.
MethodsBandCeachcontainsourcesoffundsthatrequirea
fixedannualreturnonthefundsprovided.Thisfixedannual
returnislessthanwhatisbeingearnedontheassetsof
thecompany,withthedifferencegoingtocommon
stockholders.
MethodCusesdebtandprovidesmoreleveragethanMethodB
inwhichpreferredstockisissued.Thedifferenceisdueto
thedeductibilityfortaxpurposesoftheinterestondebt,
whereasdividendsonpreferredstockarenotdeductiblefor
taxpurposes.
192.
Medium
FinancialstatementsforRaridanCompanyappearbelow:
RaridanCompany
19X619X5
Currentassets:
Cashandmarketablesecurities............$140$140
Accountsreceivable,net..................190170
Inventory.................................100110
Prepaidexpenses..........................7070
Totalcurrentassets....................500490
Noncurrentassets:
Plant&equipment,net....................1,5401,520
Totalassets................................$2,040$2,010
Currentliabilities:
Accountspayable..........................$110$110
Accruedliabilities.......................5040
Notespayable,shortterm.................110110
Bondspayable.............................280300
Totalliabilities.......................550560
Commonstock,$10par.....................200200
Additionalpaidincapitalcommonstock..260260
Retainedearnings.........................910870
Totalstockholders'equity..............1,4901,450
Totalliabilities&stockholders'equity....$2,040$2,010
RaridanCompany
IncomeStatement
Grossmargin.............................570
Incometaxes(30%).......................96
Netincome...............................$224
232
Required:
a.Currentratio.
Answer:
=$500$270
=1.85to1
=$330$270
=1.22to1
+Currentreceivables
=$140+$190
=$330
=$1,900$180
=10.56times
=$180
Averagecollection
=36510.56
=34.6days
=$1,330$105
=12.67times
=$105
Interestexpense
=$350$30
=11.67times
=$550$1,490
=0.37to1
193.
Medium
FinancialstatementsforRarigCompanyappearbelow:
RarigCompany
19X619X5
Currentassets:
Inventory.................................190180
Noncurrentassets:
Totalassets................................$2,090$2,020
Currentliabilities:
Bondspayable.............................460500
Commonstock,$5par......................160160
Totalstockholders'equity..............1,3201,150
RarigCompany
IncomeStatement
Grossmargin.............................540
Incometaxes(30%).......................84
Netincome...............................$196
234
Required:
a.Currentratio.
Answer:
=$590$310
=1.90to1
=$370$310
=1.19to1
+Currentreceivables
=$210+$160
=$370
=$1,800$155
=11.61times
=$155
Averagecollection
=36511.61
=31.4days
=$1,260$185
=6.81times
=$185
Interestexpense
=$330$50
=6.60times
=$770$1,320
=0.58to1
194.
Medium
FinancialstatementsforRarityCompanyappearbelow:
RarityCompany
19X619X5
Currentassets:
Inventory.................................90110
Noncurrentassets:
Totalassets................................$1,940$1,880
Currentliabilities:
Bondspayable.............................480500
Commonstock,$5par......................220220
Totalstockholders'equity..............980890
RarityCompany
IncomeStatement
Grossmargin.............................330
Incometaxes(30%).......................45
Netincome...............................$105
236
Required:
a.Currentratio.
Answer:
=$500$480
=1.04to1
=$340$480
=0.71to1
*Quickassets=Cash+Marketablesecurities+
+Currentreceivables
=$210+$130
=$340
=$1,100$125
=8.80times
=$125
Averagecollection
=3658.80
=41.5days
=$770$100
=7.70times
=$100
Interestexpense
=$200$50
=4.00times
=$960$980
=0.98to1
238

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How Well Am I Doing? Financial Statement Analysis

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