978-1337276337 Test Bank Chapter 13 Part 4

Chapter 13

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140. Because of its relationship to dividends and market price, which ratio is important to investors?

a. Current ratio

b. Debt-to-equity ratio

c. Price/earnings ratio

d. Asset turnover ratio

141. The concept of leverage is that

a. it is appropriate to borrow if the return on the assets is greater than the cost of the financing.

b. it is appropriate to borrow as long as the lender approves the loan.

c. it is unfavorable to borrow funds rather than raise the capital from stockholders.

d. a high debt-to-equity ratio is favorable.

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144. Debt-to-equity ratio

a. Total liabilities

b. Total stockholders’ equity

c. Net income

d. Interest expense

e. Cash flow from operations before interest and tax payments

f. Cash paid for acquisitions

g. Cash flow from operations

h. Total dividends paid

145. Debt service coverage ratio

a. Interest expense

b. Income tax expense

c. Cash flow from operations before interest and tax payments

d. Cash paid for acquisitions

e. Cash flow from operations

f. Total dividends paid

g. Interest payments

h. Principal payments on debt

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148. Asset turnover ratio

a. Market price per share

b. Net sales

c. Gross profit

d. Average total assets

e. Interest expense, net of tax

f. Net income

g. Total liabilities

h. Total assets

149. Return on sales ratio

a. Market price per share

b. Net sales

c. Gross profit

d. Average total assets

e. Interest expense, net of tax

f. Net income

g. Total liabilities

h. Total assets

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150. Dividend yield ratio

a. Market price per share

b. Net sales

c. Average inventory outstanding

d. Interest expense, net of tax

e. Common dividends per share

f. Preferred dividends per share

g. Weighted average number of common shares outstanding

h. Total stockholders’ equity

151. __________, or an increase in the level of prices, is another important consideration in analyzing financial

statements.

152. __________ ratio is capable of telling the user everything there is to know about a particular company.

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153. Trend analysis is another name for __________ analysis.

154. The ratio of net income to net sales is the relationship presented by the __________ ratio.

155. In a vertical analysis, the base, or benchmark, on which all other items in the income statement are compared is

__________.

156. __________ statements recast all items on the statement as a percentage of a selected item on the statement.

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157. The three types of analysis that involve ratios are __________, __________, and __________.

158. The __________ ratio indicates the company’s ability to meet the current year’s interest payments out of the current

year’s earnings.

159. In the numerator of the debt service coverage ratio, __________ is a good substitute for cash flow from operations

before interest and tax payments, especially where changes in these accounts are insignificant.

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160. The two groups of users that are especially interested in profitability are __________ and __________.

161. A comparison of financial statement items within a single period.

162. A comparison of financial statement items over a period of time.

163. When using vertical analysis, accounts on the balance sheet should be stated as a percentage of this amount.

164. When using vertical analysis, accounts on the income statement should be stated as a percentage of this amount.

Chapter 13

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186. The relationship between net sales and total assets

187. The relationship between dividends and the market price of a company’s stock

188. An income statement measure of the ability of a company to make its interest payments

189. A measure of the ability of a company to finance long-term asset acquisitions from cash from operations

190. What two difficulties may be that are encountered when two companies are compared?

191. What are two reasons why a company’s accounts receivable turnover may decrease?

2. Credit sales could decline because of economic conditions.

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192. What three specific ratios are especially useful for creditors and lenders?

193. Dormont, Inc., a supplier, is thinking of extending credit to Fab Company but decides not to because Fab’s current

ratio is only 0.60. Do you agree with the supplier’s decision? What other factors need to be considered in drawing any

conclusions about a company’s liquidity?

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1. Prepare common-size comparative income statements for the two years for Bloomfield Corp.

2. What observations can you make about the common-size statements? List at least four observations.

4. Assume that you are interested in identifying reasons for the changes in selling and administrative expenses and income

tax expense. Explain where you would look to find additional information about the change.

2.8% of sales.

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195. Use the Current Assets section of the balance sheets of the Breeze Company as of June 30, 2018 and 2017 presented

below to answer the questions that follow.

2018 2017

Cash and cash equivalents $ 75,000 $ 58,800

Trade accounts receivable, net 157,500 193,200

Inventory 208,200 253,400

Other current assets 18,400 15,500

Total current assets $ 459,100 $ 520,900

Total assets $2,650,000 $3,430,000

Required

Complete a horizontal analysis of the Current Assets section of Breeze Company’s balance sheet for 2018. Your answers

for “% Change” should be rounded to one decimal place, e.g., 10.3%. Provide a short evaluation of this analysis.

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196. Use the Current Assets section of the balance sheets of Breeze Company as of June 30, 2018 and 2017 presented

below to answer the questions that follow.

2018 2017

Cash and cash equivalents $ 75,000 $ 58,800

Trade accounts receivable, net 157,500 193,200

Inventory 208,200 253,400

Other current assets 18,400 15,500

Total current assets $ 459,100 $ 520,900

Total assets $2,650,000 $3,430,000

Required

Complete a vertical analysis of the Current Assets section of Breeze Company’s balance sheets for 2018 and 2017. Your

answers should be rounded to one decimal place, e.g., 10.3%.

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197. Presented below are selected data from the financial statements of Wave Company for 2019, 2018, and 2017.

2019 2018 2017

Total assets $1,205,000 $952,000 $945,000

Cost of goods sold 360,000 420,000 440,000

Inventory 56,000 64,000 53,000

Net income 65,000 25,000 16,000

A) Calculate Wave’s inventory turnover ratio for 2019 and 2018.

B)

How many days would it take to sell the entire inventory at December 31, 2019? At December 31, 2018? Assume

360 days in a year.

C) What problems do you see in the company’s inventory management?

2018. This could indicate a large amount of obsolete inventory or problems in the sales department. It may also indicate

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198. Presented below are selected data from the financial statements of Medtech Company for several years.

2019 2018 2017

Total assets $487,500 $615,750 $600,000

Net credit sales 600,000 487,500 540,000

Accounts receivable 63,750 60,000 55,500

Net income 11,250 65,000 9,000

A) Calculate Medtech’s accounts receivable turnover ratio for 2019 and 2018.

B) What could have caused the change? Explain.