978-1337276337 Test Bank Chapter 13 Part 7

Chapter 13

Page 112

= (Net Income – Preferred Dividends)/Average Common Stockholders’ Equity

= ($75,000 – $25,000*)/[($1,150,000 + $1,100,000**)/2]

= $50,000/$1,125,000 = 4.44%

2. Ulysses has not been successful in using outside funds because the return on stockholders’ equity of 4.44% is less than

the return to all providers of capital, as measured by the return on assets of 6.06%.

4.44% and indicate that Ulysses is not successfully employing leverage.

Page 113

228. The Stockholders’ Equity section of the balance sheet for Grant Corp. at the end of 2017 appears as follows:

7%, $100 par, cumulative preferred stock, 200,000 shares authorized, 55,000 shares issued and outstanding

$ 5,500,000

Additional paid-in capital on preferred 2,500,000

Common stock, $5 par, 500,000 shares authorized, 420,000 shares issued and outstanding 2,100,000

Additional paid-in capital on common 18,000,000

Retained earnings 32,500,000

Total stockholders’ equity $60,600,000

1. Compute the following ratios for the common stock:

2. Assume that you are an investment adviser. What other information would you want to have before advising a client

regarding the purchase of Grant stock?

2. An investment advisor needs to be aware of industry trends, the general economic environment, the historical

performance of the company, the investor’s attitudes about risk, and any other relevant data needed to make an informed

Chapter 13

Page 115

1. 2018 2017 $ Change % Change

Cash and cash equivalents $ 16,000 $ 20,000 $ (4,000) (20)%

2. Largest changes Refer to

230. Lockhart Corp.’s December 31, 2017, balance sheet reported current assets of $120,000 and current liabilities of

$100,000. The current ratio increased by 25% one year later, on December 31, 2018. Current liabilities on this date were

$140,000. Determine current assets on December 31, 2018.

Page 117

233. Your supervisor asks you to compare the company’s results for the year, as measured by various ratios, with one of

the published surveys that arranges information by industry classification. What difficulties might you encounter when

making comparisons using industry standards?

234. For what purpose is horizontal analysis used by management? Is this information provided to stockholders? If so, in

what form? If not, why?

Page 118

235. Starch Company experiences a 20% increase in sales over the previous year. However, gross profit actually

decreased by 10% from the previous year. What are some of the possible causes for an increase in sales but a decline in

gross profit?

236. Why is liquidity important for businesses?

Page 119

237. What situations could cause a decrease in the current ratio, but an increase in the acid-test ratio? If this happens, is

management to be commended or is a problem evident? Explain

238. What is meant by the concept of “activity” as it relates to turnover ratios? Explain.

239. What makes the analysis of a service company different from the analysis of a merchandising company?

Page 120

240. Service-oriented companies have different needs than product-oriented companies when analyzing financial

statements.

Required

Why is this true? Give an example of a financial ratio that is meaningless to a service business.

241. Would a banker be more interested in the liquidity or the solvency of a company? Explain.

242. What is meant by a company’s “long-term financial health”? Which side of the balance sheet is more informative for

this issue? Explain.

243. What is the best way to assess solvency? Explain.

Page 122

247. Ranier Parts Company has a return on assets of 12% and a return on common stockholders’ equity of 15%. What

causes the difference in the two returns?

248. What would be at least three reasons for a decrease in inventory turnover? Explain.