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14-61
125.
Which of the following is a measure of profitability?
126.
The interest coverage ratio is computed by dividing:
Essay Questions
127.
Accounting terminology
Listed below are eight technical accounting terms introduced in this chapter:
Each of the following statements may (or may not) describe one of these technical terms.
For each statement, indicate the term described, or answer "None" if the statement does
not correctly describe any of the terms.
____ (a) The percentage of total assets financed by creditors.
____ (b) A measure of the effectiveness with which management utilizes a company's
resources, regardless of how those resources are financed.
____ (c) A company's percentage share of total dollar sales within its industry.
____ (d) Current assets less current liabilities.
____ (e) A measure reflecting investors' expectations of future profitability.
____ (f) A measure of short-term solvency often used when a company has large
inventories that cannot be quickly converted into cash.
____ (g) A ratio that helps individual stockholders relate the net income of a large
corporation to their equity investment.
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128.
Percentage changes
Selected information from the financial statements of Perfectly Baked Cake Co. appears
below:
(a) Compute the percentage change in each of the above items from 2014 to 2015. Use a +
or - to indicate increase or decrease.
(b) Compute net income as a percentage of net sales in each year. (Round to the nearest
one-tenth of 1%)
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129.
Current ratio and working capital
The balance sheet of Red Missile Company contained the following items, among others:
(a) From the above information compute:
(1) Current assets: $_______
(2) Current liabilities: $______
(3) The current ratio: ______ to 1
(4) Working capital: $______
(b) Assume that Red Missile Company pays the note payable of $163,000, thus reducing
cash to $17,000. Compute the following after the completion of this transaction:
(1) The current ratio: ______ to 1
(2) Working capital: $______
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130.
Measures of solvency and credit risk
Shown below are selected items appearing in a recent balance sheet of Grant Products.
(Dollar amounts are in thousands.)
(a) Compute the following:
(1) Total quick assets $____________
(2) Total current assets $____________
(3) Total current liabilities $____________
(4) Quick ratio ______ to 1
(5) Current ratio ______ to 1
(b) Research indicates an industry average quick ratio is 1.3 to 1, and a current ratio of 2.3
to 1. Based upon this information, does Grant Products appear more or less solvent than
the average company in its industry? Explain briefly.
131.
Improving the current ratio
Carter Corporation financed construction of a new addition to its facilities with a large
long-term note payable. As a condition of obtaining the loan, Carter agreed to maintain a
current ratio at year-end of at least 1.7 to 1. If Carter fails to maintain this ratio, the lender
may demand immediate repayment of the principal amount of the note and all unpaid
accrued interest. As the end of the year approaches, Carter is concerned about the
magnitude of its current ratio. Suggest some actions that the company might take to
increase the magnitude of the current ratio.
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132.
Multiple-step income statement
Shown below is a recent income statement for Phaeton, Inc.:
Prepare an income statement for the year in a multiple-step format. (Use the grid provided
below.)
133.
Evaluating the adequacy of net income
Assume that Delta Corp. earns net income of $1,000,000 in the current year. Identify two
important factors that investors should consider in evaluating the reasonableness of this
dollar amount. Explain what investors may learn from each of these considerations.
134.
Income statement classifications
Simon Hardware and Garfunkel Foods are sole proprietorships with similar amounts of
total assets. Also, both businesses earn similar amounts of revenue, incur similar amounts
of operating expenses, and report similar net incomes. However, Simon has a higher cost of
goods sold, while Garfunkel Foods has higher interest expense.
Indicate which of these companies has the higher (a) gross profit rate, and (b) return on
assets. In each case, explain the reasons for each answer.
135.
Return on investment
Shown below are selected data from a recent annual report of Quality Service. (Dollar
amounts are in millions.)
Compute for the year:
(a) Return on average total assets
(b) Return on average total equity
