41. Eagle Company has $9,000 in cash, $11,000 in marketable securities, $26,000 in current receivables,
$34,000 in inventories, and $40,000 in current liabilities. The company’s quick ratio is closest to
a.
1.35.
b.
1.15.
c.
2.00.
d.
1.73.
42. Siri Company has $20,000 in cash, $8,000 in marketable securities, $36,000 in current receivables,
$18,000 in inventories, and $68,000 in current liabilities. The company’s quick ratio is closest to
a.
.94.
b.
.41.
c.
1.88.
d.
1.21.
43. Phillips Company had $300,000 in sales on account last year. The beginning accounts receivable
balance was $25,000 and the ending accounts receivable balance was $18,000. The company’s
accounts receivable turnover ratio was closest to
a.
16.67.
b.
12.00.
c.
3.85.
d.
13.95.
44. Miller Company had $120,000 in sales on account last year. The beginning accounts receivable
balance was $8,000 and the ending accounts receivable balance was $14,000. The company’s accounts
receivable turnover ratio was closest to
a.
5.45.
b.
8.57.
c.
10.91.
d.
15.00.
45. Arnold Company had $650,000 in sales on account last year. The beginning accounts receivable
balance was $24,000 and the ending accounts receivable balance was $36,000. The company’s
accounts receivable turnover ratio was closest to
a.
21.67.
b.
10.83.
c.
27.08.
d.
18.06.
46. Kringle Company, a retailer, had cost of goods sold of $1,400,000 last year. The beginning inventory
balance was $125,000 and the ending inventory balance was $142,000. The company’s inventory
turnover ratio was closest to
a.
10.49.
b.
5.24.
c.
11.20.
d.
9.86.
47. Lost Shoe Company, a retailer, had cost of goods sold of $220,000 last year. The beginning inventory
balance was $30,000 and the ending inventory balance was $21,000. The company’s inventory
turnover ratio was closest to
a.
10.48.
b.
7.33.
c.
4.31.
d.
8.63.
48. Jackson Company, a retailer, had cost of goods sold of $140,000 last year. The beginning inventory
balance was $8,000 and the ending inventory balance was $11,000. The company’s inventory turnover
ratio was closest to
a.
12.73.
b.
14.73.
c.
7.37.
d.
17.50.
49. Lisa’s Dress Company, a retailer, had cost of goods sold of $180,000 last year. The beginning
inventory balance was $13,000 and the ending inventory balance was $18,000. The company’s average
inventory turnover in days was closest to
a.
36.50 days.
b.
26.36 days.
c.
31.43 days.
d.
62.86 days.
50. Mike’s Sportswear Company, a retailer, had cost of goods sold of $420,000 last year. The beginning
inventory balance was $31,000 and the ending inventory balance was $28,000. The company’s average
inventory turnover in days was closest to
a.
25.64 days.
b.
51.27 days.
c.
26.94 days.
d.
24.33 days.
51. The following information pertains to Barkley Company.:
Merchandise purchased
$1,800,000
Cost of goods sold
$2,000,000
Inventory at the end of the year
$ 400,000
The inventory turnover ratio for the year was
a.
10.
b.
5.
c.
4.
d.
3.6.
52. A liquidity ratio measures the
a.
income or operating success of an enterprise over a period of time.
b.
ability of the enterprise to survive over a long period of time.
c.
short-term ability of the enterprise to pay its obligations and to meet unexpected needs for
cash.
d.
number of times interest is earned.
53. Parr Hardware Store had net credit sales of $5,200,000 and cost of goods sold of $4,000,000 for the
year. The Accounts Receivable balances at the beginning and end of the year were $600,000 and
$700,000, respectively. The accounts receivables turnover was
a.
7.4 times.
b.
8.7 times.
c.
6.2 times.
d.
8 times.
54. The current assets of Caitlin Company are $360,000. The current liabilities are $240,000. The current
ratio is
a.
1.25.
b.
1.50.
c.
0.67.
d.
cannot be determined from the information provided.
55. If a company has an acid-test ratio of 1.2, what respective effects will the borrowing of cash by
short-term debt and the collection of accounts receivable have on the ratio?
Short-term Collection of
Borrowing Receivable
a.
Increase No effect
b.
Increase Increase
c.
Decrease No effect
d.
Decrease Decrease
56. A company has a receivables turnover of 15 times. The average net receivables during the period are
$430,000. What is the amount of net credit sales for the period?
a.
$430,000
b.
$6,450,000
c.
$6,000,000
d.
$500,000
57. A company has an average inventory on hand of $100,000 and the days in inventory are 73 days. What
is the cost of goods sold?
a.
$500,000
b.
$7,300,000
c.
$1,000,000
d.
$3,650,000
58. Which one of the following would be considered a leverage ratio?
a.
accounts receivable turnover
b.
return on total assets
c.
quick ratio
d.
debt ratio
59. Grant Company reported the following on its income statement:
Income before income taxes
$420,000
Income tax expense
120,000
Net income
$300,000
An analysis of the income statement revealed that interest expense was $60,000. Grant Company’s
times-interest-earned ratio was
a.
8.
b.
7.
c.
6.
d.
5.
60. Last year Neil Company had a net income of $170,000, income tax expense of $37,000, and interest
expense of $24,000. The company’s times-interest-earned ratio was closest to
a.
8.63.
b.
7.08.
c.
9.63.
d.
6.24.
61. Last year Fuller Company had a net income of $410,000, income tax expense of $50,000, and interest
expense of $34,000. The company’s times-interest-earned ratio was closest to
a.
12.06.
b.
9.88.
c.
14.53.
d.
13.53.
62. Cottle Company has total assets of $180,000 and total liabilities of $54,000. The company’s
debt-to-equity ratio is closest to
a.
0.32.
b.
2.3.
c.
0.30.
d.
0.43.
63. Opis Company has total assets of $475,000 and total liabilities of $130,000. The company’s
debt-to-equity ratio is closest to
a.
0.32.
b.
0.21.
c.
0.38.
d.
0.27.
64. Holt Company reported the following on its income statement:
Income before income taxes
$420,000
Income tax expense
120,000
Net income
$300,000
An analysis of the income statement revealed that interest expense was $52,500. Holt Company’s
times-interest-earned ratio was
a.
9.
b.
8.
c.
7.
d.
6.
65. Presented below are selected data from the financial statements of Russell Corp. for 2014 and 2013.
2014
2013
Net income
$100,000
$123,000
Cash dividends paid on preferred stock
$12,000
$15,000
Cash dividends paid on common stock
$42,000
$38,000
Weighted average number of common shares outstanding
$105,000
$95,000
Earnings per share is reported on the 2014 income statement as
a.
$ 0.44.
b.
$ 0.55.
c.
$ 0.84.
d.
$ 0.95.
66. Presented below are selected data from the financial statements of Korn Corp. for 2014 and 2013.
Net income
Weighted average number of common shares outstanding
Market price per share of common stock at the end of the year
Earnings per share
The price-earnings ratio for 2014 is
a.
1.09.
b.
5.46.
c.
6.0.
d.
11.0.
67. Presented below are selected data from the financial statements of DeBruce Corp. for 2014 and 2013.
Net income
Cash dividends paid on common stock
Market price per share of common stock at the end of the year
Earnings per share
Shares of common stock outstanding
The dividend payout ratio for 2014 is
a.
0.382.
b.
0.05.
c.
0.28.
d.
0.50.
68. Refer to Figure 16-1. Starbuck’s price-earnings ratio is
a.
2.
b.
5.
c.
10.
d.
8.
69. Refer to Figure 16-1. Starbuck’s dividend payout ratio for 2013 is
a.
$5 per share.
b.
0.25.
c.
0.20.
d.
0.125.
70. Goslier Company’s net income last year was $130,000. The company paid preferred dividends of
$42,000 and its average common stockholders’ equity was $610,000. The company’s return on
common stockholders’ equity for the year was closest to
a.
15.8%.
b.
28.1%.
c.
21.3%.
d.
14.4%.
71. Fastlane Company has 50,000 shares of common stock and 20,000 shares of preferred stock
outstanding. There was no change in the number of common or preferred shares outstanding during the
year. Preferred stockholders received dividends this year totaling $120,000. Common stockholders
received dividends totaling $200,000. If the dividend payout ratio for the year was 80%, then the net
income was
a.
$400,000.
b.
$370,000.
c.
$160,000.
d.
$250,000.
72. The following data have been taken from your company’s financial records for the current year:
Earnings per share
$ 4.50
Market price per share
$46.00
Dividend per share
$ 3.00
Book value per share
$31.00
The price-earnings ratio is
a.
10.2.
b.
6.9.
c.
1.5.
d.
15.3.
73. Last year the return on total assets in Justin Company was 8.5%. The total assets were $2,900,000 at
the beginning of the year and $3,100,000 at the end of the year. The tax rate was 30%, interest expense
totaled $110,000, and sales were $5,200,000. Net income for the year was
a.
$145,000.
b.
$222,000.
c.
$332,000.
d.
$178,000.
74. Dowling Company’s net income last year was $40,000 and its interest expense was $8,000. Total
assets at the beginning of the year were $260,000 and total assets at the end of the year were $315,000.
The company’s income tax rate was 35%. The company’s return on total assets for the year was closest
to
a.
14.5%.
b.
15.7%.
c.
16.7%.
d.
7.9%.
75. Selected financial data from Harlow Company for the most recent year appear below:
Sales
$100,000
Cost of goods sold
$ 60,000
Dividends declared and paid
$ 5,000
Interest expense
$ 8,000
Operating expenses
$ 18,000
The income tax rate is 30%.
The return on sales ratio was closest to
a.
14%.
b.
40%.
c.
22%.
d.
10%.
76. Clover Company’s net income last year was $80,000. The company paid preferred dividends of
$12,000 and its average common stockholders’ equity was $340,000. The company’s return on
common stockholders’ equity for the year was closest to
a.
27.1%.
b.
3.5%.
c.
20.0%.
d.
23.5%.
77. The average stockholders’ equity for Holloway Co. last year was $2,000,000. Included in this figure
was $200,000 par value of 8% preferred stock. If the return on common stockholders’ equity was
12.5% for the year, net income was
a.
$225,000.
b.
$250,000.
c.
$241,000.
d.
$234,000.
78. Wellston Company’s net income last year was $300,000. The company has 100,000 shares of common
stock and 30,000 shares of preferred stock outstanding. There was no change in the number of
common or preferred shares outstanding during the year. The company declared and paid dividends
last year of $1.90 per share on the common stock and $1.70 per share on the preferred stock. The
earnings per share of common stock is closest to
a.
$2.49.
b.
$1.10.
c.
$3.51.
d.
$3.00.
79. Lew Company’s net income was $80,000 last year. The company has 20,000 shares of common stock
and 5,000 shares of $100 par value, 7% preferred stock outstanding. There was no change in the
number of common or preferred shares outstanding during the year. The earnings per share of common
stock was
a.
$4.00.
b.
$3.20.
c.
$2.25.
d.
$3.72.
80. Data concerning Bouerneuf Company’s common stock follow:
Book value per share
$24.00
Market value per share
$18.00
Earnings per share
$ 6.00
Par value per share
$ 4.00
Dividend per share
$ 1.00
The price-earnings ratio would be
a.
2.0.
b.
2.7.
c.
3.0.
d.
4.0.
81. Bogart Company has 40,000 shares of common stock outstanding. The book value per share of this
stock was $60 and the market value per share was $75 at the end of the year. Net income for the year
was $400,000. Interest on long-term debt was $40,000. Dividends paid to common stockholders were
$3 per share. The tax rate was 30%. The company’s price-earnings ratio at the end of the year was
a.
7.5.
b.
20.
c.
25.
d.
6.
82. A common measure of profitability is
a.
the quick ratio.
b.
times-interest-earned ratio.
c.
return on common stockholders’ equity ratio.
d.
debt ratio.
83. Return on sales is calculated by dividing
a.
sales by cost of goods sold.
b.
gross profit by net sales.
c.
net income by stockholders’ equity.
d.
net income by sales.
84. Which of the following is considered a profitability ratio?
a.
earnings per share
b.
debt ratio
c.
quick ratio
d.
inventory turnover ratio
85. Which profitability ratio requires the use of earnings per share in its calculation?
a.
price-earnings ratio
b.
return on common stockholders’ equity
c.
dividend yield
d.
return on sales
86. Which profitability ratio requires the use of earnings per share and the current market price?
a.
return on common stockholders’ equity
b.
dividend payout ratio
c.
dividend yield
d.
price-earnings ratio
87. Earnings per share is an indication of how much
a.
the company paid as dividends for each share of stock.
b.
the company earned for each share of outstanding common and preferred stock.
c.
the company earned for each share of outstanding common stock
d.
cash the company has for each share of all outstanding stock.
88. Chaney Inc. wants to measure the relationship between profitability and the investment made by
stockholders. Chaney should use
a.
return on common stockholders’ equity.
b.
earnings per share.
c.
return on sales.
d.
the statement of retained earnings.
89. ABC Company issued additional shares of stock for cash. The effect of the transaction is
a.
the earnings per share increased.
b.
the current ratio was increased.
c.
the debt-to-equity ratio increased.
d.
the return on total assets increased.
PROBLEM
1. Eaton Corporation had net income of $6,000,000 in 2010. Using 2014 as the base year, net income
decreased by 70% in 2013 and increased by 140% in 2014.
Required: Compute the net income reported by Eaton Corporation for 2013 and 2014.
X ÷ $6,000,000 = 70%
X = $6,000,000 0.70 = $4,200,000
The decrease is $4,200,000; therefore net income for 2009 is $1,800,000.
X ÷ $6,000,000 = 140%
X = $6,000,000 1.4
X = $8,400,000
2. The following items were taken from the financial statements of Ritz Inc., over a 4-year period:
Item
2014
2013
2012
2011
Net Sales
$800,000
$700,000
$550,000
$500,000
Cost of Goods Sold
560,000
500,000
420,000
400,000
Gross Margin
$240,000
$200,000
$130,000
$100,000
Required: Using horizontal analysis and 2011 as the base year, compute the trend percentages for net
sales, cost of goods sold, and gross profit. Explain whether the trends are favorable or unfavorable for
each item.
Item
2014
2013
2012
2011
Net Sales
Cost of Goods Sold
Gross Margin
Figure 16-6
London Company provided the following income statements for its first 3 years of operation:
Year 1
Year 2
Year 3
Net sales
$975,000
$1,150,000
$1,280,000
Less: cost of goods sold
($676,000)
($910,000)
($945,000)
Gross margin
$299,000
$240,000
$335,000
Less:
Operating expenses
($185,000)
($215,000)
($235,000)
Income taxes
($45,600)
($10,000)
($40,000)
Net income
$68,400
$15,000
$60,000
3. Refer to Figure 16-6. Prepare a horizontal analysis using Year 1 as the base year. Explain if the
results are favorable or unfavorable.
4. Refer to Figure 16-6. Prepare a vertical analysis by using net sales as the base.
Less:
Figure 16-3.
The current asset section of the balance sheets of the Shamrock Company as of June 30, 2014 and
2013 is presented below.
2014
2013
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
5. Refer to Figure 16-3. In the spaces provided below, complete a horizontal analysis of the current asset
section of Shamrock Company’s balance sheet for 2013. Your answers for “% Change” should be
rounded to one decimal place, e.g., 10.3%. Provide a short evaluation of this analysis.
$ Change
% Change
Cash and cash equivalents
Trade accounts receivable, net
(18.5%)
Inventory
(17.8%)
6. Boyle Corporation had the following comparative current assets and current liabilities:
Dec. 31, 2014
Dec. 31, 2013
Current assets
Cash
$ 20,000
$ 30,000
Short-term investments
40,000
10,000
Accounts receivable
55,000
95,000
Inventory
110,000
90,000
Prepaid expenses
35,000
20,000
Total current assets
$260,000
$245,000
Current liabilities
Accounts payable
$140,000
$110,000
Salaries payable
40,000
30,000
Income tax payable
20,000
15,000
Total current liabilities
$200,000
$155,000
During 2014, credit sales and cost of goods sold were $600,000 and $350,000, respectively.
Required: Compute the following liquidity measures for 2014:
A.
Current ratio.
B.
Acid-test ratio.
C.
Receivables turnover.
D.
Inventory turnover.
ANS:
Current ratio
Current assets ÷ Current liabilities
$260,000 ÷ $200,000 = 1.3 : 1
Other current assets
7. Assuming a starting point of a 1:1 relationship, state the effect of the following transactions on the
current ratio. Use increase, decrease, or no effect for your answer.
A.
Collection of an accounts receivable.
B.
Declaration of cash dividends.
C.
Additional stock is sold for cash.
D.
Short-term investments are purchased for cash.
E.
Equipment is purchased for cash.
F.
Inventory purchases are paid for cash.
B.
decrease
C.
increase
D.
no effect
E.
decrease
F.
no effect
8. Presented below are selected data from the financial statements of Harper Company for 2014, 2013,
and 2012.
2014
2013
2012
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 Harper’s inventory turnover ratio for 2014 and 2013.
B.
Calculate the number of days in inventory at December 31, 2014. At December 31,
2013. Assume 365 days in a year.
C.
Explain the implications of your calculations with respect to inventory management.
9. Presented below are selected data from the financial statements of eMonstore.com for 2014, 2013, and
2012.
2014
2013
2012
Total assets
$650,000
$821,000
$800,000
Net credit sales
$800,000
$650,000
$720,000
Accounts receivable
$85,000
$79,000
$74,000
A.
Calculate eMonstore.com’s accounts receivable turnover ratio for 2014 and 2013.
B.
Calculate the number of days the average balance of receivables is outstanding before
being converted into cash (turnover in days) for 2014 and 2013.
C.
What problems do you see with the company’s credit policy if the terms are net 30
days? Explain.
A.
Cost of goods sold/Average inventory =
2014: $360,000/[($56,000 + $64,000)/2] = 6.0 times
2013: $420,000/[($64,000 + $53,000)/2] = 7.2 times
B.
Number of days in the period/Inventory turnover =
2014: 365/6.0 = 60.8 days
2013: 365/7.2 = 50.7 days