Chapter 9
Multiple Choice
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64. Which of the following ratios provides a solvency measure that shows the margin of safety of noteholders or
bondholders and also gives an indication of the potential ability of the business to borrow additional funds on a long-term
basis?
a.
b.
c.
d.
Multiple Choice
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7/19/2016 10:16 AM
65. The debt ratio is computed as:
a.
net income divided by interest expense.
b.
total liabilities divided by total assets.
c.
total bonds payable divided by total stockholders’ equity.
Chapter 9
d.
fixed assets divided by long-term liabilities.
Multiple Choice
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66. _____ is a solvency metric and is computed as total assets minus total liabilities.
a.
b.
c.
d.
Multiple Choice
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67. Garnet Company reported the following on its income statement:
Income before income taxes
$450,000
Income tax expense
52,000
Chapter 9
Net income
$398,000
An analysis of the income statement revealed that interest expense was $50,000. Garnet Company’s times interest earned
are earned was:
a.
7.8 times.
b.
11 times.
c.
10 times.
d.
8.1 times.
c
Moderate
Multiple Choice
False
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68. The balance sheet and income statement for the year ended 2016 indicate the following:
Bonds payable, 10% (issued 1998, due 2022)
$1,200,000
Preferred 5% stock, $100 par (no change during year)
350,000
Common stock, $50 par (no change during year)
2,100,000
Income before income tax for year
3100,000
Income tax for year
72,000
Common dividends paid
58,000
Preferred dividends paid
16,300
Based on the data presented above, what is the times interest earned?
a.
2.6
b.
0.7
c.
3.6
d.
2.9
c
Moderate
False
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Chapter 9
69. The return on stockholders’ equity is computed as:
a.
income from operations divided by average operating assets.
b.
net income divided by preferred dividends.
c.
net income divided by average total stockholders’ equity.
d.
gross income divided by total retained earnings.
c
Easy
Multiple Choice
False
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70. The balance sheets at the end of each of the first two years of operations indicate the following:
2017
2016
Total current assets
$600,000
$560,000
Total investments
60,000
40,000
Total property, plant, and equipment
900,000
700,000
Total current liabilities
125,000
80,000
Total long-term liabilities
350,000
250,000
Preferred 9% stock, $100 par
100,000
100,000
Common stock, $10 par
600,000
600,000
Paid-in capital in excess of par—common stock
60,000
60,000
Retained earnings
325,000
210,000
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Chapter 9
Based on the above information, if net income is $130,000 and interest expense is $40,000 for 2017, what is the return on
stockholders’ equity for 2017 (round to one decimal place)?
a.
16.5%
b.
12.7%
c.
12.0%
d.
13.2%
Moderate
Multiple Choice
False
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71. The balance sheets at the end of each of the first two years of operations indicate the following:
2017
2016
Total current assets
$600,000
$560,000
Total investments
60,000
40,000
Total property, plant, and equipment
900,000
700,000
Total current liabilities
125,000
80,000
Total long-term liabilities
350,000
250,000
Preferred 9% stock, $100 par
100,000
100,000
Common stock, $10 par
600,000
600,000
Paid-in capital in excess of par—common stock
60,000
60,000
Retained earnings
325,000
210,000
Based on the above information, if net income is $130,000 and interest expense is $40,000 for 2017, what is the return on
common stockholders’ equity for 2017 (round to one decimal place)?
a.
12.3%
b.
17.4%
c.
13.0%
d.
14.0%
c
Moderate
Multiple Choice
Chapter 9
72. The balance sheets at the end of each of the first two years of operations indicate the following:
2017
2016
Total current assets
$600,000
$560,000
Total investments
60,000
40,000
Total property, plant, and equipment
900,000
700,000
Total current liabilities
125,000
80,000
Total long-term liabilities
350,000
250,000
Preferred 9% stock, $100 par
100,000
100,000
Common stock, $10 par
600,000
600,000
Paid-in capital in excess of par—common stock
60,000
60,000
Retained earnings
325,000
210,000
Based on the above information, if net income is $130,000 and interest expense is $40,000 for 2017, what are the earnings
per share on common stock for 2017 (round to two decimal places)?
a.
$2.17
b.
$2.32
c.
$2.68
d.
$2.02
Moderate
Multiple Choice
False
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False
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Chapter 9
73. The balance sheets at the end of each of the first two years of operations indicate the following:
2017
2016
Total current assets
$600,000
$560,000
Total investments
60,000
40,000
Total property, plant, and equipment
900,000
700,000
Total current liabilities
125,000
80,000
Total long-term liabilities
350,000
250,000
Preferred 9% stock, $100 par
100,000
100,000
Common stock, $10 par
600,000
600,000
Paid-in capital in excess of par—common stock
60,000
60,000
Retained earnings
325,000
210,000
Based on the above information, if net income is $130,000 and interest expense is $40,000 for 2017, and the market price
is $40, what is the price-earnings ratio on common stock (round to one decimal place)?
a.
14.9
b.
19.8
c.
17.3
d.
18.4
Moderate
Multiple Choice
False
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74. For most profitable companies, the return on total assets will be less than:
a.
the rate earned on sales.
b.
cannot be determined without more information.
c.
the rate earned on total liabilities and stockholders’ equity.
d.
the return on stockholders’ equity.
Chapter 9
Multiple Choice
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75. The following information is available for Morgan Corporation:
2016
Market price per share of common stock
$25.00
Earnings per share on common stock
1.25
Which of the following statements is correct?
a.
The price-earnings ratio is 20 and a share of common stock was selling for 20 times the amount of earnings
per share at the end of 2016.
b.
The price-earnings ratio is 5.0% and a share of common stock was selling for 5.0% more than the amount of
earnings per share at the end of 2016.
c.
The market price per share and the earnings per share are not statistically related to each other.
d.
The price-earnings ratio is 10 and a share of common stock was selling for 125 times the amount of earnings
per share at the end of 2016.
Multiple Choice
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Chapter 9
76. Sarbanes-Oxley Act of 2002 requires which of the following report to be prepared by the management of the
company?
a.
A report identifying the competency of the company’s board of directors.
b.
A report assessing the market value of the company’s current stock price.
c.
A report showing management’s assessment of internal control.
d.
A report evaluating the probability that the company will remain in business.
Multiple Choice
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77. The independent auditor’s report does which of the following?
a.
Summarizes what the auditor did.
b.
States that the financial statements are effective.
c.
Gives the auditor’s opinion regarding the fairness of the financial statements.
d.
Describes that the common-sized statements are covered by the audit.
Multiple Choice
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Chapter 9
78. The purpose of an audit is to:
a.
render an opinion on the fairness of the statements.
b.
determine whether or not a company has a good credit risk.
c.
determine whether or not a company complies with income tax regulations.
d.
determine whether or not a company is a good investment.
Multiple Choice
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79. Condensed data taken from the ledger of Crawford Company at December 31, 2017 and 2016, are as follows:
2017
2016
Current assets
$200,000
$180,000
Property, plant, and equipment
450,000
400,000
Intangible assets
20,700
30,000
Current liabilities
70,000
80,000
Long-term liabilities
200,000
250,000
Common stock
275,000
200,000
Retained earnings
125,700
80,000
Prepare a comparative balance sheet, with horizontal analysis, for December 31, 2017 and 2016. (Round percents to one
decimal place.)
Chapter 9
80. Revenue and expense data for Reuters Company are as follows:
2017
2016
Administrative expenses
$ 24,750
$ 18,000
Cost of goods sold
500,000
375,000
Income tax
11,600
12,000
Net sales
750,000
600,000
Selling expenses
182,250
154,800
(a)
Prepare a comparative income statement, with vertical analysis, stating each item for both
2017 and 2016 as a percent of sales.
(b)
Comment upon significant changes disclosed by the comparative income statement.
(a)
Current assets
Property, plant, and equipment
Intangible assets
(31.0%)
Total assets
Current liabilities
(12.5%)
Long-term liabilities
(20.0%)
Total liabilities
(18.2%)
Common stock
Retained earnings
Total stockholders’ equity
Challenging
Subjective Short Answer
False
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Chapter 9
Amount
Percent
Amount
Percent
Net sales
Cost of goods sold
Gross profit
Selling expenses
Administrative expenses
Total operating expenses
Income before income tax
5.7%
Income tax
Net income
company to be less profitable than in the prior year.
Challenging
Subjective Short Answer
False
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81. The following data are taken from the financial statements:
Current
Preceding
Year
Year
Net sales
$3,592,000
$4,056,000
Cost of goods sold
2,092,000
2,656,000
Average monthly inventory
332,000
328,000
Inventory, end of year
372,000
347,000
(a)
Determine for each year (1) the inventory turnover and (2) the days’ sales in inventory.
(b)
Comment on the favorable and unfavorable trends revealed by the data.
(a)
Chapter 9
*Average daily cost of good sold (COGS ÷ 365 days)
Moderate
Subjective Short Answer
False
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82. The following items are reported on a company’s balance sheet:
Cash
$258,000
Marketable securities
114,000
Accounts receivable
187,000
Inventory
204,000
Notes payable (short-term)
249,000
Determine the (a) current ratio and (b) quick ratio. (Round your answer to one decimal place.)
Current ratio = ($258,000 + $114,000 + $187,000 + $204,000) / $249,000
Current ratio = 3.1
Quick ratio = ($258,000 + $114,000 + $187,000) / $249,000
Quick ratio = 2.2
Moderate
Subjective Short Answer
False
Chapter 9
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83. A company reports the following:
Net sales
$750,000
Average accounts receivable (net)
$ 50,000
Determine the (a) accounts receivable turnover and (b) days’ sales in receivables. Round your answers to one decimal
place.
Accounts receivable turnover = Sales / Average accounts receivable
Accounts receivable turnover = $750,000 / $50,000
Accounts receivable turnover = 15.0
Days’ sales in receivables = Average accounts receivable / Average daily sales
Days’ sales in receivables = $50,000 / ($750,000 / 365)
Days’ sales in receivables = 24.3
Subjective Short Answer
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