Chapter 12—Financial Statement Analysis Key
1. A banker is analyzing a company which operates in the automotive industry. Which of the following will
likely be the banker’s most important consideration in determining whether the company should receive a loan?
2. Each of the following is included in a public company’s MD&A except:
3. Percentage analyses, ratios, turnovers, and other measures of financial position and operating results are:
4. Horizontal analysis is analysis in which:
5. Which of the following statements is true regarding horizontal analysis?
6. Which of the following statements is true regarding vertical analysis?
7. Which of the following profitability ratios would be determined through a common-size vertical analysis of
the income statement?
8. In a common-size income statement, the 100% amount is:
9. In a common-size balance sheet, the 100% amount is:
10. The percentage analysis of increases and decreases in individual items in comparative financial statements is
called:
11. The percent of fixed assets to total assets is an example of:
12. What type of analysis is indicated by the following?
Increase (Decrease*)
2012
2011
Amount
Percent
Current assets
$ 380,000
$ 500,000
$120,000*
24%*
Fixed assets
1,680,000
1,500,000
180,000
12%
13. An analysis in which all the components of an income statement are expressed as a percentage of net sales is
called:
14. Horizontal analysis of comparative financial statements includes the:
15. Which of the following generally indicates a positive change?
16. Return ratios are measures of the relationship between the:
17. In considering equity and debt financing, which of the following statements is generally true?
A. The lower the measure of the long-term debt to equity ratio, the greater the likelihood that the company will
have difficulty in meeting its obligation in some future period.
18. Emerald Company issued additional shares of stock. Which of the following is true with regard to the effect
of the stock issuance transaction on Emerald’s ratio computations?
19. Ruby Company sold inventory on credit. Its gross profit percentage is 23%. The effect of this transaction is
that the:
20. Which of the following is considered a profitability ratio?
21. Which of the following ratios is most useful in indicating a company’s profitability?
22. The return on assets ratio:
23. Chartreuse, Inc.
Information from the financial statements of Chartreuse, Inc. is provided below.
2012
Net income
$150,000
Cash dividends paid on preferred stock
15,000
Cash dividends paid on common stock
42,000
Average number of preferred shares outstanding
20,000
Average number of common shares outstanding
105,000
Market price per share of common stock at year-end
25.10
Refer to the information for Chartreuse, Inc. Earnings per share for 2012 would be reported as:
24. Kirby Deuce Corporation
Selected data from the financial statements of Kirby Deuce Corporation are presented below.
2012
Net income
$110,000
Cash dividends paid on common stock
42,000
Average number of common shares outstanding
140,000
Treasury Stock
70,000
Market price per share of common stock at year-end
16.00
Refer to the financial information for Kirby Deuce Corporation. Earnings per share for 2012 is:
25. Kirby Deuce Corporation
Selected data from the financial statements of Kirby Deuce Corporation are presented below.
2012
Net income
$110,000
Cash dividends paid on common stock
42,000
Average number of common shares outstanding
140,000
Treasury Stock
70,000
Market price per share of common stock at year-end
16.00
Refer to the financial information for Kirby Deuce Corporation. The price to earnings ratio for 2012 is:
A. 17.77.
26. Earnings per share is an indication of how much:
27. Stanwick, Inc. wants to measure the relationship between profitability and the investment made by
stockholders. To measure this Stanwick should use the:
28. The following information is available for Gomez Company.:
2011
Market price per share of common stock
$25.00
Earnings per share on common stock
1.25
Which of the following statements is correct?
29. The following information pertains to Raleigh Company. Assume that all balance sheet amounts represent
both average and ending balance figures. Assume that all sales were on credit.
Assets
Cash
and
short-
term
investme
nts
$ 40,000
Account
s
receivab
le (net)
30,000
Inventor
y
25,000
Property
, plant
and
equipme
nt
215,000
Total Assets
$310,000
Liabilities and Stockholders’ Equity
Current
liabiliti
es
60,000
Long-
term
liabiliti
es
95,000
Stockh
olders’
equity-
commo
n
155,000
Total Liabilities and Stockholders’ Equity
$310,000
Income Statement
Sales
$ 130,000
Cost of
goods
sold
45,000
Gross
margin
95,000
Operati
ng
expens
es
20,000
Net Income
$ 75,000
Number of shares of common stock
8,000000
Market price of common stock
$20
Dividends per share
1.00
Cash provided by operations
$40,000
What is the earnings per share on common stock?
30. The following information pertains to Raleigh Company. Assume that all balance sheet amounts represent
both average and ending balance figures. Assume that all sales were on credit.
Assets
Cash and short-term investments
$ 40,000
Accounts receivable (net)
30,000
Inventory
25,000
Property, plant and equipment
215,000
Total Assets
$310,000
Liabilities and Stockholders’ Equity
Current liabilities
60,000
Long-term liabilities
95,000
Stockholders’ equity-common
155,000
Total Liabilities and Stockholders’ Equity
$310,000
Income Statement
Sales
$ 90,000
Cost of goods sold
45,000
Gross margin
45,000
Operating expenses
20,000
Net income
$ 25,000
Number of shares of common stock
6,000000
Market price of common stock
$40
Dividends per share
1.00
Cash provided by operations
$40,000
What is the price to earnings ratio for this company?
A. 6.01 times
31. Which of the following is considered a measure of short-term liquidity?
32. Which of the following is a measure of liquidity?
33. Britt Company
Selected data from Britt Company’s financial statements are provided below.
2012
2011
2010
Cash
$ 22,000
$ 14,000
$ 7,000
Accounts receivable
42,000
16,000
57,200
Inventory
22,000
83,000
50,000
Prepaid expenses
23,000
18,000
20,800
Total current assets
109,000
131,000
135,000
Total current liabilities
$ 65,000
$ 72,000
Net credit sales
221,000
326,000
Cost of goods sold
168,000
299,000
Net cash flows from operating activities
16,000
29,000
Refer to the selected financial data for Britt Company. Britt’s current ratio for 2012 is:
34. Britt Company
Selected data from Britt Company’s financial statements are provided below.
2012
2011
2010
Cash
$ 22,000
$ 14,000
$ 7,000
Accounts receivable
42,000
16,000
57,200
Inventory
22,000
83,000
50,000
Prepaid expenses
23,000
18,000
20,800
Total current assets
109,000
131,000
135,000
Total current liabilities
$ 65,000
$ 72,000
Net credit sales
221,000
326,000
Cost of goods sold
168,000
299,000
Net cash flows from operating activities
16,000
29,000
Refer to the selected financial data for Britt Company. Which of the following statements is true regarding the company’s liquidity?
35. Britt Company
Selected data from Britt Company’s financial statements are provided below.
2012
2011
2010
Cash
$ 22,000
$ 14,000
$ 7,000
Accounts receivable
42,000
16,000
57,200
Inventory
22,000
83,000
50,000
Prepaid expenses
23,000
18,000
20,800
Total current assets
109,000
131,000
135,000
Total current liabilities
$ 65,000
$ 72,000
Net credit sales
221,000
326,000
Cost of goods sold
168,000
299,000
Net cash flows from operating activities
16,000
29,000
Refer to the selected financial data for Britt Company. Assume that competitors in Britt’s industry have an average receivable turnover ratio of 7.8
times in 2012. Britt’s receivable turnover ratio for 2012 is:
36. Britt Company
Selected data from Britt Company’s financial statements are provided below.
2012
2011
2010
Cash
$ 22,000
$ 14,000
$ 7,000
Accounts receivable
42,000
16,000
57,200
Inventory
22,000
83,000
50,000
Prepaid expenses
23,000
18,000
20,800
Total current assets
109,000
131,000
135,000
Total current liabilities
$ 65,000
$ 72,000
Net credit sales
221,000
326,000
Cost of goods sold
168,000
299,000
Net cash flows from operating activities
16,000
29,000
Refer to the selected financial data for Britt Company. Assume that competitors in Britt’s industry have an average inventory turnover ratio of 20.8
times in 2012. Britt’s inventory turnover ratio for 2012 indicates that the company:
37. Liquidity analysis is required to:
38. Which of the following is an example of liquidity analysis?
39. Which of the following results is generally considered favorable?
40. Inventory turned over seven times during the year at Prosser Electronics. Similar electronics retailers have
an inventory turnover equal to twelve times per year. What explains Prosser’s state of inventory management?
41. Airport Gift Mart, Inc. reported the following amounts in its financial statements:
2012
2011
Average inventory
$ 330,000
$ 250,000
Cost of goods sold
5,940,000
5,500,000
From 2011 to 2012, the company’s efficiency in managing inventory is:
42. The quick ratio:
43. The current assets of Lane Enterprises are considered very liquid at December 31, 2012. This means that
Lane:
44. The quick ratio differs from the current ratio in that it:
45. The inventory turnover ratio is represented by which of the following formulas?
46. If a company’s current ratio is 2.2 and the current liabilities are $400,000, then the current assets are:
47. Amethyst Company paid off a $100,000 two-year note payable. The effect of this transaction is that the:
48. Short-term creditors are usually most interested in assessing:
49. Most companies:
50. Faultless, Inc.
Selected data from Faultless’ financial statements are provided below.
2012
Current assets
$6,000
Long-term assets
7,000
Current liabilities
2,000
Long-term liabilities
7,000
Stockholders’ equity
4,000
Net sales
9,500
Net income
1,000
Refer to the financial information presented for Faultless, Inc. Which of the following is true regarding the debt management ratios for Faultless
between 2011 and 2012?
51. Which of the following debt management ratios is the most inclusive for measuring the degree to which a
company relies on outsiders for financing?
52. Below are selected financial data for Bouquet, Inc.
2012
Total liabilities
$1,205,000
Common stock
250,000
Additional paid-in capital
150,000
Retained earnings
155,000
Bouquet’s debt to equity ratio for 2012 is:
53. Sapphire Company declared and paid $1 million in dividends to its common stockholders. The effect of this
transaction is that the:
54. Opal Company purchased inventory on credit. The effect of this transaction is that the:
55. The number of times interest charges are earned is computed as:
56. Hsu 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 $80,000. Hsu Company’s times interest earned was:
57. DuPont analysis recognizes that the return on equity can be broken down into three aspects, which include
all of the following except:
58. Devon Manufacturing, Inc.
The following information is available for Devon Manufacturing for the year ended December 31, 2012:
Net income
$ 844,200
Net sales
6,809,000
Total assets
5,911,000
Total stockholders’ equity
2,575,000
Refer to Devon Manufacturing, Inc. DuPont analysis return on equity (ROE) for Devon is:
59. Devon Manufacturing, Inc.
The following information is available for Devon Manufacturing for the year ended December 31, 2012:
Net income
$ 844,200
Net sales
6,809,000
Total assets
5,911,000
Total stockholders’ equity
2,575,000
Refer to Devon Manufacturing, Inc. The total leverage per the DuPont analysis computation is:
60. Which one of the following is not a characteristic generally evaluated in ratio analysis?
61. Bloom’s Garden Center Company
Selected data from the financial statements of Bloom’s Garden Center Company are provided below.
2012
Accounts receivable
$ 71,000
Inventory
22,000
Total assets
530,000
Net sales
450,000
Cost of goods sold
240,000
Refer to the selected data provided for Bloom’s Garden Center Company. Which of the following would result from a horizontal analysis of Bloom’s
balance sheet?
62. Bloom’s Garden Center Company
Selected data from the financial statements of Bloom’s Garden Center Company are provided below.
2012
Accounts receivable
$ 71,000
Inventory
22,000
Total assets
530,000
Net sales
450,000
Cost of goods sold
240,000
Refer to the selected data provided for Bloom’s Garden Center Company. Which of the following would result from a horizontal analysis of Bloom’s
income statement?
63. Bloom’s Garden Center Company
Selected data from the financial statements of Bloom’s Garden Center Company are provided below.
2012
Accounts receivable
$ 71,000
Inventory
22,000
Total assets
530,000
Net sales
450,000
Cost of goods sold
240,000
Refer to the selected data provided for Bloom’s Garden Center Company. Which of the following would result from a horizontal analysis of Bloom’s
income statement?
64. Bloom’s Garden Center Company
Selected data from the financial statements of Bloom’s Garden Center Company are provided below.
2012
Accounts receivable
$ 71,000
Inventory
22,000
Total assets
530,000
Net sales
450,000
Cost of goods sold
240,000
Refer to the selected data provided for Bloom’s Garden Center Company. Which of the following would result from a vertical analysis of Bloom’s
income statement?
65. Bloom’s Garden Center Company
Selected data from the financial statements of Bloom’s Garden Center Company are provided below.
2012
Accounts receivable
$ 71,000
Inventory
22,000
Total assets
530,000
Net sales
450,000
Cost of goods sold
240,000
Refer to the selected data provided for Bloom’s Garden Center Company. Which of the following would be found through ratio analysis of Bloom’s
financial statements?
66. Nue Company
Information from Nue Company’s financial statements is provided below.
2012
Current liabilities
$230,000
Long-term liabilities
120,000
Stockholders’ equity
420,000
Net cash flows from operating activities
80,000
Interest and principal payments
12,000
Net sales
475,000
Net income
90,000
Interest expense
8,500
Income taxes
16,000
Dividends paid to common stockholders
15,000
Refer to the information provided for Nue Company. The debt to equity ratio for 2012 is:
67. Nue Company
Information from Nue Company’s financial statements is provided below.
2012
Current liabilities
$230,000
Long-term liabilities
120,000
Stockholders’ equity
420,000
Net cash flows from operating activities
80,000
Interest and principal payments
12,000
Net sales
475,000
Net income
90,000
Interest expense
8,500
Income taxes
16,000
Dividends paid to common stockholders
15,000
Refer to the information provided for Nue Company. The times interest earned ratio for 2012:
68. Nue Company
Information from Nue Company’s financial statements is provided below.
2012
Current liabilities
$230,000
Long-term liabilities
120,000
Stockholders’ equity
420,000
Net cash flows from operating activities
80,000
Interest and principal payments
12,000
Net sales
475,000
Net income
90,000
Interest expense
8,500
Income taxes
16,000
Dividends paid to common stockholders
15,000
Refer to the information provided for Nue Company. The net profit margin percentage for 2012 is:
69. Nue Company
Information from Nue Company’s financial statements is provided below.
2012
Current liabilities
$230,000
Long-term liabilities
120,000
Stockholders’ equity
420,000
Net cash flows from operating activities
80,000
Interest and principal payments
12,000
Net sales
475,000
Net income
90,000
Interest expense
8,500
Income taxes
16,000
Dividends paid to common stockholders
15,000
Refer to the information provided for Nue Company. Return on equity for 2012 is:
70. Nue Company
Information from Nue Company’s financial statements is provided below.
2012
Current liabilities
$230,000
Long-term liabilities
120,000
Stockholders’ equity
420,000
Net cash flows from operating activities
80,000
Interest and principal payments
12,000
Net sales
475,000
Net income
90,000
Interest expense
8,500
Income taxes
16,000
Dividends paid to common stockholders
15,000
Refer to the information provided for Nue Company. Which of the following statements is true concerning Nue’s debt management activities?