Chapter 14 – Financial Statement Analysis
73. Income statement information for Sadie Company is below:
Sales
$175,000
Cost of goods sold
115,000
Gross profit
$ 60,000
Using vertical analysis of the income statement for Sadie Company, determine the gross profit margin.
a.
100%
b.
66%
c.
34%
d.
29%
74. In a vertical analysis, the base for cost of goods sold is
a.
total selling expenses
b.
sales
c.
total expenses
d.
gross profit
75. Percentage analyses, ratios, turnovers, and other measures of financial position and operating results are
a.
a substitute for sound judgment
b.
useful analytical measures
c.
enough information for analysis; industry information is not needed
d.
unnecessary for analysis if industry information is available
Chapter 14 – Financial Statement Analysis
76. The relationship of $325,000 to $125,000, expressed as a ratio, is
a.
2.0
b.
2.6
c.
2.5
d.
0.45
Ratio = $325,000 / $125,000 = 2.6
77. The ability of a business to pay its debts as they come due and to earn a reasonable net income is
a.
solvency and leverage
b.
solvency and profitability
c.
solvency and liquidity
d.
solvency and equity
Harding Company
Accounts payable
$ 40,000
Accounts receivable
65,000
Accrued liabilities
7,000
Cash
30,000
Intangible assets
40,000
Inventory
72,000
Long-term investments
110,000
Long-term liabilities
75,000
Marketable securities
36,000
Notes payable (short-term)
30,000
Property, plant, and equipment
625,000
Prepaid expenses
2,000
Chapter 14 – Financial Statement Analysis
78. Based on the data for Harding Company, what is the amount of quick assets?
a.
$205,000
b.
$203,000
c.
$131,000
d.
$66,000
79. Based on the data for Harding Company, what is the amount of working capital?
a.
$238,000
b.
$128,000
c.
$168,000
d.
$203,000
80. Based on the data for Harding Company, what is the quick ratio, rounded to one decimal point?
a.
2.7
b.
2.6
c.
1.7
d.
0.9
Chapter 14 – Financial Statement Analysis
81. A company with working capital of $720,000 and a current ratio of 2.2 pays a $125,000 short-term liability. The
amount of working capital immediately after payment is
a.
$845,000
b.
$595,000
c.
$720,000
d.
$125,000
82. Which of the following measures a company’s ability to pay its current liabilities?
a.
earnings per share
b.
inventory turnover
c.
current ratio
d.
times interest earned
Chapter 14 – Financial Statement Analysis
83. Which of the following is not included in the computation of the quick ratio?
a.
inventory
b.
marketable securities
c.
accounts receivable
d.
cash
84. The numerator in calculating the accounts receivable turnover is
a.
total assets
b.
sales
c.
accounts receivable at year-end
d.
average accounts receivable
85. Based on the following data, what is the accounts receivable turnover?
Sales on account during year
$700,000
Cost of goods sold during year
270,000
Accounts receivable, beginning of year
45,000
Accounts receivable, end of year
35,000
Inventory, beginning of year
90,000
Inventory, end of year
110,000
a.
17.5
b.
2.6
c.
20.0
d.
15.5
Chapter 14 – Financial Statement Analysis
86. An acceleration in the collection of receivables will tend to cause the accounts receivable turnover to
a.
decrease
b.
remain the same
c.
either increase or decrease
d.
increase
87. Based on the following data for the current year, what is the number of days’ sales in receivables?
Sales on account during year
$584,000
Cost of goods sold during year
300,000
Accounts receivable, beginning of year
45,000
Accounts receivable, end of year
35,000
Inventory, beginning of year
90,000
Inventory, end of year
110,000
a.
7.3
b.
2.5
c.
14.6
d.
25
88. Based on the following data for the current year, what is the inventory turnover?
Sales on account during year
$700,000
Cost of goods sold during year
270,000
Accounts receivable, beginning of year
45,000
Accounts receivable, end of year
35,000
Inventory, beginning of year
90,000
Inventory, end of year
110,000
a.
2.7
b.
9.7
c.
2.5
d.
3.0
Chapter 14 – Financial Statement Analysis
89. Based on the following data for the current year, what is the number of days’ sales in inventory?
Sales on account during year
$1,204,500
Cost of goods sold during year
657,000
Accounts receivable, beginning of year
75,000
Accounts receivable, end of year
85,000
Inventory, beginning of year
85,600
Inventory, end of year
98,600
a.
51.2
b.
44.4
c.
6.5
d.
7.5
90. Which of the following ratios provides a solvency measure that shows the margin of safety of bondholders and also
gives an indication of the potential ability of the business to borrow additional funds on a long-term basis?
a.
ratio of fixed assets to long-term liabilities
b.
asset turnover ratio
c.
number of days’ sales in receivables
d.
return on stockholders’ equity
Chapter 14 – Financial Statement Analysis
91. Times interest earned is computed as
a.
net income plus interest expense, divided by interest expense
b.
income before income tax plus interest expense, divided by interest expense
c.
net income divided by interest expense
d.
income before income tax divided by interest expense
92. Balance sheet and income statement data indicate the following:
Bonds payable, 10% (due in two years)
$1,000,000
Preferred 5% stock, $100 par (no change during year)
300,000
Common stock, $50 par (no change during year)
2,000,000
Income before income tax for year
550,000
Income tax for year
80,000
Common dividends paid
50,000
Preferred dividends paid
15,000
Based on the data presented, what is the times interest earned ratio? (Round to one decimal point.)
a.
1.5
b.
6.4
c.
6.5
d.
5.5
93. The current ratio is
a.
used to evaluate a company’s liquidity and short-term debt paying ability
b.
a solvency measure that indicates the margin of safety for bondholders
c.
calculated by dividing current liabilities by current assets
d.
calculated by subtracting current liabilities from current assets
Chapter 14 – Financial Statement Analysis
94. A company with $70,000 in current assets and $50,000 in current liabilities pays a $1,000 current liability. As a result
of this transaction, the current ratio and working capital will
a.
both decrease
b.
both increase
c.
increase and remain the same, respectively
d.
remain the same and decrease, respectively
95. Hsu Company reported the following on its income statement:
Income before income taxes
$420,000
Income tax expense
120,000
Net income
$300,000
Interest expense was $80,000. Hsu Company‘s times interest earned ratio is
a.
8 times
b.
6.25 times
c.
5.25 times
d.
5 times
Chapter 14 – Financial Statement Analysis
96. Brock Company’s financial information is listed below. Assume that all balance sheet amounts represent both average
and ending balance figures and 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
6,000
Market price of common stock
$20
What is the current ratio?
a.
1.42
b.
1.17
c.
1.58
d.
0.67
Chapter 14 – Financial Statement Analysis
Privett Company
Accounts payable
$ 30,000
Accounts receivable
35,000
Accrued liabilities
7,000
Cash
25,000
Intangible assets
40,000
Inventory
72,000
Long-term investments
100,000
Long-term liabilities
75,000
Marketable securities
36,000
Notes payable (short-term)
20,000
Property, plant, and equipment
400,000
Prepaid expenses
2,000
97. Based on the data for Privett Company, what is the amount of quick assets?
a.
$168,000
b.
$96,000
c.
$60,000
d.
$61,000
98. Based on the data for Privett Company, what is the amount of working capital?
a.
$213,000
b.
$113,000
c.
$153,000
d.
$39,000
Chapter 14 – Financial Statement Analysis
99. Based on the data for Privett Company, what is the quick ratio, rounded to one decimal point?
a.
1.7
b.
2.9
c.
1.1
d.
1.0
100. The tendency of the return on stockholders’ equity to vary disproportionately from the return on total assets is
because of
a.
leverage
b.
solvency
c.
yield
d.
quick assets
The balance sheets at the end of each of the first two years of operations indicate the following:
Kellman Company
Year 2
Year 1
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
65,000
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
75,000
75,000
Retained earnings
310,000
210,000
Chapter 14 – Financial Statement Analysis
101. Using the balance sheets for Kellman Company, if net income is $150,000 and interest expense is $20,000 for Year
2, what is the return on total assets for the year?
a.
10.4%
b.
11.9%
c.
10.5%
d.
8.4%
102. Using the balance sheets for Kellman Company, if net income is $150,000 and interest expense is $20,000 for Year
2, what is the return on stockholders’ equity for Year 2?
a.
6.9%
b.
14.5%
c.
16.4%
d.
13.8%
Chapter 14 – Financial Statement Analysis
103. Using the balance sheets for Kellman Company, if net income is $250,000 and interest expense is $30,000 for Year
2, what are the earnings per share on common stock for Year 2?
a.
$4.16
b.
$4.32
c.
$4.02
d.
$2.49
104. Using the balance sheets for Kellman Company, if net income is $250,000 and interest expense is $20,000 for Year
2, and the market price of common shares is $30, what is the price-earnings ratio on common stock for Year 2? (Round
intermediate calculation to two decimal places and final answers to one decimal place.)
a.
7.5
b.
13.4
c.
12.1
d.
8.5
Chapter 14 – Financial Statement Analysis
105. The numerator of the return on common stockholders’ equity is
a.
net income
b.
net income minus preferred dividends
c.
income before income tax
d.
operating income minus interest expense
106. The numerator of the return on total assets is
a.
net income
b.
net income plus tax expense
c.
net income plus interest expense
d.
net income minus preferred dividends
107. The following information is available for Jase Company:
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 the year.
b.
The price-earnings ratio is 5% and a share of common stock was selling for 5% more than the amount of
earnings per share at the end of the year.
c.
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 the year.
d.
The market price per share and the earnings per share are not statistically related to each other.
Chapter 14 – Financial Statement Analysis
108. The following information is available for Meyer Company:
Dividends per share of common stock
$1.80
Market price per share of common stock
$30.00
Which of the following statements is correct?
a.
The dividend yield is 6.0%, which is of interest to investors seeking an increase in market price of their stocks.
b.
The dividend yield is 6.0%, which is of special interest to investors seeking to earn revenue on their
investments.
c.
The dividend yield is 16.7%, which is of interest to bondholders.
d.
The dividend yield is 16.7% which is an important measure of solvency.
109. The particular analytical measures chosen to analyze a company may be influenced by all of the following except
a.
industry type
b.
general economic environment
c.
diversity of business operations
d.
product quality or service effectiveness
110. Which of the following is not a characteristic evaluated in ratio analysis?
a.
liquidity
b.
profitability
c.
solvency
d.
marketability
Chapter 14 – Financial Statement Analysis
111. Short-term creditors are typically most interested in analyzing a company’s
a.
marketability
b.
profitability
c.
operating results
d.
liquidity
112. A common measure of liquidity is
a.
the asset turnover ratio
b.
dividends per share of common stock
c.
the accounts receivable turnover
d.
the profit margin
113. Richards Corporation had net income of $250,000 and paid dividends to common stockholders of $50,000. It had
50,000 shares of common stock outstanding during the entire year. Richards Corporation’s common stock is selling for
$35 per share. The price-earnings ratio is
a.
7 times
b.
14 times
c.
2 times
d.
5 times
Chapter 14 – Financial Statement Analysis
114. Leverage implies that a company
a.
contains debt financing
b.
contains equity financing
c.
has a high current ratio
d.
has a high earnings per share
The following information pertains to Diane Company. Assume that all balance sheet amounts represent both average and
ending balance figures and that all sales were on credit.
Assets
Cash and short-term investments
$ 30,000
Accounts receivable (net)
20,000
Inventory
15,000
Property, plant, and equipment
185,000
Total assets
$250,000
Liabilities and Stockholders’ Equity
Current liabilities
$ 45,000
Long-term liabilities
70,000
Stockholders’ equity—Common
135,000
Total liabilities and stockholders’ equity
$250,000
Income Statement
Sales
$85,000
Cost of goods sold
45,000
Gross margin
$40,000
Operating expenses
(15,000)
Interest expense
(5,000)
Net income
$20,000
Number of shares of common stock outstanding
6,000
Market price of common stock
$20
Total dividends paid
$9,000
Cash provided by operations
$30,000
Chapter 14 – Financial Statement Analysis
115. What is the asset turnover for Diane Company?
a.
1.00
b.
2.94
c.
0.18
d.
0.34
116. What is the return on total assets for Diane Company?
a.
10.0%
b.
8.0%
c.
0.10%
d.
1.0%
117. What are the dividends per common share for Diane Company?
a.
$20.00
b.
$3.00
c.
$0.67
d.
$1.50
Chapter 14 – Financial Statement Analysis
118. What is the dividend yield for Diane Company?
a.
7.5%
b.
0.75%
c.
13.3%
d.
1.3%
119. What is the return on common stockholders’ equity for Diane Company?
a.
6.75%
b.
14.8%
c.
7.4%
d.
13.5%
120. What is the price-earnings ratio for Diane Company?
a.
8.0 times
b.
2.5 times
c.
4.0 times
d.
6.0 times