Chapter 14—Analyzing Financial Statements Key
1. Which of the following statements best describes financial statement analysis?
2. Which of the following is one of the purposes of financial statement analysis?
3. When analyzing financial statements, diagnosis is
4. When analyzing financial statements, prognosis is
5. Relationships between financial statement amounts are called
6. External users of financial statements use financial statement analysis for
7. Management uses financial statement analysis for
8. Financial statement analysis is greatly enhanced when financial ratios are compared with
9. What ratio is used to measure a firm’s liquidity?
10. The ability a company has to pay its debts in the short run is its
11. Which of the following ratios is used to measure a firm’s leverage?
12. Which of the following ratios represents the proportion of borrowed funds used to acquire the company’s
assets?
13. Which of the following ratios is used to measure the profit earned on each dollar of sales in a firm?
14. Which of the following ratios is used to measure a firm’s efficiency at using its assets?
15. Which of the following ratios is used to measure the profit earned on each dollar invested in a firm?
16. Which of the following ratios is the fundamental measure of overall company performance?
17. Which of the following ratios represents an indication of investors’ expectations concerning a firm’s growth
potential?
18. Which of the following ratios is a comparison of a financial statement number to a market value number?
19. Which of the following is a measure of the liquid position of a corporation?
20. Which of the following ratios is calculated using only balance sheet numbers?
21. Which of the following ratios is calculated using only income statement numbers?
22. Which of the following ratios is calculated using numbers from both the income statement and the balance
sheet?
23. Which of the following transactions could increase a firm’s current ratio?
24. Partial information from Blain Company’s balance sheet is as follows:
Current assets:
Cash
$ 1,200,000
Marketable securities
3,750,000
Accounts receivable
28,800,000
Inventories
33,150,000
Prepaid expenses
600,000
Total current assets
$67,500,000
Current liabilities:
Notes payable
$ 750,000
Accounts payable
9,750,000
Accrued expenses
6,250,000
Income taxes payable
250,000
Payments due within one year on long-term debt
1,750,000
Total current liabilities
$18,750,000
What is Blain’s current ratio?
25. Exhibit 14-1
Selected information for Isaac Company is as follows:
Common stock
$1,200,000
Additional paid-in capital
500,000
Retained earnings
740,000
Sales revenue for year
1,830,000
Net income for year
480,000
Refer to Exhibit 14-1. Isaac’s return on equity, rounded to the nearest percentage point, is
26. Exhibit 14-1
Selected information for Isaac Company is as follows:
Common stock
$1,200,000
Additional paid-in capital
500,000
Retained earnings
740,000
Sales revenue for year
1,830,000
Net income for year
480,000
Refer to Exhibit 14-1. Isaac’s return on sales, rounded to the nearest percentage point, is
27. On December 31, 2010 and 2011, Taft Corporation had 100,000 shares of common stock issued and
outstanding. Additional information is as follows:
Stockholders’ equity at 12/31/2011
$4,500,000
Net income year ended 12/31/2011
1,200,000
Market price per share of common stock at 12/31/2011
144
The price-earnings ratio on common stock at December 31, 2011, was
28. The balance sheet at the end of the current year of operations indicates the following:
2011
Total current assets
$560,000
Total investments
40,000
Total property, plant, and equipment
700,000
Total current liabilities
180,000
Total long-term liabilities
250,000
Common stock, $10 par
600,000
Paid-in capital in excess of par-common stock
60,000
Retained earnings
210,000
If net income is $115,000 for 2012, what is the return on equity for 2012 (round percent to one decimal point)?
29. Exhibit 14-2
The balance sheet at the end of the first year of operations indicates the following:
2012
Total current assets
$600,000
Total investments
85,000
Total property, plant, and equipment
900,000
Total current liabilities
250,000
Total long-term liabilities
350,000
Common stock, $10 par
600,000
Paid-in capital in excess of par-common stock
60,000
Retained earnings
325,000
Refer to Exhibit 14-2. What is the debt ratio for 2012 (rounded to one decimal places)?
30. Exhibit 14-2
The balance sheet at the end of the first year of operations indicates the following:
2012
Total current assets
$600,000
Total investments
85,000
Total property, plant, and equipment
900,000
Total current liabilities
250,000
Total long-term liabilities
350,000
Common stock, $10 par
600,000
Paid-in capital in excess of par-common stock
60,000
Retained earnings
325,000
Refer to Exhibit 14-2. If sales revenue for 2012 is $950,000, what is the asset turnover for 2012 (round to two decimal places)?
31. In a common-size income statement, each item on the statement is expressed as a percentage of
32. In a common-size balance sheet, each item on the balance sheet is typically expressed as a percentage of
33. A useful tool in financial statement analysis is the common-size financial statement. What does this tool
enable the financial analyst to do?
34. When using common-size statements
35. Which of the following below generally is the most useful in analyzing companies of different sizes?
36. Exhibit 14-3
Selected information for Alastair Company is as follows:
2012
Current assets
$450,000
Total assets
725,000
Cost of goods sold
700,000
Sales revenue
915,000
Net income
145,000
Refer to Exhibit 14-3. What is the percentage that would be given to sales revenue on a common-size income statement (round to the nearest
percent)?
37. Exhibit 14-3
Selected information for Alastair Company is as follows:
2012
Current assets
$450,000
Total assets
725,000
Cost of goods sold
700,000
Sales revenue
915,000
Net income
145,000
Refer to Exhibit 14-3. What is the percentage that would be given to cost of goods sold on a common-size income statement (round to the nearest
percent)?
38. Exhibit 14-3
Selected information for Alastair Company is as follows:
2012
Current assets
$450,000
Total assets
725,000
Cost of goods sold
700,000
Sales revenue
915,000
Net income
145,000
Refer to Exhibit 14-3. What is the percentage that would be given to current assets on a common-size balance sheet (round to the nearest percent)?
39. Which of the following is NOT included in the DuPont framework of the return on equity ratio?
40. The return on equity ratio under the DuPont framework is computed as
41. Borrowing that allows a company to purchase more assets than its stockholders are able to pay for is
42. Which of the following ratios is used to measure a firm’s profitability?
43. Which of the following ratios is used to measure a firm’s leverage?
44. Which of the following ratios is used to measure a firm’s efficiency?
45. Which of the following ratios is decomposed using the DuPont framework?
46. Which of the following is NOT included in the DuPont framework?
47. Exhibit 14-4
The following data came from the financial statements of the Cheviot Company:
Revenue
$1,800,000
Assets
$1,200,000
Expenses
1,200,000
Liabilities
200,000
Net income
600,000
Equity
1,000,000
Refer to Exhibit 14-4. Compute the return on equity.
48. Exhibit 14-4
The following data came from the financial statements of the Cheviot Company:
Revenue
$1,800,000
Assets
$1,200,000
Expenses
1,200,000
Liabilities
200,000
Net income
600,000
Equity
1,000,000
Refer to Exhibit 14-4. Compute the return on sales.
49. Exhibit 14-4
The following data came from the financial statements of the Cheviot Company:
Revenue
$1,800,000
Assets
$1,200,000
Expenses
1,200,000
Liabilities
200,000
Net income
600,000
Equity
1,000,000
Refer to Exhibit 14-4. Compute the asset turnover (round to two decimal places).
50. Exhibit 14-4
The following data came from the financial statements of the Cheviot Company:
Revenue
$1,800,000
Assets
$1,200,000
Expenses
1,200,000
Liabilities
200,000
Net income
600,000
Equity
1,000,000
Refer to Exhibit 14-4. Compute the asset-to-equity ratio (round to two decimal places).
51. Which ratio represents how many times during the year a company is collecting its receivables?
52. Which ratio represents how many times a company replenishes its inventory during the year?
53. Which ratio represents how a company is managing its property, plant, and equipment?
54. Which of the following ratios is NOT an efficiency ratio?
55. Exhibit 14-5
Selected financial statement numbers for Frederick Company are given below:
Sales
$277,480
Cost of goods sold
179,155
Average accounts receivable
20,730
Average inventory
4,145
Average property, plant, and equipment
75,705
Refer to Exhibit 14-5. Using the information above, calculate Frederick’s accounts receivable turnover (round to two decimal places).
56. Exhibit 14-5
Selected financial statement numbers for Frederick Company are given below:
Sales
$277,480
Cost of goods sold
179,155
Average accounts receivable
20,730
Average inventory
4,145
Average property, plant, and equipment
75,705
Refer to Exhibit 14-5. Using the information above, calculate Frederick’s average collection period (round to two decimal places).
57. Exhibit 14-5
Selected financial statement numbers for Frederick Company are given below:
Sales
$277,480
Cost of goods sold
179,155
Average accounts receivable
20,730
Average inventory
4,145
Average property, plant, and equipment
75,705
Refer to Exhibit 14-5. Using the information above, calculate Frederick’s inventory turnover (round to two decimal places).
58. Exhibit 14-5
Selected financial statement numbers for Frederick Company are given below:
Sales
$277,480
Cost of goods sold
179,155
Average accounts receivable
20,730
Average inventory
4,145
Average property, plant, and equipment
75,705
Refer to Exhibit 14-5. Using the information above, calculate Frederick’s number of days’ sales in inventory (round to two decimal places).
59. Exhibit 14-5
Selected financial statement numbers for Frederick Company are given below:
Sales
$277,480
Cost of goods sold
179,155
Average accounts receivable
20,730
Average inventory
4,145
Average property, plant, and equipment
75,705
Refer to Exhibit 14-5. Using the information above, calculate Frederick’s fixed asset turnover (round to two decimal places).