Chapter 17: Financial Statement Analysis
169.
A company reported the following:
Net income
$270,000
Preferred dividends
$10,000
Shares of common stock outstanding
20,000
Market price per share of common stock
$36.40
Calculate the company’s priceearnings ratio. Round your answer to one decimal place.
170.
Why would you compare or not compare Coca-Cola and Pepsi-Cola (PepsiCo) as companies to each other?
Chapter 17: Financial Statement Analysis
171.
The following selected data were taken from the financial statements of the Winter Group for the three most recent
years of operations:
Dec. 31,
Year 3
Dec.31,
Year 2
Dec. 31,
Year 1
Total assets
$3,000,000
$2,700,000
$2,400,000
Notes payable (10% interest)
1,000,000
1,000,000
1,000,000
Common stock
400,000
400,000
400,000
Preferred $6 stock, $100 par
200,000
200,000
200,000
Retained earnings
1,126,000
896,000
600,000
The Year 3 net income was $242,000 and the Year 2 net income was $308,000. No dividends on common stock
were declared during the 3 years.
(a)
Determine the rate earned on assets, the rate earned on stockholders’ equity, and the rate earned on
common stockholders’ equity for Years 2 and 3. Round to one decimal place.
(b)
What conclusion can be drawn from these data as to the company’s profitability?
(a)
Rate earned on assets = (Net income + Interest expense )/Average total assets
Year 3: ($242,000 + $100,000)/$2,850,000* = 12.0%
Year 2: ($308,000 + $100,000)/$2,550,000** = 16.0%
*($3,000,000 + $2,700,000) ÷ 2
**($2,700,000 + $2,400,000) ÷ 2
Year 3: $242,000/$1,611,000* = 15.0%
Year 2: $308,000/$1,348,000** = 22.8%
*($1,726,000 + $1,496,000) ÷ 2
**($1,496,000 + $1,200,000) ÷ 2
(Net income – Preferred dividends)/Average common stockholders’ equity
Year 3: ($242,000 –$12,000)/$1,411,000* = 16.3%
Year 2: ($308,000 – $12,000)/$1,148,000** = 25.8%
*($1,526,000 + $1,296,000) ÷ 2
**($1,296,000 + $1,000,000) ÷ 2
Chapter 17: Financial Statement Analysis
172.
Selected data from the Carmen Company at year end are presented below:
Total assets
$2,000,000
Average total assets
2,200,000
Net income
250,000
Sales
1,300,000
Average common stockholders’ equity
1,000,000
Net cash provided by operating activities
275,000
Shares of common stock outstanding
10,000
Calculate: (a) ratio of sales to assets; (b) rate earned on total assets; (c) rate earned on common stockholders’ equity
and (d) earnings per share on common stock. Assume the company had no preferred stock or interest expense.
Round
percentage values to one decimal place and dollar values to zero decimal place.
(a)
Chapter 17: Financial Statement Analysis
173.
The following information was taken from the financial statement of Fox Resources for December 31 of
the
current fiscal year:
Common stock, $20 par value (no change during the year)
$5,000,000
Preferred 10% stock, $40 par (no change during the year)
2,000,000
The net income was $600,000, and the declared dividends on the common stock were $125,000 for the
current
year. The market price of the common stock is $20 per share.
Required:
Calculate for the common stock:
(a)
earnings per share
(b)
the price-earnings ratio
(c)
the dividends per share and the dividend yield
Round to one decimal place except earnings per share, which should be rounded to two decimal places.
Chapter 17: Financial Statement Analysis
174.
The following data are taken from the financial statements:
Current
Preceding
Year
Year
Current assets
$ 745,000
$ 820,000
Property, plant, and equipment
1,510,000
1,400,000
Current liabilities
(non-interest-bearing)
160,000
140,000
Long-term liabilities, 12%
400,000
400,000
Preferred 10% stock
250,000
250,000
Common stock, $25 par
1,200,000
1,200,000
Retained earnings,
beginning of year
230,000
160,000
Net income for year
110,000
155,000
Preferred dividends declared
(25,000)
(25,000)
Common dividends declared
(70,000)
(60,000)
Determine for the current year the (a) rate earned on total assets, (b) rate earned on stockholders’ equity, (c) rate e
common stockholders’ equity, (d) earnings per share on common stock, (e) price-earnings ratio on common stock,
and
yield on common stock. The current market price per share of common stock is $25.
Round percentage values to one decimal place, dollar values to two decimal places, and other ratios to one decimal
Chapter 17: Financial Statement Analysis
175.
The following information has been condensed from the December 31 balance sheets of Gabriel Co.:
Year 2
Year 1
Assets:
Current assets
$ 825,500
$ 674,300
Fixed assets (net)
1,473,600
1,275,300
Total assets
$2,299,100
$1,949,600
Liabilities:
Current liabilities
$ 313,500
$ 309,600
Long-term liabilities
703,000
545,000
Total liabilities
$1,016,500
$ 854,600
Stockholders’ equity
$1,282,600
$1,095,000
Total liabilities and
stockholders’ equity
$2,299,100
$1,949,600
(a)
Determine the ratio of fixed assets to long-term liabilities for each year.
(b)
Determine the ratio of liabilities to stockholders’ equity for each year.
(c)
Comment on the year-to-year changes for both ratios.
Round your answers to two decimal places.
Ratio of fixed assets to
long-term liabilities
Ratio of liabilities to
Chapter 17: Financial Statement Analysis
176.
Abigail Company reports the following:
Net income
$ 295,000
Preferred dividends
30,000
Average stockholders’ equity
1,000,000
Average common stockholders’ equity
700,000
Determine the (a) rate earned on stockholders’ equity, and (b) rate earned on common stockholders’ equity. Round
your answer to one decimal place.
Chapter 17: Financial Statement Analysis
177.
Gallant Company reported net income of $2,500,000. The income statement included a $500,000 gain from
condemnation of land and a $200,000 loss on discontinued operations, both after applicable income tax. There
were
100,000 shares of $10 par common stock and 40,000 shares of 4% preferred stock of $100 par outstanding
throughout the current year.
Prepare the earnings per share section of Gallant Company’s income statement.
Chapter 17: Financial Statement Analysis
178.
What information is generally included in the Management Discussion and Analysis (MD&A) section of
a
corporate annual report?
Chapter 17: Financial Statement Analysis
179.
Prepare an income statement using the following data for New Orleans Adventures for the year ended
December
31:
Sales
$24,500,000
Cost of merchandise sold
10,900,000
Operating expenses
6,300,000
Losses from asset impairment
2,800,000
Income tax expense
500,000
Loss on discontinued operations
100,000
Net loss on extraordinary item
125,000
Sales
Cost of merchandise sold
Gross profit
Operating expenses
Losses from asset impairment
Income tax expense
Income from continuing operations
Loss on discontinued operations
Income before extraordinary expense
Net loss on extraordinary item
Net income
Chapter 17: Financial Statement Analysis
180.
Zeus Company reports the following for the current year:
Income from continuing operations before income tax
$500,000
Extraordinary property loss from hurricane
$60,000*
Loss from discontinued operations
$90,000*
Weighted average number of common shares outstanding
40,000
Applicable tax rate
40%
*Net of any tax effect
(a)
Prepare a partial income statement for Zeus Company beginning with income
from
continuing operations before income tax.
(b)
Calculate the earnings per common share for Zeus, including per-share amount
for
unusual items.
Chapter 17: Financial Statement Analysis
181.
From the following data for Norton Company for the year ended December 31, prepare a multiple-step
income
statement. Show earnings per share for the following: income from continuing operations, loss on
discontinued
operations (less applicable income tax), income before extraordinary item, extraordinary item
(less applicable
income tax), and net income.
Common stock, $50 par
$200,000
Cost of merchandise sold
342,000
Administrative expenses
48,250
Income tax (applicable to continuing operations)
142,000
Interest expense
3,750
Loss on discontinued operations,
net of applicable tax of $2,700
5,400
Sales
865,000
Selling expenses
83,000
Uninsured flood loss, net of applicable
income tax of $4,500
14,000
Chapter 17: Financial Statement Analysis
Chapter 17: Financial Statement Analysis
Match each definition that follows with the term (a–h) it defines.
a.
discontinued operations
b.
extraordinary items
c.
change from one generally accepted accounting principle to another
d.
horizontal analysis
e.
vertical analysis
f.
common-sized financial statements
g.
current position analysis
h.
profitability analysis
DIFFICULTY: Easy
Bloom’s: Remembering
LEARNING OBJECTIVES: ACCT.WARD.16.17-01 – 17–01
ACCT.WARD.16.17-02 – 17–02
ACCT.WARD.16.17-03 – 17–03
ACCT.WARD.16.17-04 – 17–04
ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 – GAAP
ACCT.ACBSP.APC.23 – Financial Statement Analysis
ACCT.AICPA.FN.03 – Measurement
BUSPROG: Analytic
182.
a percentage analysis of increases and decreases in related items on comparative financial statements
183.
an event or transaction that is both unusual and infrequent
184.
an analysis of a company’s ability to pay its current liabilities
185.
the percentage analysis of the relationship of each component in a financial statement to a total within the statement
186.
occurs when a company abandons a segment
187.
focuses on a company’s ability to generate net income
Chapter 17: Financial Statement Analysis
188.
useful for comparing one company to another or a company with industry averages
189.
requires a restatement of prior-period financial statements
Match each ratio that follows to its use (items a–h). Items may be used more than once.
a.
assess the profitability of the assets
b.
assess the effectiveness in the use of assets
c.
indicate the ability to meet currently maturing obligations
d.
indicate the margin of safety to creditors
e.
indicate instant debt-paying ability
f.
assess the profitability of the investment by common stockholders
g.
indicate future earnings prospects
h.
indicate the extent to which earnings are being distributed to common stockholders
DIFFICULTY: Moderate
Bloom’s: Remembering
LEARNING OBJECTIVES: ACCT.WARD.16.17-02 – 17–02
ACCT.WARD.16.17-03 – 17–03
ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 – Financial Statement Analysis
ACCT.AICPA.FN.03 – Measurement
BUSPROG: Analytic
190.
price-earnings (P/E) ratio
191.
working capital
192.
rate earned on total assets
193.
ratio of liabilities to stockholders’ equity
Chapter 17: Financial Statement Analysis
194.
quick ratio
195.
rate earned on common stockholders’ equity
196.
current ratio
197.
ratio of sales to assets
198.
dividends per share
199.
earnings per share (EPS) on common stock