76. Refer to the Grogan Inc. information above. Grogan had an average of 5,000 shares of common stock
outstanding during 2009. At the end of the year, the market price per share was $100. The company’s
price earnings (P/E) ratio for 2009 is: (round to two decimal places)
a.
3.52 to 1
b.
50 to 1
c.
4 to 1
d.
3.85 to 1
77. Which ratio gives an indication of how investors believe a company’s stock will perform in the
future compared to other companies?
a.
Return on stockholders’ equity
b.
Earnings per share
c.
Price earnings (P/E)
d.
Return on assets
SHORT ANSWER
1. Why do decision-makers analyze financial statements and how is ratio analysis useful in the process?
2. Discuss one limitation of financial statement analysis.
3. How is horizontal analysis performed and how is it used in financial statement analysis?
4. How is vertical analysis performed and how is it used in financial statement analysis?
5. What is meant by the term liquidity and why are stakeholders interested in ratios that measure it?
6. Answer the following questions:
A.
What is the formula to compute working capital?
B.
What does it measure?
C.
What would be the implication for a company that has negative working capital?
Working capital = Current assets − Current liabilities
through that allows them to be liquid.
7. How is the current ratio calculated, and how is it interpreted?
8. How do the current and acid-test (quick) ratios differ as far as their formulas and what does each one
measure?
9. What is one weakness of either the current or acid-test (or quick) ratio?
10. How is the cash flow from operations to current liabilities ratio computed and interpreted?
11. Munson Auto Parts Inc. is a retailer of auto parts and supplies. They often deliver auto parts to various
mechanic shops around town allowing the shops to pay for the parts delivered within 45 days.
Recently, Munson’s accountant has computed that the accounts receivable turnover ratio is “7“.
Assuming the company is open 365 days a year, is the company receiving payment from its customers
in a timely enough fashion? Explain.
12. List three ratios that are better measures of liquidity than measures of solvency or profitability.
13. What is meant by the term solvency and why are stakeholders interested in ratios that measure it?
14. Schulte Enterprises has a debt-to–equity ratio of .67 in 2009. How would you interpret this ratio?
15. How is the times interest earned ratio computed? List one of the weaknesses of this ratio and list the
comparable ratio that improves upon these weaknesses.
16. List two ratios that are better measures of solvency than measures of liquidity or profitability.
17. How are profitability ratios used by different stakeholders? List one profitability ratio.
18. Indicate whether each of the following ratios are better measures of liquidity (L), solvency (S), or
profitability (P).
a.
Price earnings (P/E) ratio
b.
Debt-to-equity ratio
c.
Return on assets
d.
Current ratio
e.
Accounts receivable turnover
f.
Times interest earned ratio
g.
Earnings per share
h.
Return on common stockholder’s equity
a.
P
b.
S
c.
P
d.
L
e.
L
S
g.
P
Managerial ACCT Test Bank Chapter 12 25
PROBLEM
1. Cheshire Inc. had the following condensed income statements for the years ending December 31, 2009
and 2008.
Cheshire Inc.
Comparative Income Statements
For the year ending December 31, 2009 and 2008
2009
2008
$ change
% change
Net sales revenue
$500,000
$400,000
Cost of goods sold
200,000
150,000
Gross profit
$300,000
$250,000
Operating expenses
100,000
110,000
Income before taxes
$200,000
$140,000
Income taxes
60,000
42,000
Net income
$140,000
$ 98,000
Required: Using horizontal analysis, complete the comparative income statement by computing dollar
change ($change) and percentage change (% change). Round percentages to two decimal places.
2. Cheshire Inc. had the following condensed income statements for the years ending December 31, 2009
and 2008.
Cheshire Inc.
Comparative Income Statements
For the year ending December 31, 2009 and 2008
2009
Percent
2008
Percent
Net sales revenue
$500,000
$400,000
Cost of goods sold
200,000
150,000
Gross profit
$300,000
$250,000
Operating expenses
100,000
110,000
Income before taxes
$200,000
$140,000
Income taxes
60,000
42,000
Net income
$140,000
$ 98,000
Required: Using vertical analysis, prepare common-size income statements for 2009 and 2008. Round
percentages to two decimal places.
2009
2008
$ change
% change
Net sales revenue
$500,000
$400,000
$100,000
25.00%
Cost of goods sold
200,000
150,000
50,000
Gross profit
$300,000
$250,000
$ 50,000
20.00%
Operating expenses
100,000
110,000
Income before taxes
$200,000
$140,000
$ 60,000
Income taxes
60,000
42,000
18,000
42.86%
Net income
$140,000
$ 98,000
$ 42,000
2009
2008
Net sales revenue
$500,000
$400,000
Cost of goods sold
200,000
40.00%
150,000
37.50%
Gross profit
$300,000
$250,000
Operating expenses
100,000
20.00%
110,000
27.50%
Income before taxes
$200,000
$140,000
Income taxes
60,000
12.00%
42,000
10.50%
Net income
$140,000
$ 98,000
3. Vance Inc. had the following condensed income statements for the years ending December 31, 2009
and 2008.
Vance Inc.
Comparative Income Statements
For the year ending December 31, 2009 and 2008
2009
2008
$ change
% change
Net sales revenue
$300,000
$310,000
Cost of goods sold
100,000
90,000
Gross profit
$200,000
$220,000
Operating expenses
175,000
150,000
Income before taxes
$ 25,000
$ 70,000
Income taxes
3,750
14,000
Net income
$ 21,250
$ 56,000
Required: Using horizontal analysis, complete the comparative income statement by computing dollar
change ($change) and percentage change (% change). Round percentages to two decimal places.
Net sales revenue
$300,000
$310,000
Cost of goods sold
100,000
90,000
Gross profit
$200,000
$220,000
Operating expenses
175,000
150,000
Income before taxes
$ 25,000
$ 70,000
Income taxes
3,750
14,000
Net income
$ 21,250
$ 56,000
Managerial ACCT Test Bank Chapter 12 27
4. Vance Inc. had the following condensed income statements for the years ending December 31, 2009
and 2008.
Vance Inc.
Comparative Income Statements
For the year ending December 31, 2009 and 2008
2009
Percent
2008
Percent
Net sales revenue
$300,000
$310,000
Cost of goods sold
100,000
90,000
Gross profit
$200,000
$220,000
Operating expenses
175,000
150,000
Income before taxes
$ 25,000
$ 70,000
Income taxes
3,750
14,000
Net income
$ 21,250
$ 56,000
Required: Using vertical analysis, prepare common-size income statements for 2009 and 2008.
Round percentages to two decimal places.
5. Morrell Inc. had the following information available from its 2008 and 2009 condensed balance sheets
Morrell Inc.
Comparative Balance Sheets
At December 31, 2009 and 2008
2009
2008
$ change
% change
Current assets
$ 90,000
$ 50,000
Long-term assets
300,000
200,000
Total assets
$390,000
$250,000
Current liabilities
$ 10,000
$ 30,000
Long-term liabilities
60,000
40,000
Total liabilities
$ 70,000
$ 70,000
Common stock
$ 90,000
$ 90,000
Retained earnings
230,000
90,000
Total stockholders’ equity
$320,000
$180,000
Total liabilities and
stockholders’ equity
$390,000
$250,000
Net sales revenue
$300,000
100.00%
$310,000
100.00%
Cost of goods sold
100,000
90,000
Gross profit
$200,000
66.67%
$220,000
70.97%
Operating expenses
175,000
150,000
Income before taxes
$ 25,000
8.33%
$ 70,000
22.58%
Income taxes
3,750
1.25%
14,000
4.52%
Net income
$ 21,250
$ 56,000
Managerial ACCT Test Bank Chapter 12 28
Required: Using horizontal analysis, complete the comparative income statement by computing dollar
change ($change) and percentage change (% change). Round percentages to two decimal places.
6. Morrell Inc. had the following information available from its 2008 and 2009 condensed balance sheets
Morrell Inc.
Comparative Balance Sheets
At December 31, 2009 and 2008
2009
Percent
2008
Percent
Current assets
$ 90,000
$ 50,000
Long-term assets
300,000
200,000
Total assets
$390,000
$250,000
Current liabilities
$ 10,000
$ 30,000
Long-term liabilities
60,000
40,000
Total liabilities
$ 70,000
$ 70,000
Common stock
$ 90,000
$ 90,000
Retained earnings
230,000
90,000
Total stockholders’ equity
$320,000
$180,000
Total liabilities and
stockholders’ equity
$390,000
$250,000
Required: Using vertical analysis, prepare common-size income statements for 2009 and 2008. Round
percentages to two decimal places.
2009
2008
Current assets
$ 90,000
$ 50,000
$ 40,000
Long-term assets
300,000
200,000
100,000
Total assets
$390,000
$250,000
$140,000
Current liabilities
$ 10,000
$ 30,000
Long-term liabilities
60,000
40,000
20,000
Total liabilities
$ 70,000
$ 70,000
$ 0
Common stock
$ 90,000
$ 90,000
$ 0
Retained earnings
230,000
90,000
140,000
Total liabilities and
stockholders’ equity
$390,000
$250,000
$140,000
Percent
Percent
Current assets
Long-term assets
Total assets
Current liabilities
Long-term liabilities
Total liabilities
Common stock
Retained earnings
Total stockholders’ equity
Total liabilities and
stockholders’ equity
7. CCT Corporation is a local retailer. The following selected information is available from their 2008
and 2009 financial statements:
Accounts receivable at 12/31/08
$ 400,000
Accounts receivable at 12/31/09
600,000
Inventory at 12/31/08
200,000
Inventory at 12/31/09
280,000
Net credit sales for 2009
4,500,000
Cost of goods sold for 2009
1,800,000
Net income for 2009
1,000,000
Required:
A.
Compute CCT’s accounts receivable turnover for 2009.
B.
Compute CCT’s inventory turnover for 2009.
Accounts receivable turnover = Net credit sales Average accounts receivable
Accounts receivable turnover = $4,500,000 [($400,000 + $600,000)/2]
Accounts receivable turnover = 9 times
Inventory turnover = Cost of goods sold Average inventory
Inventory turnover = $1,800,000 [($200,000 + $280,000)/2]
Inventory turnover = 7.5 times
8. Beechwood Corporation is a local retailer. The following selected information is available from their
2008 and 2009 financial statements:
Accounts receivable at 12/31/08
$ 800,000
Accounts receivable at 12/31/09
600,000
Inventory at 12/31/08
250,000
Inventory at 12/31/09
350,000
Net credit sales for 2009
2,000,000
Cost of goods sold for 2009
1,000,000
Net income for 2009
400,000
Required:
A.
Compute Beechwood’s accounts receivable turnover for 2009.
B.
Compute Beechwood’s inventory turnover for 2009.
Accounts receivable turnover = Net credit sales Average accounts receivable
Accounts receivable turnover = $2,000,000 [($800,000 + $600,000)/2]
Accounts receivable turnover = 2.86 times
Inventory turnover = Cost of goods sold Average inventory
Inventory turnover = $1,000,000 [($250,000 + $350,000)/2]
Inventory turnover = 3.33 times
Managerial ACCT Test Bank Chapter 12 31
9. Brigman Inc. has the following financial statement information for 2009 and 2008:
Balance Sheet Information:
2009
2008
Assets:
Cash
$ 5,000
$ 12,000
Accounts receivable
14,000
10,000
Inventory
35,000
30,000
Total current assets
$ 54,000
$ 52,000
Property and Equipment (net)
50,000
45,000
Total assets
$104,000
$ 97,000
Liabilities:
Accounts payable
$ 9,000
$ 3,000
Salaries payable
3,000
1,000
Total current liabilities
$ 12,000
$ 4,000
Notes payable
20,000
25,000
Total liabilities
$ 32,000
$ 29,000
Stockholders’ Equity:
Common stock
$ 40,000
$ 40,000
Retained earnings
32,000
28,000
Total stockholders’ equity
$ 72,000
$ 68,000
Total liabilities and stockholders’ equity
$104,000
$ 97,000
Income Statement Information:
Net sales
$650,000
$556,000
Cost of goods sold
380,000
290,000
Gross profit
$270,000
$266,000
Selling and administrative expenses
75,000
70,000
Interest expense
4,000
10,000
Income before income taxes
$191,000
$186,000
Income tax expense
57,300
56,300
Net income
$133,700
$129,700
Other Information:
Number of common shares outstanding
4,000
4,000
Dividends paid
$ 0
$ 0
Market price per share (12/31)
$40
$30
Income tax rate
30%
30.27%
Required: Compute the following ratios for the year ending December 31, 2009: (round to two decimal
places)
A.
Current ratio
B.
Acid-test (or quick) ratio
C.
Accounts receivable turnover
D.
Debt-to-equity ratio
E.
Times interest earned ratio
Managerial ACCT Test Bank Chapter 12 32
10. Brigman Inc. has the following financial statement information for 2009 and 2008:
Balance Sheet Information:
2009
2008
Assets:
Cash
$ 5,000
$ 12,000
Accounts receivable
14,000
10,000
Inventory
35,000
30,000
Total current assets
$ 54,000
$ 52,000
Property and Equipment (net)
50,000
45,000
Total assets
$104,000
$ 97,000
Liabilities:
Accounts payable
$ 9,000
$ 3,000
Salaries payable
3,000
1,000
Total current liabilities
$ 12,000
$ 4,000
Notes payable
20,000
25,000
Total liabilities
$ 32,000
$ 29,000
Stockholders’ Equity:
Common stock
$ 40,000
$ 40,000
Retained earnings
32,000
28,000
Total stockholders’ equity
$ 72,000
$ 68,000
Total liabilities and stockholders’ equity
$104,000
$ 97,000
Current ratio = Current assets Current liabilities
Current ratio = $54,000 $12,000
Current ratio = 4.50
Acid-test ratio = (Current assets − Inventories − Prepaids) Current liabilities
Acid-test ratio = ($54,000 − $35,000) $12,000
Acid-test ratio = 1.58
Accounts receivable turnover = Net sales Average accounts receivable
Accounts receivable turnover = $650,000 [($14,000 + $10,000)/2]
Accounts receivable turnover = 54.17 times
Income Statement Information:
Net sales
$650,000
$556,000
Cost of goods sold
380,000
290,000
Gross profit
$270,000
$266,000
Selling and administrative expenses
75,000
70,000
Interest expense
4,000
10,000
Income before income taxes
$191,000
$186,000
Income tax expense
57,300
56,300
Net income
$133,700
$129,700
Other Information:
Number of common shares outstanding
4,000
4,000
Dividends paid
$ 0
$ 0
Market price per share (12/31)
$40
$30
Income tax rate
30%
30.27%
Required: Compute the following ratios for the year ending December 31, 2009: (round to two decimal
places)
A.
Inventory turnover
B.
Return on assets (ROA) ratio
C.
Asset turnover ratio
D.
Earnings per share (EPS)
E.
Price earnings (P/E) ratio
Inventory turnover = Cost of goods sold Average inventory
Inventory turnover = $380,000 [($35,000 + $30,000)/2]
Inventory turnover = 11.69 times
Return on assets = [Net income + Interest expense (net of tax)] Average total assets
Return on assets = [$133,700 + $4,000 (1 − .30)] [($104,000 + $97,000)/2]
Return on assets = 1.3582 or 135.82%
Asset turnover = Net sales Average total assets
Asset turnover = $650,000 [($104,000 + $97,000)/2]
Asset turnover = 6.47 times
Earnings per share = $133,700 4,000
Earnings per share = $33.43
Price earnings = Market price per share Earnings per share
Price earnings = $40.00 $33.43
Price earnings = 1.20