Chapter 14 – Financial Statement Analysis
Financial and Managerial Accounting, 17e 14-7
CHAPTER 14 NAME #
10-MINUTE QUIZ A SECTION
Indicate the best answer to each question in the space provided.
1 The quick ratio is considered more useful than the current ratio for:
a Evaluating the profitability of a business that sells inventory very quickly, such as a
restaurant.
b Evaluating the solvency of a business that turns inventory into cash very slowly,
such as a shipbuilder.
c Evaluating long–term credit risk.
d Evaluating investors’ expectations concerning future earnings.
2 The debt ratio is a measure of:
a Net cash flows relating to financing activities.
b Long–term credit risk.
c Short-term solvency.
d Profitability, independent of the manner in which assets are financed.
3 In the long-run, it is most important for a business to generate an inflow of cash from its:
a Operating activities.
b Stockholders.
c Investing activities.
d Creditors.
4 Return on assets measures the efficiency with which management:
a Generates earnings from the assets under its control, regardless of how these assets
are financed.
b Generates earnings from the assets under its control, giving consideration to any
costs of financing these assets.
c Generates cash from the assets under its control, regardless of accrual-based
measures of profitability.
d Converts its current assets into cash.
5 A transaction that will increase the quick ratio but cause the current ratio to decline is:
a Short-term borrowing.
b Investing cash in plant assets.
c Sale of inventory at a price below cost.
d Collection of an account receivable.
Chapter 14 – Financial Statement Analysis
CHAPTER 14 NAME #
10-MINUTE QUIZ B SECTION
Shown below are data taken from a recent annual report of Falcon Co. (Dollar amounts in millions.)
Beginning End
of Year of Year
Balance sheet data:
Current assets ……………………………………………………….. $1,034 $1,120
Total assets …………………………………………………………… $1,546 $1,822
Current liabilities ………………………………………………….. $379 $318
Total liabilities ……………………………………………………… $546 $605
Total stockholders’ equity ……………………………………… $1,000 $1,217
Income statement data:
Net sales ………………………………………………………………. $2,759
Gross profit ………………………………………………………….. $1,264
Operating income …………………………………………………. $574
Net income …………………………………………………………… $421
.
Based upon the above information, indicate the best answer in the space provided.
1 The current ratio at year-end (rounded to the nearest tenth) is:
a 2.3 to 1. c 3.5 to 1.
b .6 to 1. d Some other answer.
2 The amount of working capital at the beginning of the year (in millions) was:
a $785. c $479.
b $1,193. d Some other answer.
3 The gross profit rate for the year (rounded to the nearest 1 percent) was:
a 46%. c 69%.
b 54%. d Some other answer.
4 The return on average total assets during the year (rounded to the nearest percent) was:
a 24%. c 79%.
b 34%. d Some other answer.
5 The return on average total stockholders’ equity during the year (rounded to the nearest 1
percent) was:
a 50%. c 38%.
b 41%. d Some other answer.
Chapter 14 – Financial Statement Analysis
Financial and Managerial Accounting, 17e 14-9
CHAPTER 14 NAME #
10-MINUTE QUIZ C SECTION
Shown below are data taken from a recent annual report of, Topaz, Inc. (Dollar amounts in millions.)
Beginning End
of Year of Year
Balance sheet data:
Current assets ……………………………………………………….. $ 625 $700
Total assets …………………………………………………………… $1,050 $1,200
Current liabilities ………………………………………………….. $275 $175
Total liabilities ……………………………………………………… $475 $475
Total stockholders’ equity ……………………………………… $575 $725
Income statement data:
Net sales ………………………………………………………………. $1,900
Gross profit ………………………………………………………….. $900
Operating income …………………………………………………. $450
Net income …………………………………………………………… $300
.
Instructions Compute the following:
a Current ratio at year-end (round to nearest tenth) . ________ to 1
b Working capital at the beginning of the year
(in millions) $____________
c Gross profit rate for the year (round to the
nearest 1 percent) ______%
d Return on average total assets for the year
(round to the nearest 1 percent) ______%
e Return on average total equity for the year
(round to the nearest 1 percent) ______%
Chapter 14 – Financial Statement Analysis
CHAPTER 14 NAME #
10-MINUTE QUIZ D SECTION
Given below are comparative balance sheets and an income statement for the Copper Corporation:
Copper Corporation
Balance Sheets – Current Year
Dec. 31 Jan. 1
Copper Corporation
Income Statement for the
Current Year
Cash
$ 31,600
$ 26,900
Sales
Accounts receivable
252,000
216,000
Cost of goods sold
Inventory
173,000
178,000
Gross profit on sales
Equipment (net)
129,000
152,000
Operating expenses
$585,600
$572,900
Operating income
Accounts payable
$135,000
$147,000
Interest expense and
income taxes
Dividends payable
18,000
14,000
Net income
Capital stock, $9 par
90,000
90,000
Retained earnings
342,600
321,900
$585,600
$572,900
All sales were made on account. Cash dividends declared during the year totaled $29,300. Compute
the following:
a Average accounts receivable turnover times
b Book value per share at the end of the current year $______________
c Earnings per share of capital stock $______________
d Return on assets %
e Return on common stockholders’ equity is computed by
dividing $ ____________ by $______________
Chapter 14 – Financial Statement Analysis
Financial and Managerial Accounting, 17e 14–11
SOLUTIONS TO CHAPTER 14 10-MINUTE QUIZZES
QUIZ A QUIZ B
QUIZ C
a Current ratio at year-end 4 to 1
$700 $175 = 4
QUIZ D
a Accounts receivable turnover ($936,000 $234,000) = 4 times
Chapter 14 – Financial Statement Analysis
Assignment Guide to Chapter 14
Brief Exercises
Exercises
Problems
Cases
Net
1 – 10
1 – 15
1
2
3
4
5
6
7
8
9
1
2
3
4
5
Time estimate (in minutes)
< 15
< 15
40
40
25
30
60
25
25
50
30
25
15
25
25
30
Difficulty rating
E
E
M
M
S
M
S
E
M
S
M
M
E
S
S
S
Learning Objectives:
1, 2, 3
1, 2, 3, 7
√
1. Explain the uses of dollar and
percentage changes, trend
percentages, component
percentages, and ratios.
2. Discuss the quality of a company’s
earnings, assets, and working
capital.
3. Explain the nature and purpose of
classifications in financial
statements.
4, 9
4. Prepare a classified balance sheet
and compute widely used measures
of liquidity and credit risk.
4, 5, 6
4, 9, 10
5. Prepare a multiple-step and a
single-step income statement and
compute widely used measures of
profitability.
5
6. Put a company’s net income into
perspective by relating it to sales,
assets, and stockholders’ equity.
7, 8
6, 7, 8, 9,
10, 13, 15
7. Compute the ratios widely used in
financial statement analysis and
explain the significance of each.
9, 10
11, 12, 13,
14, 15
√
8.
Analyze financial statements from
the viewpoints of common
stockholders, creditors, and others.
√