Test Bank - Chapter18 FS Analysis

Chapter 18

“How Well Am I Doing?” Financial Statement Analysis

True/False

1.FMedium

In determining whether a company's financial condition is improving or deteriorating over time, vertical analysis of financial statement data would be more useful than horizontal analysis.

2.TEasy

Trend percentages state several years' financial data in terms of a base year. For example, sales for every year would be stated as a percentage of the sales in the base year.

3.TEasy

The gross margin percentage is computed taking the difference between sales and cost of goods and then dividing the result by sales.

4.FMedium

The gross margin percentage is computed by dividing net income before interest and taxes by sales.

5.FEasy

The price-earnings ratio is determined by dividing the price of a product by its profit margin.

6.TEasy

The price-earnings ratio is computed by dividing the market price per share by the current earnings per share.

7.FMedium

When computing the return on total assets, the after-tax effect of interest expense must be subtracted from net income.

8.FMedium

If the assets in which funds are invested have a rate of return lower than the fixed rate of return paid to the supplier of the funds, then financial leverage is positive.

9.FEasy

If the market value of a share of stock is greater than its book value, the stock is probably overpriced.

10.THard

Working capital equals current assets, plus noncurrent liabilities and stockholders' equity, less total assets.

Managerial Accounting, 9/e 664

11.TMedium

Assuming that a company has a current ratio greater than 1.0 to 1, repaying a short-term note payable will increase the current ratio.

12.FMedium

The acid-test ratio is a test of the quality of accounts receivable--in other words, whether they are likely to be collected.

13.TMedium

When computing the acid-test ratio, prepaid expenses are ignored.

14.TEasy

Only credit sales (i.e., sales on account) are included in the computation of the accounts receivable turnover.

15.FEasy

The inventory turnover ratio is equal to the average inventory balance divided by the cost of goods sold.

Multiple Choice

16.DEasy

Horizontal analysis of financial statements is accomplished through:a. placing statement items on an after-tax basis.b. common-size statements.c. computing both earnings per share and the price-earnings

ratio.d. trend percentages.

17.DEasy

The gross margin percentage is most likely to be used to assess:a. how quickly accounts receivables can be collected.b. how quickly inventories are sold.c. the efficiency of administrative departments.d. the overall profitability of the company's products.

18.CMedium

Earnings per share of common stock will immediately increase as a result of:a. the sale of additional shares of common stock by the

company.b. an increase in the dividends paid to common stockholders by

the company.c. an increase in the company's net income.d. the issuance of bonds by the company to finance construction

of new buildings.

Managerial Accounting, 9/e665

19.CEasy

The market price of XYZ Company's common stock dropped from $25 to $21 per share. The dividend paid per share remained unchanged. The company’s dividend payout ratio would:a. increase.b. decrease.c. be unchanged.d. impossible to determine without more information.

20.AMediumCMA adapted

An increase in the market price of a company’s common stock will immediately affect its:a. dividend yield ratio.b. debt-to-equity ratio.c. earnings per share of common stock.d. dividend payout ratio.

21.DMedium

Which of the following is true regarding the calculation of return on total assets?a. The numerator of the ratio consists only of net income.b. The denominator of the ratio consists of the balance of

total assets at the end of the period under consideration.c. The numerator of the ratio consists of net income plus

interest expense times the tax rate.d. The numerator of the ratio consists of net income plus

interest expense times one minus the tax rate.

22.DMedium

Financial leverage is negative when:a. the return on total assets is less than the rate of return

on common stockholders' equity.b. total liabilities are less than stockholders' equity.c. total liabilities are less than total assets.d. the return on total assets is less than the rate of return

demanded by creditors.

23.DMedium

Which of the following is not a source of financial leverage?a. Bonds payable.b. Accounts payable.c. Preferred stock.d. Retained earnings.

24.AMedium

If a company's bonds bear an interest rate of 8%, the tax rate is 30%, and the company's assets are generating an after-tax return of 7%, then the leverage would be:a. positive.b. negative.c. neither positive or negative.d. impossible to determine without knowing the return on common

stockholders' equity.


25.DMediumCMA adapted

A company’s current ratio and acid-test ratios are both greater than 1.0 to 1. If obsolete inventory is written off, this would:a. decrease the acid-test ratio.b. increase the acid-test ratio.c. increase net working capital.d. decrease the current ratio.

26.DMedium

If a company converts a short-term note payable into a long-term note payable, this transaction would:a. decrease working capital and increase the current ratio.b. decrease working capital and decrease the current ratio.c. decrease the current ratio and decrease the acid-test ratio.d. increase working capital and increase the current ratio.

27.BHardCMA adapted

Which one of the following would increase the working capital of a company?a. Cash payment of payroll taxes payable.b. Refinancing a short-term note payable with a two year note

payable.c. Cash collection of accounts receivable.d. Payment of a 20-year mortgage payable with cash.

28.AMedium

Sale of a piece of equipment at book value for cash will:a. increase working capital.b. decrease working capital.c. decrease the debt-to-equity ratio.d. increase net income.

29.BMediumCMA adapted

If a firm has a high current ratio but a low acid-test ratio, one can conclude that:a. the firm has a large outstanding accounts receivable

balance.b. the firm has a large investment in inventory.c. the firm has a large amount of current liabilities.d. the firm's financial leverage is very high.

30BHard

Desktop Co. presently has a current ratio of 1.2 to 1 and an acid-test ratio of 0.8 to 1. Prepaying next year's office rent of $50,000 will:a. have no effect on either the company's current ratio or its

acid-test ratio.b. have no effect on the company's current ratio but will

decrease its acid-test ratio.c. decrease the company's current ratio and decrease its acid-

test ratio.d. increase the company's current ratio and increase its acid-

test ratio.


31.AMedium

The Miller Company paid off some of its accounts payable using cash. The company's current ratio is greater than 1.0 to 1. The company’s current ratio would:a. increase.b. decrease.c. remain unchanged.d. impossible to determine from the information given.

32.AHard

Rahner Company has a current ratio of 1.75 to 1. This ratio will decrease if Rahner Company:a. borrows cash using a six-month note.b. pays the taxes payable which have been a current liability.c. pays the following month's rent on the last day of the year.d. sells inventory for more than their cost.

33.DEasy

Which of the following accounts would be included in the calculation of the acid-test ratio:

Accounts Receivable Prepaid Expense Inventorya. yes yes nob. no yes yesc. no no yesd. yes no no

34.CMedium

Allen Company's average collection period for accounts receivable was 40 days last year, but increased to 60 days this year. Which of the following would most likely account for this change?a. a decrease in accounts receivable relative to sales.b. a decrease in sales.c. a relaxation of credit policies.d. an increase in sales.

35.BHard

The net accounts receivable for Andante Company were $150,000 at the beginning of the most recent year and $190,000 at the end of the year. If the accounts receivable turnover for the year was 8.5, and 15% of total sales were cash sales, then the total sales for the year were:a. $1,445,000.b. $1,700,000.c. $1,900,000.d. $1,500,000.


36.AHardCMA adapted

Selected data from Sheridan Corporation’s year-end financial statements are presented below. The difference between average and ending inventory is immaterial.

Current ratio ............ 2.0 Acid-test ratio .......... 1.5 Current liabilities ...... $120,000 Inventory turnover ....... 8 times Gross profit margin ...... 40%

Sheridan's sales for the year was:a. $800,000.b. $480,000.c. $1,200,000.d. $240,000.

37.CHard

Fulton Company's price-earnings ratio is 8.0 and the market price of a share of common stock is $32. The company has 3,000 shares of preferred stock outstanding with each share receiving a dividend of $3 per share. The earnings per share of common stock is:a. $10.b. $7.c. $4.d. $3.

38.CHard

Perlman Company had 100,000 shares of common stock and 20,000 shares of preferred stock at the end of the year just completed. Preferred stockholders received dividends totaling $140,000. Common stockholders received dividends totaling $210,000. If the dividend payout ratio for the year was 70%, then the net income for the year was:a. $300,000.b. $287,000.c. $440,000. d. $147,000.

39.CMedium

NOTE TO THE INSTRUCTOR: Questions 39, 40, and 41 are different versions of the same question.

Arlberg Company's net income last year was $250,000. The company has 150,000 shares of common stock and 80,000 shares of preferred stock outstanding. There was no change in the number of common or preferred shares outstanding during the year. The company declared and paid dividends last year of $1.30 per share on the common stock and $1.40 per share on the preferred stock. The earnings per share of common stock is closest to:a. $1.67.b. $2.41.c. $0.92.d. $0.37.


40.CMedium


Arget Company's net income last year was $600,000. The company has 150,000 shares of common stock and 60,000 shares of preferred stock outstanding. There was no change in the number of common or preferred shares outstanding during the year. The company declared and paid dividends last year of $1.10 per share on the common stock and $0.60 per share on the preferred stock. The earnings per share of common stock is closest to:a. $4.24.b. $4.00.c. $3.76.d. $2.90.

41.DMedium


Arquandt Company's net income last year was $550,000. The company has 150,000 shares of common stock and 50,000 shares of preferred stock outstanding. There was no change in the number of common or preferred shares outstanding during the year. The company declared and paid dividends last year of $1.20 per share on the common stock and $1.70 per share on the preferred stock. The earnings per share of common stock is closest to:a. $3.67.b. $2.47.c. $4.23.d. $3.10.

42.CEasy

NOTE TO THE INSTRUCTOR: Questions 42 and 43 are different versions of the same question.

The following data have been taken from your company's financial records for the current year:

Earnings per share ...... $10 Dividend per share ...... $6 Market price per share .. $90 Book value per share .... $70

The price-earnings ratio is:a. 1.67 to 1.b. 15.0 to 1.c. 9.0 to 1.d. 7.0 to 1.


43.CEasy

NOTE TO THE INSTRUCTOR: Questions 42 and 43 are different versions of the same question.

The following data have been taken from your company's financial records for the current year:

Earnings per share ...... $15 Dividend per share ...... $9 Market price per share .. $120 Book value per share .... $90

The price-earnings ratio is:a. 12.5 to 1.b. 6.0 to 1.c. 8.0 to 1.d. 7.5 to 1.

44.DMedium

Information concerning the common stock of Morris Company as of the end of the company's fiscal year is presented below.

Number of shares outstanding ...... 460,000 Par value per share ............... $5.00 Dividends paid per share .......... $6.00 Market price per share ............ $54.00 Earnings per share ................ $18.00

The dividend yield ratio is closest to:a. 50.0%.b. 33.3%.c. 120.0%.d. 11.1%.

45.D Hard

Cameron Company had 50,000 shares of common stock issued and outstanding during the year just ended. The following information pertains to these shares:

Price originally issued ................... $40 Book value at end of current year ......... $70 Market value, beginning of current year ... $85 Market value, end of current year ......... $90

The total dividend on common stock for the year was $400,000. Cameron Company's dividend yield ratio for the year was:a. 20.00%b. 11.43%.c. 9.41%.d. 8.89%.


46.CMedium


Braverman Company's net income last year was $75,000 and its interest expense was $10,000. Total assets at the beginning of the year were $650,000 and total assets at the end of the year were $610,000. The company's income tax rate was 30%. The company's return on total assets for the year was closest to:a. 13.5%.b. 12.4%.c. 13.0%.d. 11.9%.

47.DMedium


Brachlan Company's net income last year was $80,000 and its interest expense was $20,000. Total assets at the beginning of the year were $660,000 and total assets at the end of the year were $620,000. The company's income tax rate was 30%. The company's return on total assets for the year was closest to:a. 12.5%.b. 13.4%.c. 15.6%.d. 14.7%.

48.AMedium


Brawer Company's net income last year was $55,000 and its interest expense was $20,000. Total assets at the beginning of the year were $660,000 and total assets at the end of the year were $620,000. The company's income tax rate was 30%. The company's return on total assets for the year was closest to:a. 10.8%.b. 8.6%.c. 11.7%.d. 9.5%.

49.CMedium

The total assets of the Philbin Company on January 1, 19x9 were $2.3 million and on December 31, 19x9 were $2.5 million. Net income for 19x9 was $188,000. Dividends for 19x9 totaled $75,000, interest expenses totaled $70,000, and the tax rate was 30%. The return on total assets for 19x9 was closest to:a. 9.5%.b. 6.8%.c. 9.9%.d. 10.8%.


50.CMediumCPA adapted

Selected financial data for Irvington Company appear below:

Account Balances o Beginning End of of year year Preferred stock ......... $125,000 $125,000 Common stock ............. 300,000 400,000 Retained earnings......... 75,000 185,000

During the year, the company paid dividends of $10,000 on its preferred stock. The company's net income for the year was $120,000. The company's return on common stockholders' equity for the year is closest to:a. 17%.b. 19%.c. 23%.d. 25%.

51.AEasy


Crasler Company's net income last year was $100,000. The company paid preferred dividends of $20,000 and its average common stockholders' equity was $580,000. The company's return on common stockholders' equity for the year was closest to:a. 13.8%.b. 3.4%.c. 20.7%.d. 17.2%.

52.DEasy


Crawler Company's net income last year was $80,000. The company paid preferred dividends of $10,000 and its average common stockholders' equity was $400,000. The company's return on common stockholders' equity for the year was closest to:a. 20.0%.b. 22.5%.c. 2.5%.d. 17.5%.


53.CEasy


Crabtree Company's net income last year was $50,000. The company paid preferred dividends of $20,000 and its average common stockholders' equity was $440,000. The company's return on common stockholders' equity for the year was closest to:a. 15.9%.b. 11.4%.c. 6.8%.d. 4.5%.

54.AMedium

The following account balances have been provided for the end of the most recent year:

Total assets $150,000 Total stockholders' equity $120,000 Total common stock $50,000 (5,000 shares) Total preferred stock $10,000 (1,000 shares)

The book value per share of common stock is:a. $22.b. $25.c. $20.d. $28.

55.AMedium


Dratif Company's working capital is $33,000 and its current liabilities are $80,000. The company's current ratio is closest to:a. 1.41 to 1.b. 0.59 to 1.c. 3.42 to 1.d. 0.41 to 1.

56.DMedium


Dragin Company's working capital is $36,000 and its current liabilities are $61,000. The company's current ratio is closest to:a. 2.69 to 1.b. 0.41 to 1.c. 0.59 to 1.d. 1.59 to 1.


57.BMedium


Draban Company's working capital is $38,000 and its current liabilities are $59,000. The company's current ratio is closest to:a. 0.36 to 1.b. 1.64 to 1.c. 0.64 to 1.d. 2.55 to 1.

58.CHard

At the end of the year just completed, Orem Company's current liabilities totaled $75,000, and its long-term liabilities totaled $225,000. Working capital at year-end was $100,000. If the company's debt-to-equity ratio is 0.30 to 1, total long-term assets must equal:a. $1,000,000.b. $1,300,000.c. $1,125,000.d. $1,225,000.

59.BHardCMA adapted

Starrs Company has current assets of $300,000 and current liabilities of $200,000. Which of the following transactions would increase its working capital?a. Prepayment of $50,000 of next year’s rent.b. Refinancing $50,000 of short-term debt with long-term debt.c. Acquisition of land valued at $50,000 by issuing new common

stock.d. Purchase of $50,000 of marketable securities for cash.

60.CHardCMA adapted

Selected year-end data for the Brayer Company are presented below:

Current liabilities ........ $600,000 Acid-test ratio ............ 2.5 to 1 Current ratio .............. 3.0 to 1 Cost of goods sold ......... $500,000

The company has no prepaid expenses and inventories remained unchanged during the year. Based on these data, the company's inventory turnover ratio for the year was closest to:a. 1.20 times.b. 2.40 times.c. 1.67 times.d. 2.33 times.


61.AHard

Harwichport Company has a current ratio of 3.5 to 1 and an acid-test ratio of 2.8 to 1. Current assets equal $175,000 of which $5,000 consists of prepaid expenses. Harwichport Company's inventory must be:a. $30,000.b. $40,000.c. $50,000.d. $35,000.

62.AHard

Ben Company has the following data for the year just ended:

Cash .................... ? Accounts Receivable ..... $28,000 Inventory ............... $35,000 Current ratio ........... 2.4 to 1 Acid test ratio ......... 1.6 to 1

Ben Company's current liabilities were:a. $43,750.b. $50,400.c. $35,000.d. $63,000.

63.CHardCMA adapted

Marcy Corporation's current ratio is currently 1.75 to 1. The firm’s current ratio cannot fall below 1.5 to 1 without violating agreements with its bondholders. If current liabilities are presently $250 million, the maximum new short-term debt that can be issued to finance an equivalent amount of inventory expansion is:a. $ 41.67 million.b. $375.00 million.c. $125.00 million.d. $ 62.50 million.

64.BEasy


Eral Company has $17,000 in cash, $3,000 in marketable securities, $36,000 in current receivables, $24,000 in inventories, and $45,000 in current liabilities. The company's acid-test (quick) ratio is closest to:a. 1.78 to 1.b. 1.24 to 1.c. 0.80 to 1.d. 0.44 to 1.


65.CEasy


Erambo Company has $11,000 in cash, $6,000 in marketable securities, $27,000 in current receivables, $8,000 in inventories, and $51,000 in current liabilities. The company's acid-test (quick) ratio is closest to:a. 0.75 to 1.b. 1.02 to 1.c. 0.86 to 1.d. 0.53 to 1.

66.AEasy


Erack Company has $15,000 in cash, $4,000 in marketable securities, $38,000 in current receivables, $18,000 in inventories, and $40,000 in current liabilities. The company's acid-test (quick) ratio is closest to:a. 1.43 to 1.b. 0.95 to 1.c. 1.33 to 1.d. 1.88 to 1.

67.DHardCPA adapted

Eastham Company's accounts receivable were $600,000 at the beginning of the year and $800,000 at the end of the year. Cash sales for the year were $300,000. The accounts receivable turnover for the year was 5 times. Eastham Company's total sales for the year were:a. $ 800,000.b. $1,300,000.c. $3,300,000.d. $3,800,000.

68.CEasy


Frantic Company had $130,000 in sales on account last year. The beginning accounts receivable balance was $10,000 and the ending accounts receivable balance was $16,000. The company's accounts receivable turnover was closest to:a. 5.00 times.b. 13.00 times.c. 10.00 times.d. 8.13 times.


69.DEasy


Fracus Company had $100,000 in sales on account last year. The beginning accounts receivable balance was $14,000 and the ending accounts receivable balance was $16,000. The company's accounts receivable turnover was closest to:a. 6.25 times.b. 7.14 times.c. 3.33 times.d. 6.67 times.

70.BEasy


Frabine Company had $150,000 in sales on account last year. The beginning accounts receivable balance was $14,000 and the ending accounts receivable balance was $18,000. The company's accounts receivable turnover was closest to:a. 4.69 times.b. 9.38 times.c. 8.33 times.d. 10.71 times.

71.BEasy


Granger Company had $180,000 in sales on account last year. The beginning accounts receivable balance was $10,000 and the ending accounts receivable balance was $18,000. The company's average collection period (age of receivables) was closest to:a. 20.28 days.b. 28.39 days.c. 36.50 days.d. 56.78 days.

72.AEasy


Grapp Company had $130,000 in sales on account last year. The beginning accounts receivable balance was $18,000 and the ending accounts receivable balance was $16,000. The company's average collection period (age of receivables) was closest to:a. 47.73 days.b. 50.54 days.c. 44.92 days.d. 95.46 days.


73.DEasy


Grave Company had $150,000 in sales on account last year. The beginning accounts receivable balance was $14,000 and the ending accounts receivable balance was $10,000. The company's average collection period (age of receivables) was closest to:a. 24.33 days.b. 58.40 days.c. 34.07 days.d. 29.20 days.

74.BEasy


Harris Company, a retailer, had cost of goods sold of $290,000 last year. The beginning inventory balance was $26,000 and the ending inventory balance was $24,000. The company's inventory turnover was closest to:a. 12.08 times.b. 11.60 times.c. 5.80 times.d. 11.15 times.

75.DEasy


Harton Company, a retailer, had cost of goods sold of $250,000 last year. The beginning inventory balance was $20,000 and the ending inventory balance was $22,000. The company's inventory turnover was closest to:a. 5.95 times.b. 11.36 times.c. 12.50 times.d. 11.90 times.

76.CEasy


Harker Company, a retailer, had cost of goods sold of $160,000 last year. The beginning inventory balance was $26,000 and the ending inventory balance was $20,000. The company's inventory turnover was closest to:a. 6.15 times.b. 8.00 times.c. 6.96 times.d. 3.48 times.


77.AEasy


Irawaddy Company, a retailer, had cost of goods sold of $230,000 last year. The beginning inventory balance was $24,000 and the ending inventory balance was $22,000. The company's average sale period (turnover in days) was closest to:a. 36.50 days.b. 73.00 days.c. 38.09 days.d. 34.91 days.

78.DEasy


Irappa Company, a retailer, had cost of goods sold of $170,000 last year. The beginning inventory balance was $28,000 and the ending inventory balance was $26,000. The company's average sale period (turnover in days) was closest to:a. 55.82 days.b. 60.12 days.c. 115.94 days.d. 57.97 days.

79.AEasy


Irally Company, a retailer, had cost of goods sold of $150,000 last year. The beginning inventory balance was $26,000 and the ending inventory balance was $24,000. The company's average sale period (turnover in days) was closest to:a. 60.83 days.b. 63.27 days.c. 58.40 days.d. 121.67 days.

80.CHardCPA adapted

Last year Dunn Company purchased $1,920,000 of inventory. The cost of good sold was $1,800,000 and the ending inventory was $360,000. What was the inventory turnover?a. 5.0 times.b. 5.3 times.c. 6.0 times.d. 6.4 times.

81.AHard

During the year just ended, James Company purchased $425,000 of inventory. The inventory balance at the beginning of the year was $175,000. If the cost of goods sold for the year was $450,000, then the inventory turnover for the year was:a. 2.77 times.b. 2.57 times.c. 3.00 times.d. 2.62 times.


82.DEasy


Last year Javer Company had a net income of $200,000, income tax expense of $74,000, and interest expense of $20,000. The company's times interest earned was closest to:a. 10.00 times.b. 11.00 times.c. 5.30 times.d. 14.70 times.

83.CEasy


Last year Jabber Company had a net income of $180,000, income tax expense of $62,000, and interest expense of $20,000. The company's times interest earned was closest to:a. 9.00 times.b. 4.90 times.c. 13.10 times.d. 10.00 times.

84.BEasy


Last year Jackson Company had a net income of $160,000, income tax expense of $66,000, and interest expense of $20,000. The company's times interest earned was closest to:a. 9.00 times.b. 12.30 times.c. 8.00 times.d. 3.70 times.

85.BHard

The times interest earned ratio of McHugh Company is 4.5 times. The interest expense for the year was $20,000, and the company's tax rate is 40%. The company's net income is:a. $22,000.b. $42,000.c. $54,000.d. $66,000.

86.DHard

Mariah Company has a times interest earned ratio of 3.0 for the year just ended. The company's tax rate is 40% and the interest expense for the year was $25,000. Mariah Company's after-tax net income was:a. $50,000.b. $75,000.c. $25,000.d. $30,000.


87.AHard

PFM Company has sales of $210,000, interest expense of $8,000, a tax rate of 30%, and a net profit after tax of $35,000. PFM Company's times interest earned ratio is:a. 7.25 times.b. 4.375 times.c. 5.375 times.d. 15.5 times.

88.BEasy


Karma Company has total assets of $190,000 and total liabilities of $90,000. The company's debt-to-equity ratio is closest to:a. 0.47 to 1.b. 0.90 to 1.c. 0.53 to 1.d. 0.32 to 1.

89.DEasy


Karl Company has total assets of $170,000 and total liabilities of $110,000. The company's debt-to-equity ratio is closest to:a. 0.39 to 1.b. 0.65 to 1.c. 0.35 to 1.d. 1.83 to 1.

90.AEasy


Krakov Company has total assets of $170,000 and total liabilities of $80,000. The company's debt-to-equity ratio is closest to:a. 0.89 to 1.b. 0.32 to 1.c. 0.47 to 1.d. 0.53 to 1.


Reference: 18-1Selected financial data for Barnstable Company appear below:

19x9 19x8 (in thousands)

Sales ......................... $1,500 $1,200Operating Expenses ............ 450 400Interest Expense .............. 75 30Cost of Goods Sold ............ 900 720Dividends Declared and Paid ... 30 0

91.DEasyRefer To: 18-1

For 19x9, the gross margin as a percentage of sales was:a. 5%.b. 60%.c. 10%.d. 40%.

92.DEasyRefer To: 18-1

For 19x9, the net income before taxes as a percentage of sales was:a. 10%.b. 3%.c. 8%.d. 5%.

93.CEasyRefer To: 18-1

For 19x9, the net operating income as a percentage of sales was:a. 70%.b. 8%.c. 10%.d. 40%.

94.BMediumRefer To: 18-1

Between 19x8 and 19x9, the times interest earned ratio:a. increased.b. decreased.c. remained the same.d. cannot be determined from the data provided.


Reference: 18-2NOTE TO THE INSTRUCTOR: Questions 95 to 101, 102 to 108, and 109 to 115 are different versions of the same question.

Financial statements for Larned Company appear below:

Larned CompanyStatement of Financial Position

December 31, 19X6 and 19X5(dollars in thousands)

19X6 19X5 Current assets: Cash and marketable securities ............. $ 130 $ 100 Accounts receivable, net ................... 150 130 Inventory .................................. 100 100 Prepaid expenses ........................... 20 20 Total current assets ..................... 400 350 Noncurrent assets: Plant & equipment, net ..................... 1,640 1,600 Total assets ................................. $2,040 $1,950

Current liabilities: Accounts payable ........................... $ 120 $ 120 Accrued liabilities ........................ 110 80 Notes payable, short term .................. 170 160 Total current liabilities ............... 400 360 Noncurrent liabilities: Bonds payable .............................. 370 400 Total liabilities ........................ 770 760 Stockholders' equity: Preferred stock, $20 par, 10% .............. 120 120 Common stock, $10 par ...................... 180 180 Additional paid-in capital--common stock ... 110 110 Retained earnings .......................... 860 780 Total stockholders' equity ............... 1,270 1,190 Total liabilities & stockholders' equity ..... $2,040 $1,950


Larned CompanyIncome Statement

For the Year Ended December 31, 19X6(dollars in thousands)

Sales (all on account) ................... $2,930Cost of goods sold ....................... 2,050Gross margin ............................. 880Operating expenses ....................... 350Net operating income ..................... 530Interest expense ......................... 40Net income before taxes .................. 490Income taxes (30%) ....................... 147Net income ............................... $ 343

Dividends during 19X6 totalled $263 thousand, of which $12 thousand were preferred dividends. The market price of a share of common stock on December 31, 19X6 was $160.

95.AMediumRefer To: 18-2

Larned Company's earnings per share of common stock for 19X6 was closest to:a. $18.39.b. $27.22.c. $19.06.d. $11.03.

96.CMediumRefer To: 18-2

Larned Company's price-earnings ratio on December 31, 19X6 was closest to:a. 5.88.b. 14.50.c. 8.70.d. 8.40.


Larned Company's dividend payout ratio for 19X6 was closest to:a. 75.8%.b. 28.5%.c. 76.7%.d. 47.4%.


Larned Company's dividend yield ratio on December 31, 19X6 was closest to:a. 8.7%.b. 9.1%.c. 8.3%.d. 5.5%.


Larned Company's return on total assets for 19X6 was closest to:a. 15.8%.b. 17.2%.c. 18.6%.d. 17.8%.



Larned Company's return on common stockholders' equity for 19X6 was closest to:a. 29.8%.b. 26.9%.c. 30.9%.d. 27.9%.


Larned Company's book value per share at the end of 19X6 was closest to:a. $16.11.b. $63.89.c. $70.56.d. $10.00.


Financial statements for Laroche Company appear below:

Laroche CompanyStatement of Financial Position



Current liabilities: Accounts payable ........................... $ 150 $ 190 Accrued liabilities ........................ 70 80 Notes payable, short term .................. 140 150 Total current liabilities ............... 360 420 Noncurrent liabilities: Bonds payable .............................. 280 300 Total liabilities ........................ 640 720 Stockholders' equity: Preferred stock, $20 par, 10% .............. 100 100 Common stock, $10 par ...................... 240 240 Additional paid-in capital--common stock ... 180 180 Retained earnings .......................... 740 640 Total stockholders' equity ............... 1,260 1,160 Total liabilities & stockholders' equity ..... $1,900 $1,880


Laroche CompanyIncome Statement



Dividends during 19X6 totaled $166 thousand, of which $10 thousand were preferred dividends. The market price of a share of common stock on December 31, 19X6 was $150.


Laroche Company's earnings per share of common stock for 19X6 was closest to:a. $10.67.b. $15.83.c. $3.71.d. $11.08.


Laroche Company's price-earnings ratio on December 31, 19X6 was closest to:a. 13.53.b. 40.43.c. 14.06.d. 9.47.


Laroche Company's dividend payout ratio for 19X6 was closest to:a. 22.9%.b. 62.4%.c. 60.9%.d. 38.0%.


Laroche Company's dividend yield ratio on December 31, 19X6 was closest to:a. 4.6%.b. 4.1%.c. 4.3%.d. 1.6%.


Laroche Company's return on total assets for 19X6 was closest to:a. 14.1%.b. 15.2%.c. 14.6%.d. 13.0%.


107.DMediumRefer To: 18-3

Laroche Company's return on common stockholders' equity for 19X6 was closest to:a. 24.0%.b. 21.2%.c. 22.0%.d. 23.1%.


Laroche Company's book value per share at the end of 19X6 was closest to:a. $52.50.b. $10.00.c. $48.33.d. $17.50.


Financial statements for Larosa Company appear below:

Larosa CompanyStatement of Financial Position



Current liabilities: Accounts payable ........................... $ 140 $ 170 Accrued liabilities ........................ 10 40 Notes payable, short term .................. 190 200 Total current liabilities ............... 340 410 Noncurrent liabilities: Bonds payable .............................. 370 400 Total liabilities ........................ 710 810 Stockholders' equity: Preferred stock, $20 par, 10% .............. 100 100 Common stock, $10 par ...................... 220 220 Additional paid-in capital--common stock ... 250 250 Retained earnings .......................... 1,240 1,070 Total stockholders' equity ............... 1,810 1,640 Total liabilities & stockholders' equity ..... $2,520 $2,450

Larosa Company


Income StatementFor the Year Ended December 31, 19X6

(dollars in thousands)




Larosa Company's earnings per share of common stock for 19X6 was closest to:a. $3.09.b. $9.41.c. $14.09.d. $9.86.


Larosa Company's price-earnings ratio on December 31, 19X6 was closest to:a. 7.10.b. 22.66.c. 7.44.d. 4.97.


Larosa Company's dividend payout ratio for 19X6 was closest to:a. 21.7%.b. 17.9%.c. 6.5%.d. 10.6%.


Larosa Company's dividend yield ratio on December 31, 19X6 was closest to:a. 1.8%.b. 3.1%.c. 2.4%.d. 1.0%.


Larosa Company's return on total assets for 19X6 was closest to:a. 8.7%.b. 9.9%.c. 7.6%.d. 9.2%.



Larosa Company's return on common stockholders' equity for 19X6 was closest to:a. 12.0%.b. 12.7%.c. 13.4%.d. 12.6%.


Larosa Company's book value per share at the end of 19X6 was closest to:a. $77.73.b. $82.27.c. $10.00.d. $21.36.

Reference: 18-5The Dawson Corporation projects the following for the upcoming year:

Earnings before interest and taxes ............. $35 million Interest expense ............................... $ 5 million Preferred stock dividends ...................... $ 4 million Common stock dividend payout ratio ............. 30% Average number of common shares outstanding .... 2 million Effective corporate income tax rate ............ 40%

116.AHardCMA adaptedRefer To: 18-5

The expected dividend per share of common stock isa. $2.10.b. $2.70.c. $1.80.d. $3.90.

117.BHardCMA adaptedRefer To: 18-5

If Dawson corporation’s common stock has a price-earnings ratio of eight, the market price per share (to the nearest dollar) would bea. $125.b. $56.c. $72.d. $68.


Financial statements for Orange Company appear below:


Orange CompanyStatement of Financial Position



Current liabilities: Accounts payable ........................... $ 90 $ 100 Accrued liabilities ........................ 60 80 Notes payable, short term .................. 160 180 Total current liabilities ............... 310 360 Noncurrent liabilities: Bonds payable .............................. 250 300 Total liabilities ........................ 560 660 Stockholders' equity: Preferred stock, $10 par, 15% ............... 120 120 Common stock, $5 par ....................... 220 220 Additional paid-in capital--common stock ... 210 210 Retained earnings .......................... 1,100 920 Total stockholders' equity ............... 1,650 1,470 Total liabilities & stockholders' equity ..... $2,210 $2,130

Orange CompanyIncome Statement






Orange Company's earnings per share of common stock for 19X6 was closest to:a. $7.23.b. $2.27.c. $10.91.d. $7.64.


Orange Company's dividend yield ratio on December 31, 19X6 was closest to:a. 3.1%.b. 1.1%.c. 3.5%.d. 2.7%.


Orange Company's return on total assets for 19X6 was closest to:a. 15.5%.b. 15.9%.c. 16.5%.d. 14.5%.


Orange Company's current ratio at the end of 19X6 was closest to:a. 1.24 to 1.b. 0.55 to 1.c. 0.44 to 1.d. 1.71 to 1.


Orange Company's accounts receivable turnover for 19X6 was closest to:a. 15.7 times.b. 11.0 times.c. 17.7 times.d. 12.4 times.


Orange Company's average sale period (turnover in days) for 19X6 was closest to:a. 23.2 days.b. 29.5 days.c. 33.2 days.d. 20.6 days.


Orange Company's times interest earned for 19X6 was closest to:a. 16.0 times.b. 28.3 times.c. 17.0 times.d. 11.2 times.



Financial statements for Orantes Company appear below:

Orantes CompanyStatement of Financial Position



Current liabilities: Accounts payable ........................... $ 120 $ 120 Accrued liabilities ........................ 30 40 Notes payable, short term .................. 170 170 Total current liabilities ............... 320 330 Noncurrent liabilities: Bonds payable .............................. 270 300 Total liabilities ........................ 590 630 Stockholders' equity: Preferred stock, $10 par, 10% ............... 120 120 Common stock, $10 par ....................... 200 200 Additional paid-in capital--common stock ... 270 270 Retained earnings .......................... 1,310 1,190 Total stockholders' equity ............... 1,900 1,780 Total liabilities & stockholders' equity ..... $2,490 $2,410

Orantes CompanyIncome Statement






Orantes Company's earnings per share of common stock for 19X6 was closest to:a. $3.61.b. $14.45.c. $15.05.d. $21.50.


Orantes Company's dividend yield ratio on December 31, 19X6 was closest to:a. 3.0%.b. 0.8%.c. 2.8%.d. 3.2%.


Orantes Company's return on total assets for 19X6 was closest to:a. 12.3%.b. 11.4%.c. 13.1%.d. 12.7%.


Orantes Company's current ratio at the end of 19X6 was closest to:a. 0.54 to 1.b. 1.19 to 1.c. 0.35 to 1.d. 1.50 to 1.


Orantes Company's accounts receivable turnover for 19X6 was closest to:a. 19.3 times.b. 13.5 times.c. 14.8 times.d. 10.3 times.


Orantes Company's average sale period (turnover in days) for 19X6 was closest to:a. 24.7 days.b. 27.1 days.c. 18.9 days.d. 35.5 days.


Orantes Company's times interest earned for 19X6 was closest to:a. 10.0 times.b. 15.3 times.c. 14.3 times.d. 25.3 times.



Financial statements for Oratz Company appear below:

Oratz CompanyStatement of Financial Position



Current liabilities: Accounts payable ........................... $ 70 $ 100 Accrued liabilities ........................ 100 70 Notes payable, short term .................. 230 220 Total current liabilities ............... 400 390 Noncurrent liabilities: Bonds payable .............................. 300 300 Total liabilities ........................ 700 690 Stockholders' equity: Preferred stock, $10 par, 5% ............... 120 120 Common stock, $15 par ....................... 140 140 Additional paid-in capital--common stock ... 240 240 Retained earnings .......................... 720 670 Total stockholders' equity ............... 1,220 1,170 Total liabilities & stockholders' equity ..... $1,920 $1,860

Oratz CompanyIncome Statement






Oratz Company's earnings per share of common stock for 19X6 was closest to:a. $1.74.b. $28.93.c. $20.25.d. $19.61.


Oratz Company's dividend yield ratio on December 31, 19X6 was closest to:a. 5.7%.b. 5.2%.c. 5.5%.d. 0.5%.


Oratz Company's return on total assets for 19X6 was closest to:a. 8.9%.b. 11.1%.c. 10.5%.d. 10.0%.


Oratz Company's current ratio at the end of 19X6 was closest to:a. 0.57 to 1.b. 1.23 to 1.c. 0.51 to 1.d. 1.26 to 1.


Oratz Company's accounts receivable turnover for 19X6 was closest to:a. 9.1 times.b. 12.5 times.c. 8.8 times.d. 6.3 times.


Oratz Company's average sale period (turnover in days) for 19X6 was closest to:a. 29.1 days.b. 40.3 days.c. 41.6 days.d. 57.6 days.


Oratz Company's times interest earned for 19X6 was closest to:a. 6.3 times.b. 16.3 times.c. 10.0 times.d. 9.0 times.


Reference: 18-9Selected data for the MK Company follow:

Current Year Prior YearPreferred stock, 8%, par value $50 ....... $250,000 $250,000Common stock, par value $10 .............. 500,000 500,000Retained earnings at end of year ......... 257,000 240,000Net income ............................... 102,000 90,000Dividends paid on preferred stock ........ 20,000 20,000Dividends paid on common stock ........... 65,000 60,000Quoted market price per common share at year end...................... 25.00 20.00

139.BHardRefer To: 17-9

The price-earnings ratio for the prior year was:a. 15.8 to 1.b. 14.3 to 1.c. 12.2 to 1.d. 11.1 to 1.


The dividend yield ratio on common stock for the current year was(rounded to the nearest tenth of a percent):a. 5.2%b. 6.8%.c. 6.6%.d. 7.4%.

141.DHardRefer To: 17-9

MK Company's return on common stockholders' equity for the current year was (rounded to the nearest tenth of a percent):a. 10.2%.b. 8.2%.c. 13.6%.d. 10.9%.


The dividend payout ratio for the prior year was:a. 55.6%b. 140%.c. 114.3%.d. 85.7%.


The book value per share for the current year is (rounded to the nearest cent:a. $22.18.b. $18.31.c. $15.14.d. $20.14.


Reference: 18-10Lisa Inc.'s balance sheet appears below:

Lisa Inc.Statement of Financial Position

December 31(in thousands)

19X7 19X6 Cash ................................... $ 30 $ 25 Marketable securities ................... 20 15 Accounts receivable (net) ............... 45 30 Inventories ............................. 60 50 Prepaid expenses ........................ 15 20 Total current assets ................... 170 140 Land .................................... 155 125 Building (net) .......................... 80 90 Equipment (net) ......................... 95 100 Total long-term assets ................. 330 315 Total Assets ......................... $500 $455

Accounts payable ........................ $ 47 $ 28 Accrued interest ........................ 15 15 Short-term notes payable ................ 23 12 Total current liabilities .............. 85 55 Long-term otes payable .................. 10 10 Bonds payable ........................... 15 15 Total long-term liabilities ............ 25 25 Total liabilities ...................... 110 80 Preferred stock ($100 par value, 5%) .... 100 100 Common Stock ($10 par value) ............ 150 150 Additional paid-in capital--common stock 75 75 Retained earnings ....................... 65 50 Total shareholders’ equity ............. 390 375 Total liabilities & equity ........... $500 $455

The company's sales for the year were $300,000, its cost of goods sold was $220,000, and its net income was $35,000. All sales were on credit. Preferred dividends for the year were $5,000.

144.BMediumCMA adaptedRefer To: 18-10

Lisa Inc.’s acid test (quick) ratio at December 31, 19X7, was closest to:a. 0.6 to 1.b. 1.1 to 1.c. 1.8 to 1.d. 2.0 to 1.


145.DMediumCMA adaptedRefer To: 18-10

Lisa Inc.’s accounts receivable turnover for 19X7 was closest to:a. 4.9 times.b. 5.9 times.c. 6.7 times.d. 8.0 times.


Lisa Inc.’s inventory turnover for 19X7 was closest to:a. 3.7 times.b. 4.0 times.c. 4.4 times.d. 5.0 times.

147.CMediumCMA adaptedRefer To: 18-10

Lisa Inc.’s book value per share of common stock at December 31, 19X7, was closest to:a. $10.00.b. $11.25.c. $19.33.d. $18.33.


Lisa Inc.’s return on common stockholders' equity for 19X7 was closest to:a. 7.8%.b. 10.6%.c. 10.9%.d. 12.4%.



Financial statements for Marcell Company appear below:

Marcell CompanyStatement of Financial Position



Current liabilities: Accounts payable ........................... $ 110 $ 150 Accrued liabilities ........................ 60 60 Notes payable, short term .................. 280 290 Total current liabilities ............... 450 500 Noncurrent liabilities: Bonds payable .............................. 480 500 Total liabilities ........................ 930 1,000 Stockholders' equity: Preferred stock, $10 par, 8% ............... 100 100 Common stock, $5 par ....................... 140 140 Additional paid-in capital--common stock ... 280 280 Retained earnings .......................... 720 620 Total stockholders' equity ............... 1,240 1,140 Total liabilities & stockholders' equity ..... $2,170 $2,140

Marcell CompanyIncome Statement





Marcell Company's working capital (in thousands of dollars) at the end of 19X6 was closest to:a. $470.b. $20.c. $520.d. $1,240.


Marcell Company's current ratio at the end of 19X6 was closest to:a. 1.04 to 1.b. 0.42 to 1.c. 0.48 to 1.d. 1.22 to 1.


Marcell Company's acid-test (quick) ratio at the end of 19X6 was closest to:a. 0.33 to 1.b. 1.35 to 1.c. 0.60 to 1.d. 0.74 to 1.


Marcell Company's accounts receivable turnover for 19X6 was closest to:a. 16.2 times.b. 9.9 times.c. 23.2 times.d. 14.2 times.


Marcell Company's average collection period (age of receivables) for 19X6 was closest to:a. 22.6 days.b. 15.7 days.c. 25.8 days.d. 36.9 days.


Marcell Company's inventory turnover for 19X6 was closest to:a. 16.2 times.b. 23.2 times.c. 14.2 times.d. 9.9 times.


Marcell Company's average sale period (turnover in days) for 19X6 was closest to:a. 15.7 days.b. 25.8 days.c. 36.9 days.d. 22.6 days.



Financial statements for March Company appear below:

March CompanyStatement of Financial Position




March CompanyIncome Statement





March Company's working capital (in thousands of dollars) at the end of 19X6 was closest to:a. $520.b. $1,290.c. $180.d. $580.


March Company's current ratio at the end of 19X6 was closest to:a. 1.27 to 1.b. 0.47 to 1.c. 0.49 to 1.d. 1.45 to 1.


March Company's acid-test (quick) ratio at the end of 19X6 was closest to:a. 0.95 to 1.b. 0.39 to 1.c. 1.90 to 1.d. 0.53 to 1.


March Company's accounts receivable turnover for 19X6 was closest to:a. 7.2 times.b. 10.4 times.c. 7.5 times.d. 10.7 times.


March Company's average collection period (age of receivables) for 19X6 was closest to:a. 48.9 days.b. 35.1 days.c. 34.0 days.d. 50.5 days.


March Company's inventory turnover for 19X6 was closest to:a. 7.5 times.b. 10.4 times.c. 10.7 times.d. 7.2 times.


March Company's average sale period (turnover in days) for 19X6 was closest to:a. 48.9 days.b. 34.0 days.c. 35.1 days.d. 50.5 days.



Financial statements for Marcial Company appear below:

Marcial CompanyStatement of Financial Position




Marcial CompanyIncome Statement





Marcial Company's working capital (in thousands of dollars) at the end of 19X6 was closest to:a. $440.b. $570.c. $1,360.d. $200.


Marcial Company's current ratio at the end of 19X6 was closest to:a. 1.83 to 1.b. 0.38 to 1.c. 0.35 to 1.d. 1.22 to 1.


Marcial Company's acid-test (quick) ratio at the end of 19X6 was closest to:a. 0.76 to 1.b. 1.32 to 1.c. 1.04 to 1.d. 0.25 to 1.


Marcial Company's accounts receivable turnover for 19X6 was closest to:a. 8.4 times.b. 14.8 times.c. 12.1 times.d. 10.4 times.


Marcial Company's average collection period (age of receivables) for 19X6 was closest to:a. 24.6 days.b. 35.2 days.c. 43.2 days.d. 30.2 days.


Marcial Company's inventory turnover for 19X6 was closest to:a. 8.4 times.b. 12.1 times.c. 14.8 times.d. 10.4 times.


Marcial Company's average sale period (turnover in days) for 19X6 was closest to:a. 35.2 days.b. 30.2 days.c. 43.2 days.d. 24.6 days.


Reference: 18-14The following financial data have been taken from the records of CPZ Enterprises.

Accounts receivable ...................... $200,000Accounts payable ......................... 80,000Bonds payable, due in 10 years ........... 300,000Cash ..................................... 100,000Interest payable, due in three months .... 10,000Inventory ................................ 440,000Land ..................................... 250,000Notes payable, due in six months ......... 50,000

170.DMediumCMA adaptedRefer To: 18-14

The current ratio for CPZ Enterprises is:a. 1.68.b. 2.14.c. 5.00.d. 5.29.

171.CMediumCMA adaptedRefer To: 18-14

What is the company’s acid test (quick) ratio?a. 0.68.b. 1.68.c. 2.14.d. 2.31.

172.AHardCMA adaptedRefer To: 18-14

What will happen to the ratios below if CPZ Enterprises uses cash to pay 50% of its accounts payable?

Current Ratio Acid-test Ratio a. increase increase b. decrease decrease c. increase decrease d. decrease increase

Reference: 18-15At December 31, Curry Co. had the following balances in selected asset accounts:

19x7 19x6 Cash ........................... $ 300 $ 200 Accounts receivable, net ....... 1,200 800 Inventory ...................... 500 300 Prepaid expenses ............... 100 60 Other assets ................... 400 250 Total assets ................... $2,500 $1,610

Curry had current liabilities of $1,000 at December 31, 19x7, and credit sales of $7,200 for 19x7.


173.AMediumCPA adaptedRefer To: 18-15

Curry Company’s acid-test (quick) ratio at December 31, 19x7 was closest to:a. 1.5 to 1.b. 1.6 to 1.c. 2.0 to 1.d. 2.1 to 1.

174.CMediumCPA adaptedRefer To: 18-15

Drew Company's average collection period (age of receivables) for 19x7 was closest to:a. 30.4 days.b. 40.6 days.c. 50.7 days.d. 60.8 days.


Financial statements for Narita Company appear below:

Narita CompanyStatement of Financial Position



Current liabilities: Accounts payable ........................... $ 150 $ 140 Accrued liabilities ........................ 50 60 Notes payable, short term .................. 180 200 Total current liabilities ............... 380 400 Noncurrent liabilities: Bonds payable .............................. 260 300 Total liabilities ........................ 640 700 Stockholders' equity: Preferred stock, $10 par, 6% ............... 120 120 Common stock, $2 par ....................... 140 140 Additional paid-in capital--common stock ... 180 180 Retained earnings .......................... 1,100 1,000 Total stockholders' equity ............... 1,540 1,440 Total liabilities & stockholders' equity ..... $2,180 $2,140


Narita CompanyIncome Statement




Narita Company's times interest earned for 19X6 was closest to:a. 14.7 times.b. 26.0 times.c. 10.3 times.d. 15.7 times.


Narita Company's debt-to-equity ratio at the end of 19X6 was closest to:a. 0.17 to 1.b. 0.58 to 1.c. 0.25 to 1.d. 0.42 to 1.


Financial statements for Narlock Company appear below:

Narlock CompanyStatement of Financial Position





Narlock CompanyIncome Statement




Narlock Company's times interest earned for 19X6 was closest to:a. 7.2 times.b. 8.2 times.c. 13.6 times.d. 5.0 times.


Narlock Company's debt-to-equity ratio at the end of 19X6 was closest to:a. 0.70 to 1.b. 0.32 to 1.c. 0.38 to 1.d. 1.09 to 1.



Financial statements for Narumi Company appear below:

Narumi CompanyStatement of Financial Position



Current liabilities: Accounts payable ........................... $ 120 $ 110 Accrued liabilities ........................ 80 80 Notes payable, short term .................. 180 230 Total current liabilities ............... 380 420 Noncurrent liabilities: Bonds payable .............................. 510 500 Total liabilities ........................ 890 920 Stockholders' equity: Preferred stock, $10 par, 6% ............... 120 120 Common stock, $2 par ....................... 160 160 Additional paid-in capital--common stock ... 200 200 Retained earnings .......................... 430 350 Total stockholders' equity ............... 910 830 Total liabilities & stockholders' equity ..... $1,800 $1,750

Narumi CompanyIncome Statement





Narumi Company's times interest earned for 19X6 was closest to:a. 12.4 times.b. 7.6 times.c. 6.6 times.d. 4.6 times.


Narumi Company's debt-to-equity ratio at the end of 19X6 was closest to:a. 2.07 to 1.b. 0.42 to 1.c. 0.98 to 1.d. 0.56 to 1.

Essay

181.MediumCIMA (UK) adapted

M. K. Berry is the managing director of CE Ltd. a small, family-owned company which manufactures cutlery. His company belongs to a trade association which publishes a monthly magazine. The latest issue of the magazine contains a very brief article based on the analysis of the accounting statements published by the 40 companies which manufacture this type of product. The article contains the following table:

Average for all companies in the industry Return on stockholders' equity ...... 33% Return on total assets .............. 29% Gross margin percentage ............. 30% Current ratio ....................... 1.9:1 Average sale period ................. 37 days Average collection period ........... 41 days

CE Ltd's latest financial statements are as follows:

CE Ltd.Income Statement

for the year ended 31 October(in thousands)

Sales ...................................... £900 Cost of goods sold ......................... 720 Gross margin ............................... 180 Selling and administrative expenses ........ 55 Interest ................................... 15 Net income ................................. £110

The country in which the company operates has no corporate income tax. No dividends were paid during the year. All sales are on account.

CE Ltd.


Balance Sheetsas of 31 October(in thousands)

This Year Last YearCurrent assets: Cash ............................... £ 5 £ 20 Accounts receivable ................ 120 110 Inventories ........................ 96 80Noncurrent assets .................... 500 460 Total assets ....................... £721 £670

Current liabilities: Accounts payable ................... £147 £206Noncurrent liabilities: Bonds payable ...................... 150 150Common stock ......................... 100 100Retained earnings .................... 324 214 Total liabilities and stockholders’ equity ............ £721 £670

Required:

a. Calculate each of the ratios listed in the magazine article for this year for CE, and comment briefly on CE Ltd's performance in comparison to the industrial averages.

b. Explain why it could be misleading to compare CE Ltd's ratios with those taken from the article.

Answer:a. Return on common stockholders’ equity: Net income = £110 Preferred dividends = £0 Average common stockholders’ equity = [(£100 + £324) + (£100 + £214)] ÷ 2 = £369 Return on common stockholders’ equity = (£110 - £0) ÷ £369 = 29.8% (rounded)

Return on total assets: Net income = £110 Tax rate = 0% Interest expense = £15 Average total assets = (£721 + £670) ÷ 2 = £695.5 Return on total assets = [£110 + £15x(1 - 0.00)] ÷ £695.5 = 18.0% (rounded)


Gross margin percentage: Gross margin = £180 Sales = £900 Gross margin percentage = £180/£900 = 20%

Current ratio: Current assets = £5 + £120 + £96 = £221 Current liabilities = £147 Current ratio = £221/£147 = 1.5:1 (rounded)

Average sale period: Cost of goods sold = £720 Average inventory balance = (£96 + £80)/2 = £88 Inventory turnover = £720/£88 = 8.2 (rounded) Average sale period = 365 days/8.2 = 45 days (rounded)

Average collection period: Sales on account = £900 Average accounts receivable balance = (£120 + £110)/2 = £115 Accounts receivable turnover = £900/£115 = 7.8 (rounded) Average collection period = 365 days/7.8 = 47 days (rounded)

CE Ltd's return on stockholders' equity is not as good as the industry’s average. For every pound invested, shareholders are obtaining a return which is smaller than they should expect, based on the article's figures. Similarly, the return on total assets is much less than the average. This indicates that the company is unable to make good use of the funds invested in the company.

CE Ltd's gross margin percentage is also lower than average--perhaps because it's selling prices are lower than the average or its cost of sales are higher.

The current ratio indicates that CE Ltd's current assets are greater than its current liabilities by a factor of 1.5. The industry average shows an even higher figure, with current assets amounting to almost double current liabilities.

Most companies aim to turn over inventory as quickly as possible, in order to improve cash flow. CE Ltd is not managing to do this as quickly as the industry's average of 37 days. Similarly, companies should try to obtain payment from customers as soon as possible. CE Ltd is taking much longer to do this than the average for the industry.


b.Care must be taken when comparing CE Ltd's ratios with industry averages because there may be differences in accounting methods. Although accounting standards have reduced the range of acceptable accounting policies, there is still scope for different firms to apply different accounting policies. For example, one firm may use straight-line depreciation, while another may use accelerated depreciation. These variations make comparisons difficult.

Size differences may also mean that ratios are not comparable. A very large manufacturing business should be able to achieve economies of scale which are not possible for CE Ltd. For example, large companies may be able to negotiate sizable discounts from suppliers.

A third problem arises from differences in product range. CE Ltd may produce cutlery which is sold at the top end of the market, for very high prices, and in small volumes. Alternatively, it may be producing high-volume, low quality cutlery for the catering industry. Either situation will reduce the value of comparisons with the industry average.


182.Medium

Comparative financial statements for Springville Company for the last two years appear below. The market price of Springville's common stock was $25 per share on December 31, Year 2. During Year 2, dividends of $2,000,000 were paid to preferred stockholders and $10,000,000 to stockholders.

Springville CompanyStatement of Financial PositionDecember 31, Year 2 and Year 1

(dollars in thousands) Year 2 Year 1Current assets: Cash and marketable securities ........... $ 6,000 $ 4,800 Accounts receivable, net ................. 20,000 16,800 Inventory ................................ 28,000 28,800 Total current assets ................... 54,000 50,400Noncurrent assets: Investments............................... 75,000 81,600 Plant & equipment, net ................... 12,000 12,000Total assets ............................... $141,000 $144,000

Current liabilities: Accounts payable ......................... $ 7,000 $ 6,000 Accrued liabilities ...................... 1,000 1,200 Total current liabilities ............. 8,000 7,200Noncurrent liabilities: Bonds payable ............................ 24,000 24,000 Total liabilities ...................... 32,000 31,200Stockholders' equity: Preferred stock, 8%, 1,000,000 shares..... 20,000 20,000 Common stock, no par, 5,000,000 shares.... 30,000 30,000 Retained earnings ........................ 59,000 62,800 Total stockholders' equity ............. 109,000 112,800Total liabilities & stockholders' equity ... $141,000 $144,000

Springville CompanyIncome Statement

For the Year Ended December 31, Year 2(dollars in thousands)

Sales (all on account) ................... $280,000Cost of goods sold ....................... 200,000Gross margin ............................. $ 80,000Operating expenses ....................... 61,333Net operating income ..................... 18,667Interest expense ......................... 5,000Net income before taxes .................. 13,667Income taxes (40%) ....................... 5,467Net income ............................... $ 8,200


Required:

Compute the following for Year 2:a. Dividend payout ratio.b. Dividend yield ratio.c. Price-earnings ratio.d. Accounts receivable turnover.e. Inventory turnover.f. Return on total assets.g. Return on common stockholders' equity.h. Was financial leverage positive or negative for the year? Explain.

Answer:a. Dividend payout ratio = Dividends per share ÷ Earnings per share. = ($10,000,000/5,000,000) ÷ (($8,200,000 - $2,000,000) /5,000,000)) = $2.00 $1.24 = 161.3%.

b. Dividend yield ratio = Dividends paid per share Market price per share = $2.00 ÷ $25 = 8%.

c. Price-earnings ratio = Market price per share ÷ Earnings per share = $25 ÷ (($8,200,000 - $2,000,000)/5,000,000)) = 20.16.

d. Accounts receivable turnover = Sales on account Average accounts receivable balance = $280,000 (($16,800 + $20,000)/2)) = 15.22 times.

e. Inventory turnover = Cost of goods sold ÷ Average inventory balance = $200,000 ÷ (($28,800 + $28,000)/2)) = 7.04 times

f. Return on total assets = [Net income + ((Interest expense x (1 - Tax rate))] Average total assets = [$8,200,000 + 5,000,000 x (1 - 0.40)] [($144,000,000 + $141,000,000)/2] = 7.9%


g. Return on common stockholders' equity = (Net income - preferred dividends) Average common stockholders' equity = ($8,200,000 - $2,000,000) [($92,800,000 + $89,000,000)/2] = 6.8%

h. Financial leverage was negative, since the rate of return to the common stockholders (6.8%) was less than the rate of return on total assets (7.8%).

183.Medium

Financial statements for Praeger Company appear below:

Praeger CompanyStatement of Financial Position


19X6 19X5Current assets: Cash and marketable securities ............. $ 100 $ 100 Accounts receivable, net ................... 170 170 Inventory .................................. 110 110 Prepaid expenses ........................... 60 60 Total current assets ..................... 440 440Noncurrent assets: Plant & equipment, net ..................... 2,020 1,990Total assets ................................. $2,460 $2,430

Current liabilities: Accounts payable ........................... $ 140 $ 170 Accrued liabilities ........................ 70 50 Notes payable, short term .................. 100 120 Total current liabilities ............... 310 340Noncurrent liabilities: Bonds payable .............................. 500 500 Total liabilities ........................ 810 840Stockholders' equity: Preferred stock, $5 par, 5% ................ 100 100 Common stock, $5 par ....................... 200 200 Additional paid-in capital--common stock ... 200 200 Retained earnings .......................... 1,150 1,090 Total stockholders' equity ............... 1,650 1,590Total liabilities & stockholders' equity ..... $2,460 $2,430


Praeger CompanyIncome Statement


Sales (all on account) ................... $1,100Cost of goods sold ....................... 770Gross margin ............................. 330Operating expenses ....................... 130Net operating income ..................... 200Interest expense ......................... 50Net income before taxes .................. 150Income taxes (30%) ....................... 45Net income ............................... $ 105

Dividends during 19X6 totalled $45 thousand, of which $5 thousand were preferred dividends. The market price of a share of common stock on December 31, 19X6 was $30.

Required:

Compute the following for 19X6:a. Earnings per share of common stock.b. Price-earnings ratio.c. Dividend payout ratio.d. Dividend yield ratio.e. Return on total assets.f. Return on common stockholders' equity.g. Book value per share.h. Working capital.i. Current ratio.j. Acid-test (quick) ratio.k. Accounts receivable turnover.l. Average collection period (age of receivables).m. Inventory turnover.n. Average sale period (turnover in days).o. Times interest earned.p. Debt-to-equity ratio.

Answer:a. Earnings per share = (Net Income - Preferred Dividends) ÷ Average number of common shares outstanding* = ($105 - $5) ÷ 40 = $2.50

*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $5 = 40


b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above) = $30 ÷ $2.50 = 12.0

c. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above) = $1.00 ÷ $2.50 = 40.0%

*Dividends per share = Common dividends ÷ Common shares** = $40 ÷ 40 = $1.00 **See above

d. Dividend yield ratio = Dividends per share* ÷ Market price per share = $1.00 ÷ $30.00 = 3.33% *See above

e. Return on total assets = Adjusted net income* ÷ Average total assets** = $140 ÷ $2,445 = 5.73%

*Adjusted net income = Net income + [Interest expense x (1-Tax rate)] = $105 + [$50 x (1 – 0.30)] = $140

**Average total assets = ($2,460 + $2,430) ÷ 2 = $2,445

f. Return on common stockholders' equity = (Net income - Preferred dividends) ÷ Average common stockholders' equity* = ($105 - $5) ÷ $1,520 = 6.58%

*Average common stockholders' equity = ($1,550 + $1,490) ÷ 2 = $1,520

g. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding* = $1,550 ÷ 40 = $38.75



h. Working capital = Current assets - Current liabilities = $440 - $310 = $130

i. Current ratio = Current assets ÷ Current liabilities = $440 ÷ $310 = 1.42 to 1

j. Acid-test ratio = Quick assets* ÷ Current liabilities = $270 ÷ $310 = 0.87 to 1

*Quick assets = Cash + Marketable securities + Current receivables = $100 + $170 = $270

k. Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,100 ÷ $170 = 6.47 times

*Average accounts receivable = ($170 + $170) ÷ 2 = $170

l. Average collection period = 365 days ÷ Accounts receivable turnover* = 365 ÷ 6.47 = 56.4 days *See above

m. Inventory turnover = Cost of goods sold ÷ Average inventory* = $770 ÷ $110 = 7.00 times

*Average inventory = ($110 + $110)÷2 = $110

n. Average sale period = 365 days ÷ Inventory turnover* = 365 ÷7.00 = 52.1 days *See above

o. Times interest earned = Net operating income ÷ Interest expense = $200 ÷ $50 = 4.00 times

p. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $810 ÷ $1,650 = 0.49 to 1


184.Medium

Financial statements for AAR Company appear below:

AAR CompanyStatement of Financial Position

December 31

Current assets: Cash and marketable securities ............. $ 21,000 Accounts receivable, net ................... 160,000 Inventory .................................. 300,000 Prepaid expenses ........................... 9,000 Total current assets ..................... 490,000 Noncurrent assets: Plant & equipment, net ..................... 810,000 Total assets ................................. $1,300,000

Current liabilities: Accounts payable ........................... $ 75,000 Accrued liabilities ........................ 25,000 Notes payable, short term .................. 100,000 Total current liabilities ............... 200,000 Noncurrent liabilities: Bonds payable .............................. 300,000 Total liabilities ........................ 500,000 Stockholders' equity: Common stock, $5 par ....................... 100,000 Retained earnings .......................... 700,000 Total stockholders' equity ............... 800,000 Total liabilities & stockholders' equity ..... $1,300,000

AAR CompanyIncome Statement

For the Year Ended December 31(dollars in thousands)

Sales (all on account) .................. $2,100,000Cost of goods sold ...................... 1,770,000Gross margin ............................ 330,000Operating expenses ...................... 130,000Net operating income .................... 200,000Interest expense ........................ 50,000Net income before taxes ................. 150,000Income taxes (30%) ...................... 45,000Net income .............................. $ 105,000

AAR Company paid dividends of $3.15 per share during the year. The market price of the company's stock at December 31 was $63 per share. Assets at the beginning of the year totaled $1,100,000, and stockholders' equity totaled $725,000. The balance of accounts receivable at the beginning of the year was $150,000. The balance in inventory at the beginning of the year was $250,000.


Required:

Compute the following:a. Current ratio.b. Acid-test (quick) ratio.c. Average collection period (age of receivables).d. Inventory turnover.e. Times interest earned.f. Debt-to-equity ratio.g. Dividend payout ratio.h. Price-earnings ratio.i. Return on total assets.j. Return on common stockholders' equity.k. Was financial leverage positive or negative for the year. Explain.

Answer:

a. Current ratio = Current assets ÷ Current liabilities = $490,000 ÷ $200,000 = 2.45 to 1

b. Acid-test ratio = Quick assets* ÷ Current liabilities = $181,000 ÷ $200,000 = 0.91 to 1

*Quick assets = Cash + Marketable securities + Current receivables = $21,000 + $160,000 = $181,000

c. Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $2,100,000 ÷ $155,000 = 13.55 times

*Average accounts receivable = ($160,000 + $150,000) ÷ 2 = $155,000.

Average collection period = 365 days ÷ Accounts receivable turnover = 365 ÷ 13.55 = 26.94 days

d. Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,770,000 ÷ $275,000 = 6.4 times

*Average inventory = ($300,000 + $250,000) ÷ 2 = $275,000.


e. Times interest earned = Net operating income ÷ Interest expense = $200,000 ÷ $50,000 = 4.00 times

f. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $500,000 ÷ $800,000 = 0.625 to 1

g. Dividend payout ratio = Dividends per share ÷ Earnings per share. = $3.15 ÷ ($105,000/20,000 shares) = $3.15 $5.25 = 60%.

h. Dividend yield ratio = Dividends paid per share Market price per share = $3.15 ÷ $63.00 = 5%.

i. Price-earnings ratio = Market price per share ÷ Earnings per share = $63 ÷ $5.25 = 12.0.

j. Return on total assets = ((Net income + (Interest expense x (1 - Tax rate)) Average total assets = (($105,000 + (50,000 x (1 - 0.30)) (($1,100,000 + $1,300,000)/2)) = $140,000 $1,200,000 = 11.67%.

k. Return on common stockholders' equity = (Net income – Preferred dividends) Average common stockholders' equity = $105,000 [($725,000 + $800,000)/2] = 13.8%

l. Financial leverage was positive, since the rate of return to the common stockholders (13.8%) was greater than the rate of return on total assets (11.67%).


185.Medium


Financial statements for Qiang Company appear below:

Qiang CompanyStatement of Financial Position



Current liabilities: Accounts payable ........................... $ 160 $ 160 Accrued liabilities ........................ 50 70 Notes payable, short term .................. 80 110 Total current liabilities ............... 290 340Noncurrent liabilities: Bonds payable .............................. 400 400 Total liabilities ........................ 690 740Stockholders' equity: Preferred stock, $5 par, 10% ............... 120 120 Common stock, $5 par ....................... 180 180 Additional paid-in capital--common stock ... 120 120 Retained earnings .......................... 1,280 1,180 Total stockholders' equity ............... 1,700 1,600Total liabilities & stockholders' equity ..... $2,390 $2,340


Qiang CompanyIncome Statement




Required:

Compute the following for 19X6:a. Earnings per share of common stock.b. Price-earnings ratio.c. Dividend yield ratio.d. Return on total assets.e. Return on common stockholders' equity.f. Book value per share.




c. Dividend yield ratio = Dividends per share*


÷ Market price per share = $1.36 ÷ $50.00 = 2.72%


d. Return on total assets = Adjusted net income* ÷ Average total assets** = $189 ÷ $2,365 = 7.99%

*Adjusted net income = Net income + [Interest expense x (1-Tax rate)] = $161 + [$40 x (1 - 0.30)] = $189


e. Return on common stockholders' equity = (Net income – Preferred dividends) ÷ Average common stockholders' equity* = ($161 - $12)÷$1,530 = 9.74%


f. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding* = $1,580 ÷ 36 = $43.89



186.Medium


Financial statements for Qualle Company appear below:

Qualle CompanyStatement of Financial Position



Current liabilities: Accounts payable ........................... $ 130 $ 130 Accrued liabilities ........................ 40 50 Notes payable, short term .................. 250 290 Total current liabilities ............... 420 470Noncurrent liabilities: Bonds payable .............................. 470 500 Total liabilities ........................ 890 970Stockholders' equity: Preferred stock, $5 par, 10% ............... 100 100 Common stock, $10 par ...................... 160 160 Additional paid-in capital--common stock ... 170 170 Retained earnings .......................... 1,010 900 Total stockholders' equity ............... 1,440 1,330Total liabilities & stockholders' equity ..... $2,330 $2,300


Qualle CompanyIncome Statement




Required:





c. Dividend yield ratio = Dividends per share*


÷ Market price per share = $8.69 ÷ $280.00 = 3.10%



*Adjusted net income = Net income + [Interest expense x (1-Tax rate)] = $259 + [$50 x (1 - 0.30)] = $294







187.Medium


Financial statements for Quade Company appear below:

Quade CompanyStatement of Financial Position



Current liabilities: Accounts payable ........................... $ 130 $ 130 Accrued liabilities ........................ 20 40 Notes payable, short term .................. 260 270 Total current liabilities ............... 410 440Noncurrent liabilities: Bonds payable .............................. 380 400 Total liabilities ........................ 790 840Stockholders' equity: Preferred stock, $5 par, 15% ............... 120 120 Common stock, $10 par ...................... 160 160 Additional paid-in capital--common stock ... 280 280 Retained earnings .......................... 660 590 Total stockholders' equity ............... 1,220 1,150Total liabilities & stockholders' equity ..... $2,010 $1,990


Quade CompanyIncome Statement




Required:






c. Dividend yield ratio = Dividends per share* ÷ Market price per share = $12.00 ÷ $230.00 = 5.22%



*Adjusted net income = Net income + [Interest expense x (1-Tax rate)] = $280 + [$40 x (1 – 0.30)] = $308







188.Medium

Condensed financial statements of Miller Company at the beginning and at the end of the current year are given below:

Miller CompanyBalance Sheet

End of Beginning of Current Year Current Year Cash ........................... $ 10,000 $ 8,000 Marketable securities .......... 20,000 22,000 Accounts receivable ............ 90,000 110,000 Inventories .................... 150,000 100,000 Plant and equipment, net ....... 280,000 260,000 Total assets ................ $550,000 $500,000

Accounts payable ............... $ 80,000 $ 60,000 Accrued short-term liabilities 20,000 25,000 Bonds payable .................. 75,000 75,000 Preferred stock, 10%, $100 par 50,000 50,000 Common stock, $10 par .......... 100,000 100,000 Additional paid-in capital, common stock ................. 50,000 50,000 Retained earnings .............. 175,000 140,000 Total liabilities and equity $550,000 $500,000

Miller CompanyCondensed Income Statement

For the Current Year

Sales (all on account) ............ $650,000Less cost of goods sold ........... 350,000Gross margin ...................... 300,000Less operating expenses ........... 200,000Net operating income .............. 100,000Less interest expense ............. 10,000Net income before income taxes .... 90,000Less income taxes ................. 40,000Net income ........................ $ 50,000

The company paid total dividends of $15,000 during the year, of which $5,000 were to preferred stockholders. The market price of a share of common stock at the end of the year was $30.


Required:

On the basis of the information given above, fill in the blanks with the appropriate figures.

Example: The current ratio at the end of the current year would be computed by dividing $270,000 by $100,000

a. The acid-test (quick) ratio at the end of the current year would be computed by dividing _______________ by _________________.

b. The inventory turnover for the year would be computed by dividing _______________ by _________________.

c. The debt-to-equity ratio at the end of the current year would be computed by dividing _______________ by _________________.

d. The earnings per share of common stock would be computed by dividing _______________ by _________________.

e. The accounts receivable turnover for the year would be computed by dividing _______________ by _________________.

f. The times interest earned for the year would be computed by dividing _______________ by _________________.

g. The return on common stockholders' equity for the year would be computed by dividing _______________ by _________________.

h. The dividend yield would be computed by dividing _______________ by _________________.

Answer:a. $120,000; $100,000b. $350,000; $125,000c. $175,000; $375,000d. $ 45,000; 10,000 sharese. $650,000; $100,000f. $100,000; $ 10,000g. $ 45,000; $307,500h. $1; $30


189.HardCMA adapted

Shelzo Inc., a manufacturer of construction equipment is considering the purchase of one of its suppliers, Raritron Industries. The purchase has been given preliminary approval by Shelzo's Board of Directors, and several discussions have taken place between the management of both companies. Raritron has submitted financial data for the past several years. Shelzo's controller has analyzed Raritron's financial statements and prepared the following ratio analysis comparing Raritron's performance with the industry averages.

Industry 1993 1992 1991 AverageReturn on common stockholders’ equity ......... 13.03 13.02 12.98 12.96Average sale period ............ 51.16 47.29 42.15 38.63Times interest earned .......... 3.87 3.46 3.28 3.56Price-earnings ratio ........... 10.96 11.23 11.39 11.54Debt-to-equity ratio ........... 0.50 0.46 0.48 0.57Accounts receivable turnover ... 6.98 7.25 7.83 7.78Current ratio .................. 1.65 1.95 1.70 2.30Dividend yield ratio ........... 2.08 2.06 2.12 2.25

Required:

Using the information provided above for Raritron Industries:

A. 1. Identify the two ratios from the above list that would be of most interest to short-term creditors.

2. Explain what these two ratios measure. 3. What do these two ratios indicate about Shelzo Inc.?

B. 1. Identify the three ratios from the above list that would be of most interest to stockholders.

2. Explain what these three ratios measure. 3. What do these three ratios indicate about Shelzo Inc.?

C. 1. Identify the two ratios from the above list that would be of most interest to long-term creditors.

2. Explain what these two ratios measure. 3. What do these two ratios indicate about Shelzo Inc.?

Answer:A. 1. Two ratios that would be of most interest to short-term

creditors would be the average sale period and the current ratio.

2. The average sale period relates the average amount of inventory to the cost of goods sold. This ratio measures the length of time it takes on average to sell inventory and is a gauge of how well the company manages its inventory. The current ratio is calculated by dividing current assets by current liabilities. This ratio measures short-run solvency, i.e., the ability to meet current obligations.


3. For Shelzo Inc., the average sale period has been increasing and is well above the industry average, while the current ratio has been below the industry average. Both of these ratios indicate that there may be problems with the company’s liquidity position. This could be caused by poor inventory control.

B. 1. The three ratios that would be of most interest to common stockholders are the return on common stockholders’ equity, the price-earnings ratio, and the dividend yield ratio.

2. The return on common stockholders’ equity is a measure of how effectively the company has used the stockholders’ investment in the company to generate profits. The price-earnings ratio provides a measure of how the stock market perceives the company’s future earnings prospects. The higher the ratio, the more favorable the future looks for the company. The dividend yield ratio tells us what proportion of the company’s profits are paid out as cash dividends to common stockholders.

3. These three ratios are close to the industry averages and there are no discernible significant trends.

C. 1. The two ratios that would be of most interest to long-term creditors are times interest earned and the debt-to-equity ratio.

2. Times interest earned is earnings before interest expense and taxes divided by interest expense. This ratio measures debt paying ability. If stable, the company will be able to refinance or obtain new funds at reasonable rates. The debt-to-equity ratio measures the relative proportions of debt and equity in the company’s capital structure. The lower the level of the debt-to-equity ratio, the more security long-term debtors have.

3. For Shelzo Inc., times interest earned has been improving and is currently above the industry average, indicating that the company should be able to borrow additional funds if needed. The company’s debt-to-equity ratio is below the industry average which also indicates the company has the capacity to perhaps take on additional debt.


190.Medium

Financial statements for Lowe Company appear below:

Lowe CompanyStatement of Financial PositionDecember 31, Year 2 and Year 1

(dollars in thousands)

Year 2 Year 1 Cash........................................ $ 45 $ 30 Accounts receivable, net ................... 38 40 Inventory .................................. 67 60 Long-term investments....................... 162 150 Land........................................ 128 100 Building.................................... 98 50 Total assets.............................. $ 538 $ 430

Accounts payable ........................... $ 36 $ 40 Notes payable, short term .................. 24 30 Bonds payable............................... 35 50 Mortgage payable............................ 100 -0- Preferred stock,12%......................... 100 100 Common stock................................ 195 170 Retained earnings .......................... 48 40 Total liabilities & stockholders' equity.. $ 538 $ 430

Lowe CompanyIncome Statement

For the Year Ended December 31, Year 2(dollars in thousands)

Sales (all on account) ................... $145Cost of goods sold ....................... 74Gross margin ............................. $ 71Operating expenses (including interest expense of $5,000)...................... 16Net income before taxes .................. 55Income taxes (40%) ....................... 22Net income ............................... $ 33

Dividends totaled $25,000 for the year, of which $12,000 was paid to the preferred stockholder.

Required:

Compute the following for Year 2:a. Current ratio.b. Acid-test (quick) ratio.c. Average collection period (age of receivables).d. Inventory turnover.e. Return on total assets.f. Debt-to-equity ratio.g. Times-interest-earned ratio.


Answer:

a. Current ratio = Current assets ÷ Current liabilities = ($45 + $38 + $67) ÷ ($36 + $24) = 2.5 to 1

b. Acid-test ratio = Quick assets* ÷ Current liabilities = $83 ÷ ($36 + $24) = 1.38 to 1

*Quick assets = Cash + Current receivables = $45 + $38 = $83

c. Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $145 ÷ $39 = 3.72 times



d. Inventory turnover = Cost of goods sold ÷ Average inventory* = $74 ÷ $63.5 = 1.17 times

*Average inventory = ($67 + $60) ÷ 2 = $63.5

e. Return on total assets = ((Net income + (Interest expense x (1 - tax rate)) Average total assets = (($33 + ($5 x (1 - 0.40)) (($538 + $430)/2)) = $36 $484 = 7.4%.

f. Times interest earned = Earnings before interest and taxes ÷ Interest expense = ($55 + $5) ÷ $5 = 12.00 times

g. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = ($36 + $24 + $35 + $100) ÷ ($100 + $195 + $48) = $195 ÷ $343 = 0.57 to 1


191.Medium

Several investors are in the process of organizing a new company. The investors feel that $800,000 would be adequate to finance the new company's operations. Three methods are available to finance the new company:

a. All $800,000 could be obtained through the issuance of common stock.

b. Common stock could be issued to provide $400,000 with the other $400,000 obtained by issuing $100 par value, l0% preferred stock.

c. Common stock could be issued to provide $40,000 with the other $400,000 obtained by issuing bonds with an interest rate of 10%.

The investors are confident that the company could earn $175,000 each year before interest and taxes. The tax rate is 40%.

Required:

a. Assuming that the estimates are correct, compute the net income available to common stockholders under each of the three financing methods proposed above.

b. Using the income data computed in (a) above, compute the return on common stockholders’ equity under each of the three methods.

c. Why do methods B and C provided a greater return on common equity than does method A? Why does method C provide a greater return on common equity than method B?

Answer:

a. Net income available to common stockholders:

Method A Method B Method CIncome before interest and taxes... $175,000 $175,000 $175,000Deduct interest expense: 0.10 x $400,000.................. ________ ________ 40,000Income before taxes................ $175,000 $175,000 $135,000Deduct income taxes (40%).......... 70,000 70,000 54,000Net income......................... $105,000 $105,000 $ 81,000Deduct preferred dividends: 0.10 x $400,000................... - o 40,000 - o Net income to common stockholders.. $105,000 $ 65,000 $ 81,000


b. Return on common equity: Method A Method B Method CNet income to common stockholders $105,000 $ 65,000 $ 81,000Common stockholders' investment... $800,000 $400,000 $400,000Return on common equity........... 13.10% 16.25% 20.25%

c. Methods B and C provide a greater return on common equity than Method A due to the effect of positive leverage. Methods B and C each contain sources of funds that require a fixed annual return on the funds provided. This fixed annual return is less than what is being earned on the assets of the company, with the difference going to common stockholders.

Method C uses debt and provides more leverage than Method B in which preferred stock is issued. The difference is due to the deductibility for tax purposes of the interest on debt, whereas dividends on preferred stock are not deductible for tax purposes.


192.Medium


Financial statements for Raridan Company appear below:

Raridan CompanyStatement of Financial Position


19X6 19X5 Current assets: Cash and marketable securities ............ $ 140 $ 140 Accounts receivable, net .................. 190 170 Inventory ................................. 100 110 Prepaid expenses .......................... 70 70 Total current assets .................... 500 490 Noncurrent assets: Plant & equipment, net .................... 1,540 1,520 Total assets ................................ $2,040 $2,010

Current liabilities: Accounts payable .......................... $ 110 $ 110 Accrued liabilities ....................... 50 40 Notes payable, short term ................. 110 110 Total current liabilities .............. 270 260 Noncurrent liabilities: Bonds payable ............................. 280 300 Total liabilities ....................... 550 560 Stockholders' equity: Preferred stock, $10 par, 5% .............. 120 120 Common stock, $10 par ..................... 200 200 Additional paid-in capital--common stock .. 260 260 Retained earnings ......................... 910 870 Total stockholders' equity .............. 1,490 1,450 Total liabilities & stockholders' equity .... $2,040 $2,010

Raridan CompanyIncome Statement




Required:

Compute the following for 19X6:a. Current ratio.b. Acid-test (quick) ratio.c. Average collection period (age of receivables).d. Inventory turnover.e. Times interest earned.f. Debt-to-equity ratio.

Answer:a. Current ratio = Current assets ÷ Current liabilities = $500 ÷ $270 = 1.85 to 1

b. Acid-test ratio = Quick assets* ÷ Current liabilities = $330 ÷ $270 = 1.22 to 1


c. Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,900 ÷ $180 = 10.56 times



d. Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,330 ÷ $105 = 12.67 times

*Average inventory = ($100 + $110) ÷ 2 = $105

e. Times interest earned = Net operating income ÷ Interest expense = $350 ÷ $30 = 11.67 times

f. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $550 ÷ $1,490 = 0.37 to 1


193.Medium


Financial statements for Rarig Company appear below:

Rarig CompanyStatement of Financial Position



Current liabilities: Accounts payable .......................... $ 170 $ 190 Accrued liabilities ....................... 60 60 Notes payable, short term ................. 80 120 Total current liabilities .............. 310 370 Noncurrent liabilities: Bonds payable ............................. 460 500 Total liabilities ....................... 770 870 Stockholders' equity: Preferred stock, $5 par, 15% .............. 100 100 Common stock, $5 par ...................... 160 160 Additional paid-in capital—common stock .. 110 110 Retained earnings ......................... 950 780 Total stockholders' equity .............. 1,320 1,150 Total liabilities & stockholders' equity .... $2,090 $2,020

Rarig CompanyIncome Statement




Required:








d. Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,260 ÷ $185 = 6.81 times



f. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $770 ÷ $1,320 = 0.58 to 1


194.Medium


Financial statements for Rarity Company appear below:

Rarity CompanyStatement of Financial Position



Current liabilities: Accounts payable .......................... $ 180 $ 170 Accrued liabilities ....................... 60 80 Notes payable, short term ................. 240 240 Total current liabilities .............. 480 490 Noncurrent liabilities: Bonds payable ............................. 480 500 Total liabilities ....................... 960 990 Stockholders' equity: Preferred stock, $10 par, 5% .............. 100 100 Common stock, $5 par ...................... 220 220 Additional paid-in capital--common stock .. 200 200 Retained earnings ......................... 460 370 Total stockholders' equity .............. 980 890 Total liabilities & stockholders' equity .... $1,940 $1,880

Rarity CompanyIncome Statement


Sales (all on account) ................... $1,100Cost of goods sold ....................... 770Gross margin ............................. 330Operating expenses ....................... 130Net operating income ..................... 200Interest expense ......................... 50Net income before taxes .................. 150Income taxes (30%) ....................... 45Net income ............................... $ 105


Required:




*Quick assets = Cash + Marketable securities + + Current receivables = $210 + $130 = $340




d. Inventory turnover = Cost of goods sold ÷ Average inventory* = $770 ÷ $100 = 7.70 times



f. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $960 ÷ $980 = 0.98 to 1


Documents

Test Bank - Chapter18 FS Analysis