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ACC 206 Week 10 Quiz – Strayer

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Quiz 8 Chapter18

FINANCIALSTATEMENTANALYSIS

CHAPTERSTUDYOBJECTIVES

1.Discusstheneedforcomparativeanalysis.

2.Identifythetoolsoffinancialstatementanalysis.

3.Explainandapplyhorizontal(trend)analysis.

4.Describeandapplyverticalanalysis.

5.Identifyandcomputeratiosusedinanalyzingafirm'sliquidity,profitability,andsolvency.

6.Understandtheconceptofearningpower,andindicatehowirregularitemsarepresented.

7.Understandtheconceptofqualityofearnings.

TRUE-FALSESTATEMENTS

1. Intracompanycomparisonsofthesamefinancialstatementitemscanoftendetect changes infinancialrelationships andsignificanttrends.

2. Calculatingfinancialratiosisafinancialreportingrequirementundergenerallyaccepted accountingprinciples.

3. Measuresofacompany'sliquidityareconcernedwiththefrequencyandamountsof dividend payments.

4. Analysisof financialstatementsis enhancedwith theuseof comparativedata.

5. Comparisonsofcompanydatawithindustryaveragescanprovidesomeinsightintothe company's relativepositionintheindustry.

6. Verticalandhorizontalanalysesareconcernedwiththeformatusedtopreparefinancial statements.

7. Horizontal,vertical,andcircularanalysesarethemostcommontoolsoffinancial statementanalysis.

8. Horizontalanalysisisatechniqueforevaluatingafinancialstatementiteminthecurrent yearwith otheritemsinthecurrentyear.

9. Anothernamefortrendanalysisishorizontalanalysis.

10. Ifacompanyhassalesof$110in2008and$154in2009,thepercentageincreasein sales from2008to2009is140%.

11. Inhorizontalanalysis,ifanitemhasanegativeamountinthebaseyear,andapositive amount inthefollowingyear,nopercentagechangeforthatitemcanbecomputed.

12. Commonsizeanalysisexpresseseachitemwithinafinancialstatementintermsofa percent of a baseamount.

13. Verticalanalysisisa moresophisticatedanalyticaltoolthanhorizontal analysis.

14. Verticalanalysisisusefulinmakingcomparisonsofcompaniesofdifferentsizes.

15. Meaningfulanalysisoffinancialstatementswillincludeeitherhorizontalorvertical analysis,butnotboth.

16. Usingvertical analysisoftheincomestatement,acompany'snetincome asapercentage ofnetsalesis10%;therefore,thecostofgoodssoldasapercentageofsalesmustbe 90%.

17. Intheverticalanalysisoftheincomestatement,eachitemisgenerallystatedasa percentage of net income.

18. A ratiocanbeexpressedasapercentage,arate,oraproportion.

19. Asolvencyratiomeasurestheincomeoroperatingsuccessofanenterpriseforagiven period of time.

20. Thecurrentratiois ameasure of alltheratioscalculatedforthe currentyear.

21. Inventoryturnovermeasuresthenumberoftimesontheaveragetheinventorywassold during theperiod.

22. Profitabilityratiosarefrequentlyusedasabasisforevaluatingmanagement'soperating effectiveness.

23. Therateofreturnontotalassetswillbegreaterthantherateofreturnoncommon stockholders' equity ifthe companyhas beensuccessful intrading ontheequityat again.

24. Fromacreditor's pointofview,thehigherthetotaldebttototalassetsratio,thelowerthe risk that thecompanymaybeunableto payits obligations.

25. Acurrentratioof1.2to1indicatesthatacompany'scurrentassetsexceeditscurrent liabilities.

26. Usingborrowedmoneytoincreasetherateofreturnoncommonstockholders'equityis called "tradingontheequity."

27. Whenthedisposalofasignificantsegmentoccurs,theincomestatementshouldreport both incomefromcontinuingoperationsandincome(loss)fromdiscontinuedoperations.

28. Aneventortransactionshouldbeclassifiedasanextraordinaryitemifitisunusualin nature orifit occurs infrequently.

29. Variationsamongcompaniesintheapplicationofgenerallyacceptedaccounting principles mayreducequalityofearnings.

30. Proformaincomeusuallyexcludesitemsthatthecompanythinksareunusualor nonrecurring.

Additional True-FalseQuestions

31. Thethreebasictoolsofanalysisarehorizontalanalysis,verticalanalysis,andratio analysis.

32. A percentagechangecan becomputedonlyif thebaseamountiszeroorpositive.

33. Inverticalanalysis, the baseamountinanincomestatementisusuallynetsales.

34. Profitabilityratiosmeasuretheabilityoftheenterprisetosurviveoveralongperiodof time.

35. Thedaysin inventoryiscomputedbymultiplyinginventoryturnoverby365.

36. Extraordinaryitemsarereportednetofapplicabletaxesinaseparatesectionofthe income statement.

MULTIPLECHOICEQUESTIONS

37. Whichoneof thefollowingisprimarilyinterestedintheliquidityof acompany? a.Federalgovernment

b.Stockholders

c.Long-termcreditors d.Short-termcreditors

38. Whichoneof thefollowing isnot a characteristic generallyevaluatedin analyzingfinancial statements?

a.Liquidity

b.Profitabilityc.Marketability d.Solvency

39. Inanalyzingthefinancialstatementsofacompany,asingleitemonthefinancial statements

a.shouldbereported inbold-facetype.

b.ismoremeaningfulif comparedtootherfinancialinformation. c.is significantonlyifit is large.

d.shouldbeaccompaniedbyafootnote.

40. Short-termcreditorsareusuallymostinterestedinevaluating a.solvency.

b.liquidity.

c.marketability. d.profitability.

41. Long-termcreditorsareusuallymostinterestedinevaluating a.liquidityandsolvency.

b.solvencyandmarketability. c.liquidityandprofitability.

d.profitabilityandsolvency.

42. Stockholdersaremostinterestedinevaluating a.liquidityandsolvency.

b.profitabilityandsolvency. c.liquidityandprofitability.

d.marketabilityandsolvency.

FinancialStatementAnalysis 18-7

43. A stockholderis interestedintheabilityof afirmto a.payconsistentdividends.

b.appreciateinshareprice.c.surviveovera longperiod. d.all of these.

44. Comparisonsoffinancialdatamadewithina companyarecalled a.intracompanycomparisons.

b.interiorcomparisons.

c.intercompanycomparisons. d.intramuralcomparisons.

45. Atechniqueforevaluatingfinancialstatementsthatexpressestherelationshipamong selected items offinancialstatementdatais

a.commonsizeanalysis. b.horizontalanalysis.

c.ratioanalysis.

d.verticalanalysis.

46. Whichoneof thefollowingisnotatool infinancialstatementanalysis? a.Horizontalanalysis

b.Circularanalysis c.Verticalanalysis d.Ratioanalysis

47. Inanalyzingfinancialstatements,horizontalanalysis is a a.requirement.

b.tool.

c.principle. d.theory.

48. Horizontalanalysisis also called a.linearanalysis.

b.verticalanalysis. c.trendanalysis.

d.commonsizeanalysis.

49. Verticalanalysisisalsoknownas a.perpendicularanalysis.

b.commonsizeanalysis. c.trendanalysis.

d.straight-lineanalysis.

50. Inratioanalysis,theratiosareneverexpressedasa a.rate.

b.negativefigure. c.percentage.

d.simpleproportion.

18-8

51. Theformulaforhorizontalanalysisofchangessincethebaseperiodisthecurrentyear amount

a.dividedbythebaseyearamount.

b.minusthebaseyearamountdividedbythe base yearamount.c.minusthebase yearamountdividedbythe currentyearamount. d.plusthebaseyearamountdividedbythebase yearamount.

52. Horizontalanalysisevaluatesaseriesoffinancialstatementdataovera periodof time a.that hasbeenarrangedfromthehighestnumbertothelowestnumber.

b.that hasbeenarrangedfromthelowestnumbertothehighestnumber. c.todeterminewhichitemsareinerror.

d.todeterminetheamountand/orpercentageincreaseordecreasethathastaken place.

53. Horizontalanalysisevaluatesfinancialstatementdata a.withina periodof time.

b.overa periodof time. c.onacertaindate.

d.as it mayappearinthefuture.

54. Assumethefollowingsalesdatafor a company:

2010 $1,000,000 2009 900,000 2008 750,000 2007 600,000

If2007isthebaseyear, whatis thepercentageincreaseinsalesfrom2007to 2009? a.100%

b.150% c.50%d.66.7%

55. Comparativebalancesheetsareusuallypreparedfor a.oneyear.

b.twoyears.c.threeyears. d.four years.

56. Horizontalanalysisisappropriatelyperformed a.onlyonthe incomestatement.

b.onlyonthebalancesheet.

c.onlyonthestatementof retainedearnings. d.onallthreeofthesestatements.

57. Ahorizontalanalysisperformedonastatementofretainedearningswouldnotshowa percentagechangein

a.dividendspaid. b.netincome.

c.expenses.

d.beginningretained earnings.

FinancialStatementAnalysis 18-9

58. Under whichofthefollowingcasesmaya percentagechangebecomputed? a.Thetrendofthe balancesisdecreasingbutallbalancesarepositive.

b.Thereis nobalanceinthebaseyear.

c.There is apositivebalancein thebaseyear andanegativebalancein thesubsequent year.

d.There is anegativebalancein thebaseyearandapositivebalanceinthe subsequent year.

59. Assumethefollowingsalesdatafor a company:

2009 $945,000 2008 780,000 2007 650,000

If2007isthebaseyear,whatis thepercentageincreaseinsalesfrom2007to 2008? a.25%

b.20%c.125% d.143%

60. Assumethefollowingcost ofgoodssolddatafora company:

2009 $1,500,000 2008 1,200,000 2007 900,000

If2007isthebaseyear,whatisthepercentage increase incostofgoodssoldfrom2007 to2009?

a.167% b.67%c.60% d.40%

Usethefollowing informationforquestions61–62:

MoonBeam,Inc.hasthefollowingincomestatement(inmillions):

MOON BEAM, INC. IncomeStatement

FortheYearEndedDecember31,2008

NetSales $180 CostofGoodsSold 120 GrossProfit 60 OperatingExpenses 33NetIncome $27

61. Usingverticalanalysis,whatpercentageisassignedto Costof GoodsSold? a. 67%

b. 33% c.100%

d.Noneof theabove

18-10

62. Usingverticalanalysis,whatpercentageis assignedto NetIncome? a.100%

b.85% c.15%

d.Noneof theabove

63. Verticalanalysisisalsocalled a.commonsizeanalysis.

b.horizontalanalysis. c.ratioanalysis.

d.trendanalysis.

64. Verticalanalysisisa techniquewhichexpresseseachitemwithinafinancialstatement a.in dollarsandcents.

b.intermsof apercentageoftheiteminthepreviousyear. c.in terms of apercentofa baseamount.

d.starting withthe highestvaluedowntothe lowestvalue.

65. Incommonsizeanalysis,

a.a baseamountisrequired. b.abase amountisoptional.

c.thesamebaseisusedacross allfinancialstatementsanalyzed.

d.theresultsof thehorizontalanalysisarenecessaryinputsforperformingtheanalysis.

66. Inperforminga verticalanalysis,thebaseforprepaid expensesis a.totalcurrentassets.

b.totalassets.

c.totalliabilitiesandstockholders'equity. d.prepaidexpenses.

67. Inperforminga verticalanalysis,thebaseforsalesrevenuesontheincomestatementis a.netsales.

b.sales.

c.net income.

d.costof goodsavailablefor sale.

68. Inperforminga verticalanalysis,thebaseforsalesreturnsandallowancesis a.sales.

b.salesdiscounts. c.netsales.

d.totalrevenues.

69. Inperforminga verticalanalysis,thebaseforcost ofgoodssoldis a.totalsellingexpenses.

b.netsales.

c.totalrevenues. d.totalexpenses.

FinancialStatementAnalysis 18-11

70. Eachof thefollowingisa liquidityratioexceptthe a.acid-testratio.

b.currentratio.

c.debttototal assetsratio. d.inventoryturnover.

71. A ratiocalculatedinthe analysisof financialstatements

a.expressesamathematicalrelationshipbetweentwonumbers. b.showsthepercentageincreasefromone yeartoanother.

c.restatesallitemsonafinancialstatementintermsofdollarsofthesamepurchasing power.

d.ismeaningfulonlyifthenumeratorisgreaterthanthedenominator.

72. A liquidityratiomeasuresthe

a.incomeoroperatingsuccessof anenterpriseovera periodoftime. b.abilityoftheenterpriseto surviveovera longperiodof time.

c.short-termabilityoftheenterprisetopayitsmaturingobligationsandtomeet unexpectedneedsforcash.

d.numberoftimesinterestisearned.

73. Thecurrentratiois

a.calculatedbydividingcurrentliabilitiesbycurrentassets.

b.usedtoevaluateacompany'sliquidityandshort-termdebtpayingability. c.usedtoevaluate acompany's solvencyandlong-term debtpayingability. d.calculatedbysubtractingcurrentliabilitiesfromcurrentassets.

74. Theacid-test(quick)ratio

a.isusedtoquickly determineacompany'ssolvencyand long-termdebtpayingability. b.relatescash, short-terminvestments,andnetreceivablestocurrentliabilities.

c.iscalculatedbytakingoneitemfromtheincomestatementandoneitemfromthe balance sheet.

d.isthesameasthecurrentratioexceptitis roundedtothenearest wholepercent.

75. WalkerClothingStorehadabalanceintheAccountsReceivableaccountof$780,000at thebeginningoftheyearandabalanceof$820,000attheendoftheyear.Netcredit salesduringtheyearamountedto$8,000,000.Theaveragecollectionperiodofthe receivables interms ofdays was

a.30 days.b.365days. c.10days. d.37days.

76. ParrHardwareStorehadnetcreditsalesof$5,200,000andcostofgoodssoldof $4,000,000fortheyear.TheAccountsReceivablebalancesatthebeginningandendof theyearwere$600,000and$700,000,respectively.Thereceivablesturnover was

a.7.4times. b.8.7times. c.6.2times. d.8times.

18-12

Usethefollowing informationforquestions77–78.

WatersDepartmentStorehadnetcreditsalesof$12,000,000andcostofgoodssoldof $9,000,000fortheyear.Theaverageinventoryfor the year amountedto $2,000,000.

77. Inventoryturnoverforthe yearis a.6 times.

b.10.5times. c.4.5times. d.3times.

78. Theaveragenumberof daysininventoryduringthe yearwas a.122days.

b.81days. c.61days. d.35days.

79. Eachof thefollowingis includedincomputingtheacid-testratio except a.cash.

b.inventory.c.receivables.

d.short-terminvestments.

80. Whichoneof thefollowing wouldnot beconsidereda liquidityratio? a.Currentratio

b.Inventoryturnover c.Acid-testratio

d.Returnonassets

81. Assetturnovermeasures

a.howoftenacompanyreplacesitsassets.

b.howefficientlyacompanyusesits assetstogeneratesales.c.theportionof theassetsthathavebeenfinancedbycreditors. d.theoverallrateof returnonassets.

82. Profitmarginis calculatedbydividing a.salesbycost ofgoodssold.

b.grossprofitbynetsales.

c.net incomebystockholders'equity. d.netincomebynetsales.

Usethefollowing informationforquestions83–84.

RaneyCorporationhadnetincomeof$200,000andpaiddividendstocommonstockholdersof $50,000in2008.Theweightedaveragenumberofsharesoutstandingin2008was50,000 shares.RaneyCorporation'scommonstockissellingfor$40pershareontheNewYorkStock Exchange.

83. RaneyCorporation's price-earningsratiois a.2.5times.

b.10times.c.13.3times. d.4times.

FinancialStatementAnalysis 18-13

84 RaneyCorporation's payout ratiofor2008is a.$4pershare.

b33.3%. c.25%.d.10%.

85 Holt Companyreportedthefollowingon its income statement:

Incomebeforeincometaxes Incometaxexpense

Netincome

$420,000

120,000$300,000

Ananalysisoftheincomestatementrevealedthatinterestexpensewas$50,000.Holt Company'stimesinterestearnedwas

a.9 times. b.8times. c.7times. d.6times.

86. Thedebttototalassetsratiomeasures a.thecompany'sprofitability.

b.whetherinterest canbepaidondebtinthecurrentyear. c.theproportionofinterestpaidrelativetodividendspaid. d.thepercentageofthetotalassetsprovidedbycreditors.

87. Tradingontheequity(leverage)referstothe a.amountof workingcapital.

b.amountof capitalprovidedbyowners.

c.useof borrowedmoneyto increasethereturnto owners. d.numberoftimesinterestis earned.

88. ThecurrentassetsofKileCompanyare$150,000.Thecurrentliabilitiesare$120,000. Thecurrentratioexpressedasaproportion is

a.125%. b.1.25:1 c..80:1

d.$150,000÷$120,000.

89. Thecurrentratiomayalso bereferredto asthe a.shortrunratio.

b.acid-testratio.

c.workingcapitalratio. d.contemporaryratio.

90. A weaknessofthecurrentratiois a.thedifficultyof thecalculation.

b.that itdoesn'ttakeintoaccountthecompositionof thecurrentassets. c.thatitis rarelyusedbysophisticatedanalysts.

d.that itcanbeexpressedasapercentage,asarate, orasaproportion.

18-14

91. A suppliertoacompanywouldbemostinterestedinthecompany’s a.asset turnover.

b.profitmargin. c.currentratio.

d.earningspershare.

92. Whichoneofthefollowingratioswouldnotlikelybeusedbyashort-termcreditorin evaluatingwhethertoselloncreditto acompany?

a.Currentratio b. Acid-testratio c. Assetturnover

d.Receivablesturnover

93. Ratiosareusedastoolsinfinancialanalysisa.insteadof horizontal and verticalanalyses.

b.becausetheymayprovideinformationthatisnotapparentfrominspectionofthe individualcomponents of theratio.

c.becauseevensingleratiosbythemselvesarequitemeaningful. d.becausetheyareprescribedbyGAAP.

94. Theratiosthat areusedto determineacompany'sshort-termdebtpaying abilityare a.assetturnover,timesinterest earned,currentratio, andreceivablesturnover.

b.timesinterestearned,inventory turnover,currentratio,andreceivables turnover. c.timesinterestearned,acid-test ratio,currentratio,andinventoryturnover.

d.currentratio,acid-testratio, receivablesturnover,andinventoryturnover.

95. A measureof thepercentage of eachdollarof salesthatresultsinnetincome is a.profit margin.

b.returnonassets.

c.returnoncommon stockholders'equity. d.earningspershare.

Usethefollowing informationforquestions96–97.

RisenCompanyhad$250,000ofcurrentassetsand$90,000ofcurrentliabilitiesbefore borrowing$50,000fromthebankwitha 3-monthnotepayable.

96. WhateffectdidtheborrowingtransactionhaveontheamountofRisenCompany's working capital?

a.Noeffect

b. $50,000increase c. $90,000increase d.$50,000decrease

97. WhateffectdidtheborrowingtransactionhaveonRisenCompany'scurrentratio? a.Theratioremained unchanged.

b.Thechangeinthecurrentratiocannotbedetermined. c.The ratiodecreased.

d.Theratioincreased.

FinancialStatementAnalysis 18-15

98. Ifequal amountsareaddedtothenumeratorand thedenominatorofthecurrent ratio, the ratiowill always

a.increase. b.decrease.

c.staythesame. d.equalzero.

99. Theacid-testratio

a.isaquick calculationofanapproximationof thecurrentratio. b.doesnot includeallcurrentliabilitiesinthecalculation.

c.doesnotincludeinventoryaspart ofthenumerator.

d.doesincludeprepaidexpensesas part of the numerator.

100. Ifacompanyhasanacid-testratioof1.2:1,whatrespectiveeffectswilltheborrowingof cash byshort-termdebtandcollectionof accountsreceivablehaveontheratio?

Short-termBorrowing a. Increase

b. Increase c. Decrease d. Decrease

Collection ofReceivableNoeffectIncrease

Noeffect Decrease

101. Acompanyhasareceivablesturnoverof10times.Theaveragenetceivablesduringthe period are$500,000.Whatistheamount of netcreditsalesfortheperiod?

a.$50,000

b.$5,000,000 c.$600,000

d.Cannotbedeterminedfromtheinformationgiven

102. If theaveragecollectionperiodis 35days,whatisthereceivablesturnover? a.9.49times

b.10.43times c.5.22times

d.Noneof these

103. Ageneralruleto useinassessingtheaveragecollectionperiodisthat a.it shouldnotexceed30days.

b.itcanbeany lengthas long asthecustomercontinuestobuymerchandise. c.it shouldnotgreatlyexceedthediscountperiod.

d.itshouldnotgreatlyexceedthecredittermperiod.

104. Inventoryturnoveriscalculatedbydividing

a.costofgoodssoldbythe endinginventory.

b.costofgoodssoldbythe beginninginventory. c.costofgoodssoldbytheaverageinventory.d.averageinventorybycostofgoodssold.

105. Acompanyhasan averageinventoryon handof$100,000andthedaysin inventoryis73 days.Whatisthecostofgoodssold?

a.$500,000b.$7,300,000 c.$1,000,000 d.$3,650,000

18-16

106. A successfulgrocerystorewouldprobablyhave a.a lowinventoryturnover.

b.a highinventoryturnover. c.zeroprofitmargin.

d.lowvolume.

107. Anaircraftcompanywouldmostlikelyhave a.ahighinventoryturnover.

b.lowprofitmargin. c.highvolume.

d.a lowinventoryturnover.

108. Net salesare$4,500,000,beginningtotalassetsare $2,100,000,andthe assetturnoveris 3.0times.Whatistheending totalassetbalance?

a.$1,500,000 b.$900,000c.$2,100,000 d.$1,200,000

109. Earningspershareiscalculated a.onlyfor commonstock.

b.onlyfor preferredstock.

c.forcommonand preferredstock. d.onlyfortreasurystock.

110. Whichofthefollowingisnot a profitabilityratio? a.Payoutratio

b.Profitmargin

c.Timesinterestearned

d.Returnoncommonstockholders'equity

111. Timesinterestearnedisalsocalledthe a.moneymultiplier.

b.interestcoverageratio. c.couponcoverageratio. d.premiumratio.

112. Theratiothatusesweightedaveragecommonsharesoutstandinginthedenominatoris the

a.price-earningsratio.

b.returnoncommonstockholders'equity. c.earningspershare.

d.payoutratio.

113. Net incomedoesnotappearinthenumerator ofthe a.profitmargin.

b.returnonassets.

c.returnoncommon stockholders'equity. d.payoutratio.

FinancialStatementAnalysis 18-17

114. FallClothingStorehadabalanceintheAccountsReceivableaccountof$820,000atthe beginningoftheyearandabalanceof$880,000attheendoftheyear.Netcreditsales during theyear amountedto $6,120,000.Thereceivablesturnover ratiowas

a.7.2times. b.7times.c.6.9times. d.6.8times.

115. FallClothingStorehadabalanceintheAccountsReceivableaccountof$810,000atthe beginningoftheyearandabalanceof$850,000attheendoftheyear.Netcreditsales duringtheyearamountedto$5,814,980.Theaveragecollectionperiodofthereceivables in termsofdays was

a.50 days.b.52.1days. c. 365days. d.52.9days.

Usethefollowing informationforquestions116–117.

LuthorCorporationhadnetincomeof$160,000andpaiddividendstocommonstockholdersof $40,000in2008.Theweightedaveragenumberofsharesoutstandingin2008was50,000 shares.LuthorCorporation'scommonstockissellingfor$50pershareontheNewYorkStock Exchange.

116. LuthorCorporation'sprice-earningsratiois a.3.2times.

b.15.6times. c.10times.d.5 times.

117. LuthorCorporation'spayout ratiofor2008is a.$5pershare.

b.25%. c.20%. d.12.5%.

118. RayeCompany reportedthefollowingon itsincome statement:

Incomebeforeincometaxes Incometaxexpense

Netincome

$500,000

150,000$350,000

Ananalysisoftheincomestatementrevealedthatinterestexpensewas$80,000.Raye Company'stimesinterestearnedwas

a.8 times.

b.7.25times. c.6.25times. d.4.4times.

18-18

Usethefollowing informationforquestions119-125.

ThefollowinginformationpertainstoSohoCompany.Assumethatallbalancesheetamounts represent both averageandendingbalancefigures. Assumethatallsaleswereoncredit.

Assets

Cashandshort-terminvestments Accountsreceivable (net) Inventory

Property,plantandequipment TotalAssets

Liabilities and Stockholders’EquityCurrentliabilities

Long-termliabilities Stockholders’equity—common

TotalLiabilitiesandStockholders’Equity

$40,000 25,000 20,000

210,000$295,000

$60,000 85,000

150,000$295,000

Sales

Costofgoodssold Grossmargin Operatingexpenses

Netincome

Income Statement

$85,000

45,000 40,000

20,000$20,000

Numberof sharesof commonstock 6,000 Marketprice of commonstock $20 Dividendspershare .90

119. Whatisthecurrentratioforthiscompany? a.1.42

b..80c.1.16 d..60

120. Whatisthereceivablesturnoverforthiscompany? a.2.8times

b.2timesc.3.4times d.3times

121. Whatistheinventoryturnoverforthiscompany? a.2 times

b.2.25times c.1time

d..44times

122. Whatisthereturnonassetsforthiscompany? a.6.8%

b.10.5% c.11.7% d.26.7%

FinancialStatementAnalysis 18-19

123. Whatisthe profitmarginforthiscompany? a.42.86%

b.18.75% c.23.5% d.15.0%

124. Whatisthereturnoncommon stockholders’equityforthiscompany? a.13.3%

b.5%

c.23.3% d.53.3%

125. Whatisthe price-earningsratioforthiscompany? a.6 times

b.2.5times c.8timesd.4 times

Usethefollowing informationforquestions126–129.

ThefollowinginformationpertainstoCasheCompany.Assumethatallbalancesheetamounts represent both averageandendingbalancefigures.Assumethatallsaleswereoncredit.

AssetsCashandshort-terminvestments Accountsreceivable (net)

Inventory

Property,plantandequipment TotalAssets

$40,000 30,000 25,000

215,000$310,000

Liabilitiesand Stockholders’Equity Currentliabilities

Long-termliabilities Stockholders’equity—common

TotalLiabilitiesandStockholders’Equity

$60,000 95,000

155,000$310,000

Sales

Costofgoodssold Grossmargin Operatingexpenses

Netincome

Income Statement

$90,000

45,000 45,000

20,000$25,000

Numberof sharesof commonstock 6,000 Marketprice of commonstock $20 Dividendspershare 1.00

126. Whatisthereturnonassetsforthiscompany? a.6.8%

b.10.5% c.8.1% d.16.1%

18-20

127. Whatisthe profitmarginforthiscompany? a.50.0%

b.55.6% c.23.5% d.27.8%

128. Whatisthereturnoncommon stockholders’equityforthiscompany? a.7.3%

b.16.1% c.23.5% d.53.3%

129. Whatisthe price-earningsratioforthiscompany? a.6 times

b.4.2times c.8timesd.4.8times

Usethefollowing informationforquestions130–131.

ThefollowinginformationisavailableforCharlesCompany:

Accountsreceivable Inventory

Netcreditsales Costofgoodssold Netincome

2008

$360,000 280,000 3,000,000 1,200,000 300,000

2007

$400,000 320,000 1,400,000 1,060,000 170,000

130. Thereceivablesturnoverratiofor2008 is a.8.3times.

b. 3.9times. c. 7.9times. d.10.0times.

131. Theinventoryturnoverratiofor2008is a.4.3times.

b.4.0times. c.2.0times. d.2.4times.

Usethefollowing informationforquestions132–134.

Thefollowingamountsweretakenfromthefinancialstatementsof PalmerCompany:

Totalassets Netsales Grossprofit Netincome

Weightedaveragenumberof commonsharesoutstanding Marketprice of commonstock

2008

$800,000 720,000 352,000 144,000 120,000 $36

2007

$1,000,000 650,000 320,000 117,000 120,000$40

FinancialStatementAnalysis 18-21

132. Thereturnonassetsratiofor2008is a.18%.

b.16%. c.36%. d.32%.

133. Theprofitmarginratiofor 2008is a.10%.

b.15%. c.20%. d.30%.

134. Theprice-earningsratiofor2008is a.30times.

b.20times. c.10times. d.5times.

Usethefollowing informationforquestions135–136.

PanzaCorporationhadnetincomeof$250,000andpaiddividendstocommonstockholdersof $50,000in2008.Theweightedaveragenumberofsharesoutstandingin2008was50,000 shares.PanzaCorporation'scommonstockissellingfor$40pershareontheNewYorkStock Exchange.

135. PanzaCorporation'sprice-earningsratiois a.2 times.

b.8 times.c.10times. d.5 times.

136. PanzaCorporation'spayout ratiofor 2008is a.$5pershare.

b.25%. c.20%. d.12.5%.

137. Ester’sBunnyBarnhasexperienceda$40,000lossduetotornadodamagetoits inventory.Tornadoshaveneverbeforeoccurredinthisarea.Assumingthatthe company’staxrateis30%,whatamountwillbereportedforthislossontheincome statement?

a.$40,000 b.$28,000 c.$12,000 d.$36,000

138. WengerCompanyreportedincomebeforetaxes of$600,000andanextraordinarylossof $150,000.Assumethatthecompany’staxrateis30%. Whatamountswillbereportedon theincomestatementforincomebeforeirregularitemsandextraordinaryitems, respectively?

a.$420,000and$150,000 b.$420,000 and$105,000 c.$495,000and$150,000 d.$495,000and $105,000

18-22

139. KandyKaneCorporationhasincomebeforetaxesof$400,000andanextraordinarygain of$100,000. Iftheincometaxrateis25%onallitems,theincomestatement shouldshow income beforeirregularitemsandextraordinaryitems,respectively,of

a.$325,000and$100,000. b.$325,000and$75,000.c.$300,000and$100,000. d.$300,000and$75,000.

140. HardyInc.hasaninvestmentinavailable-for-salesecuritiesof$50,000.Thisinvestment experiencedanunrealizedlossof$3,000duringthecurrentyear.Assuminga35%tax rate, the effectof thisloss oncomprehensiveincomewill be

a.no effect.

b.$50,000increase. c.$17,500decrease. d.$3,000decrease.

141. The disposalof a significant segmentofabusinessiscalled a.achangeinaccountingprinciple.

b.an extraordinaryitem. c.anotherexpense.

d.discontinuedoperations.

142. ABCCompanyreportsincomebeforeincometaxesof$1,800,000andhadanextra-ordinary loss of$600,000.If thetaxrateis30%,

a.theincomebeforetheextraordinary itemis$1,440,000.

b.theextraordinarylosswouldbereportedontheincome statementat$600,000. c.the incomebeforetheextraordinary itemis$1,260,000.

d.theextraordinarylosswillbereportedat$180,000.

143. Evers,Inc.disposesofanunprofitablesegmentofitsbusiness.Theoperationofthe segmentsuffereda$240,000lossintheyearofdisposal.Thelossondisposalofthe segmentwas$120,000.Ifthetaxrateis30%,andincomebeforeincometaxeswas $1,500,000,

a.theincometaxexpenseontheincomebeforediscontinuedoperationsis $342,000. b.theincomefromcontinuingoperationsis$1,050,000.

c.net incomeis$1,140,000.

d.thelossesfrom discontinuedoperationsarereportednetof incometaxes at $180,000.

144. Eachof thefollowingisanextraordinaryitemexceptthe a.effectsof majorcasualties,ifrareinthearea.

b.effectsof anewlyenactedlaworregulation.

c.expropriationof propertybyaforeigngovernment. d.lossesattributabletolabor strikes.

145. Thediscontinuedoperationssectionof theincomestatementrefersto a.discontinuanceof a product line.

b.theincomeor loss onproductsthathavebeencompletedandsold. c.obsoleteequipment anddiscontinuedinventoryitems.

d.thedisposalof asignificantsegmentofabusiness.

FinancialStatementAnalysis 18-23

146. Whichoneof thefollowing wouldbeclassifiedasanextraordinaryitem? a.Expropriationof propertybyaforeigngovernment

b.Lossesattributedtoa laborstrike c.Write-downofinventories

d.Gainsorlossesfromsalesof equipment

147. A lossonthewritedownofobsoleteinventoryshouldbereported as a."otherexpensesandlosses."

b.part of discontinuedoperations. c.anoperatingexpense.

d.an extraordinaryitem.

148. Ifan itemmeetsone(butnotboth)of thecriteriaforanextraordinaryitem,it a.onlyneedstobedisclosedinthefootnotesof thefinancialstatements.

b.maybetreatedassalesrevenue (ifitisagain)andasanoperatingexpense (ifitisa loss).

c.isreportedas an"otherrevenue orgain"or"otherexpenseandloss,"netof tax.

d.isreportedatitsgrossamountasan"otherrevenueorgain"or"otherexpenseor loss."

149. Theorderof presentationofnontypicalitemsthatmayappear ontheincomestatementis a.Extraordinaryitems,Discontinuedoperations,Otherrevenuesandexpenses.

b.Discontinuedoperations,Extraordinary items,Otherrevenuesandexpenses. c.Otherrevenuesandexpenses, Discontinuedoperations,Extraordinaryitems. d.Other revenuesandexpenses,Extraordinaryitems,Discontinuedoperations.

150. Eachof thefollowingisafactoraffectingqualityof earningsexcept a.alternativeaccountingmethods.

b.improperrecognition. c.proformaincome.

d.extraordinaryitems.

Additional MultipleChoiceQuestions

151. Comparisonscan bemadeoneachof thefollowingbasesexcept a.industryaverages.

b.intercompanybasis. c.intracompanybasis.

d.Eachoftheseis abasisforcomparison.

152. Comparisonsofdatawithinacompanyareanexampleofthefollowingcomparative basis:

a.Industryaverages b.Intercompany

c.Intracompany d.Interregional

18-24

153. SilvaCorporationreportednetsalesof$240,000,$420,000,and$540,000intheyears 2007, 2008,and2009respectively. If2007isthebaseyear,whatisthetrendpercentage for 2009?

a.129% b.135% c.164% d.225%

154. Inverticalanalysis, the baseamountfor eachincome statementitemis a.grossprofit.

b.netincome. c.netsales.d.sales.

155. Whenperformingverticalanalysis,thebaseamountforadministrativeexpenseis generally

a.administrativeexpenseina previousyear. b.netsales.

c.grossprofit. d.fixedassets.

156. Ratiosthatmeasuretheshort-termabilityofthecompanytopayitsmaturingobligations are

a.liquidityratios.

b.profitabilityratios. c.solvencyratios.d.trendratios.

157. Whattypeofratiosbestmeasuretheshort-termabilityoftheenterprisetopayits maturing obligationsandtomeetunexpectedneedsfor cash?

a.Leverageb.Solvencyc.Profitability d.Liquidity

158. Theacid-testratiois alsoknownasthe a.currentratio.

b.quickratio. c.fastratio.

d.timesinterestearnedratio.

159. Thedebttototalassetsratio a.is asolvencyratio.

b.iscomputedbydividingtotalassetsbytotal debt.

c.measuresthetotalassets providedbystockholders. d.isaprofitabilityratio.

160. Anextraordinaryitemisonethat

a.occursinfrequentlyandisuncontrollableinnature. b.occursinfrequently andisunusualinnature.

c.ismaterialand isunusualinnature.

d.ismaterialandis uncontrollableinnature.

FinancialStatementAnalysis 18-25

161. Galileo,Inc.decidedonJanuary1todiscontinueitstelescopemanufacturingdivision.On July1,thedivision’sassetswithabookvalueof$630,000aresoldfor$450,000. OperatingincomefromJanuary1toJune30forthedivisionamountedto$75,000. Ignoringincometaxes,whattotalamountshouldbereportedonGalileo’sincome statementforthecurrent yearunderthecaption,DiscontinuedOperations?

a.$75,000

b.$105,000loss c.$180,000loss d.$255,000

162. Whentherehasbeena changeinaccountingprinciple,

a.theoldprincipleshouldbeusedinreportingtheresultsofoperationsforthecurrent year.

b.thecumulativeeffectofthechangeshouldbereportedinthecurrentyear’sretained earningsstatement.

c.thechangeshouldbereportedretroactively.

d.thenewprincipleshouldbeusedunreportingtheresultsofoperationsofthecurrent year,but thereisnochangeto prioryears.

BRIEFEXERCISES

BE163

ThefollowingitemsweretakenfromthefinancialstatementsofHorace,Inc.,overathree-year period:

Item

NetSales

CostofGoodsSold GrossProfit

2009

$355,000

214,000$141,000

2008

$336,000

206,000$130,000

2007

$300,000

186,000$114,000

Instructions

Computethe followingfor each ofthe abovetimeperiods.a.Theamountandpercentagechangefrom2007to 2008. b.Theamountandpercentagechangefrom2008to 2009.

BE164

IfParthenonCompanyhadnetincomeof$672,300 in2009and itexperienceda20% increasein netincomeover2008,whatwasits 2008netincome?

BE165

Horizontal analysis(trendanalysis)percentagesforVishnuCompany’ssales,costofgoodssold, and expenses are listedhere.

Horizontal Analysis 2009

Sales 98.2% Costof goodssold 102.5 Expenses 108.6

2008 2007

104.8% 100.0% 98.0 100.0 96.4 100.0

FinancialStatementAnalysis 18-27

BE165 (cont.)

Instructions

ExplainwhetherVishnu’snetincomeincreased,decreased,orremainedunchangedoverthe3-yearperiod.

BE166

Usingthefollowingoperating datafor Manchac Corporation,illustrate horizontal analysis.

Netsales

Costof goodssold Operatingexpenses Netincome

2008 2007

$350,000 $320,000 200,000 180,000 120,000 100,000 30,000 40,000

BE167

UsingthedatapresentedforManchacCompanyinBE166,prepareascheduleshowinga vertical analysis for2008.

BE168

UsingthesedatafromthecomparativebalancesheetofLucaCompany,performvertical analysis.

Accountsreceivable Inventory

Totalassets

December 31,2009 $500,000

780,000 3,220,000

December 31,2008 $400,000

600,000 2,800,000

BE169

Foreachoftheratioslistedbelow,indicatebytheappropriatecodeletter,whetheritisaliquidity ratio(L),a profitability ratio (P),orasolvencyratio(S).

1.Timesinterestearnedratio 2.Assetturnover

3.Receivablesturnover

4.Debtto total assets ratio 5.Currentratio

6.Payoutratio

BE170

Selectedfinancial statementdatafor MeyerCompanyarepresented below.

Cash

Short-terminvestments Accountsreceivable Inventories

Totalcurrent liabilities

12/31/08 $10,000 15,000 60,000 75,000 110,000

Instructions

Computethefollowingratios at December31,2008: (a)Current.

(b)Acid-test.

BE171

BreaktownCompanyhadnetincomeof$152,000andnetsalesof$625,000in2008.The company’stotalassetsfor2007/2008averaged$3,900,000.Itscommonstockholders’equityfor theperiodaveraged$2,340,000.Calculate(a)profitmargin,(b)returnonassets,and(c)return on common stockholders’ equity.

BE172

BermanCompanyreported thefollowing financialinformation:

Accountsreceivable Netcredit sales

12/31/08$320,000

2,100,000

12/31/07$360,000

2,420,000

Compute(a) thereceivables turnoverand(b) theaveragecollection periodfor2008.

BE173

Prepareapartialincomestatement,beginningwithincomebeforeincometaxesusingthe followinginformationforSlidellCorporationfor thefiscal yearended December31, 2008:

Sales Extraordinary loss

Sellingand administrative expenses Costof goodssold

Losson sale ofland

$800,000 100,000 180,000 500,000 25,000

SlidellCorporation issubject toa30% incometaxrate.

EXERCISES

Ex.174

Selectedfinancial informationforBradleyCorporation is presentedbelow.

CurrentassetsLong-termliabilities Retainedearnings

December 31,2009 $60,000

100,000 115,000

December 31,2008 $50,000

80,000 100,000

Instructions

Prepareaschedule showingahorizontal analysisfor 2009 using 2008asthe baseyear.

Ex.175

ComparativeinformationtakenfromtheWellsCompanyfinancial statements is shown below:

(a) Notesreceivable(b) Accountsreceivable (c) Retainedearnings

(d) Incometaxes payable (e) Sales

(f) Operatingexpenses

2009 2008

$20,000 $-0-182,000 140,000

30,000 (40,000) 44,000 20,000 960,000 750,000 170,000 200,000

Instructions

Using horizontalanalysis,showthepercentagechangefrom2008to2009with2008asthebase year.

Ex.176

EatonCorporationhadnetincomeof$6,000,000in2007.Using2007asthebaseyear,net income decreased by70% in 2008 andincreasedby140% in 2009.

Instructions

Computethe net incomereported by EatonCorporationfor 2008and 2009.

Ex.177

Thefollowingitemswere takenfromthefinancialstatements ofRitz, Inc., over a four-year period:

Item

NetSales

Costof Goods Sold GrossProfit

2010

$800,000

560,000$240,000

2009

$700,000

500,000$200,000

2008

$550,000

420,000$130,000

2007

$500,000

400,000$100,000

Instructions

Usinghorizontalanalysisand2007asthebaseyear,computethetrendpercentagesfornet sales,costofgoodssold,andgrossprofit.Explainwhetherthetrendsarefavorableor unfavorablefor each item.

Ex.178

Thecomparative balance sheetof Greer Companyappears below:

GREER COMPANY ComparativeBalance Sheet December31,

———————————————————————————————————————————

Assets 2009 2008

Currentassets...................................................................................... $330 $280 Plantassets.......................................................................................... 670 520Totalassets.......................................................................................... $1,000 $800

Liabilities and stockholders' equity

Currentliabilities................................................................................... $160 $120 Long-termdebt..................................................................................... 240 160 Commonstock..................................................................................... 340 320 Retainedearnings................................................................................ 260200Totalliabilities and stockholders'equity......................................... $1,000$800

FinancialStatementAnalysis 18-33

Ex.178 (cont.)

Instructions

(a) Usinghorizontalanalysis,showthepercentagechangeforeachbalancesheetitemusing 2008as abase year.

(b) Usingvertical analysis, preparea common size comparative balance sheet.

Ex.179

UsingthefollowingselecteditemsfromthecomparativebalancesheetofAndersCompany, illustrate horizontal andverticalanalysis.

AccountsReceivable Inventory

TotalAssets

December 31,2009 $900,000

975,000 4,000,000

December 31,2008 $600,000

750,000 2,500,000

Ex.180

Operatingdatafor Manning Corporation are presented below.

Netsales

Costof goodssold Operatingexpenses Netincome

2008

$500,000 340,000 120,000 40,000

Instructions

Prepareaschedule showingavertical analysis for2008.

Ex.181

Thefollowinginformationwas takenfrom thefinancial statementsofLeeCompany:

Grossprofit on sales............................................................ Incomebefore incometaxes................................................ Netincome........................................................................... Netincome as apercentageofnet sales.............................

2009

$750,000 280,000 200,000 8%

2008

$800,000 230,000 180,000 9%

Instructions

(a) Computethe netsalesforeach year.

(b) Computethe cost of goods sold indollarsandasa percentage ofnet salesforeach year. (c) Computeoperatingexpensesindollarsandasapercentageofnetsalesforeachyear.

(Incometaxes are notoperatingexpenses).

Ex.182

Selectedfinancial statementdatafor Morton Companyarepresented below.

Cash

Short-terminvestments Receivables(net) Inventories

Totalcurrent liabilities

December 31,2009 $20,000

25,000 100,000 85,000 100,000

December 31,2008 $30,000

18,000 80,000 65,000 90,000

During2009,netsaleswere $810,000, and cost of goodssold was $615,000.

Instructions

Computethefollowingratios at December31,2009: (a)Current.

(b)Acid-test.

(c)Receivables turnover. (d)Inventory turnover.

Ex.183

SelectedinformationfromthecomparativefinancialstatementsofFrymanCompanyfortheyear ended December31,appearsbelow:

2009 2008

Accountsreceivable (net) $180,000 $200,000 Inventory 140,000 160,000 Totalassets 1,200,000 800,000 Currentliabilities 140,000 110,000 Long-termdebt 340,000 300,000 Netcredit sales 1,520,000 700,000 Costof goodssold 750,000 530,000 Interestexpense 40,000 25,000 Incometaxexpense 60,000 29,000 Netincome 160,000 85,000

Instructions

AnswerthefollowingquestionsrelatingtotheyearendedDecember31,2009.Showcomputa-tions.

1.Inventory turnoverfor 2009 is .

2.Times interest earned in2009 is .

3.Thedebt to total assets ratiofor2009 is .

4.Receivables turnoverfor2009is .

5.Return onassets for2009 is .

$750,000

————————————

Ex.184

Thefinancial statements ofDobsonCompanyappear below:

DOBSON COMPANY Comparative Balance Sheet December 31,

———————————————————————————————————————————

AssetsCash................................................................................................. Short-terminvestments.................................................................... Accountsreceivable (net)................................................................ Inventory.......................................................................................... Property,plant and equipment (net)................................................

Totalassets...............................................................................

Liabilities and stockholders' equity

Accountspayable............................................................................. Short-termnotespayable................................................................. Bondspayable................................................................................. Commonstock................................................................................. Retainedearnings............................................................................ Totalliabilities and stockholders'equity.....................................

2009

$35,000 15,000 50,000 50,000

250,000$400,000

$10,000 40,000 88,000 160,000

102,000$400,000

2008

$40,000 60,000 30,000 70,000

300,000$500,000

$30,000 90,000 160,000 145,000

75,000$500,000

DOBSON COMPANY Income Statement

Forthe YearEndedDecember 31, 2009

Netsales.......................................................................................... Costof goodssold........................................................................... Grossprofit...................................................................................... Expenses

Interestexpense......................................................................... Sellingexpenses........................................................................ Administrativeexpenses............................................................ Totalexpenses.....................................................................Incomebefore incometaxes............................................................ Incometaxexpense......................................................................... Netincome.......................................................................................

$12,000 40,000

59,000

$360,000

198,000 162,000

111,000 51,000

15,000$36,000

Additional information:

a. Cash dividends of$9,000 were declared andpaid in 2009.

b. Weighted-averagenumberofsharesofcommonstockoutstandingduring2009was30,000 shares.

c. Marketvalue ofcommon stock onDecember31,2009,was $21 pershare.

————=3

$50,000

$12,000

18-38

Ex.184(cont.)

Instructions

Usingthefinancialstatementsandadditionalinformation,compute thefollowingratiosforCoulter Companyfor2009.Showall computations.

Computations

1. Current ratio .

2. Returnoncommonstockholders'equity .

3. Price-earningsratio .

4. Acid-test ratio .

5. Receivables turnover .

6. Times interest earned .

7. Profit margin .

8. Days in inventory .

9. Payout ratio .

10. Returnonassets .

Ex.185

Thefollowing ratios have been computedfor Pratt Companyfor 2009.

Profitmargin

Times interest earned Receivables turnover Acid-test ratioCurrentratio

Debttototal assets ratio

20% 15times

5times 1.60:1

3 : 1 26%

PrattCompany’s 2009financial statements with missing informationfollow:

PRATTCOMPANY ComparativeBalance Sheet December31,

———————————————————————————————————————————

AssetsCash........................................................................................... Short-termInvestments.............................................................. Accountsreceivable (net).......................................................... Inventory.................................................................................... Property,plant,andequipment (net).........................................

Totalassets........................................................................

Liabilities and stockholders' equity

Accountspayable....................................................................... Short-termnotespayable........................................................... Bondspayable........................................................................... Commonstock........................................................................... Retainedearnings...................................................................... Totalliabilities and stockholders'equity..............................

2009

$25,000 15,000

? (6) ? (8)

200,000

$ ? (9)

$ ? (7) 35,000

? (10) 200,000

59,000

$ ? (11)

2008

$35,000 15,000 60,000 50,000

150,000$310,000

$25,000 30,000 20,000 200,000

35,000$310,000

18-40

Ex.185 (cont.)

PRATTCOMPANY Income Statement

Forthe YearEndedDecember 31, 2009 ———————————————————————————————————————————

Netsales.................................................................................... Costof goodssold...................................................................... Grossprofit................................................................................. Expenses:

Depreciation expense........................................................... Interestexpense................................................................... Sellingexpenses.................................................................. Administrativeexpenses...................................................... Totalexpenses...............................................................Incomebefore incometaxes...................................................... Incometaxexpense.............................................................Netincome.................................................................................

$250,000

125,000 125,000

$ ? (5) 5,000

10,000

15,000

? (4) ? (2)

? (3) $ ? (1)

Instructions

UsetheaboveratiosandinformationfromthePrattCompanyfinancialstatementstofillinthe missinginformationonthefinancialstatements.Followthesequenceindicated.Show computationsthat support youranswers.

Ex.186

SelecteddataforNancy's Store appearbelow.

Netsales

Costof goodssold Inventoryatend ofyear

Accountsreceivable at end ofyear

2009 2008

$650,000 $520,000 455,000 345,000 65,000 85,000 80,000 50,000

Instructions

Computethefollowing for 2009: (a) Gross profitrate.

(b) Inventory turnover.(c) Receivables turnover.

Ex.187

Selectedfinancial statementdatafor Holmes Companyarepresented below.

Netsales

Costof goodssold Interestexpense Netincome

Totalassets (ending)

Totalcommon stockholders' equity(ending)

$1,200,000 700,000 10,000 180,000 850,000 650,000

Totalassetsatthebeginningoftheyearwere$750,000;totalcommonstockholders'equitywas $550,000atthe beginning of theperiod.

Instructions

Computeeach of thefollowing: (a)Asset turnover

(b)Profitmargin

(c)Return onassets

(d)Return oncommonstockholders'equity

Ex.188

WinterCorporationhasissuedcommonstockonly.Thecompanyhasbeensuccessfulandhasa grossprofitrateof20%.Theinformationshownbelowwastakenfromthecompany'sfinancial statements.

Beginninginventory Purchases

Endinginventory

Averageaccountsreceivable

Averagecommonstockholders'equity Sales(all on credit)

Netincome

$482,000 5,636,000

? 700,000

3,500,000 7,000,000 525,000

Instructions

Computethefollowing:

(a)Receivables turnoverand theaverage collectionperiod. (b)Inventory turnover andthe days in inventory.

(c)Return oncommonstockholders'equity.

Ex.189

BoyleCorporation had thefollowingcomparativecurrentassetsandcurrentliabilities:

Currentassets Cash

Short-terminvestments Accountsreceivable Inventory

PrepaidexpensesTotalcurrentassets

Currentliabilities Accountspayable Salariespayable Incometax payable

Totalcurrent liabilities

Dec.31,2009

$20,000 40,000 55,000 110,000

35,000 $260,000

$140,000 40,000

20,000 $200,000

Dec.31,2008

$30,000 10,000 95,000 90,000

20,000 $245,000

$110,000 30,000

15,000 $155,000

During2009,credit salesand cost of goodssoldwere $600,000 and$350,000, respectively.

Instructions

Computethefollowingliquiditymeasuresfor2009: 1.Current ratio.

2.Workingcapital. 3.Acid-test ratio.

4.Receivables turnover. 5.Inventory turnover.

Ex.190

SelecteddatafromOates Companyarepresented below:

Totalassets Averageassets NetincomeNetsales

Averagecommonstockholders'equity

$1,600,000 1,750,000 175,000 1,225,000 1,000,000

Instructions

Calculatethe profitability ratiosthat canbe computedfrom the above information.

Ex.191

Thefollowingdata are takenfrom thefinancial statementsofDoyle Company:

Monthlyaverage accounts receivable Netsales onaccount

Termsfor all sales are 2/10,n/30

2009

$520,000 5,460,000

2008

$500,000 4,500,000

Instructions

(a)Computethereceivables turnoverandthe average collectionperiodfor both years.

(b)Whatconclusioncan ananalystdrawabout themanagement of the accounts receivable?

—————

FinancialStatementAnalysis 18-47

Ex.192

Statetheeffectofthefollowingtransactionsonthecurrentratio.Useincrease,decrease,orno effect for youranswer.

(a) Collection ofan accountsreceivable. (b) Declaration ofcash dividends.

(d) Short-term investmentsare purchasedfor cash. (e) Equipmentispurchasedfor cash.

(f) Inventory purchasesaremadefor cash. (g) Accountspayable are paid.

Ex.193

Thebalancesheet for FarleyCorporation attheend of thecurrent yearindicatesthe following:

Bondspayable,7%.............................................................. 6%Preferredstock, $100 par............................................... Commonstock,$10par.......................................................

$4,000,000 1,000,000 3,000,000

Incomebeforeincometaxeswas$1,120,000andincometaxesexpenseforthecurrentyear amountedto$336,000.Cashdividendspaidoncommonstockwere$300,000,andthecommon stockwassellingfor$45pershareattheendoftheyear.Therewerenoownershipchanges during theyear.

Instructions

Determineeach of thefollowing:

(a) timesthatbondinterest was earned. (b) earningsper sharefor commonstock. (c) price-earningsratio.

Ex.194

TheincomestatementforStovalCompanyfortheyearendedDecember31,2008appears below.

Sales

Costof goodssold Grossprofit Expenses

Netincome

$610,000

380,000 230,000

170,000*$60,000

*Includes$30,000 ofinterest expense and $18,000 ofincometax expense.

—————————————

Ex.194 (cont.) Additional information:

1.CommonstockoutstandingonJanuary1,2008was40,000shares.OnJuly1,2008,10,000 more shares were issued.

2.Themarket price ofStoval'sstockwas $15 at the endof2008.

3.Cash dividends of$30,000were paid,$6,000ofwhich were paid topreferredstockholders.

Instructions

Computethefollowingratiosfor2008: (a)earnings per share.

(b)price-earnings.

(c)times interestearned.

$60,000–$6,000 54,000

Ex.195

GumbleCorporationhadincomefromcontinuingoperationsof$300,000fortheyearended December31, 2008. It also hadthe followingitems(before incometaxes):

1.Extraordinaryflood lossof$150,000.

2.Lossof$60,000 ondiscontinuanceofa division.

Allitemsare subject to incometaxesata 30%tax rate.

Instructions

Preparea partial incomestatement,beginningwith incomefrom continuing operations.

Ex.196

LawrenzCorporationgatheredthefollowinginformationforthefiscalyearendedDecember31, 2008:

Sales $1,400,000 Extraordinary fire loss 140,000 Sellingand administrative expenses 160,000 Costof goodssold 900,000 Losson sale ofequipment 40,000

LawrenzCorporation issubject to a 30% incometaxrate.

Instructions

Preparea partial incomestatement,beginningwith incomebefore incometaxes.

Ex.197

DennehyCorporationhadtheinformationlistedbelowavailableinpreparinganincomestatement fortheyearendedDecember31,2008.Allamountsarebeforeincometaxes.Assumea30% incometaxratefor all items.

Sales

Expropriationofpropertybyaforeigngovernment (loss) Incomefromoperation ofdiscontinued cement division Lossfrom disposal ofcement division

Operatingexpenses

Gainon sale ofequipment Costof goodssold

$600,000 $(120,000) $100,000$(80,000) $125,000$85,000$360,000

FinancialStatementAnalysis 18-51

Ex.197 (cont.)

Instructions

Prepareamultiple-stepincomestatementingoodformwhichtakesintoaccountintraperiod incometaxallocation. Ignore EPScomputations.

Ex.198

Indicatewhetherthefollowingitemswouldbereportedasanordinaryoranextraordinaryitemin LoganCorporation'sincome statement.

(a)Lossattributabletolabor strike. (b)Gain onsale offixed assets.

(c)Lossfrom fire.Logan isa chemicalcompany. (d)Lossfromsale ofshort-term investments.

(e)Expropriation ofproperty byaforeigngovernment.

(f) Lossfrom tornadodamage.Logan Corporation is locatedin the Midwest's tornado alley. (g)Lossfrom governmentcondemnation of propertythroughnewly enacted law.

Ex.199

PotterCompanyhasincomefromcontinuingoperationsof$480,000fortheyearended December31, 2008. It also hasthefollowingitems (beforeconsideringincometaxes):

(1)An extraordinaryfire lossof$180,000.

(2)A gainof$110,000 on the discontinuance ofamajor segment.

(3)Acorrectionofanerrorinlastyear'sfinancialstatementthatresultedina$100,000 overstatementof2007netincome.

Assumeall itemsare subject toincometaxes ata30%taxrate.

Instructions

(a) Prepare an incomestatement,beginningwith incomefrom continuing operations. (b) Indicatethestatement presentation ofany itemnot included in (a)above.

COMPLETIONSTATEMENTS

200.Inanalyzingand interpretingfinancial statement information,threemajor characteristics aregenerallyevaluated:(1) , (2) ,and(3) .

201. analysis,alsocalledtrendanalysis,isatechniqueforevaluatinga percentageincrease or decreasefor afinancial statementitem overa period of time.

202.Expressingeachitemwithinafinancialstatementasapercentageofabaseamountis called analysis.

203.Theratiosusedinevaluatingacompany'sliquidityandshort-termdebtpayingabilitythat complementeach otherarethe ratio andthe ratio.

204.Thereceivablesturnoveriscalculatedbydividing byaverage

205.Ifinventoryturnoveris5times,andtheaverageinventorywas$400,000,thecostof goodssoldduringtheyearwas$ andthedaysininventorywas

days.

206.HansenCorporationhadnetincomefortheyearof$300,000andaprofitmarginof25%. Iftotalaverage assetswere $400,000,theasset turnoverratio was times.

207.The ratio measures the percentageofearningsdistributed in theformof cash dividends.

208.Thelowerthe to ratio,themoreequity"buffer"there isavailable to thecreditors.

209.Timesinterestearnedis calculatedbydividing before

and by interestexpense.

210.Discontinued operationsrefers tothedisposal of a ofabusiness.

211.Thetwo criteria necessaryfor an itemtobe classifiedas an extraordinaryitem arethat the transactionoreventmustbe(1) and(2) .

212.Achangeininventorymethodsduringtheyearwouldbeclassifiedasachangein

MATCHING

SETA

213.Foreachoftheratioslistedbelow,indicatebytheappropriatecodeletter,whetheritisa liquidity ratio, aprofitability ratio, orasolvencyratio.

Code:

L = Liquidity ratio

P = Profitability ratio S = Solvency ratio

1.Price-earningsratio

2.Assetturnover

3.Receivablesturnover

4.Earningsper share

5.Payoutratio

6.Currentratio

7.Acid-testratio

8.Debttototal assets ratio

9.Timesinterestearned

10.Inventoryturnover

SETB

214.Matchtheratioswiththeappropriateratiocomputationbyenteringtheappropriateletterin the spaceprovided.

A.Current ratioB.Acid-test ratio C.Profit marginD.Assetturnover

E.Price-earnings ratio

F.Times interestearned G.Inventory turnover

H.Averagecollection period I.Days in inventory

J.Payout ratio

10.

Costof goodssold Average inventory

—————

Netincome Netsales

———————

Cashdividends Netincome

———————

Netsales Average assets

————————

Currentassets Current liabilities

——————————

365daysReceivables turnover

——————————————

Marketpriceper share of stock Earnings pershare

————————

365daysInventory turnover

——————————————————————

Incomebefore incometaxes and interestexpense Interest expense

Cash+short-term investments +receivables (net)

Current liabilities

SHORT-ANSWERESSAYQUESTIONS

S-AE215

Horizontalandverticalanalysesareanalyticaltoolsfrequentlyusedtoanalyzefinancial statements.Whattypeofinformationorinsightscanbeobtainedbyusingthesetwotechniques? Explainhowtheoutputofhorizontalanalysisandverticalanalysiscanbecomparedtoindustry averages and/or competitive companies.

S-AE216

ManuelMentirosa,theCEOofMysticalProducts,isasuccessfulentrepreneurbutapoorstudent ofaccounting.Heasksyoutoexplaintohim,inamemo,thebasesofcomparisonforratio analysis.

S-AE217(Ethics)

AtrustedemployeeofWildernessTourswascaughtintheactofembezzlingfunds.He confessedtoearlierembezzlements,butretractedtheconfessionontheadviceofhisattorney. Overthecourse of themost recentquarter, it has been determined that $20,000 was embezzled.

WildernessTourshassufferedadversepublicityintherecentpastbecauseofseriousinjuryto fivetouriststhatoccurredduringatwoweek"WinterWildsAdventure"tour.Thecompanyhas thereforedecidedtoavoidpublicityandhasagreedtodropallchargesagainsttheembezzling employee.Inreturn,theemployeehasagreedtoanotationof"Terminated—NottobeRehired" tobeappendedtohispersonnelfile.

Required:

1.Whoarethestakeholders in thedecision not to prosecute?

2.Was it ethicalfor thecompany to decide not to prosecute? Explain.

S-AE218(Communication)

KwikExpressspecializesintheovernighttransportationofmedicalequipmentandlaboratory specimens.Thecompanyhasselectedthefollowinginformationfromitsmostrecentannual reportto be thesubjectofan immediatepressrelease.

• Thefinancial statementsare beingreleased.

• Netincome this yearwas $2.2million.Last year's netincomehadbeen$2.0 million. • Thecurrent ratio haschanged to2:1fromlastyear's 1.5:1

• Thedebt/total assets ratio haschangedto4:5fromlastyear's 3:5

• Thecompanyexpandeditstruckfleetsubstantiallybypurchasingtennewdeliveryvans.The companyalreadyhad twelve delivery vans.

• Thecompanyis nowthe largest medicalcourierin themid-Atlanticregion.

Required:

Prepareabriefpressreleaseincorporatingtheinformationabove.Includeallinformation.Think

carefullywhich information (ifany) isgoodnewsfor thetcompany,andwhich (ifany)is badnews.

#ACC 206 Week 10 Quiz – Strayer

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