Deck 12: Analysis and Interpretation of Financial Statements

Question 1

Asset turnover measures a company's profitability.

Answer 1

False

Question 2

Ratios provide one way to compare companies in the same industry regardless of their size.

Answer 2

True

Question 3

All things equal, the higher a company's inventory turnover rate, the better.

Answer 3

True

Question 4

Return on assets can be disaggregated into profit margin and return on common stockholders' equity ratio.

Question 5

Solvency ratios measure a company's ability to meet its debt obligations.

Question 6

A common size balance sheet expresses the balance sheet items as a percentage of total assets.

Question 7

Gains and losses related to the disposal of a segment of a business, and any related income tax effects, are reported in the discontinued operations section of the income statement.

Question 8

Which one of the following ratios does not involve assets?

A) Account receivable turnover
B) Current ratio
C) Profit margin
D) Inventory turnover

Question 9

Liquidity analysis of a company includes the following useful measures: (select all that apply)

A) Current ratio
B) Quick ratio
C) Times-interest-earned ratio
D) Debt-to-equity ratio
E) Working capital

Question 10

Return on assets is computed as:

A) Net income / Average stockholders' equity
B)Net income / Average total assets
C) Net Sales / Average total assets
D) Net income / Net sales

Question 11

Big K Grocer's balance sheet shows average stockholders' equity of $5,000 million, net operating profit after tax of $57 million, net income of $190 million, and common shares issued of $958 million. The company has no preferred shares issued.
Big K Grocer's return on common stockholders' equity for the year is:

A) 1.10%
B) 3.80%
C) 72.90%
D) 7.30%
E) There is not enough information to calculate the ratio.

Question 12

Big K Grocer's financial statements show average shareholders' equity of $5,103 million, net income of $700 million, and average total assets of $23,175 million.
How much is Big K Grocer's return on assets for the year?

A) 21.42%
B) 3.02%
C) 21.24%
D) 4.77%
E) There is not enough information to calculate the ratio.

Question 13

Big K Grocer's financial statements show net income of $700 million, sales of $76,733 million, and average total assets of $23,175 million.
How much is Big K Grocer's profit margin for the year?

A) 4.71%
B) 0.91%
C) 30.20%
D) 6.42%
E) There is not enough information to calculate the ratio.

Question 14

Use the following selected balance sheet and income statement information for Gardening Supply Co. (in millions) to compute the gross profit percentage to the nearest hundredth of a percent.

A) 5.16%
B) 17.30%
C) 16.17%
D) 61.96%

Question 15

Use the following selected balance sheet and income statement information for Gardening Supply Co. (in millions) to compute the return on assets to the nearest hundredth.

A) 17.30%
B) 5.16%
C) 5.52%
D) 21.71%

Question 16

Use the following selected balance sheet and income statement information for Gardening Supply Co. (in millions) to compute asset turnover (AT) to the nearest hundredth of a percent.

A) 0.32
B) 3.69
C) 17.30
D) 5.52

Question 17

Smith Enterprises reported sales revenue totaling $280,000, $335,000, and $354,000 in the years, 2018, 2019, and 2020, respectively.
Performing trend analysis, with 2018 serving as the base year, what is the percentage for 2020?

A) 123.58%
B) 19.08%
C) 126.43%
D) 28.21%

Question 18

At December 31, Williams Company has total assets of $500,000, total liabilities of $300,000, and total owner's equity of $200,000.
At December 31, Williams Company's debt-to-equity ratio is:

A) 0.25
B) 5.00
C) 0.80
D) 1.50
E) None of the above

Question 19

At December 31, Mendez Company has total assets of $900,000, total liabilities of $200,000, and total owner's equity of $700,000.
At December 31, Mendez Company's debt-to-equity ratio is:

A) 0.29
B) 1.20
C) 5.00
D) 0.17
E) None of the above

Question 20

The operating-cash-flow-to-current-liabilities ratio is computed by dividing a firm's a net cash flow from operating activities by:

A) Current liabilities at the end of the period
B) Current liabilities at the beginning of the period
C) Total liabilities at the middle of the period
D) Average current liabilities for the period
E) None of the above

Question 21

Cherokee Company is preparing trend percentages for its service fees earned for the period 2010 through 2020. The base year is 2016.
The 2019 trend percentage is computed as:

A) 2019 service fees earned divided by 2018 service fees earned
B) 2019 service fees earned divided by 2016 service fees earned
C) 2016 service fees earned divided by 2019 service fees earned
D) 2018 service fees earned divided by 2019 service fees earned
E) None of the above

Question 22

Stern Company's net income was $75,000 for 2018, $81,250 for 2019, and $69,800 for 2020. Assume trend percentages for net income over the three-year period are computed, with 2018 serving as the base year.
The trend percentage for 2020's net income is:

A) 100.0
B) 108.7
C) 93.1
D) 73.6
E) None of the above

Question 23

Rodriguez Company reported net income of $1,300 million for the current year. The weighted average number of common shares outstanding was 554 million shares. Rodriguez paid $30 million in dividends on preferred stock.
How much is basic earnings per share amount for the current year?

A) $2.23
B) $2.18
C) $2.29
D) $2.34

Question 24

Benson Company sells a segment of its operations at a loss. Benson has not previously experienced such an event and does not expect to again.
The loss from the disposal of the segment should be reported in the income statement as:

A) An extraordinary item
B) A separate amount in a discontinued operations section
C) A separate amount in net income from continuing operations
D) As part of cost of goods sold
E) None of the above

Question 25

Information about a segment of the business that a company sells, abandons, or otherwise disposes of is reported in the:

A) Retained earnings statement
B) Discontinued operations section of the income statement
C) Balance sheet
D) Continuing operations section of the income statement

Question 26

World Airlines has no preferred stock outstanding. The company had 50,000 shares of common stock outstanding on January 1 and issued 20,000 additional shares on April 1.
If World's net income was $359,000, the company should report earnings per share of (to the nearest cent)

A) $4.27
B) $4.60
C) $5.52
D) $5.98
E) None of the above

Question 27

Bowden, Inc. has no preferred stock outstanding. The company had 40,000 shares of common stock outstanding on January 1 and issued 12,000 additional shares on May 1.
If Bowden's net income was $100,000, the company should report earnings per share of (to the nearest cent)

A) $2.00
B) $2.22
C) $2.08
D) $2.62
E) None of the above

Question 28

Westminster, Inc. has net income of $185,000. At January 1, the company had outstanding 54,000 shares of $25 par value common stock and 10,000 shares of 6%, $50 par value cumulative preferred stock. On September 1, an additional 18,000 shares of common stock were issued.
What is the earnings per share (to the nearest cent)?

A) $2.22
B) $2.58
C) $2.25
D) $2.05
E) None of the above

Question 29

Pooly Inc. has net income of $136,000 for the current year. At January 1, the company had outstanding 37,000 shares of $10 par value common stock and 5,000 shares of 8%, $50 par value cumulative preferred stock. On October 1, an additional 12,000 shares of common stock were issued.
What is the earnings per share (to the nearest cent)?

A) $2.37
B) $2.90
C) $3.40
D) $2.70
E) None of the above

Question 30

At December 31, Belinda, Inc. had 500,000 shares of common stock issued and outstanding, 250,000 of which had been issued and outstanding throughout the year and 250,000 of which were issued on July 1. Net income for the year ended December 31, was $795,000.
What is Belinda's 2013 earnings per common share (to the nearest cent)?

A) $1.06
B) $1.27
C) $1.59
D) $2.12
E) None of the above

Question 31

At December 31, McKensie's price-earnings ratio was 13.4. McKensie's net income was $330,000, its earnings per share was $3.50, and its annual dividend per share was $2.00.
What was the per share market price of McKensie's stock at December 31?

A) $46.90
B) $16.40
C) $32.80
D) $57.40
E) None of the above

Question 32

On the income statement of a merchandising company, interest income and interest expense are reported:

A) By offsetting interest income and interest expense and showing the excess as an operating revenue or expense
B) As separate items of other income and expense below the net operating income or loss
C) As part of cost of goods sold
D) By showing interest income as additional sales revenue and interest expense as an operating expense
E) Some other way

Question 33

Selected balance sheet and income statement information for Forrester Company follows in millions:

a. Calculate the company's return on common stockholders' equity.
b. Explain what information this provides to management.

Question 34

Selected balance sheet and income statement information from the Electric Company for fiscal years 2018 through 2020 follows (Amounts in millions):

a. Compute the times-interest-earned ratio for each year and discuss any trends.
b. What concerns about Electric's ability to meet its interest obligations might creditors have? Explain.

Question 35

Selected recent balance sheet and income statement information for the clothing companies: Price Plus Imports and Bullseye Corporation follows:

a. Calculate the current ratio and quick ratio for both companies.
b. Which company is more liquid?
c. Calculate the times-interest-earned and debt-to-equity ratios for both companies.
d. Which company is more solvent? Explain.

Question 36

Selected balance sheet and income statement information for two manufacturing companies: Calico, Inc. and Packard Corporation follows:

a. Calculate the current ratio and quick ratio for both companies.
b. Which company is more liquid?
c. Calculate the times-interest-earned ratio and debt-to-equity ratio for both companies.
d. Which company is more solvent?

Question 37

Selected recent balance sheet and income statement information for Eva Systems, Inc. follows:

a. Calculate accounts receivable turnover for both years. Has accounts receivable turnover improved during the year or worsened?
b. Calculate inventory turnover for 2019 and 2018. Has inventory turnover improved during the year or worsened?

Question 38

Selected recent balance sheet and income statement information for Smith & Johnson Corporation follows:

a. Calculate accounts receivable turnover for both years. Has it improved during the year or worsened?
b. Calculate inventory turnover for both years. Has it improved during the year or worsened?

Question 39

Selected recent balance sheet and income statement information for Somerset, Inc. follows:

a. Calculate accounts receivable turnover for both years. Has it improved during the year or worsened?
b. Calculate inventory turnover for both years. Has it improved during the year or worsened?

Question 40

Selected recent balance sheet and income statement information for the communication giants, Horizon Communications, Inc., and New Phone Inc., follow:

a. Compute accounts receivable turnover for Horizon Communications, Inc. and New Phone, Inc. .
b. Interpret and comment on the differences between the receivables turnover rates between each company assuming the industry average is 9.0 times.

Question 41

Selected recent balance sheet and income statement information for Business Products, Inc. follows (in $ millions):

Compute accounts receivable turnover and inventory turnover.

Question 42

The following is selected balance sheet and income statement information for Menendez Company.

Compute the following ratios:
a. Gross profit percentage
b. Profit margin
c. Asset turnover
d. Return on assets
e. Return on common stockholders' equity (Menendez Company has no preferred stock)

Question 43

During the current year, Darnsworth Company had 50,000 shares of $10 par value common stock and 7,000 shares of 8%, $30 par value convertible preferred stock outstanding. Darnsworth Company's net income was $450,000.
Compute earnings per share for the year.

Question 44

Listed below are six items or sections that may be found in a multiple-step income statement.

-Gross profit

A) 1
B) 2
C) 3
D) 4
E) 5

Question 45

Listed below are six items or sections that may be found in a multiple-step income statement.

-Discontinued operations

A) 5
B) 6
C) 7
D) 8
E) 9

Question 46

During the current year, Swade Corporation had 75,000 shares of $5 par value common stock and 10,000 shares of 6%, $25 par value preferred stock outstanding. Swade Corporation's net income is $399,000.
Compute the earnings per share for the year.

Question 47

During the current year, Tapir Corporation had 160,000 shares of $5 par value common stock and 30,000 shares of 5%, $20 par value preferred stock outstanding. Tapir Corporation's net income is $480,000.
Compute the primary earnings per share for the year.

Question 48

The following information relates to Corte, Inc. for the current year:

a. Compute Corte's earnings per share.
b. Compute Corte's price-earnings ratio at December 31.

Question 49

Twin Roads Company has the following values taken from its annual report (in thousands):
a. Calculate Twin Roads Company's times-interest-earned ratio.

b. Calculate Twin Roads Company's debt-to-equity ratio.

Question 50

Selected recent balance sheet and income statement information from Dress Co. and Purse Inc. follows:

a. Compute the following turnover rates for each company:
1. Accounts receivable turnover
2. Inventory turnover
3. Asset turnover
b. Interpret and comment on any differences you observe between the turnover rates for these two companies.

Question 51

The balance sheets and income statements for Sunshine Communications follow:


a. Compute the company's current ratio for both years. Comment on any observed trend.
b. Compute the debt-to-equity ratios for both years. Comment on any observed trend.

Question 52

The partial balance sheets and income statements for Fun Merchandise, Inc., for fiscal years ending June 30, 2019 and 2018 follow (in millions):
Required
a. Calculate accounts receivable turnover for 2019 and 2018. Accounts receivable in 2017 totaled $6,629 million. Has accounts receivable turnover improved during the year or worsened?
b. Calculate inventory turnover for 2019 and 2018. Inventories in 2017 were $6,819 million. Has inventory turnover improved during the year or worsened?
c. Calculate asset turnover for 2019 and 2018 considering that 2017 total assets are $138,014 million.

Question 53

The income statements for Sommerset Corporation for 2019 and 2018 follow:

a. Prepare a common-size income statement for 2019 and 2018. Round to one decimal place.
b. Comment on the most significant changes.

Question 54

The balance sheets for Beldon Corporation for the years ending January 30, 2019 and January 31, 2018 follow:

a. Prepare common-size statements for the asset section of Beldon's balance sheet for 2019 and 2018. Round to one decimal place.
b. Comment on the most significant changes.

Question 55

Consider the following results for Winsberg Webcom:

Prepare the income statement for this company assuming a 35% income tax rate. Omit the statement heading.