Deck 23: Analysis of Financial Statements

Question 1

Selected information for Henriot Company is as follows:

Henriot's return on common stockholder's equity,rounded to the nearest percentage point,for 2014 is

A)20 percent.
B)21 percent.
C)28 percent.
D)40 percent.

Answer 1

B

Question 2

Selected information from the accounting records of Carbine Manufacturing follows:

What is the number of days' sales in average inventories for the year?

A)132
B)109
C)101
D)66

Answer 2

C

Question 3

Information from Caine Company's balance sheet is as follows:

What is Caine's current ratio?

A)0.26 to 1
B)0.30 to 1
C)1.80 to 1
D)3.78 to 1

Answer 3

D

Question 4

Selected information from the accounting records of the Clemens Company is as follows:

What was Clemens' gross margin for 2014?

A)$150,000
B)$200,000
C)$400,000
D)$500,000

Question 5

Which of the following transactions would increase a firm's current ratio?

A)Purchase of inventory on account
B)Payment of accounts payable
C)Collection of accounts receivable
D)Purchase of temporary investments for cash

Question 6

If a firm changes its inventory method from FIFO to LIFO just prior to a period of rising prices,the effect in the next period will be

Question 7

Selected financial data of Nicholas Corporation for the year ended December 31,2014,is presented below:

Common stock dividends were $120,000.The times-interest-earned ratio is

A)2.9 to 1.
B)3.6 to 1.
C)4.3 to 1.
D)5.3 to 1.

Question 8

Which of the following ratios measures short-term solvency?

A)Current ratio
B)Creditors' equity to total assets
C)Return on investment
D)Total asset turnover

Question 9

In comparing the current ratios of two companies,why is it invalid to assume that the company with the higher current ratio is the better company?

A)The two companies may be different sizes.
B)A high current ratio may indicate inadequate inventory on hand.
C)The two companies may define working capital in different terms.
D)A high current ratio may indicate inefficient use of various assets and liabilities.

Question 10

On December 31,2013 and 2014,Tomlin Corporation had 100,000 shares of common stock and 50,000 shares of noncumulative and nonconvertible preferred stock issued and outstanding.Additional information:

The price-earnings ratio on common stock at December 31,2014,was

A)10 to 1.
B)12 to 1.
C)14 to 1.
D)16 to 1.

Question 11

The following data were abstracted from the records of Ballistic Corporation for the year:

How many times was bond interest earned?

A)18.0
B)15.0
C)11.0
D)10.0

Question 12

Which of the following is included in the calculation of the acid-test (quick)ratio?

Question 13

Selected information from the accounting records of Thackary Company is as follows:

Thackary's inventory turnover for 2014 is

A)7.50 times.
B)6.665 times.
C)4.44times.
D)2.22 times.

Question 14

Which of the following statements best describes the use of financial statement analysis?

A)Financial statement analysis techniques are merely guides to interpretation of financial data.
B)Financial statement analysis can eliminate the risk in investment decisions.
C)Measurements for a specific company should be compared only with data from past periods.
D)All of these are correct.

Question 15

When using common-size statements,

A)data may be selected for the same business as of different dates, or for two or more businesses as of the same date.
B)relationships should be stated in terms of ratios.
C)dollar changes are reported over a period of at least three years.
D)All of these are correct.

Question 16

Harvest Corporation's capital stock at December 31 consisted of the following: (a)Common stock,$2 par value; 100,000 shares authorized,issued,and outstanding.(b)10% noncumulative,nonconvertible preferred stock,$100 par value; 1,000 shares authorized,issued,and outstanding.
Harvest's common stock,which is listed on a major stock exchange,was quoted at $4 per share on December 31.Harvest's net income for the year ended December 31 was $50,000.The yearly preferred dividend was declared.No capital stock transactions occurred.What was the price- earnings ratio on Harvest's common stock at December 31?

A)6 to 1
B)8 to 1
C)10 to 1
D)16 to 1

Question 17

How are trade receivables used in the calculation of each of the following?

Question 18

A useful tool in financial statement analysis is the common-size financial statement.What does this tool enable the financial analyst to do?

A)Evaluate financial statements of companies within a given industry of approximately the same value.
B)Determine which companies in the same industry are at approximately the same stage of development.
C)Ascertain the relative potential of companies of similar size in different industries.
D)Compare the mix of assets, liabilities, capital, revenue, and expenses within a company over time or between companies within a given industry without respect to relative size.

Question 19

Brookville Corporation's books disclosed the following information for the year ended December 31,2014:

Brookville's accounts receivable turnover is

A)3.75 times.
B)4.35 times.
C)5.00 times.
D)5.80 times.

Question 20

Ringer Corporation had a current ratio of 3.1 at the end of 2013.Current assets and current liabilities increased by equal amounts during 2014.The effects on net working capital and on the current ratio,respectively,were

A)no effect; increase.
B)no effect; decrease.
C)increase; increase.
D)decrease; decrease.

Question 21

Which of the following ratios does NOT measure efficiency or activity of an entity?

A)Accounts receivable turnover
B)Age of accounts receivable
C)Net cash flow to current liabilities
D)Times interest earned

Question 22

What is the effect of the collection of accounts receivable on the current ratio and net working capital,respectively?

Question 23

The book value per share of common stock measures

A)liquidity.
B)profitability.
C)equity position and coverage.
D)efficiency.

Question 24

Which of the following ratios does NOT measure liquidity?

A)Net cash flow to current liabilities
B)Working capital to total assets
C)Current ratio
D)Quick ratio

Question 25

Which of the following ratios does NOT measure liquidity?

A)Current ratio
B)Quick ratio
C)Working capital to total assets
D)Debt to equity

Question 26

How would the quick ratio be affected by a prepayment of $30,000 for fire and liability insurance?

A)The quick ratio would decrease.
B)The quick ratio would increase.
C)The quick ratio would not change.
D)The effect cannot be determined from the information given.

Question 27

An entity changed from the FIFO to the LIFO cost flow assumption for inventories.Assuming that inventory and sales remain constant over time,and that prices are rising,how would the current ratio be changed as a result of converting from FIFO to LIFO?

A)The current ratio did not change.
B)The current ratio increased.
C)The current ratio decreased.
D)The effect on the current ratio cannot be determined from the information given.

Question 28

Selected information from the 2014 and 2013 financial statements of Sculley Corporation is presented below:

Refer to the Sculley Corporation information above.Sculley's merchandise inventory turnover for 2014 is

A)3.43.
B)5.68.
C)6.63.
D)6.79.

Question 29

During the year,The Core Company purchased $1,700,000 of inventory.The cost of goods sold for the year was $1,600,000 and the ending inventory at December 31 was $330,000.What was the inventory turnover for the year?

A)2.9
B)3.3
C)5.7
D)6.1

Question 30

Selected information from the 2014 and 2013 financial statements of Sculley Corporation is presented below:

Refer to the Sculley Corporation information above.Sculley's current ratio as of December 31,2014,is

A)2.84 to 1.
B)3.37 to 1.
C)2.91 to 1.
D)3.33 to 1.

Question 31

Selected information from the 2014 and 2013 financial statements of Sculley Corporation is presented below:

Refer to the Sculley Corporation information above.Sculley's quick (acid test)ratio as December 31,2014,is

A)1.44 to 1.
B)1.50 to 1.
C)1.67 to 1.
D)1.66 to 1.

Question 32

Hermine Company wrote off an $700 uncollectible account receivable against the allowance for doubtful accounts with a balance of $2,000.The current ratio after the write-off of the uncollectible account

A)would be less than before the write-off of the account.
B)would be greater than before the write-off of the account.
C)would be the same as before the write-off of the account.
D)cannot be determined with the information given.

Question 33

From the standpoint of the stockholders of a company,the ratio that measures the overall performance of a company would be calculated using which of the following?

A)Average total assets and net income
B)Average stockholders' equity and net sales
C)Average stockholders' equity and net income
D)Net sales and average total assets

Question 34

An entity sells an equal dollar amount of convertible preferred stock and long-term notes payable.Prior to these transactions,total debt was less than total equity.How did the sale of the convertible preferred stock and the long-term notes payable affect the company's debt to total assets ratio?

A)The debt to total assets ratio would decrease.
B)The debt to total assets ratio would increase.
C)The debt to total assets ratio would remain the same.
D)The effect on the debt to total assets ratio cannot be determined from the information given.

Question 35

A measure of profitability analysis is

A)times interest earned.
B)cash flow per share.
C)quick ratio.
D)dividend payout ratio.

Question 36

Selected information from the 2014 and 2013 financial statements of Sculley Corporation is presented below:

Refer to the Sculley Corporation information above.Sculley's account receivable turnover for 2014 is

A)13.85.
B)10.00.
C)9.49.
D)7.78.

Question 37

Refer to the Sculley Corporation information above.Sculley's turnover of assets and number of times interest earned for 2014 are respectively

Question 38

Which of the following is true regarding the debt to equity ratio?

A)The debt to equity ratio is a stringent measure of liquidity.
B)The debt to equity ratio measures the productivity and desirability of the equity investment.
C)The debt to equity ratio measures management's ability to productively employ all its resources.
D)The debt to equity ratio measures the capital structure of the entity.

Question 39

The calculation of the return on total assets ratio would use all of the following except

A)average stockholders' equity.
B)total assets.
C)average total assets.
D)net sales.

Question 40

Which of the following is an appropriate computation for return on investment?

A)Sales divided by total assets
B)Net income divided by total assets
C)Net income divided by sales
D)Sales divided by stockholders' equity

Question 41

Diane Singer has just been assigned as the senior accountant on the audit of Pottery Manufacturing Company.Diane currently is planning the audit and has been considering what procedures to perform in examining the company's inventories of raw materials,work-in-process,and finished goods.She has determined that the calculation of certain ratios and other financial analysis techniques will prove useful to her in deciding how to approach the audit of the company's inventory accounts.
Identify the ratios to be calculated and the factors to be considered in Diane's analysis of the company's inventory accounts.

Question 42

All other things held constant,which of the following ratios would not be improved if a company structures a leasing transaction as an operating lease rather than a capital lease?

A)Debt to equity ratio
B)Quick ratio
C)Price-earnings ratio
D)Return on investment

Question 43

The following information has been collected regarding Collections Company:

Estimate a price per share for Collections' stock using the following equity valuation models:
1.Constant future dividends
2.Constant dividend growth
3.Price-earnings multiple

Question 44

The following information has been collected regarding Hunter Company:

Estimate a price per share for the stock of Hunter using the following equity valuation models:
1.Constant future dividends
2.Constant dividend growth
3.Price-earnings multiple

Question 45

The inventory turnover ratio

A)measures management's ability to productively employ all of its resources.
B)measures the efficient use of assets held for resale.
C)is a stringent measure of liquidity.
D)provides a measure of the strength of the sales mix the company currently employs.

Question 46

Comparative data for Agnew Inc.for the two-year period 2013-2014 are given as follows:

From the given data,compute the following for 2014 and 2013:
(1)Current ratio.
(2)Net profit margin on sales.
(3)Gross profit margin on sales.
(4)Debt-to-equity ratio.
(5)Times interest earned.

Question 47

A large body of scholarly literature exists relating to the subject of choices of accounting methods.The choice of depreciation methods is an example of these accounting choices.The choice of depreciation method affects several ratios.
Required:
1.Explain which financial statement ratios are affected by the choice of depreciation methods,with specific attention to the effects of straight-line vs.accelerated depreciation on the ratios.
2.Comment on the effects on financial statement users of the issues discussed in part 1.

Question 48

The following are comparative data for Jobs Company for the three-year period 2012-2014:

Compute the following measurements for 2014 and 2013:
(1)The receivables turnover rate.
(2)The average collection period for accounts receivable.

Question 49

The following information is available from the Lyon Company accounting records:

Required:
1.Prepare a statement of cash flows in thousands of dollars using the direct method.
Deep Check
2.Calculate the following ratios:
a.Current ratio
b.Quick ratio
c.Working capital to total assets
d.Accounts receivable turnover
e.Age of accounts receivable

Question 50

Which of the following ratios would not be affected by the choice of depreciation methods?

A)Working capital turnover
B)Earnings per share of common stock
C)Debt to equity
D)Price-earnings ratio

Question 51

Which of the following is NOT correct regarding the rate of return on assets?

A)The rate of return on assets measures management's ability to productively employ all its resources.
B)The rate of return on assets measures the return on all assets used regardless of how the assets are financed.
C)The rate of return on assets is a measure of profitability.
D)The rate of return on assets measures the return on the investment made by the owners of the entity.

Question 52

Which of the following ratios would NOT be positively affected by a change from LIFO to FIFO,assuming that prices are rising?

A)Current ratio
B)Debt to equity ratio
C)Times interest earned
D)Quick ratio

Question 53

Income statements for Maroon Co.show the following:

From the data presented,calculate the following ratios for 2014 and 2013:
(1)Inventory turnover rate.
(2)Number of days' sales in inventories.
(3)Gross profit margin on sales.

Question 54

The following information is available from the Embargo Company accounting records:

Required:
1.Prepare a statement of cash flows in thousands of dollars using the indirect method.
Deep Check
2.Calculate the following ratios:
a.Current ratio
b.Quick ratio
c.Working capital to total assets
d.
Accounts receivable turnover
e.
Age of accounts receivable

Question 55

Which of the following is not a component of the DuPont Framework?

A)Return on sales
B)Asset turnover
C)Assets to debt
D)Assets to equity

Question 56

Comparative balance sheet data for the Veronica Co.at the end of 2013 and 2014 follows:

Prepare a common-size balance sheet comparing financial structure percentages for the two-year period.Use total assets to standardize.

Question 57

Whereis Company is expected to pay a $0.50 per share dividend at the end of the year.The required rate of return on the stock is 15 percent.
Required:
What is the value per share of the company's stock?

Question 58

Sinbad Company is expected to pay a $0.50 per share dividend at the end of the year.The dividend is expected to grow at a constant rate of 7 percent per year.The required rate of return on the stock is 15 percent.
Required:
What is the value per share of the company's stock?

Question 59

Assume that you have just been hired as the controller of the Tonnage Manufacturing Company.In order to be fully apprised of the financial and operating condition of the company,you have decided to analyze several of the key accounts appearing on the company's financial statements.An account of obvious interest to you is the company's trade accounts receivable.
Identify specific attributes of the accounts receivable that you would examine as well as any ratios that might be useful to you in your analysis.

Question 60

The inventory of Regatta Company averages $1,315,500 at cost.During 2014,sales of $6,995,990 were made at 35 percent above cost.
Using the given data,compute the following:
(1)Inventory turnover rate for 2014.
(2)Number of days' sales in inventory.

Question 61

The following information has been collected for Lightfoot Company:

Required:
Estimate the price per share for Lightfoot Company's common stock using the discounted free cash flow model.

Question 62

The following information has been collected for Lloyd Turnbull Company:

Required:
Estimate the price per share for Lloyd Turnbull's common stock using the discounted free cash flow model.

Question 63

The following information has been collected regarding Boonaroo Company:

Estimate a price per share for the stock of Boonaroo using the following equity valuation models:
1.Constant future dividends
2.Constant dividend growth
3.Price-earnings multiple

Question 64

The following information has been collected for Enzo Company:

Required:
Estimate the price per share for Enzo Company's common stock using the discounted free cash flow model.

Question 65

Spiritlight Ventures shows the following information in their income statements:

Calculate the following ratios for 2014 and 2013 using the given data:
(1)Inventory turnover rate.
(2)Number of days' sales in inventories.
(3)Gross profit margin on sales.