Question 1

Cross-sectional analysis involves the comparison of different firms' financial ratios at the same point in time.

Accepted Answer

Cross-sectional analysis compares different firms' financial ratios at the same point in time to understand how they differ from each other. This allows for a comparison between companies in the same industry or sector and can identify potential strengths or weaknesses of individual firms.

Question 2

Ag Silver Mining, Inc. has $500,000 of earnings before interest and taxes at the year end. Interest expenses for the year were $10,000. The firm expects to distribute $100,000 in dividends. Calculate the earnings after taxes for the firm assuming a 40 percent tax on ordinary income.

Accepted Answer

The answer of Ag Silver Mining, Inc. has $500,000 of...

Question 3

At the end of 2015, Long Life Light Bulb Corporation announced a gross profit of $1 million. The company has also established that over the course of this year that it has incurred $345,000 in operating expenses and $125,000 in interest expenses. The company is subject to a 30% tax rate and has declared $57,000 of total preferred stock dividends.
(a) Calculate the earnings available for common stockholders?
(b) Compute the increased retained earnings for 2015 if the company were to declare a $4.25 common stock dividend. The company has 15,000 shares of common stock outstanding.

Accepted Answer

The answer of At the end of 2015, Long Life...

Question 4

A firm's year-end retained earnings balance are $670,000 and $560,000 for 2014 and 2015, respectively. The firm reported net profits after taxes of $100,000 in 2015. The firm paid dividends of ________ in 2015.

Accepted Answer

The answer of A firm's year-end retained earnings balance are...

Question 5

On December 31, 2014, Bradshaw Corporation had $485,000 as an ending balance for its retained earnings account. During 2015, the corporation declared a $3.50/share dividend to its stockholders. The company has 35,000 shares of common stock outstanding. When the books were closed for 2015 year end, the corporation had a final retained earnings balance of $565,000. What was the net profit earned by Bradshaw Corporation during 2015?

Accepted Answer

The answer of On December 31, 2014, Bradshaw Corporation had...

Question 6

Information on the accounting policies, procedures, calculations, and transactions underlying entries in the financial statements can be found on ________.

Accepted Answer

The notes to the financial statements provide specific details about accounting policies, procedures, calculations, and transactions that are used to prepare the financial statements. The statement of retained earnings only shows changes in retained earnings over time, and the proxy statement and management discussion and analysis provide other types of information but not specifically on accounting policies and procedures.

Question 7

Creditors are primarily interested in short-term liquidity of the company and its ability to make interest and principal payments.

Accepted Answer

Creditors typically focus on the short-term liquidity of a company, as they want to ensure that the company can meet its interest and principal payments on time. They are less concerned with long-term profitability or growth potential.

Question 8

Reliable Auto Parts has 5,000 shares of common stock outstanding. The company also has the following amounts in revenue and expense accounts.  Calculate
(a) gross profits.
(b) operating profits.
(c) net profits before taxes.
(d) net profits after taxes (assume a 40 percent tax rate).
(e) earnings available to common stockholders.
(f) earnings per share.

Accepted Answer

The answer of Reliable Auto Parts has 5,000 shares of...

Question 9

Both current and prospective shareholders are interested in the firm's current and future level of risk and return, which directly affect share price.

Accepted Answer

Shareholders are interested in the firm's risk and return because it affects the value or price of their shares. High levels of risk and low returns can lead to a decrease in share price, while low levels of risk and high returns can lead to an increase in share price. Therefore, both current and prospective shareholders closely monitor a firm's level of risk and return.

Question 10

Time-series analysis evaluates the performance of various firms at the same point in time using financial ratios.

Accepted Answer

Time-series analysis involves evaluating the performance of a single firm over time using financial ratios. It does not compare the performance of multiple firms at the same point in time. Instead, cross-sectional analysis is used for comparing multiple firms at the same point in time using financial ratios.

Question 11

Due to inflationary effects, inventory costs and depreciation write-offs can differ from their true values, thereby distorting profits.

Accepted Answer

Inflation can affect the true value of inventory costs and depreciation write-offs, leading to distortions in profits.

Question 12

Benchmarking is a type of cross-sectional analysis in which a firm's ratios are compared to a key competitor firm within the same industry, primarily to identify areas for improvement.

Accepted Answer

Benchmarking involves comparing a firm's ratios to those of a key competitor in the same industry to identify areas where the firm can improve relative to its competitor.

Question 13

Time-series analysis is the evaluation of a firm's financial performance in comparison to other firm(s) at the same point in time.

Accepted Answer

Time-series analysis is actually the evaluation of a firm's financial performance over time, typically using financial ratios or other metrics to compare performance across different periods. Comparing a firm's performance to other firms at the same point in time would be considered cross-sectional analysis.

Question 14

FASB Standard No. 52 mandates that U.S.-based companies must translate their foreign-currency-denominated assets and liabilities into dollars using the ________.

Accepted Answer

FASB Standard No. 52 requires the use of the current exchange rate to translate foreign-currency-denominated assets and liabilities into dollars. This means that the exchange rate in effect on the balance sheet date should be used.

Question 15

Sunshine Corporation had a retained earnings balance of $850,000 at the beginning of 2015. By the end of 2015, the company's retained earnings balance stood at $950,000. During 2015, the company earned $245,000 as net profits after paying its taxes. The company was then able to pay its preferred stockholders a sum of $45,000. Compute the common stock dividend per share in 2015 assuming 10,000 shares of common stock outstanding.

Accepted Answer

The answer of Sunshine Corporation had a retained earnings balance...

Question 16

Benchmarking is a type of time-series analysis in which the firm's ratio values are compared to those of a key competitor or group of competitors, primarily to isolate areas of opportunity for improvement.

Accepted Answer

Benchmarking involves comparing a company's processes, performance metrics, and products to industry best practices or leading competitors, but it is not a type of time-series analysis. Time-series analysis involves analyzing data points collected or recorded at specific time intervals to identify trends, cycles, or seasonal variations over time.

Question 17

A single key ratio of a firm provides all the information required to judge the overall performance of the firm.

Accepted Answer

A single ratio cannot provide a comprehensive view of a firm's overall performance. It is important to consider multiple factors, such as liquidity, profitability, efficiency, and solvency, to gain a more complete understanding of the firm's financial health.

Question 18

The basic inputs to an effective financial analysis are the firm's income statement and the balance sheet.

Accepted Answer

The income statement and balance sheet are the two primary financial statements that provide key information for financial analysis. Other inputs may include cash flow statements, management's discussion and analysis, and notes to the financial statements.

Question 19

Colonial Furniture's net profits before taxes for 2015 totaled $354,000. The company's total retained earnings were $338,000 for 2014 year-end and $389,000 for 2015 year-end. Colonial is subject to a 26 percent tax rate. What was the cash dividend declared by Colonial Furniture in 2015?

Accepted Answer

The answer of Colonial Furniture's net profits before taxes for...

Question 20

Ratios merely direct an analyst to potential areas of concern and it does not provide conclusive evidence as to the existence of a problem.

Accepted Answer

Ratios are tools that offer a way to quickly compare and evaluate financial information. However, they only indicate potential issues and do not provide conclusive evidence of problems. Further analysis and investigation are necessary to confirm the existence of a problem.

Quiz 3: Financial Statements and Ratio Analysis