Deck 23: Analysis of Financial Statements

Question 1

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

Answer 1

B

Question 2

Rauh Corporation had a current ratio of 2.0 at the end of 2010. Current assets and current liabilities increased by equal amounts during 2011. 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.

Answer 2

B

Question 3

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

Answer 3

B

Question 4

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 5

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

How many times was bond interest earned?

A) 7.67
B) 11.67
C) 12.67
D) 13.67

Question 6

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 7

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 8

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

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

Question 9

A measure of profitability analysis is

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

Question 10

Millward Corporation's books disclosed the following information for the year ended December 31, 2011:

Millward's accounts receivable turnover is

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

Question 11

Selected financial data of Alexander Corporation for the year ended December 31, 2011, is presented below:

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

A) 2.8 to 1.
B) 4.8 to 1.
C) 6.0 to 1.
D) 9.0 to 1.

Question 12

Selected information from the accounting records of Ellison Manufacturing follows:

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

A) 102.2
B) 94.9
C) 87.6
D) 68.1

Question 13

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

What is Blain's current ratio?

A) 0.26 to 1
B) 0.30 to 1
C) 1.80 to 1
D) 3.60 to 1

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

On December 31, 2010 and 2011, Taft 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, 2011, was

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

Question 16

Orchard 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.
Orchard's common stock, which is listed on a major stock exchange, was quoted at $4 per share on December 31. Orchard'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 Orchard's common stock at December 31?

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

Question 17

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

What was Vassar's gross margin for 2011?

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

Question 18

Selected information for Henry Company is as follows:

Henry's return on common stockholder's equity, rounded to the nearest percentage point, for 2011 is

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

Question 19

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

Thorne's inventory turnover for 2011 is

A) 5.36 times.
B) 3.85 times.
C) 3.67 times.
D) 3.57 times.

Question 20

During the year, The Grap Company purchased $1,920,000 of inventory. The cost of goods sold for the year was $1,800,000 and the ending inventory at December 31 was $360,000. What was the inventory turnover for the year?

A) 5.0
B) 5.3
C) 6.0
D) 6.4

Question 21

Selected information from the 2011 and 2010 financial statements of SCL Corporation is presented below:


Refer to the SCL Corporation information above. SCL's account receivable turnover for 2011 is

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

Question 22

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

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

Question 23

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 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

The book value per share of common stock measures

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

Question 26

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 27

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 28

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 29

Selected information from the 2011 and 2010 financial statements of SCL Corporation is presented below:


Refer to the SCL Corporation information above. SCL's merchandise inventory turnover for 2011 is

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

Question 30

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

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

Question 31

Cleybourne Company wrote off an $800 uncollectible account receivable against the allowance for doubtful accounts with a balance of $2,100. 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 32

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 33

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 34

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) Return on investment
C) Price-earnings ratio
D) Quick ratio

Question 35

Selected information from the 2011 and 2010 financial statements of SCL Corporation is presented below:


Refer to the SCL Corporation information above. SCL's quick (acid test) ratio as December 31, 2011, is

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

Question 36

Selected information from the 2011 and 2010 financial statements of SCL Corporation is presented below:


Refer to the SCL Corporation information above. SCL's current ratio as of December 31, 2011, is

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

Question 37

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 38

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 39

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

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

Question 40

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 41

Waldo 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 42

A manufacturer/dealer disclosed the following information related to its selling activities and receivable balances:

Required:
1. Determine the ending gross accounts receivable balance for 2010 and 2011.
2. Did the accounts receivable turnover rise or fall from 2010 to 2011 and by how much?
3. Compute the age of accounts receivable for 2010 and 2011. Comment on the factors that might have caused the two ratios to change in 2011.
4. What effect does a significant increase in bad debt expense have on accounts receivable turnover and age of accounts receivable? Explain the effect in both real and economic terms.

Question 43

Income statements for LaRue Co. show the following:

From the data presented, calculate the following ratios for 2011 and 2010:

Question 44

The following information has been collected regarding Collins Company:

Estimate a price per share for Collins' stock using the following equity valuation models:

Question 45

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 46

Laura Anderson has just been assigned as the senior accountant on the audit of Larsen Manufacturing Company. Laura 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 Laura's analysis of the company's inventory accounts.

Question 47

The following 3 ratios have been computed using the financial statements for the year ended December 31, 2011, for CR Company:

The following additional information has been assembled:

Show how the values for the 3 ratios computed above differ if CR had used LIFO, depreciated the asset over 12 years, and recognized the full amount of its environmental cleanup obligation. Compute how the financial statements would differ if the alternative accounting methods had been used. Do not treat the use of these alternative methods as accounting changes. Ignore any income tax effects.

Question 48

The following information has been collected for Ben Locke Company:

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

Question 49

The following information has been collected for CLD Company:

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

Question 50

The following 3 ratios have been computed using the financial statements for the year ended December 31, 2011, for James Company:

The following additional information has been assembled:

Show how the values for the 3 ratios computed above differ if James had used FIFO, depreciated the asset over 8 years, and recognized only 5% of its environmental cleanup obligation. Compute how the financial statements would differ if the alternative accounting methods had been used. Do not treat the use of these alternative methods as accounting changes. Ignore any income tax effects.

Question 51

The following information has been collected regarding Benjamin Company:

Estimate a price per share for the stock of Benjamin using the following equity valuation models:

Question 52

Comparative balance sheet data for the Addyson Co. at the end of 2010 and 2011 follows:

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

Question 53

The following information has been collected regarding Douglas Company:

Estimate a price per share for the stock of Douglas using the following equity valuation models:

Question 54

Cosmo 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 55

The following 3 ratios have been computed using the financial statements for the year ended December 31, 2011, for Arthur Company:

The following additional information has been assembled:

Show how the values for the 3 ratios computed above differ if Arthur had used FIFO, depreciated the asset over 8 years, and recognized only 5% of its environmental cleanup obligation. Compute how the financial statements would differ if the alternative accounting methods had been used. Do not treat the use of these alternative methods as accounting changes. Ignore any income tax effects.

Question 56

The following information has been collected for Gordon Company:

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

Question 57

The balance sheet for the Byrne Dareed Corp. showed liabilities and stockholders' equity balances at the end of each year as given below:

Based on the data provided, compute the following ratios for 2011: