Deck 16: How Well Am I Doing Financial Statement Analysis

Question 1

What effect will a year-end increase in the market price of a corporation's common stock have on the following ratios?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Answer 1

A

Question 2

If the assets in which funds are invested have a rate of return lower than the fixed rate of return paid to the supplier of the funds, then financial leverage is positive.

Answer 2

False

Question 3

Trend percentages state several years' financial data in terms of a base year. For example, sales for every year would be stated as a percentage of the sales in the base year.

Answer 3

True

Question 4

Horizontal analysis of financial statements is accomplished through:

A) placing statement items on an after-tax basis.
B) common-size statements.
C) computing both earnings per share and the price-earnings ratio.
D) trend percentages.

Question 5

Assuming that a company has a current ratio greater than 1.0, repaying a short-term note payable will increase the current ratio.

Question 6

The gross margin percentage is computed taking the difference between sales and cost of goods and then dividing the result by sales.

Question 7

The inventory turnover ratio is equal to the average inventory balance divided by the cost of goods sold.

Question 8

Earnings per share of common stock will immediately increase as a result of:

A) the sale of additional shares of common stock by the company.
B) an increase in the dividends paid to common stockholders by the company.
C) an increase in the company's net income.
D) the issuance of bonds by the company to finance construction of new buildings.

Question 9

When computing the acid-test ratio, prepaid expenses are ignored.

Question 10

The price-earnings ratio is determined by dividing the price of a product by its profit margin.

Question 11

Only credit sales (i.e., sales on account) are included in the computation of the accounts receivable turnover.

Question 12

When computing the return on total assets, the after-tax effect of interest expense must be subtracted from net income.

Question 13

Net operating income will always increase when a company increases its accounts receivable turnover.

Question 14

The price-earnings ratio is computed by dividing the market price per share by the current earnings per share.

Question 15

The gross margin percentage is computed by dividing net income before interest and taxes by sales.

Question 16

In determining whether a company's financial condition is improving or deteriorating over time, vertical analysis of financial statement data would be more useful than horizontal analysis.

Question 17

An increase in the market price of a company's common stock will immediately affect its:

A) dividend yield ratio.
B) debt-to-equity ratio.
C) earnings per share of common stock.
D) dividend payout ratio.

Question 18

If the market value of a share of stock is greater than its book value, the stock is probably overpriced.

Question 19

The acid-test ratio is a test of the quality of accounts receivable--in other words, whether they are likely to be collected.

Question 20

Working capital equals current assets, plus noncurrent liabilities and stockholders' equity, less total assets.

Question 21

If a company converts a short-term note payable into a long-term note payable, this transaction would:

A) decrease working capital and increase the current ratio.
B) decrease working capital and decrease the current ratio.
C) decrease the current ratio and decrease the acid-test ratio.
D) increase working capital and increase the current ratio.

Question 22

The following data have been taken from your company's financial records for the current year:
The price-earnings ratio is:

A) 1.67
B) 15.0
C) 9.0
D) 7.0

Question 23

Which of the following would cause a corporation's inventory turnover ratio to increase?

A) an increase in the accounts receivable turnover.
B) an increase in sales price per unit without a reduction in the number of units sold.
C) a switch from the immediate cash payment of inventory purchases to the credit purchase of inventory with payment due in 60 days (sales are unaffected).
D) none of these.

Question 24

Information concerning the common stock of Morris Company as of the end of the company's fiscal year is presented below.
The dividend yield ratio is closest to:

A) 50.0%
B) 33.3%
C) 120.0%
D) 11.1%

Question 25

Craston Company's net income last year was $70,000. The company paid preferred dividends of $10,000 and its average common stockholders' equity was $480,000. The company's return on common stockholders' equity for the year was closest to:

A) 12.5%
B) 14.6%
C) 16.7%
D) 2.1%

Question 26

A company's current ratio and acid-test ratios are both greater than 1. If obsolete inventory is written off, this would:

A) decrease the acid-test ratio.
B) increase the acid-test ratio.
C) increase net working capital.
D) decrease the current ratio.

Question 27

Which one of the following would increase the working capital of a company?

A) Cash payment of payroll taxes payable.
B) Refinancing a short-term note payable with a two year note payable.
C) Cash collection of accounts receivable.
D) Payment of a 20-year mortgage payable with cash.

Question 28

VIM Company purchased $100,000 in inventory from its suppliers on credit terms. The company's acid-test ratio would most likely:

A) increase.
B) decrease.
C) be unchanged.
D) impossible to determine without more information.

Question 29

Allen Company's average collection period for accounts receivable was 40 days last year, but increased to 60 days this year. Which of the following would most likely account for this change?

A) a decrease in accounts receivable relative to sales.
B) a decrease in sales.
C) a relaxation of credit policies.
D) an increase in sales.

Question 30

Desktop Co. presently has a current ratio of 1.2 and an acid-test ratio of 0.8. Prepaying next year's office rent of $50,000 will:

A) have no effect on either the company's current ratio or its acid-test ratio.
B) have no effect on the company's current ratio but will decrease its acid-test ratio.
C) decrease the company's current ratio and decrease its acid-test ratio.
D) increase the company's current ratio and increase its acid-test ratio.

Question 31

Litten Corporation's most recent income statement appears below:
The gross margin percentage is closest to:

A) 92.0%
B) 416.5%
C) 24.0%
D) 47.9%

Question 32

Rahner Company has a current ratio of 1.75. This ratio will decrease if Rahner Company:

A) borrows cash using a six-month note.
B) pays the taxes payable which have been a current liability.
C) pays the following month's rent on the last day of the year.
D) sells inventory for more than their cost.

Question 33

Fulton Company's price-earnings ratio is 8.0 and the market price of a share of common stock is $32. The company has 3,000 shares of preferred stock outstanding with each share receiving a dividend of $3 per share. The earnings per share of common stock is:

A) $10
B) $7
C) $4
D) $3

Question 34

The Herald Company has 50,000 shares of common stock outstanding. Earnings per share of common stock for the year is $15.00. The dividend paid to the preferred stockholders during the year was $2.00 per share. Common stockholders received dividends totaling $150,000. The dividend payout ratio for the year was closest to:

A) 38.4%
B) 33.3%
C) 23.1%
D) 20.0%

Question 35

The Miller Company paid off some of its accounts payable using cash. The company's current ratio is greater than 1. The company's current ratio would:

A) increase.
B) decrease.
C) remain unchanged.
D) impossible to determine from the information given.

Question 36

If a company has a high current ratio but a low acid-test ratio, one can conclude that:

A) the company has a large outstanding accounts receivable balance.
B) the company has a large investment in inventory.
C) the company has a large amount of current liabilities.
D) the company's financial leverage is very high.

Question 37

Arston Company's net income last year was $300,000. The company has 150,000 shares of common stock and 60,000 shares of preferred stock outstanding. There was no change in the number of common or preferred shares outstanding during the year. The company declared and paid dividends last year of $1.50 per share on the common stock and $0.60 per share on the preferred stock. The earnings per share of common stock is closest to:

A) $2.00
B) $1.76
C) $0.50
D) $2.24

Question 38

If a company's bonds bear an interest rate of 8%, the tax rate is 30%, and the company's assets are generating an after-tax return of 7%, then the leverage would be:

A) positive.
B) negative.
C) neither positive or negative.
D) impossible to determine without knowing the return on common stockholders' equity.

Question 39

Which of the following accounts would be included in the calculation of the acid-test ratio?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 40

Which of the following is true regarding the calculation of return on total assets?

A) The numerator of the ratio consists only of net income.
B) The denominator of the ratio consists of the balance of total assets at the end of the period under consideration.
C) The numerator of the ratio consists of net income plus interest expense times the tax rate.
D) The numerator of the ratio consists of net income plus interest expense times one minus the tax rate.

Question 41

Montgomery Corporation's most recent income statement appears below:
The beginning balance of total assets was $720,000 and the ending balance was $730,000. The return on total assets is closest to:

A) 17.4%
B) 21.2%
C) 24.8%
D) 30.3%

Question 42

Harrison Company, a retailer, had cost of goods sold of $180,000 last year. The beginning inventory balance was $26,000 and the ending inventory balance was $24,000. The company's inventory turnover was closest to:

A) 7.20
B) 6.92
C) 3.60
D) 7.50

Question 43

Grast Company had $170,000 in sales on account last year. The beginning accounts receivable balance was $14,000 and the ending accounts receivable balance was $16,000. The company's average collection period was closest to:

A) 32.21 days
B) 30.06 days
C) 64.41 days
D) 34.35 days

Question 44

Excerpts from Melby Corporation's most recent balance sheet appear below:
Net income for Year 2 was $94,000. Dividends on common stock were $33,000 in total and dividends on preferred stock were $11,000 in total. The return on common stockholders' equity for Year 2 is closest to:

A) 7.8%
B) 7.4%
C) 4.8%
D) 8.8%

Question 45

Wernett Corporation's net income for the most recent year was $1,509,000. A total of 200,000 shares of common stock and 100,000 shares of preferred stock were outstanding throughout the year. Dividends on common stock were $4.95 per share and dividends on preferred stock were $1.35 per share. The earnings per share of common stock is closest to:

A) $1.92
B) $7.55
C) $6.87
D) $2.60

Question 46

Starrs Company has current assets of $300,000 and current liabilities of $200,000. Which of the following transactions would increase its working capital?

A) Prepayment of $50,000 of next year's rent
B) Refinancing $50,000 of short-term debt with long-term debt
C) Acquisition of land valued at $50,000 by issuing new common stock
D) Purchase of $50,000 of marketable securities for cash

Question 47

Centerville Company's debt-to-equity ratio is 0.60 Total assets are $320,000, current assets are $170,000 and working capital is $80,000. Centerville's long-term liabilities must be:

A) $30,000
B) $80,000
C) $90,000
D) $120,000

Question 48

Leonhardt Corporation's net income last year was $3,800,000. The dividend on common stock was $2.00 per share and the dividend on preferred stock was $1.80 per share. The market price of common stock at the end of the year was $53.40 per share. Throughout the year, 500,000 shares of common stock and 100,000 shares of preferred stock were outstanding. The price-earnings ratio is closest to:

A) 9.54
B) 7.03
C) 7.38
D) 10.19

Question 49

Iffert Corporation's net income last year was $4,040,000. The dividend on common stock was $6.40 per share and the dividend on preferred stock was $2.30 per share. The market price of common stock at the end of the year was $43.30 per share. Throughout the year, 300,000 shares of common stock and 100,000 shares of preferred stock were outstanding. The dividend payout ratio is closest to:

A) 0.50
B) 0.91
C) 1.02
D) 0.48

Question 50

Marcy Corporation's current ratio is currently 1.75. The firm's current ratio cannot fall below 1.5 without violating agreements with its bondholders. If current liabilities are presently $250 million, the maximum new short-term debt that can be issued to finance an equivalent amount of inventory expansion is:

A) $41.67 million
B) $375.00 million
C) $125.00 million
D) $62.50 million

Question 51

Frawner Company had $140,000 in sales on account last year. The beginning accounts receivable balance was $12,000 and the ending accounts receivable balance was $10,000. The company's accounts receivable turnover was closest to:

A) 11.67
B) 6.36
C) 14.00
D) 12.73

Question 52

Data from Murrish Corporation's most recent balance sheet appear below:
A total of 200,000 shares of common stock and 40,000 shares of preferred stock were outstanding at the end of the year. The book value per share is closest to:

A) $5.00
B) $5.70
C) $2.65
D) $4.70

Question 53

The following account balances have been provided for the end of the most recent year:
The book value per share is:

A) $28
B) $25
C) $36
D) $34

Question 54

Bracken Company's net income last year was $85,000 and its interest expense was $10,000. Total assets at the beginning of the year were $660,000 and total assets at the end of the year were $600,000. The company's income tax rate was 30%. The company's return on total assets for the year was closest to:

A) 14.6%
B) 14.0%
C) 13.5%
D) 15.1%

Question 55

Draper Company's working capital is $12,000 and its current liabilities are $71,000. The company's current ratio is closest to:

A) 0.83
B) 1.17
C) 6.92
D) 0.17

Question 56

Selected data from Sheridan Corporation's year-end financial statements are presented below. The difference between average and ending inventory is immaterial.
Sheridan's sales for the year were:

A) $800,000
B) $480,000
C) $1,200,000
D) $240,000

Question 57

Last year, Bartberger Corporation's dividend on common stock was $10.20 per share and the dividend on preferred stock was $3.60 per share. The market price of common stock at the end of the year was $51.70 per share. The dividend yield ratio is closest to:

A) 0.74
B) 0.07
C) 0.20
D) 0.27

Question 58

The total assets of the Philbin Company on January 1 were $2.3 million and on December 31 were $2.5 million. Net income was $188,000. Dividends totaled $75,000, interest expense totaled $70,000, and the tax rate was 30%. The return on total assets was closest to:

A) 9.5%
B) 6.8%
C) 9.9%
D) 10.8%

Question 59

Eradicate Company has $16,000 in cash, $8,000 in marketable securities, $29,000 in account receivable, $30,000 in inventories, and $34,000 in current liabilities. The company's current assets consist of cash, marketable securities, accounts receivable, and inventory. The company's acid-test ratio is closest to:

A) 0.85
B) 2.44
C) 1.56
D) 1.32

Question 60

Harwichport Company has a current ratio of 3.5 and an acid-test ratio of 2.8. Current assets equal $175,000 of which $5,000 consists of prepaid expenses. The remainder of current assets consists of cash, accounts receivable, marketable securities, and inventory. Harwichport Company's inventory must be:

A) $30,000
B) $40,000
C) $50,000
D) $35,000

Question 61

Cintron Corporation's total current assets are $370,000, its noncurrent assets are $740,000, its total current liabilities are $300,000, its long-term liabilities are $430,000, and its stockholders' equity is $380,000. The current ratio is closest to:

A) 0.81
B) 0.70
C) 0.50
D) 1.23

Question 62

Lesmerises Corporation's most recent balance sheet and income statement appear below: Dividends on common stock during Year 2 totaled $40 thousand. Dividends on preferred stock totaled $10 thousand. The market price of common stock at the end of Year 2 was $2.85 per share.
The return on total assets for Year 2 is closest to:

A) 4.27%
B) 5.85%
C) 5.83%
D) 4.26%

Question 63

Last year Jack Company had a net income of $270,000, income tax expense of $50,000, and interest expense of $20,000. The company's times interest earned was closest to:

A) 17.00
B) 10.00
C) 13.50
D) 14.50

Question 64

Kramer Company has total assets of $180,000 and total liabilities of $60,000. The company's debt-to-equity ratio is closest to:

A) 0.25
B) 0.33
C) 0.50
D) 0.67

Question 65

Lesmerises Corporation's most recent balance sheet and income statement appear below: Dividends on common stock during Year 2 totaled $40 thousand. Dividends on preferred stock totaled $10 thousand. The market price of common stock at the end of Year 2 was $2.85 per share.

-The gross margin percentage for Year 2 is closest to:

A) 53.4%
B) 671.4%
C) 34.8%
D) 14.9%

Question 66

Dondero Corporation has provided the following data:
The accounts receivable turnover for this year is closest to:

A) 1.02
B) 0.98
C) 6.62
D) 6.70

Question 67

Biancuzzo Corporation has provided the following data from its most recent balance sheet:
The debt-to-equity ratio is closest to:

A) 5.60
B) 0.85
C) 6.60
D) 0.18

Question 68

Naser Corporation's total current assets are $390,000, its noncurrent assets are $500,000, its total current liabilities are $330,000, its long-term liabilities are $370,000, and its stockholders' equity is $190,000. Working capital is:

A) $130,000
B) $60,000
C) $190,000
D) $390,000

Question 69

Lesmerises Corporation's most recent balance sheet and income statement appear below: Dividends on common stock during Year 2 totaled $40 thousand. Dividends on preferred stock totaled $10 thousand. The market price of common stock at the end of Year 2 was $2.85 per share.
The return on common stockholders' equity for Year 2 is closest to:

A) 5.94%
B) 7.69%
C) 6.59%
D) 6.93%

Question 70

Data from Sawin Corporation's most recent balance sheet appear below:
The company's acid-test ratio is closest to:

A) 0.12
B) 0.39
C) 0.70
D) 0.87

Question 71

The times interest earned ratio of McHugh Company is 4.5. The interest expense for the year was $20,000, and the company's tax rate is 40%. The company's net income is:

A) $22,000
B) $42,000
C) $54,000
D) $66,000

Question 72

Olea Corporation has provided the following data:
The inventory turnover for this year is closest to:

A) 2.50
B) 1.08
C) 0.92
D) 2.41

Question 73

Pauk Corporation has provided the following data from its most recent income statement:
The times interest earned ratio is closest to:

A) 2.49
B) 3.55
C) 1.03
D) 1.49

Question 74

Lesmerises Corporation's most recent balance sheet and income statement appear below: Dividends on common stock during Year 2 totaled $40 thousand. Dividends on preferred stock totaled $10 thousand. The market price of common stock at the end of Year 2 was $2.85 per share.
The book value per share at the end of Year 2 is closest to:

A) $0.30
B) $4.60
C) $5.10
D) $8.20

Question 75

Data from Waisner Corporation's most recent balance sheet and income statement appear below:
The average sale period for this year is closest to:

A) 134.7 days
B) 15.2 days
C) 14.0 days
D) 137.7 days

Question 76

Lesmerises Corporation's most recent balance sheet and income statement appear below: Dividends on common stock during Year 2 totaled $40 thousand. Dividends on preferred stock totaled $10 thousand. The market price of common stock at the end of Year 2 was $2.85 per share.
The dividend yield ratio for Year 2 is closest to:

A) 1.75%
B) 7.02%
C) 80.00%
D) 8.77%

Question 77

Irawan Company, a retailer, had cost of goods sold of $200,000 last year. The beginning inventory balance was $24,000 and the ending inventory balance was $22,000. The company's average sale period was closest to:

A) 41.98 days
B) 83.95 days
C) 43.80 days
D) 40.15 days

Question 78

Lesmerises Corporation's most recent balance sheet and income statement appear below: Dividends on common stock during Year 2 totaled $40 thousand. Dividends on preferred stock totaled $10 thousand. The market price of common stock at the end of Year 2 was $2.85 per share.
The price-earnings ratio for Year 2 is closest to:

A) 5.70
B) 8.14
C) 4.13
D) 9.50

Question 79

Lesmerises Corporation's most recent balance sheet and income statement appear below: Dividends on common stock during Year 2 totaled $40 thousand. Dividends on preferred stock totaled $10 thousand. The market price of common stock at the end of Year 2 was $2.85 per share.
The earnings per share of common stock for Year 2 is closest to:

A) $0.69
B) $0.35
C) $0.30
D) $0.50

Question 80

Data from Alf Corporation's most recent balance sheet and income statement appear below:
The average collection period for this year is closest to:

A) 78.5 days
B) 74.3 days
C) 40.6 days
D) 36.2 days