Question 1

The debt to assets ratio measures

Accepted Answer

The debt to assets ratio measures the percentage of the total assets that are provided by creditors, indicating the extent to which the company is reliant on debt financing. It is calculated by dividing total liabilities by total assets. It does not provide information on profitability, current year interest payments, or dividend payments.

Question 2

Ratios are used as tools in financial analysis

Accepted Answer

Ratios provide insight into the relationships between different financial statement items, which may not be immediately apparent from just looking at the individual items. They can help identify trends, strengths, and weaknesses in a company's financial performance. Ratios are not prescribed by GAAP, but they are widely used in financial analysis. While individual ratios may be meaningful, it is their comparison to industry standards or historical trends that provide the most valuable information.

Question 3

Trading on the equity (leverage) refers to the

Accepted Answer

Trading on equity or leverage involves using borrowed funds or debt to finance investments instead of relying solely on equity or owner-provided capital. This can increase the potential return to owners because debt often has a lower cost of capital compared to equity. However, it also increases the risk of financial distress or default if earnings are not sufficient to cover the debt payments.

Question 4

The asset turnover measures

Accepted Answer

The asset turnover measures how efficiently a company uses its assets to generate sales. It is calculated by dividing the company's net sales by its average total assets. It does not measure how often a company replaces its assets, the portion of assets financed by creditors, or the overall rate of return on assets.

Question 5

The current assets of Orangette Company are $292,500. The current liabilities are $130,000. The current ratio expressed as a proportion is

Accepted Answer

Current ratio = current assets / current liabilities
Current ratio = $292,500 / $130,000
Current ratio = 2.25:1, which means that for every $1 of current liabilities, the company has $2.25 of current assets to cover those liabilities.

Question 6

BVI Corporation had net income of $1,600,000 and paid dividends to common stockholders of $320,000 in 2017. The weighted average number of shares outstanding in 2017 was 500,000 shares. BVI Corporation's common stock is selling for $50 per share on the NASDAQ. BVI Corporation's payout ratio for 2017 is

Accepted Answer

The payout ratio is calculated as dividends paid divided by net income. Here, it is $320,000 / $1,600,000 = 20%.

Question 7

Rama Company reported the following on its income statement: $\begin{array}{ll}
\text { Income before income taxes } & \$ 500,000 \
\text { Income tax expense } & 150,000 \
\text { Net income } & \$ 350,000
\end{array}$ An analysis of the income statement revealed that interest expense was $80,000. Rama Company's times interest earned was

Accepted Answer

The answer of Rama Company reported the following on its...

Question 8

Tito Corporation had net income of $2,000,000 and paid dividends to common stockholders of $300,000 in 2017. The weighted average number of shares outstanding in 2017 was 400,000 shares. Tito Corporation's common stock is selling for $50 per share on the NASDAQ. Tito Corporation's payout ratio for 2017 is

Accepted Answer

Payout Ratio = Dividends Paid / Net Income 
Payout Ratio = $300,000 / $2,000,000 
Payout Ratio = 0.15 or 15%
Therefore, the correct answer is C) 15%.

Question 9

Ed's Drive-In had $175,000 of current assets and $80,000 of current liabilities before borrowing $60,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on Ed's Drive-In's current ratio?

Accepted Answer

Before borrowing, Ed's Drive-In's current ratio was:

Current Ratio = Current Assets / Current Liabilities 
Current Ratio = $175,000 / $80,000 
Current Ratio = 2.1875

After borrowing, the current liabilities increase by $60,000 (the note payable).

New Current Liabilities = $80,000 + $60,000 = $140,000

So the new current ratio is:

Current Ratio = Current Assets / New Current Liabilities 
Current Ratio = $175,000 / $140,000 
Current Ratio = 1.25

Therefore, the borrowing transaction decreased Ed's Drive-In's current ratio from 2.1875 to 1.25.

Question 10

Which one of the following would not be considered a liquidity ratio?

Accepted Answer

Liquidity ratios are used to measure a company's ability to pay off its short-term debts, and current ratio, inventory turnover, and average collection period are all examples of liquidity ratios. Return on assets, on the other hand, is a profitability ratio, which measures a company's ability to generate profits from its assets.

Question 11

The profit margin is calculated by dividing

Accepted Answer

The profit margin indicates how much profit a company earned from its sales. This can be calculated by dividing the net income (total profit) by the net sales (total revenue generated from sales). Choice D is the only option that correctly calculates the profit margin using these two variables. Thus, D is the best choice.

Question 12

BVI Corporation had net income of $1,600,000 and paid dividends to common stockholders of $400,000 in 2017. The weighted average number of shares outstanding in 2017 was 500,000 shares. BVI Corporation's common stock is selling for $40 per share on the NASDAQ. BVI Corporation's price-earnings ratio is

Accepted Answer

First, we need to calculate the earnings per share (EPS) by dividing net income by the weighted average number of shares outstanding:

EPS = net income / weighted average number of shares outstanding
EPS = $1,600,000 / 500,000 shares
EPS = $3.20 per share

Next, we can calculate the price-earnings (P/E) ratio by dividing the stock price by the EPS:

P/E ratio = stock price / EPS 
P/E ratio = $40 per share / $3.20 per share 
P/E ratio = 12.5 times

Therefore, the answer is B) 12.5 times.

Question 13

A weakness of the current ratio is

Accepted Answer

The weakness of the current ratio is that it uses year-end balances of current asset and current liability accounts, which may not accurately reflect the company's liquidity position throughout the year.

Question 14

The asset turnover is

Accepted Answer

Asset turnover is calculated by dividing net sales by average total assets. This ratio measures how efficiently a company uses its assets to generate revenue.

Question 15

A company that is leveraged is one that

Accepted Answer

A company that is leveraged has debt financing, meaning they have borrowed money to finance their operations or growth. This can increase the potential for higher returns, but also comes with the risk of financial difficulty if the company is unable to generate sufficient cash flows to cover their debt payments. The other choices (A, C, and D) do not necessarily indicate leverage.

Question 16

Which one of the following ratios would not likely be used by a short-term creditor in evaluating whether to sell on credit to a company?

Accepted Answer

Asset turnover is a measure of a company's efficiency in using its assets to generate revenue, which is more relevant for long-term creditors and investors. Short-term creditors are more concerned with a company's ability to pay its debts in the short term, which is why they would typically rely on ratios such as the current ratio, inventory turnover, and accounts receivable turnover.

Question 17

Aps Company reported the following on its income statement: $\begin{array}{ll}
\text { Income before income taxes } & \$ 420,000 \
\text { Income tax expense } & 120,000 \
\text { Net income } & \$ 300,000
\end{array}$ An analysis of the income statement revealed that interest expense was $60,000. Aps Company's times interest earned was

Accepted Answer

Times interest earned = Income before income taxes / Interest expense= $420,000 / $60,000= 8 times

Question 18

The ratios that are used to determine a company's short-term debt paying ability are

Accepted Answer

The current ratio, accounts receivable turnover, and inventory turnover are all measures of a company's ability to pay short-term obligations. The current ratio assesses liquidity, while the turnover ratios evaluate how efficiently assets are converted to cash.

Question 19

Tito Corporation had net income of $2,000,000 and paid dividends to common stockholders of $300,000 in 2017. The weighted average number of shares outstanding in 2017 was 400,000 shares. Tito Corporation's common stock is selling for $50 per share on the NASDAQ. Tito Corporation's price-earnings ratio is

Accepted Answer

The answer of Tito Corporation had net income of $2,000,000...

Question 20

A supplier to a company would be most interested in the

Accepted Answer

A supplier is primarily concerned with a company's ability to pay its short-term obligations, which is indicated by the current ratio. This ratio measures a company's assets relative to its liabilities, providing insight into financial health in the near term.

Quiz 13: Financial Statement Analysis