Question 1

__________ is a true statement.

Accepted Answer

During periods of inflation, the use of LIFO results in lower priced inventory remaining in stock; thus the balance sheet understates the actual inventory values.

Question 2

The financial statements of Midwest Tours are given below. $\begin{array}{c}
 
\text {  Midwest Tours } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$  2,500,000 \
\text { Cost of goods sold } &   \underline {1,260,000} \
\text { Gross profit } & 1,240,000  \
\text { Selling \& administrative expenses } &  \underline { 700,000} \
\text { Operating profit } & 540,000 \
\text { Interest expense } &  \underline {160,000 }\
\text { Income before tax } & 380,000 \
\text { Tax expense } &  \underline {152,000} \
 \text { Net income } &  \underline {\$ 228,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 60,000 \
 \text {  Accounts receivable } &  500,000  \
 \text {   Inventory } &  \underline {300,000} \
 \text {Total current assets  } &\$ 860,000  \
 \text {Fixed assets  } &  \underline {2,180,000} \
 \text { Total assets } &  \underline {\$  3,040,000} \
\
 \text { Accounts Payable } &\$ 200,000 \
 \text { Bank loan } & \underline {460,000} \
 \text { Total current liabilities } & \$ 660,000 \
 \text {Bond payable  } & \underline { 860,000} \
 \text {  Total liabilities } & \underline {\$  1,520,000  }\
 \text { Common stock ( 130,000 shares) } & \$ 120,000 \
 \text {Retained earnings  } & \underline {1,400,000}\
 \text { Total liabilities \& equity } &  \underline {\$  3,040,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$ 50,000 \
450,000 \
 \underline { 270,000  }\
 \$  770,000 \
 \underline { 2,000,000} \
 \underline { \$ 2,770,000 }\
\

\$ 170,000 \
 \underline { 440,000} \
 \$  610,000  \
 \underline {860,000} \
 \underline {\$  1,470,000 }\
\$  120,000\
 \underline {1,300,000} \
 \underline { \$ 2,890,000 } \
\end{array}
\end{array}\) Note: The common shares are trading in the stock market for $36 each. Refer to the financial statements of Midwest Tours. The firm's quick ratio for 2009 is

Accepted Answer

The answer of The financial statements of Midwest Tours are...

Question 3

One problem with comparing financial ratios prepared by different reporting agencies is

Accepted Answer

One problem with comparing financial ratios prepared by different reporting agencies is agencies vary in their policies as to what is included in specific calculations.

Question 4

Fundamental analysis uses

Accepted Answer

Relative strength and price momentum are technical, not fundamental, tools.

Question 5

The financial statements of Midwest Tours are given below. $\begin{array}{c}
 
\text {  Midwest Tours } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$  2,500,000 \
\text { Cost of goods sold } &   \underline {1,260,000} \
\text { Gross profit } & 1,240,000  \
\text { Selling \& administrative expenses } &  \underline { 700,000} \
\text { Operating profit } & 540,000 \
\text { Interest expense } &  \underline {160,000 }\
\text { Income before tax } & 380,000 \
\text { Tax expense } &  \underline {152,000} \
 \text { Net income } &  \underline {\$ 228,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 60,000 \
 \text {  Accounts receivable } &  500,000  \
 \text {   Inventory } &  \underline {300,000} \
 \text {Total current assets  } &\$ 860,000  \
 \text {Fixed assets  } &  \underline {2,180,000} \
 \text { Total assets } &  \underline {\$  3,040,000} \
\
 \text { Accounts Payable } &\$ 200,000 \
 \text { Bank loan } & \underline {460,000} \
 \text { Total current liabilities } & \$ 660,000 \
 \text {Bond payable  } & \underline { 860,000} \
 \text {  Total liabilities } & \underline {\$  1,520,000  }\
 \text { Common stock ( 130,000 shares) } & \$ 120,000 \
 \text {Retained earnings  } & \underline {1,400,000}\
 \text { Total liabilities \& equity } &  \underline {\$  3,040,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$ 50,000 \
450,000 \
 \underline { 270,000  }\
 \$  770,000 \
 \underline { 2,000,000} \
 \underline { \$ 2,770,000 }\
\

\$ 170,000 \
 \underline { 440,000} \
 \$  610,000  \
 \underline {860,000} \
 \underline {\$  1,470,000 }\
\$  120,000\
 \underline {1,300,000} \
 \underline { \$ 2,890,000 } \
\end{array}
\end{array}\) Note: The common shares are trading in the stock market for $36 each. Refer to the financial statements of Midwest Tours. The firm's fixed asset turnover ratio for 2009 is

Accepted Answer

The answer of The financial statements of Midwest Tours are...

Question 6

What best explains why a firm's ratio of long-term debt/total capital is lower than the industry average, while the ratio of income before interest and taxes/debt interest charges is higher than the industry average?

Accepted Answer

The firm is using more short-term debt, possibly to finance fixed assets, than the average firm. The coverage ratio includes only interest on long-term debt.

Question 7

The financial statements of Midwest Tours are given below. $\begin{array}{c}
 
\text {  Midwest Tours } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$  2,500,000 \
\text { Cost of goods sold } &   \underline {1,260,000} \
\text { Gross profit } & 1,240,000  \
\text { Selling \& administrative expenses } &  \underline { 700,000} \
\text { Operating profit } & 540,000 \
\text { Interest expense } &  \underline {160,000 }\
\text { Income before tax } & 380,000 \
\text { Tax expense } &  \underline {152,000} \
 \text { Net income } &  \underline {\$ 228,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 60,000 \
 \text {  Accounts receivable } &  500,000  \
 \text {   Inventory } &  \underline {300,000} \
 \text {Total current assets  } &\$ 860,000  \
 \text {Fixed assets  } &  \underline {2,180,000} \
 \text { Total assets } &  \underline {\$  3,040,000} \
\
 \text { Accounts Payable } &\$ 200,000 \
 \text { Bank loan } & \underline {460,000} \
 \text { Total current liabilities } & \$ 660,000 \
 \text {Bond payable  } & \underline { 860,000} \
 \text {  Total liabilities } & \underline {\$  1,520,000  }\
 \text { Common stock ( 130,000 shares) } & \$ 120,000 \
 \text {Retained earnings  } & \underline {1,400,000}\
 \text { Total liabilities \& equity } &  \underline {\$  3,040,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$ 50,000 \
450,000 \
 \underline { 270,000  }\
 \$  770,000 \
 \underline { 2,000,000} \
 \underline { \$ 2,770,000 }\
\

\$ 170,000 \
 \underline { 440,000} \
 \$  610,000  \
 \underline {860,000} \
 \underline {\$  1,470,000 }\
\$  120,000\
 \underline {1,300,000} \
 \underline { \$ 2,890,000 } \
\end{array}
\end{array}\) Note: The common shares are trading in the stock market for $36 each. Refer to the financial statements of Midwest Tours. The firm's leverage ratio for 2009 is

Accepted Answer

The answer of The financial statements of Midwest Tours are...

Question 8

The financial statements of Midwest Tours are given below. $\begin{array}{c}
 
\text {  Midwest Tours } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$  2,500,000 \
\text { Cost of goods sold } &   \underline {1,260,000} \
\text { Gross profit } & 1,240,000  \
\text { Selling \& administrative expenses } &  \underline { 700,000} \
\text { Operating profit } & 540,000 \
\text { Interest expense } &  \underline {160,000 }\
\text { Income before tax } & 380,000 \
\text { Tax expense } &  \underline {152,000} \
 \text { Net income } &  \underline {\$ 228,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 60,000 \
 \text {  Accounts receivable } &  500,000  \
 \text {   Inventory } &  \underline {300,000} \
 \text {Total current assets  } &\$ 860,000  \
 \text {Fixed assets  } &  \underline {2,180,000} \
 \text { Total assets } &  \underline {\$  3,040,000} \
\
 \text { Accounts Payable } &\$ 200,000 \
 \text { Bank loan } & \underline {460,000} \
 \text { Total current liabilities } & \$ 660,000 \
 \text {Bond payable  } & \underline { 860,000} \
 \text {  Total liabilities } & \underline {\$  1,520,000  }\
 \text { Common stock ( 130,000 shares) } & \$ 120,000 \
 \text {Retained earnings  } & \underline {1,400,000}\
 \text { Total liabilities \& equity } &  \underline {\$  3,040,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$ 50,000 \
450,000 \
 \underline { 270,000  }\
 \$  770,000 \
 \underline { 2,000,000} \
 \underline { \$ 2,770,000 }\
\

\$ 170,000 \
 \underline { 440,000} \
 \$  610,000  \
 \underline {860,000} \
 \underline {\$  1,470,000 }\
\$  120,000\
 \underline {1,300,000} \
 \underline { \$ 2,890,000 } \
\end{array}
\end{array}\) Note: The common shares are trading in the stock market for $36 each. Refer to the financial statements of Midwest Tours. The firm's average collection period for 2009 is

Accepted Answer

The average collection period is calculated as (Accounts Receivable / Sales) * 365. For 2009, it is (500,000 / 2,500,000) * 365 = 73 days. However, the choices provided seem to be incorrect based on this calculation.

Question 9

__________ best explains a ratio of sales/average net fixed assets that exceeds the industry average.

Accepted Answer

If the firm has more old plant and equipment than competing firms, the denominator is deflated, thus producing a higher than average ratio.

Question 10

The financial statements of Midwest Tours are given below. $\begin{array}{c}
 
\text {  Midwest Tours } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$  2,500,000 \
\text { Cost of goods sold } &   \underline {1,260,000} \
\text { Gross profit } & 1,240,000  \
\text { Selling \& administrative expenses } &  \underline { 700,000} \
\text { Operating profit } & 540,000 \
\text { Interest expense } &  \underline {160,000 }\
\text { Income before tax } & 380,000 \
\text { Tax expense } &  \underline {152,000} \
 \text { Net income } &  \underline {\$ 228,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 60,000 \
 \text {  Accounts receivable } &  500,000  \
 \text {   Inventory } &  \underline {300,000} \
 \text {Total current assets  } &\$ 860,000  \
 \text {Fixed assets  } &  \underline {2,180,000} \
 \text { Total assets } &  \underline {\$  3,040,000} \
\
 \text { Accounts Payable } &\$ 200,000 \
 \text { Bank loan } & \underline {460,000} \
 \text { Total current liabilities } & \$ 660,000 \
 \text {Bond payable  } & \underline { 860,000} \
 \text {  Total liabilities } & \underline {\$  1,520,000  }\
 \text { Common stock ( 130,000 shares) } & \$ 120,000 \
 \text {Retained earnings  } & \underline {1,400,000}\
 \text { Total liabilities \& equity } &  \underline {\$  3,040,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$ 50,000 \
450,000 \
 \underline { 270,000  }\
 \$  770,000 \
 \underline { 2,000,000} \
 \underline { \$ 2,770,000 }\
\

\$ 170,000 \
 \underline { 440,000} \
 \$  610,000  \
 \underline {860,000} \
 \underline {\$  1,470,000 }\
\$  120,000\
 \underline {1,300,000} \
 \underline { \$ 2,890,000 } \
\end{array}
\end{array}\) Note: The common shares are trading in the stock market for $36 each. Refer to the financial statements of Midwest Tours. The firm's inventory turnover ratio for 2009 is

Accepted Answer

The answer of The financial statements of Midwest Tours are...

Question 11

Assuming continued inflation, a firm that uses LIFO will tend to have a(n) ________current ratio than a firm using FIFO, and the difference will tend to __________ as time passes.

Accepted Answer

A firm using LIFO will have lower priced inventory, thus resulting in a lower current ratio. If inflation continues, these differences will increase over time.

Question 12

The level of real income of a firm can be distorted by the reporting of depreciation and interest expense. During periods of high inflation, the level of reported depreciation tends to __________ income, and the level of interest expense reported tends to __________ income.

Accepted Answer

Depreciation is based on historic costs; thus during periods of inflation depreciation is understated, which results in the overstatement of income. In periods of inflation, interest rates are high, and thus result in the understatement of the firm's long term earning capacity.

Question 13

Which of the following would best explain a situation where the ratio of net income/total equity of a firm is higher than the industry average, while the ratio of net income/total assets is lower than the industry average?

Accepted Answer

Assets are financed either by debt or equity. The situation described above could occur only if the firm is financing more assets with debt than are industry competitors.

Question 14

The financial statements of Midwest Tours are given below. $\begin{array}{c}
 
\text {  Midwest Tours } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$  2,500,000 \
\text { Cost of goods sold } &   \underline {1,260,000} \
\text { Gross profit } & 1,240,000  \
\text { Selling \& administrative expenses } &  \underline { 700,000} \
\text { Operating profit } & 540,000 \
\text { Interest expense } &  \underline {160,000 }\
\text { Income before tax } & 380,000 \
\text { Tax expense } &  \underline {152,000} \
 \text { Net income } &  \underline {\$ 228,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 60,000 \
 \text {  Accounts receivable } &  500,000  \
 \text {   Inventory } &  \underline {300,000} \
 \text {Total current assets  } &\$ 860,000  \
 \text {Fixed assets  } &  \underline {2,180,000} \
 \text { Total assets } &  \underline {\$  3,040,000} \
\
 \text { Accounts Payable } &\$ 200,000 \
 \text { Bank loan } & \underline {460,000} \
 \text { Total current liabilities } & \$ 660,000 \
 \text {Bond payable  } & \underline { 860,000} \
 \text {  Total liabilities } & \underline {\$  1,520,000  }\
 \text { Common stock ( 130,000 shares) } & \$ 120,000 \
 \text {Retained earnings  } & \underline {1,400,000}\
 \text { Total liabilities \& equity } &  \underline {\$  3,040,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$55,000 \
495,000 \
 \underline {295,000} \
 \$ 845,000 \
\underline { 2,175,000} \
\underline { \$ 3,020,000 }\

\
\$ 195,000 \
\underline { 455,000} \
\$ 650,000 \
\underline { 860,000 }\
\underline { \$ 1,510,000} \
115,000 \
\underline { 1,395,000 }\
\underline { \$  3,020,000} \

\end{array}
\end{array}\)
 Note: The common shares are trading in the stock market for $36 each. Refer to the financial statements of Midwest Tours. The firm's asset turnover ratio for 2009 is

Accepted Answer

The answer of The financial statements of Midwest Tours are...

Question 15

The financial statements of Midwest Tours are given below. $\begin{array}{c}
 
\text {  Midwest Tours } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$  2,500,000 \
\text { Cost of goods sold } &   \underline {1,260,000} \
\text { Gross profit } & 1,240,000  \
\text { Selling \& administrative expenses } &  \underline { 700,000} \
\text { Operating profit } & 540,000 \
\text { Interest expense } &  \underline {160,000 }\
\text { Income before tax } & 380,000 \
\text { Tax expense } &  \underline {152,000} \
 \text { Net income } &  \underline {\$ 228,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 60,000 \
 \text {  Accounts receivable } &  500,000  \
 \text {   Inventory } &  \underline {300,000} \
 \text {Total current assets  } &\$ 860,000  \
 \text {Fixed assets  } &  \underline {2,180,000} \
 \text { Total assets } &  \underline {\$  3,040,000} \
\
 \text { Accounts Payable } &\$ 200,000 \
 \text { Bank loan } & \underline {460,000} \
 \text { Total current liabilities } & \$ 660,000 \
 \text {Bond payable  } & \underline { 860,000} \
 \text {  Total liabilities } & \underline {\$  1,520,000  }\
 \text { Common stock ( 130,000 shares) } & \$ 120,000 \
 \text {Retained earnings  } & \underline {1,400,000}\
 \text { Total liabilities \& equity } &  \underline {\$  3,040,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$50,000 \
450,000 \
\underline { 270,000} \
\$ 770,000 \
\underline { 2,000,000} \
\underline { \$ 2,770,000} \
\
\$170,000 \
\underline { 440,000} \
\$ 610,000 \
\underline { 860,000} \
\$ 1,470,000 \
\$ 120,000 \
\underline { 1,300,000 }\
\underline { \$ 2,890,000} \
\end{array}
\end{array}\)
 Note: The common shares are trading in the stock market for $36 each. Refer to the financial statements of Midwest Tours. The firm's return on equity ratio for 2009 is

Accepted Answer

The answer of The financial statements of Midwest Tours are...

Question 16

The financial statements of Midwest Tours are given below. $\begin{array}{c}
 
\text {  Midwest Tours } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$  2,500,000 \
\text { Cost of goods sold } &   \underline {1,260,000} \
\text { Gross profit } & 1,240,000  \
\text { Selling \& administrative expenses } &  \underline { 700,000} \
\text { Operating profit } & 540,000 \
\text { Interest expense } &  \underline {160,000 }\
\text { Income before tax } & 380,000 \
\text { Tax expense } &  \underline {152,000} \
 \text { Net income } &  \underline {\$ 228,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 60,000 \
 \text {  Accounts receivable } &  500,000  \
 \text {   Inventory } &  \underline {300,000} \
 \text {Total current assets  } &\$ 860,000  \
 \text {Fixed assets  } &  \underline {2,180,000} \
 \text { Total assets } &  \underline {\$  3,040,000} \
\
 \text { Accounts Payable } &\$ 200,000 \
 \text { Bank loan } & \underline {460,000} \
 \text { Total current liabilities } & \$ 660,000 \
 \text {Bond payable  } & \underline { 860,000} \
 \text {  Total liabilities } & \underline {\$  1,520,000  }\
 \text { Common stock ( 130,000 shares) } & \$ 120,000 \
 \text {Retained earnings  } & \underline {1,400,000}\
 \text { Total liabilities \& equity } &  \underline {\$  3,040,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$ 50,000 \
450,000 \
 \underline { 270,000  }\
 \$  770,000 \
 \underline { 2,000,000} \
 \underline { \$ 2,770,000 }\
\

\$ 170,000 \
 \underline { 440,000} \
 \$  610,000  \
 \underline {860,000} \
 \underline {\$  1,470,000 }\
\$  120,000\
 \underline {1,300,000} \
 \underline { \$ 2,890,000 } \
\end{array}
\end{array}\) Note: The common shares are trading in the stock market for $36 each. Refer to the financial statements of Midwest Tours. The firm's current ratio for 2009 is

Accepted Answer

The answer of The financial statements of Midwest Tours are...

Question 17

The financial statements of Midwest Tours are given below. $\begin{array}{c}
 
\text {  Midwest Tours } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$  2,500,000 \
\text { Cost of goods sold } &   \underline {1,260,000} \
\text { Gross profit } & 1,240,000  \
\text { Selling \& administrative expenses } &  \underline { 700,000} \
\text { Operating profit } & 540,000 \
\text { Interest expense } &  \underline {160,000 }\
\text { Income before tax } & 380,000 \
\text { Tax expense } &  \underline {152,000} \
 \text { Net income } &  \underline {\$ 228,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 60,000 \
 \text {  Accounts receivable } &  500,000  \
 \text {   Inventory } &  \underline {300,000} \
 \text {Total current assets  } &\$ 860,000  \
 \text {Fixed assets  } &  \underline {2,180,000} \
 \text { Total assets } &  \underline {\$  3,040,000} \
\
 \text { Accounts Payable } &\$ 200,000 \
 \text { Bank loan } & \underline {460,000} \
 \text { Total current liabilities } & \$ 660,000 \
 \text {Bond payable  } & \underline { 860,000} \
 \text {  Total liabilities } & \underline {\$  1,520,000  }\
 \text { Common stock ( 130,000 shares) } & \$ 120,000 \
 \text {Retained earnings  } & \underline {1,400,000}\
 \text { Total liabilities \& equity } &  \underline {\$  3,040,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$ 50,000 \
450,000 \
 \underline { 270,000  }\
 \$  770,000 \
 \underline { 2,000,000} \
 \underline { \$ 2,770,000 }\
\

\$ 170,000 \
 \underline { 440,000} \
 \$  610,000  \
 \underline {860,000} \
 \underline {\$  1,470,000 }\
\$  120,000\
 \underline {1,300,000} \
 \underline { \$ 2,890,000 } \
\end{array}
\end{array}\) Note: The common shares are trading in the stock market for $36 each. Refer to the financial statements of Midwest Tours. The firm's times interest earned ratio for 2009 is

Accepted Answer

The times interest earned ratio is calculated as Operating Profit divided by Interest Expense. For 2009, it is $540,000 / $160,000 = 3.375.

Question 18

__________ is a false statement.

Accepted Answer

During periods of inflation, the use of LIFO results in lower priced inventory remaining in stock; thus the balance sheet understates the actual inventory values.

Question 19

The financial statements of Midwest Tours are given below. $\begin{array}{c}
 
\text {  Midwest Tours } \
\text { Income Statement (2009) }\
\begin{array}{lrr} 
\hline \text { Sales } & \$  2,500,000 \
\text { Cost of goods sold } &   \underline {1,260,000} \
\text { Gross profit } & 1,240,000  \
\text { Selling \& administrative expenses } &  \underline { 700,000} \
\text { Operating profit } & 540,000 \
\text { Interest expense } &  \underline {160,000 }\
\text { Income before tax } & 380,000 \
\text { Tax expense } &  \underline {152,000} \
 \text { Net income } &  \underline {\$ 228,000} \
\end{array} 
\end{array}$ \(\begin{array}{c}
\begin{array}{lll}
 \text { Balance Sheet } &2009\
\
 \text {  Cash } &\$ 60,000 \
 \text {  Accounts receivable } &  500,000  \
 \text {   Inventory } &  \underline {300,000} \
 \text {Total current assets  } &\$ 860,000  \
 \text {Fixed assets  } &  \underline {2,180,000} \
 \text { Total assets } &  \underline {\$  3,040,000} \
\
 \text { Accounts Payable } &\$ 200,000 \
 \text { Bank loan } & \underline {460,000} \
 \text { Total current liabilities } & \$ 660,000 \
 \text {Bond payable  } & \underline { 860,000} \
 \text {  Total liabilities } & \underline {\$  1,520,000  }\
 \text { Common stock ( 130,000 shares) } & \$ 120,000 \
 \text {Retained earnings  } & \underline {1,400,000}\
 \text { Total liabilities \& equity } &  \underline {\$  3,040,000} \
\end{array}
\begin{array}{lll}
2008\
\
\$50,000 \
450,000 \
\underline { 270,000} \
\$ 770,000 \
\underline { 2,000,000} \
\underline { \$ 2,770,000} \
\
\$170,000 \
\underline { 440,000} \
\$ 610,000 \
\underline { 860,000} \
\$ 1,470,000 \
\$ 120,000 \
\underline { 1,300,000 }\
\underline { \$ 2,890,000} \
\end{array}
\end{array}\)
 Note: The common shares are trading in the stock market for $36 each. Refer to the financial statements of Midwest Tours. The firm's return on sales ratio for 2009 is

Accepted Answer

The answer of The financial statements of Midwest Tours are...

Question 20

Comparability problems arise because

Accepted Answer

Firms often select specific generally accepted accounting principles for the desired effect on the financial statements. The analyst must make adjustments in order to compare firms using different account techniques. Often firms adopt specific techniques to offset the negative effects of inflation on the firm.

Quiz 19: Financial Statement Analysis

__________ is a true statement.

One problem with comparing financial ratios prepared by different reporting agencies is

Fundamental analysis uses

What best explains why a firm's ratio of long-term debt/total capital is lower than the industry average, while the ratio of income before interest and taxes/debt interest charges is higher than the industry average?

__________ best explains a ratio of sales/average net fixed assets that exceeds the industry average.

Assuming continued inflation, a firm that uses LIFO will tend to have a(n) current ratio than a firm using FIFO, and the difference will tend to __ as time passes.

The level of real income of a firm can be distorted by the reporting of depreciation and interest expense. During periods of high inflation, the level of reported depreciation tends to income, and the level of interest expense reported tends to income.

Which of the following would best explain a situation where the ratio of net income/total equity of a firm is higher than the industry average, while the ratio of net income/total assets is lower than the industry average?

__________ is a false statement.

Comparability problems arise because