Question 1

At the end of 2005, the Long Life Light Bulb Company announced it had produced a gross profit of $1 million. The company has also established that over the course of this year 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 total preferred stock dividends.
(a) How much is the earnings available for common stockholders?
(b) Compute the increased retained earnings for 2005 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 2005, the Long...

Question 2

In a cross-sectional comparison of firms operating in several lines of business, the industry average ratios of any of the firm's product lines may be used to analyze the multiproduct firm's financial performance.

Accepted Answer

The use of industry average ratios of any of the firm's product lines may not be appropriate for analyzing the financial performance of a multiproduct firm as the financial ratios can vary significantly across different product lines. Therefore, a more accurate analysis would require the use of specific ratios relevant to each product line or a weighted average of the ratios of each product line.

Question 3

The 2002 Sarbanes-Oxley Act was designed to
A) limit the compensation that could be paid to corporate CEOs.
B) eliminate the many disclosure and conflict of interest problems of corporations.
C) provide uniform international accounting standards.
D) two of the above.

Accepted Answer

The Sarbanes-Oxley Act of 2002 was primarily designed to address issues related to corporate governance, financial disclosure, and conflicts of interest in the wake of major corporate scandals. It did not focus on CEO compensation or international accounting standards.

Question 4

Colonial Furniture's net profits before taxes for 2002 totaled $354,000. The company's total retained earnings were $338,000 for 2004 year end and $389,000 for 2005 year end. Colonial is subject to a 26 percent tax rate. How large was the cash dividend declared by Colonial Furniture in 2005?

Accepted Answer

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

Question 5

Benchmarking is a type of cross-sectional analysis in which the firm's ratio values are compared to those of firms in other industries, primarily to identify areas for improvement.

Accepted Answer

Benchmarking involves comparing a firm's performance metrics to those of similar firms within the same industry, not across different industries.

Question 6

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) cash flow from operations.
(f) earnings available to common stockholders.
(g) earnings per share.

Accepted Answer

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

Question 7

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 8

The Sunshine Company had a retained earnings balance of $850,000 at the beginning of 2005. By the end of 2005, the company's retained earnings balance was $950,000. During 2005, the company earned $245,000 as net profits after paying its taxes. The company was then able to pay its preferred stockholders $45,000. Compute the common stock dividend per share in 2005 assuming 10,000 shares of common stock outstanding.

Accepted Answer

The answer of The Sunshine Company had a retained earnings...

Question 9

On December 31, 2004, the Bradshaw Corporation had $485,000 as an ending balance for its retained earnings account. During 2005, the corporation declared a $3.50/share dividend to its stockholders. The Bradshaw Corporation has 35,000 shares of common stock outstanding. When the books were closed for 2005 year end, the corporation had a final retained earnings balance of $565,000. What was the net profit earned by Bradshaw Corporation during 2005?

Accepted Answer

The answer of On December 31, 2004, the Bradshaw Corporation...

Question 10

Cross-sectional ratio analysis involves comparing the firm's ratios to those of firms in other industries at the same point in time.

Accepted Answer

Cross-sectional ratio analysis involves comparing a firm's financial ratios to those of other firms within the same industry at the same point in time, not across different industries.

Question 11

The firm's creditors are primarily interested in the short-term liquidity of the company and its ability to make interest and principal payments.

Accepted Answer

Creditors are concerned with their own interests, such as getting paid back, and therefore focus on a company's short-term liquidity and ability to make interest and principal payments. They may not be as concerned with the long-term profitability or growth potential of the company.

Question 12

The 2002 law that established the Public Company Accounting Oversight Board (PCAOB) was called
A) the McCain-Feingold Act.
B) the Harkins-Oxley Act.
C) the Sarbanes-Harkins Act.
D) the Sarbanes-Oxley Act.

Accepted Answer

The 2002 law that established the Public Company Accounting Oversight Board (PCAOB) is commonly known as the Sarbanes-Oxley Act, making choice D the correct answer. The other options are incorrect as they do not relate to the establishment of the PCAOB.

Question 13

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

Accepted Answer

Time-series analysis involves evaluating a firm's financial performance over a period of time, not in comparison to other firms at the same point in time. Comparing a firm's financial performance to other firms is known as cross-sectional analysis.

Question 14

Ratio analysis merely directs the analyst to potential areas of concern; it does not provide conclusive evidence as to the existence of a problem.

Accepted Answer

Ratio analysis is a useful tool to identify potential areas of concern and assess the financial performance of a company. However, it only provides a snapshot of the financial health of the company and does not give conclusive evidence of the existence of a problem. Further analysis and investigation are required to confirm the concerns raised by ratio analysis.

Question 15

As a rule, the necessary inputs to an effective financial analysis include, at minimum, the income statement and the statement of cash flow.

Accepted Answer

The answer of As a rule, the necessary inputs to...

Question 16

A firm had year end 2004 and 2005 retained earnings balance of $670,000 and $560,000, respectively. The firm reported net profits after taxes of $100,000 in 2005. The firm paid dividends in 2005 of
A) $10,000.
B) $100,000.
C) $110,000.
D) $210,000.

Accepted Answer

The decrease in retained earnings from 2004 to 2005 is $110,000 ($670,000 - $560,000). Since the net profit was $100,000, the dividends paid must have been $210,000 to account for the decrease in retained earnings.

Question 17

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 18

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

Accepted Answer

Time-series analysis evaluates the performance of a firm over a period of time by analyzing the trend of financial ratios. A cross-sectional analysis, on the other hand, evaluates the performance of different firms at the same point in time using financial ratios.

Question 19

The Public Company Accounting Oversight Board (PCAOB)
A) is a not-for-profit corporation that oversees auditors of public corporations.
B) is a not-for-profit corporation that oversees managers of public corporations.
C) is a for-profit corporation that oversees auditors of public corporations.
D) is a for-profit corporation that oversees managers of public corporations.

Accepted Answer

The PCAOB is a not-for-profit corporation that was created by the Sarbanes-Oxley Act of 2002 to oversee auditors of public corporations in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports.

Question 20

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

Accepted Answer

Inflation can cause inventory costs and depreciation write-offs to be recorded at values that differ from their true values, which can lead to distorted profits.

Quiz 3: Financial Statements and Ratio Analysis