Question 1

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 2

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 company's financial performance over time, typically using historical data to identify trends and patterns, rather than comparing it to other firms at the same point in time. This type of comparison is more commonly seen in cross-sectional analysis.

Question 3

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 4

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 answer of The 2002 Sarbanes-Oxley Act was designed to
A)...

Question 5

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 6

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 to increase, leading to an overstatement of costs and understatement of profits. Similarly, depreciation write-offs may not fully reflect the true loss in value of assets due to inflation, leading to an overstatement of profits.

Question 7

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 8

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 law that established the Public Company Accounting Oversight Board (PCAOB) in 2002 is called the Sarbanes-Oxley Act.

Question 9

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 10

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 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 typically lend money with the expectation of receiving regular interest and principal payments in return. Therefore, their primary concern is the company's ability to meet these payment obligations in the short term, which is closely tied to its liquidity.

Question 12

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 tool used to identify potential areas of concern in a company's financial statements. It provides insights into the company's financial health, but it does not provide conclusive evidence as to the existence of a problem. Further investigation and analysis are required to confirm the existence of any issues identified through ratio analysis.

Question 13

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

Accepted Answer

Time-series analysis evaluates performance of firms over time, not at the same point in time.

Question 14

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 15

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 answer of A firm had year end 2004 and...

Question 16

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 17

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

Cross-sectional comparison of firms operating in different industries may not be appropriate as they may have different characteristics, risks, and operating conditions. Therefore, using industry average ratios of any product line of the multiproduct firm may not give a true picture of the financial performance of the entire firm. Instead, it would be more appropriate to use segment-specific or consolidated financial statements of the multiproduct firm for analysis.

Question 18

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

The answer of Cross-sectional ratio analysis involves comparing the firm's...

Question 19

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

The answer of Benchmarking is a type of cross-sectional analysis...

Question 20

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 established by the Sarbanes-Oxley Act of 2002 to oversee the audits of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports.

Quiz 3: Financial Statements and Ratio Analysis