Chapter 11
For Year 2, sales were $1,200,000 and cost of goods sold was $800,000. Inventories amounted to $90,000 at the end of Year 1 and $110,000 at the end of Year 2. The days' sales in inventory for Year 2 (rounded to one decimal) was:
$110,000 / ($800,000 / 365) = 50.2 days
Sales for Year 2 were $800,000. Accounts receivable was $100,000 at the end of Year 1 and $150,000 at the end of Year 2. The days' sales in accounts receivable for Year 2 (rounded to one decimal) was:
$150,000 / ($800,000 / 365) = 68.4 days
Firm A's common stock has a par value per share of $1, market value per share of $90, earnings per share of $5, dividends per share of $2, and a book value per share of $60. Firm A's dividend yield (rounded to one decimal) is:
$2 / $90 = 2.2%
Sales for Year 2 were $2,400,000. Accounts receivable was $200,000 at the end of Year 1 and $300,000 at the end of Year 2. The accounts receivable turnover for Year 2 (rounded to one decimal) was:
$2,400,000 / (($200,000 + $300,000) / 2) = 9.6 times
Sales were $2,000,000 in Year 1 and $2,400,000 in Year 2. Accounts receivable was $400,000 at the end of Year 1 and $200,000 at the end of Year 2. The accounts receivable turnover for Year 2 (rounded to one decimal) was:
$2,400,000 / (($400,000 + $200,000) / 2) = 8.0 times
Total liabilities were $330,000 at the beginning of the year and $300,000 at the end of the year. Stockholders' equity was $270,000 at the beginning of the year and $240,000 at the end of the year. The debt/equity ratio at the end of the year (rounded to one decimal) was:
$300,000 / $240,000 = 125%
Firm B's common stock has a par value per share of $1, market value per share of $72, dividends per share of $4, earnings per share of $8, and a book value per share of $64. Firm B's dividend yield (rounded to one decimal) is:
$4 / $72 = 5.6%
Firm B's common stock has a par value per share of $1, market value per share of $72, dividends per share of $4, earnings per share of $8, and a book value per share of $64. Firm B's dividend payout ratio (rounded to one decimal) is:
$4 / $8 = 50%
Firm C's common stock has a par value per share of $10, earnings per share of $6, dividends per share of $5, a book value per share of $69, and a market value per share of $80. Firm C's dividend payout ratio (rounded to one decimal) is:
$5 / $6 = 83.3%
Cost of goods sold was $400,000 and $500,000 in Year 1 and Year 2, respectively. Sales for Year 2 were $1,000,000. Inventory was $60,000 at the end of Year 1 and $40,000 at the end of Year 2. The inventory turnover for Year 2 (rounded to one decimal) was:
$500,000 / (($60,000 + $40,000) / 2) = 10.0 times
Total liabilities were $650,000 at the beginning of the year and $600,000 at the end of the year. Stockholders' equity was $300,000 at the beginning of the year and $400,000 at the end of the year. The debt ratio at the end of the year (rounded to one decimal) was:
$600,000 / ($600,000 + $400,000) = 60%
Cost of goods sold for Year 2 was $600,000. Sales for Year 2 were $1,000,000. Inventory was $100,000 at the end of Year 1 and $150,000 at the end of Year 2. The inventory turnover for Year 2 (rounded to once decimal) was:
$600,000 / (($100,000 + $150,000) / 2) = 4.8 times
Firm B's common stock has a par value per share of $1, market value per share of $72, dividends per share of $4, earnings per share of $8, and a book value per share of $64. Firm B's price/earnings ratio is:
$72 / $8 = 9.0 per share
Firm C's common stock has a par value per share of $10, earnings per share of $6, dividends per share of $5, a book value per share of $69, and a market value per share of $84. Firm C's price/earnings ratio is:
$84 / $6 = $14 per share
Firm G's earnings before income taxes for the year was $140,000, income tax expense was $35,000, interest expense was $20,000, and net income was $105,000. Firm G's times interest earned for the year (rounded to one decimal) was:
($140,000 + $20,000) / $20,000 = 8.0 times
Firm H's earnings before income taxes for the year was $180,000, cost of goods sold was $240,000, interest expense was $30,000, and income tax expense was $60,000. Firm H's times interest earned for the year (rounded to one decimal) was:
($180,000 + $30,000) / $30,000 = 7.0 times
To calculate the inventory turnover, you divide (sales/CGS) by the (beginning/ending/average) inventory.
Blank 1: CGS Blank 2: average
The (pre-/after-) tax cost of debt is its interest rate multiplied by the complement of the firm's tax rate.
Blank 1: after-
The use of an accelerated depreciation method and the LIFO inventory cost flow assumption will usually (increase/decrease) a company's total asset turnover relative to using the straight-line method and FIFO.
Blank 1: increase
Financial leverage is considered positive if the interest rate paid on borrowed money is (more/less) than the rate of return (ROI) earned on that money.
Blank 1: less
The P/E ratio is calculated by dividing the (dividends/price/earnings) per share of common stock by the (dividends/price/earnings) per share of common stock.
Blank 1: price Blank 2: earnings
The difference between the inventory valuation as reported under LIFO and the amount that would have been reported under FIFO is called the LIFO (backlog/reserve/stockpile).
Blank 1: reserve
Which of the following is(are) an example of a measure of leverage?
Debt/equity ratio.
For the year ended December 31, 2019, a company reported earnings per share of $1.95 and cash dividends per share of $0.30. During 2020, the company had a 3-for-2 stock split. In the annual report for the year ended December 31, 2020, earnings per share and cash dividends for 2019 would be reported, respectively, as:
Earnings per share =$1.30 Dividend per share =$0.20
Identify a true statement about a leveraged buyout.
In a leveraged buyout, the company goes heavily into debt to obtain the funds needed to buy the shares of the public stockholders.
The LIFO reserve is the difference between the inventory valuation as reported under:
LIFO and the amount that would have been reported under FIFO.
The difference between the inventory valuation as reported under LIFO and the amount that would have been reported under FIFO is called the:
LIFO reserve
Which of the following statements are true regarding the price/earning (P/E) ratio?
P/E ratios are significantly influenced by the company's reported earnings. A low P/E ratio for a well-established company may be an indicator that the company's stock is undervalued. P/E ratios are shown in the stock listing tables of The Wall Street Journal. The P/E ratio is sometimes referred to as earnings multiple. The P/E ratio is a measure of the relative expensiveness of a company's common stock. The P/E ratio should not be the sole, or even principal, consideration in an investment decision. The P/E ratio reflects the amount an average investor is willing to pay per dollar of current earnings for a company. A high P/E ratio usually means that investors expect the firm to have strong future earnings and dividend growth. Diluted earnings per share is usually the denominator of the P/E calculation. Firms with high P/E ratios generally have strong investor confidence. Low P/E ratios usually indicate poor earnings expectations.
Identify the true statements about extra dividends.
They may be declared and paid after an especially profitable year. They indicate to stockholders that they should not expect to receive the larger amount every year.
A leveraged buyout refers to:
a firm goes heavily into debt in order to obtain the funds to purchase the shares of the public stockholders and thus take the firm private.
The ratios used to facilitate the interpretation of an entity's financial position and results of operations can be grouped into four categories:
activity debt (or financial leverage) profitability liquidity
A company desiring to increase its total asset turnover could do so by using:
an accelerated depreciation method and the LIFO cost flow assumption.
Financial leverage:
arises because most borrowed funds have a fixed interest rate
The comparison of activity measures of different companies is complicated by the fact that:
different inventory cost flow assumptions may be used.
To calculate the days' sales in accounts receivable, you would normally divide the:
ending accounts receivable by the average day's sales.
To calculate the days' sales in inventory, you would normally divide the:
ending inventory by the average day's cost of goods sold.
The price/earnings ratio:
is a measure of the relative expensiveness of a firm's common stock.
The inventory turnover calculation:
is an alternative way of expressing the number of days' sales in inventory
A transaction in which the present top management of a publicly held firm buys the stock of the nonmanagement stockholders and the firm becomes "privately owned" is known as a(n) _____.
leveraged buyout
The LIFO reserve:
may be disclosed in the notes to the financial statements.
Operating income is frequently substituted for net income in the calculation of ROI and ROE because:
operating income is a more direct measure of the results of a firm's activities. operating income excludes interest expense, which varies from firm to firm based on their capital structure decisions. operating income excludes income tax expense, which varies from firm to firm based on country-specific tax rates. operating income excludes the effects of discontinued operations and thus provides a more forward looking measure of the firm's profitability.
A management that wanted to increase the financial leverage of its firm would:
raise additional capital by selling fixed interest rate long-term bonds.
Dividends that are stable, or gradually changing, and periodic in nature are known as _____ dividends.
regular
An individual interested in making a judgment about the profitability of a company should:
review the trend of the company's ROI for several years.
To calculate the accounts receivable turnover, you would divide:
sales by the average accounts receivable.
It is difficult to develop reliable rules of thumb for the evaluation of ratio results because firms within a given industry may vary considerably over time in terms of their:
selected accounting methods market segmentation strategies life cycle stage of development relative scale of operations
The Sarbanes-Oxley Act (SOX) of 2002 does not specifically prohibit an independent auditor from performing the following non-audit function(s) for an audit client:
tax services.
Earnings multiple is another term used to describe the price/earnings ratio. This term merely reflects that:
the market price of stock is equal to the earnings per share multiplied by the P/E ratio.
The dividend payout ratio describes:
the proportion of earnings paid as dividends.
The debt ratio is usually calculated by dividing the:
year-end liabilities by year-end liabilities + stockholders' equity.
The debt/equity ratio is usually calculated by dividing the:
year-end liabilities by year-end stockholders' equity.