Chapter 14 Adaptive pre-test and Q&A's

Which of the following is not a solvency ratio?

Days' sales in inventory

The formula for the dividend yield is

Dividends per Share of Common Stock ÷ Market Price per Share of Common Stock.

Which of the following profitability ratios must be reported on the income statement?

Earnings per share on common stock

The numerator in the computation of the ratio of fixed assets to long-term liabilities is

Fixed Assets at Year-End.

Which of the following is not a quick asset?

Inventories

Which of the following falls under the category of current position analysis?

Quick ratio

In the annual report, where would a financial statement reader find out if the company's financial statements give a fair depiction of its financial position and operating results?

Report of Independent Registered Public Accounting Firm

The formula to compute the asset turnover is

Sales ÷ Average Total Assets (excluding long-term investments).

Bondholders and other long-term creditors are most interested in which dimension of company analysis?

Solvency

A company's ratio of liabilities to stockholders' equity decreased from 0.6 to 0.4 during the year. This is a(n)

improvement in the margin of safety for creditors.

A company's ability to convert assets into cash is called

liquidity

A company's times interest earned ratio is 12.1. This means that

the company has more than enough earnings to make its interest payments.

A company's times interest earned ratio is 12.1. This means that

the company has more than enough earnings to make its interest payments. (The company has 12 times more earnings than interest debt.)

The formula for earnings per share on common stock is

(Net Income − Preferred Dividends) ÷ Shares of Common Stock Outstanding.

Assume the following sales data for a company: Year 2: $616,000Year 1: $550,000 What is the percentage increase in sales from Year 1 to Year 2 (rounded to the nearest whole percent)?

12%

Based on the following data for the current year, what is the accounts receivable turnover? Line Item Description Amount Sales on account during year$520,000 Cost of goods sold during year416,000 Accounts receivable, beginning of year45,000 Accounts receivable, end of year35,000 Inventory, beginning of year80,000 Inventory, end of year120,000

13.0

The balance sheets at the end of each of the first two years of operations indicate the following: Line Item DescriptionYear 2Year 1 Total current assets$610,000$540,000 Total investments50,00030,000 Total property, plant, and equipment930,000730,000 Total current liabilities150,00080,000 Total long-term liabilities350,000250,000 Preferred 9% stock, $100 par100,000100,000 Common stock, $10 par600,000600,000 Paid-in capital in excess of par-common stock50,00050,000 Retained earnings340,000220,000 If net income is $155,000 and interest expense is $50,000 for Year 2, what is the return on total assets for Year 2?

14.2% (Correct. Return on Total Assets = (Net Income + Interest Expense) ÷ Average Total Assets = ($155,000 + $50,000) ÷ {[($610,000 + $50,000 + $930,000) + ($540,000 + $30,000 + $730,000)] ÷ 2} = $205,000 ÷ $1,445,000 = 14.2%.

Assume the following sales data for a company: Year 2: $643,500Year 1: $550,000 What is the percentage increase in sales from Year 1 to Year 2 (rounded to the nearest whole percent)?

17 (The computation is: ($643,500 − $550,000) ÷ $550,000 = 17%.)

Given the following information, what is the times interest earned ratio? Line Item Description Amount Fixed assets (net) at year-end$430,000 Average fixed assets480,000 Total assets530,000 Long-term liabilities350,000 Total liabilities400,000 Total stockholders' equity250,000 Total liabilities and stockholders' equity650,000 Interest expense5,000 Income before income tax130,000 Net income80,000

27

In which analytical method are no dollar amounts shown?

Common-sized statement

What type of analysis is indicated by the following? Line Item Description Year 2 Year 1 Increase (Decrease)Amount Increase (Decrease)Percent Current assets$380,000$400,000$(20,000)(5%) Fixed assets1,680,0001,500,000180,00012%

Horizontal analysis

Which of the following clarifies information presented in the financial statements, as well as expands upon where additional detail is needed?

Management discussion and analysis section

Corporate annual reports typically do not contain which of the following?

Next year's budget

Sometimes called the coverage ratio, this ratio measures the risk that interest payments will not be made if earnings decrease.

Times interest earned ratio

The numerator in the computation of the ratio of liabilities to stockholders' equity is

Total Liabilities.

In a vertical analysis of a balance sheet, which of the following would be shown at 100%?

Total liabilities and stockholders' equity

Which of the following is not a profitability ratio?

b. Times interest earned

Which of the following profitability ratios must be reported on the income statement?

b. Earnings per share on common stock