Managerial Accounting

Which of the following is another name for horizontal analysis?

Trend analysis

Liquidity ratios are used to assess

company's ability to pay short-term obligations.

Financial statements are designed for

general purposes.

To calculate a company's earnings per share,

only shares of common stock outstanding should be included.

When making decisions, information ___________ is the problem of having so much data that important information becomes obstructed by trivial information.

overload

Assume three companies in the same industry have the following quick ratios: Davis Co. = .83 to 1 Edwards Co. = .65 to 1 Fender Co. = .47 to 1 Based on this information alone, which company appears to have the highest liquidity?

Davis The quick ratio measures the assets that are liquid. It omits less liquid current assets such as inventories and prepaid expenses. Companies with higher quick ratios are more liquid.

Which of the following ratios are used to assess solvency? (Select all that apply.)

Debt to assets ratio Plant assets to long-term liabilities

Which of the following ratios is used to assess solvency?

Debt to equity ratio

Which of the following ratios is used to assess the performance of a company's stock?

Dividend yield

Which of the following formulas yields the number of times interest earned ratio?

Earnings before interest and taxes divided by interest expense

Assume three companies in the same industry have the following accounts receivable turnover ratios: Georgia Co. = 8.3 Hawaii Co. = 11.7 Idaho Co. = 5.2 Based on this information alone, which company appears to have the best accounts receivable turnover ratio?

Hawaii Reason: Accounts receivable turnover indicates the speed at which a company collects its accounts receivable. In general, it is better to have accounts receivable turnover that is higher.

Assume three companies in the same industry have the following return on equity ratios: Jennings Co. = 22.4% King Co. = 23.1% Lewis Co. = 19.7% Based on this information alone, which company appears to have the best return on equity ratio?

King

Assume three companies in the same industry have the following net margin ratios: Lemon Co. = 3.7% Mango Co. = 6.1% Nectarine Co. = 5.3% Based on this information alone, which company appears to have the worst net margin ratio?

Lemon Reason: It is better for a company to have a larger percentage of net margin. In this case, Lemon Co has the lowest net margin so it is performing the worst.

Which of the following best describes the calculation needed to yield the plant assets to long-term liabilities ratio?

Long-term assets divided by long-term liabilities

Which of the following formulas yields the price-earnings ratio?

Market price per share divided by earnings per share

Which of the following formulas yields the accounts receivable turnover ratio?

Net credit sales divided by average accounts receivable

Which of the following formulas yields the return on investment ratio?

Net income divided by average total assets

Which of the following formulas yields the return on equity ratio?

Net income divided by average total stockholders' equity

Assume three companies in the same industry have the following net margin ratios: Pamela Co. = 7.7% Rachel Co. = 5.4% Susan Co. = 6.3% Based on this information alone, which company appears to have the best net margin ratio?

Pamela It is better for a company to have a larger percentage of net margin.

Which of the following ratios is used to assess the performance of a company's stock?

Price-earnings ratio Book value per share

Which of the following ratios assess management's ability to generate earnings?

Profitability ratios

Which of the following formulas yields the quick ratio?

Quick assets divided by current liabilities

Assume three companies in the same industry have the following average days to sell inventory: Quest Co. = 87 days Rand Co. = 103 days Smith Co. = 96 days Based on this information alone, which company appears to have the worst average days to sell inventory?

Rand Co

True or false: Financial statements can provide only highly summarized economic information.

T

True or false: Users of financial statement information include managers, creditors, stockholders, potential investors and regulatory agencies.

T

If Delta Airlines assumes its airplanes will last 20 years, while United Airlines assumes its airplanes will last 30 years, which of the following statements is true?

The companies' return on assets ratios cannot be compared with confidence.

Which of the following formulas yields the debt to equity ratio?

Total liabilities divided by total stockholders' equity

Assume three companies in the same industry have the following debt to assets ratios: Trenton Co. = 63% Valdosta Co. = 47% Wichita Co. = 82% Based on this information alone, which company appears to have the lowest financial risk?

Valdosta

Other things being equal, a company would prefer that its accounts receivable turnover ratio be ___________________ , indicating that the company is faster at collecting its receivables.

high

_____________ analysis involves studying various relationships between different items reported in a set of financial statements. (Enter only one word.)

ratio

Studying various relationships between different items reported in a set of financial statements is called

ratio analysis

Current reporting standards target users that have a _________ informed knowledge of business.

reasonably

In order to perform vertical analysis on the balance sheet, it is necessary to divide the dollar amount of each account by

total assets.

Which of the following formulas yields the average days to collect receivables?

365 divided by accounts receivable turnover ratio

Assume three companies in the same industry have the following current ratios: Adams Co. = 1.33 to 1 Baker Co. = 1.15 to 1 Charles Co. = 1.27 to 1 Based on this information alone, which company appears to have the lowest liquidity?

Baker

If the debt to assets ratio for Dominion Resources, a large gas and electric utility company, is .71, and the debt to assets ratio for Home Depot, a large building supplies retailer, is .53, which of the following conclusions should a financial analysis reach?

Because the companies are in different industries, no good conclusion can be reached.

Which of the following ratios is used to assess the performance of a company's stock?

Book value per share Price-earnings ratio

The type of financial analysis that uses percentages to compare individual items on a financial statement, such as Wages Expense, to a key figure on the same statement, such as Sales, is called

vertical analysis.

If a company has net income of $5,700,000, average shares of common stock of 1,500,000, average shares of preferred stock of 200,000, retained earnings of $37,900,000, and annual preferred stock dividends of $800,000, what is its EPS?

$3.27 Reason: $5,700,000 - $800,000 ÷ 1,500,000 = $3.27. The $800,000 of preferred dividends is subtracted from net income because it is not available to common stockholders.

If a company has net income of $8,500,000, average shares of common stock outstanding of 2,000,000, average total stockholders' equity of $154,400,000, and annual preferred stock dividends of $1,500,000, what is its EPS?

$3.50 Reason: $8,500,000 - $1,500,000 ÷ 2,000,000 = $3.5. The preferred stock dividend is subtracted from net income, and is not available to the common stockholder.

If a company has current assets of $178,000, total assets of $928,000, current liabilities of $132,000, and total liabilities of $643,000, how much working capital does it have?

$46,000 Reason: $178,000 - $132,000 = $46,000.

If a company has net income of $340,000, interest expense of $10,000, and income tax expense of $180,000, how much is its EBIT?

$530,000 Reason: $340,000 + $10,000 + $180,000 = $530,000.

Which of the following statements about calculating the inventory turnover ratio are correct? (Select all that apply.)

*Cost of good sold should be used for the numerator. *Average inventory should be used in the denominator.

Other things being equal, which of the following events would cause a company's earnings per share to increase? (Select all that apply.)

*Decrease in the amount of preferred stock dividends a company has to pay *Decrease in the number of shares of common stock outstanding *Increase in net income

Listed below are four ratios used to assess profitability. Match the name of the ratio with the formula used to calculate it.

*Net margin - Net income ÷ net sales *Asset turnover - Net sales ÷ average total assets *Return on investment - Net income ÷ average total assets *Return on equity - Net income ÷ average total stockholders' equity

If a company has current assets of $250,000, quick assets of $120,000, total assets of $1,000,000, current liabilities of $200,000, and total liabilities of $700,000, what is its quick ratio?

.60 to 1 Reason: $120,000 ÷ $200,000 =.6 (for every 60 cents of quick assets, there are $1.00 of current liabilities).

If a company has current liabilities of $176,000, total liabilities of $1,065,000, current assets of $220,000, and total assets of $1,500,000, what is its current ratio?

1.25 to 1 Current ratio= current assets/current liabilities Current ratio= $220,000/$176,000 Current ratio=1.25 to 1

If a company has average current assets of $900,000, average total assets of $4,400,000, sales of $6,000,000, cost of goods sold of $4,600,000, and net income of $450,000, what is its assets turnover ratio?

1.36 Reason: $6,000,000 ÷ $4,400,000 = 1.36 (every $1 of assets produced $1.36 in sales)

Assume a company has sales of $300,000, total assets of $500,000, total liabilities of $200,000, net income of $23,000, and accounts payable of $7,000. If it is performing vertical analysis, what percentage would be assigned to accounts payable?

1.40% Reason: $7,000 ÷ $500,000 = 1.4%.

If a company has current liabilities of $176,000, total liabilities of $1,065,000, current assets of $220,000, and total assets of $1,500,000, what is its current ratio?

1.45 to 1 Current ratio= current assets/current liabilities Current ratio= $145,000/$100,000 Current ratio=1.45 to 1

If a company has net earnings of $4,500,000; earnings per share of $1.73; sales of $72,000,000; and common stock with a current market price of $24.22 per share, its price-earnings ratio is _______________.

14 24.22/1.73

If a company has average total assets of $8,500,000, average total common stock of $1,100,000, average total stockholders' equity of $4,400,000, sales of $10,500,000, and net income of $860,000, what is its return on equity ratio?

19.5% Reason: $860,000 ÷ $4,400,000 =.195 or 195% (the stockholders earned a 19.5% return or they earned 19 cents for every dollar of equity).

Assume a company has sales of $2,700,000, total assets of $4,400,000, current assets of $160,000, net income of $350,000, and Inventory of $90,000. If it is performing vertical analysis, what percentage would be assigned to inventory?

2.05% Reason: $90,000 ÷ 4,400,000 = 2.05%.

If a company has total assets of $1,700,000, current liabilities of $300,000, total liabilities of $1,200,000, common stock of $150,000 and total stockholders' equity of $500,000, what is its debt to equity ratio?

2.40 to 1 Reason: $1,200,000 ÷ $500,000 = 2.4 (there is $2.40 of debt for every $1 of equity).

Assume a company has net income of $24,000, income before taxes of 33,000, income taxes $9,000, gross margin of $105,000, and sales of $350,000. If it is performing vertical analysis, what percentage would be assigned to income taxes?

2.6% Reason: $9,000 ÷ $350,000 = 2.6%.

If a company has net income of $150,000, gross profit of $1,100,000, net sales of $4,050,000, and total assets of $2,500,000, what is its net margin ratio?

3.70% Reason: $150,000 ÷ $4,050,000 = 3.7% the company retained 3.7% of the assets earned.

If a company has an accounts receivable turnover ratio of 7.4, ending accounts receivable of $780,000, and average accounts receivable of $740,000, what is its average days to collect receivables?

49.3 days Reason: 365 ÷ 7.4 = 49.3.

If a company has current assets of $145,000, total assets of $1,200,000, current liabilities of $100,000, total liabilities of $660,000, and total stockholders' equity of $540,000, what is its debt to assets ratio?

55.0% Reason: $660,000 ÷ $1,200,000 =.55 or 55%.

If a company has total assets of $13,000,000, ending inventory of $2,000,000, average inventory of $1,900,000, sales of $18,000,000, and cost of goods sold of $11,700,000, what is its average days to sell inventory?

59.3 days Average days to sell inventory=365 days/inventory turnover Average days to sell inventory= 365/6.16= 59.3 days Inventory turnover=Cost of goods sold/Average inventory Inventory turnover=$11,700,000/$1,900,000 =6.16

If a company has sales of $2,700,000, cost of goods sold of $1,900,000, net income of $120,000, average current assets of $300,000, and average total assets of $1,600,000, what is its return on investment ratio?

7.5% 120,000/1,600,000

Assume a company has total assets of $750,000, sales of $470,000, gross margin of $350,000, income before taxes of 55,000, and net income of $40,000. If it is performing vertical analysis, what percentage would be assigned to net income?

8.5% Reason: $40,000 ÷ $470,000 = 8.5%.

If a company has current assets of $700,000, average accounts receivable of $160,000, credit sales of $1,500,000, cost of goods sold of $900,000 and net income of $100,000, what is its accounts receivable turnover ratio?

9.38 Reason: $1,500,000 ÷ $160,000 = 9.38.

Which of the following statements about the price-earnings ratio is correct?

A high P/E ratio often indicates the market is optimistic about the company's future.

Assume three companies in the same industry have the following return on investment ratios: Alice Co. = 8.7% Betsy Co. = 9.4% Carol Co. = 10.2% Based on this information alone, which company appears to have the worst return on investment ratio?

Alice Co.

Which of the following is another name for preparing a vertical analysis of the income statement?

Common size income statement

Assume three companies in the same industry have the following number of times interest is earned ratios: Collins Co. = 7.2 times Dean Co. = 9.4 times Edgar Co. = 13.9 times Based on this information alone, which company appears to have the lowest financial risk?

Edgar Reason: Obviously, interest is only paid once but the more times it could be paid, the bigger the company's safety net. Companies with higher times interest earned have lower financial risk.

Assume three companies in the same industry have the following asset turnover ratios: Waters Co. = 3.7% Xenon Co. = 2.4% Zenith Co. = 2.6% Based on this information alone, which company appears to have the worst asset turnover ratio?

Xenon

Assume Blue-Sky Company reported the following earnings per share for each of the past three years: Year 1 = $2.23 Year 2 = $2.02 Year 3 = $2.31 Based on this information alone, which year appears to have the best earnings per share?

Year 3

When performing financial statement analysis,

comparison of financial ratios from year to year may be difficult if economic conditions are changing.

Working capital is defined as

current assets minus current liabilities.

Other things being equal, a company would prefer that its return on equity ratio be ___________, indicating that the stockholders' investment is more profitable.

high

Other things being equal,a company would prefer that its return on investment ratio be__________.(Enter only one word.)

high

Other things being equal, a company would prefer that its inventory turnover ratio be __________ , indicating merchandise is being handled more efficiently.

high or higher

Other things being equal, a company would prefer that its earnings per share ratio be ____________ (higher/lower).

higher

Other things being equal, the higher a company's current ratio, the ____________(higher/lower) its liquidity.

higher

An investor who places high importance on receiving dividends from his/her investments would prefer to invest in stock with a

higher dividend yield

Other things being equal, if a company's quick ratio is low, then its liquidity is

low Reason: The quick ratio measures the assets that are liquid. It omits less liquid current assets such as inventories and prepaid expenses.

Other things being equal, a company will appear to have greater financial risk if its number of times interest is earned ratio is _________

lower or low

Other things being equal, a company would prefer that its average days to sell inventory be ________ , indicating more efficient sales.

lower or low

If knowledge of an item would influence the decision of a reasonably informed user then it is considered

material

The ___________ of information refers to its relative importance.

materiality

If Pepper Company has a price-earnings ratio of 32 and Squash Company has a price-earnings ratio of 24, this may suggest that the stock market is __________ optimistic about Pepper Company's future earnings potential compared to Squash Company's.

more

If a financial analyst wished to reduce the effects of materiality when performing horizontal analysis, he/she would use the ______________ (absolute/percentage) method. (Enter only one word.)

percentage

Vertical analysis is performed by comparing items from: (Select all that apply.)

the same accounting period. the same financial statement.

Horizontal analysis may be performed

with absolute dollar amounts or percentages.

If a company has total assets of $13,100,000; net earnings of $1,400,000; 900,000 average shares of common stock outstanding; total stockholders' equity of $5,700,000; and preferred stock of $500,000, what is its book value per share?

$5.78 Reason: $5,700,000 -$500,000 ÷ 900,000. Preferred rights are subtracted from stockholders' equity, since they are not available to common stockholders.

Which of the following formulas yields the book value per share?

(Stockholders equity - preferred stock) ÷ average shares of common stock outstanding

Which of the following statements are correct? (Select all that apply.)

*To correctly evaluate an absolute amount, the analyst must consider its relative importance. *Financial statement users with expertise in particular industries can look at absolute amounts and assess a company's performance in a certain area.

Which of the following factors complicate the communication of financial information to decision makers? (Select all that apply.)

*Various users of financial information have differing levels of sophistication related to financial analysis. *Different individuals and companies use financial information for different purposes. *There is no one method of financial analysis that is appropriate for all decisions.

Comparing two companies' earnings per share ratios can be made more difficult because: (Select all that apply.)

*different companies can use different methods of depreciation. *different companies can use different estimates of future bad debts. *different companies can use different cost flow assumptions for merchandise inventory.

If a company has earnings per share of $3.47, book value per share of $68.35, dividends per share of $1.20, and common stock with a current market price of $79.91 per share, what is its dividend yield percentage?

1.50% Reason: $1.20 ÷ $79.91 =.0150 or as a percentage,1.50%. This ratio provides a common base for comparing dividend payments.

If a company has current assets of $250,000, long-term assets of $1,750,000, total assets of $2,000,000, current liabilities of $150,000, long-term liabilities of $1,100,000, and total liabilities of $1,250,000, what is its net plant assets to long-term liabilities ratio?

1.59 to 1 Reason: $1,750,000 ÷ $1,100,000 = 1.59. Long-term assets are used to proxy plant assets which have a long life. The company has $1.59 of plant assets for every $1 of long-term debt. These assets can be used to pay the company's long-term debt.

If a company has current assets of $900,000, average inventory of $460,000, total assets of $5,400,000, sales of $6,000,000, and cost of goods sold of $4,600,000, what is its inventory turnover ratio?

10.0 Reason: Inventory turnover = Cost of goods sold/average inventory Inventory turnover= $4,600,000/$460,000= 10.0

The following data are available for selected income statement accounts for two years for Bronze Company: Year 1 Year 2 Sales $750,000 $845,000 Cost of goods sold $457,000 $524,000 Income before taxes $88,500 $99,000 Net income $62,000 $70,000 If a percentage analysis approach for horizontal analysis is calculated, what is the percentage increase in cost of goods sold for Year 2?

14.66% Reason: $524,000 - $457,000 ÷ $457,000 = 14.66%.

If a company has sales of $17,500,000, net income of $1,475,000, earnings before interest and taxes of $2,300,000, income tax expense of $695,000, and interest expense of $130,000, and what is its number of times interest is earned?

17.69 times Reason: $2,300,000 ÷ $130,000 = 17.69 (there is $17.69 of earnings for every $1 of interest expense).

Assume a company has sales of $500,000, total assets of $1,000,000, gross margin of $350,000, selling expenses of $210,000, and net income of $21,000. If it is performing vertical analysis, what percentage would be assigned to selling expenses?

42% Reason: $210,000 ÷ $500,000 = 42%.

If a company has current assets of $700,000, ending inventory of $500,000, average inventory of $450,000, sales of $2,500,000, and cost of goods sold of $1,750,000, what is its average days to sell inventory?

93.9 days Reason: Average days to sell inventory=365 days/inventory turnover Average days to sell inventory= 365/3.89= 93.9 days Inventory turnover=Cost of goods sold/Average inventory Inventory turnover=$1,750,000/$450,000=3.89

Which of the following statements about calculating the asset turnover ratio are correct? (Select all that apply.)

Average total assets should be used in the denominator Net sales should be used in the numerator

Which of the following ratios is used to assess the performance of a company's stock?

Earnings per share

Other things being equal, a company would prefer that its average days to collect receivables be __________, indicating that it takes the company fewer days to collect a receivable.

Low

Which of the following formulas yields the net margin (return on sales) ratio?

Net income divided by net sales

Which of the following formulas yields the asset turnover ratio?

Net sales÷ average total assets

Which of the following formulas yields the debt to assets ratio?

Total liabilities divided by total assets

The dividend yield is calculated by dividing __________ per share by ___________ price,___________ per share. (Enter only one word per blank.)

dividends, market, price

When performing financial statement analysis of two companies,

even if the companies are in the same industry, if one company uses FIFO and the other uses LIFO, it will be unwise to compare their current ratios.

Profitability ratios are used to assess management's ability to

generate earnings.

Other things being equal, a company would prefer that its asset turnover ratio be ____________ , indicating good use of assets to generate sales.

high

Other things being equal, a company would prefer that its net margin (return on sales) ratio be ____________ , indicating lower expenses.

high

When performing financial statement analysis,

it is easier to compare the financial ratios of companies in the same industry than to compare the ratios of companies in different industries.

Which ratios indicate a company's ability to pay short-term debts?

liquidity ratios

Other things being equal, a company will appear to have less financial risk if its debt to equity ratio is ___________.

low

If an item would influence the decision of an informed user it is considered

material

If a financial analyst divides a company's cost of goods sold for Year 2 by its cost of goods sold for Year 1, he/she is performing a(n)

percentage analysis approach for horizontal analysis.

A common size income statement is prepared on a(n)

percentage basis.