CH 14 assement
Richards Corporation had net income of $250,000 and paid dividends to common stockholders of $50,000. It had 50,000 shares of common stock outstanding during the entire year. Richards Corporation's common stock is selling for $35 per share. The price-earnings ratio is
7 times
Comparative financial statements are designed to compare the financial statements of two or more corporations.
False
In a common-sized income statement, each item is expressed as a percentage of net income.
False
In horizontal analysis, the current year is the base year.
False
In the vertical analysis of a balance sheet, the base for current liabilities is total liabilities.
False
In the vertical analysis of an income statement, each item is generally stated as a percentage of total assets.
False
On a common-sized income statement, all items are stated as a percent of total assets or equities at year-end.
False
Using vertical analysis of the income statement, a company's net income as a percentage of sales is 15%; therefore, the cost of goods sold as a percentage of sales must be 85%.
False
The following information is available for Meyer Company: Dividends per share of common stock$1.80Market price per share of common stock$30.00 Which of the following statements is correct?
The dividend yield is 6.0%, which is of special interest to investors seeking to earn revenue on their investments.
Factors that reflect the ability of a business to pay its debts and earn a reasonable amount of income are referred to as solvency, profitability, and liquidity.
True
The analysis of increases and decreases in the amount and percentage of comparative financial statement items is referred to as horizontal analysis.
True
The relationship of each asset item as a percent of total assets is an example of vertical analysis.
True
Using measures to assess a business's ability to pay its current liabilities is called current position analysis.
True
A loss on disposal of a segment would be reported in the income statement as a(n)
deduction from income from continuing operations
The tendency of the return on stockholders' equity to vary disproportionately from the return on total assets is because of
leverage
Which of the following items should be classified as an unusual item on an income statement?
loss due to a discontinued operation in Colorado
Accumulated other comprehensive income is presented in the financial statements
on the balance sheet as part of stockholders' equity.
The current ratio is
used to evaluate a company's liquidity and short-term debt paying ability
Which of the following is not a characteristic evaluated in ratio analysis?
marketability
The numerator of the return on common stockholders' equity is
net income minus preferred dividends
The numerator of the return on total assets is
net income plus interest expense
Horizontal analysis is a technique for evaluating financial statement data
over a period of time
The purpose of an audit is to
render an opinion on the fairness of the statements
The percent of fixed assets to total assets is an example of
vertical analysis
Based on the following data, what is the accounts receivable turnover? Sales on account during year$700,000Cost of goods sold during year270,000Accounts receivable, beginning of year45,000Accounts receivable, end of year35,000Inventory, beginning of year90,000Inventory, end of year110,000
17.5
Assume the following sales data for a company: Current year$325,000 Preceding year250,000 What is the percentage increase in sales from the preceding year to the current year?
30%
In horizontal analysis, each item is expressed as a percentage of the
base year figure
Income statement information for Sadie Company is below: Sales$175,000Cost of goods sold115,000Gross profit$60,000 Using vertical analysis of the income statement for Sadie Company, determine the gross profit margin.
34%
All of the following are typically included in the management's discussion and analysis in annual reports except
journal entries
Short-term creditors are typically most interested in analyzing a company's
liquidity
One reason that a common-sized statement is a useful tool in financial analysis is that it enables the user to
make a better comparison of two companies of different sizes in the same industry
The following information is available for Jase Company: Market price per share of common stock$25.00Earnings per share on common stock$1.25 Which of the following statements is correct?
The price-earnings ratio is 20 and a share of common stock was selling for 20 times the amount of earnings per share at the end of the year.
Which of the following is considered an unusual item affecting the prior period's income statement?
a change in accounting principles
Which of the following is required by the Sarbanes-Oxley Act?
a report on internal control
Horizontal analysis of comparative financial statements includes
calculation of dollar amount changes and percentage changes from the previous to the current year
A balance sheet that displays only component percentages is a
common-sized balance sheet
Which of the following is the most useful in analyzing companies of different sizes?
common-sized financial statements
Leverage implies that a company
contains debt financing
The numerator in calculating the accounts receivable turnover is
sales
In a common-sized balance sheet, 100% is
total assets
Which of the following measures a company's ability to pay its current liabilities?
current ratio
Dividend yield on common stock is calculated as
dividends per share of common stock, divided by market price per share of common stock.
The percentage analysis of increases and decreases in individual items in comparative financial statements is called
horizontal analysis
What type of analysis is indicated by the following? Increase (Decrease) Current YearPreceding YearAmountPercentCurrent assets$430,000 $500,000 $(70,000)(14%) Fixed assets1,740,000 1,500,000 240,000 16%
horizontal analysis
Which of the following items appear on the corporate income statement before income from continuing operations?
income tax expense
Which of the following is not included in the computation of the quick ratio?
inventory
The price-earnings ratio on common stock is calculated as
market price per share of common stock, divided by earnings per share on common stock.
The particular analytical measures chosen to analyze a company may be influenced by all of the following except
product quality or service effectiveness
Which of the following ratios provides a solvency measure that shows the margin of safety of bondholders and also gives an indication of the potential ability of the business to borrow additional funds on a long-term basis?
ratio of fixed assets to long-term liabilities
In a common-sized income statement, 100% is the
sales
In a vertical analysis, the base for cost of goods sold is
sales
The ability of a business to pay its debts as they come due and to earn a reasonable net income is
solvency and profitability
A common measure of liquidity is
the accounts receivable turnover
A change from one acceptable accounting method to another is reported
through a retroactive restatement of prior-period earnings
Which of the following would appear as an unusual item on the income statement?
gain resulting from the disposal of a segment of the business
The independent auditor's report
gives the auditor's opinion regarding the fairness of the financial statements
Times interest earned is computed as
income before income tax plus interest expense, divided by interest expense
An acceleration in the collection of receivables will tend to cause the accounts receivable turnover to
increase
A company with $70,000 in current assets and $50,000 in current liabilities pays a $1,000 current liability. As a result of this transaction, the current ratio and working capital will
increase and remain the same, respectively
The following information pertains to Diane Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. AssetsCash and short-term investments$30,000Accounts receivable (net)20,000Inventory15,000Property, plant and equipment185,000Total Assets$250,000 Liabilities and Stockholders' EquityCurrent liabilities$45,000Long-term liabilities70,000Common stock80,000Retained earnings55,000Total liabilities and stockholders' equity$250,000 Income StatementSales$85,000 Cost of goods sold45,000 Gross margin$40,000 Operating expenses(15,000)Interest expense(5,000)Net income$20,000 Number of shares of common stock outstanding6,000Market price of common stock$20Total dividends paid$9,000Cash provided by operations$30,000 What is the asset turnover for Diane Company?
0.34
A financial statement showing each item on the statement as a percentage of one key item on the statement is called a common-sized financial statement.
True
Dollar amounts of working capital are difficult to assess when comparing companies of different sizes or in comparing such amounts with industry figures.
True
Which of the following is not an unusual item?
corporate income tax being paid
Percentage analyses, ratios, turnovers, and other measures of financial position and operating results are
useful analytical measures
An analysis in which all the components of an income statement are expressed as a percentage of sales is a
vertical analysis
The relationship of $325,000 to $125,000, expressed as a ratio, is
2.6
A 15% change in sales will result in a 15% change in net income.
False
The excess of current assets over current liabilities is referred to as working capital.
True
Corporate annual reports typically do not contain
an SEC statement expressing an opinion
Privett CompanyAccounts payable$30,000Accounts receivable35,000Accrued liabilities7,000Cash25,000Intangible assets40,000Inventory72,000Long-term investments100,000Long-term liabilities75,000Marketable securities36,000Notes payable (short-term)20,000Property, plant, and equipment400,000Prepaid expenses2,000 Based on the data for Privett Company, what is the amount of working capital?
$113,000
Select the correct presentation for other comprehensive income on the financial statements of Puma Company.
Both are correct
Vertical analysis refers to comparing the financial statements of a single company over several years.
False
A loss due to a discontinued operation should be reported on the income statement
below income from continuing operations
The following information pertains to Diane Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. AssetsCash and short-term investments$30,000Accounts receivable (net)20,000Inventory15,000Property, plant and equipment185,000Total Assets$250,000 Liabilities and Stockholders' EquityCurrent liabilities$45,000Long-term liabilities70,000Common stock80,000Retained earnings55,000Total liabilities and stockholders' equity$250,000 Income StatementSales$85,000 Cost of goods sold45,000 Gross margin$40,000 Operating expenses(15,000)Interest expense(5,000)Net income$20,000 Number of shares of common stock outstanding6,000Market price of common stock$20Total dividends paid$9,000Cash provided by operations$30,000 What are the dividends per common share for Diane Company?
$1.50
Harding CompanyAccounts payable$40,000Accounts receivable65,000Accrued liabilities7,000Cash30,000Intangible assets40,000Inventory72,000Long-term investments110,000Long-term liabilities75,000Marketable securities36,000Notes payable (short-term)30,000Property, plant, and equipment625,000Prepaid expenses2,000 What is the amount of working capital?
$128,000
Harding CompanyAccounts payable$40,000Accounts receivable65,000Accrued liabilities7,000Cash30,000Intangible assets40,000Inventory72,000Long-term investments110,000Long-term liabilities75,000Marketable securities36,000Notes payable (short-term)30,000Property, plant, and equipment625,000Prepaid expenses2,000 What is the amount of quick assets?
$131,000
A company with working capital of $720,000 and a current ratio of 2.2 pays a $125,000 short-term liability. The amount of working capital immediately after payment is
$720,000
Hsu Company reported the following on its income statement: Income before income taxes$420,000 Income tax expense120,000 Net income$300,000 Interest expense was $80,000. Hsu Company's times interest earned ratio is
6.25 times
Balance sheet and income statement data indicate the following: Bonds payable, 10% (due in two years)$1,000,000Preferred 5% stock, $100 par (no change during year)300,000Common stock, $50 par (no change during year)2,000,000Income before income tax for year550,000Income tax for year80,000Common dividends paid50,000Preferred dividends paid15,000 Based on the data presented, what is the times interest earned ratio? (Round to one decimal point.)
6.5
Manx Company owns one investment, purchased several years ago for $20,000. As of the end of the year two years ago, the investment had increased in value to $26,000. As of the end of the current year, the investment had decreased somewhat in value to $24,000. Manx anticipates selling the investment in the coming year, and expects to receive $28,000. Under fair value accounting, what would be the value of the investments account on the current year's December 31 balance sheet?
$24,000
The balance sheets at the end of each of the first two years of operations indicate the following: Kellman Company Year 2Year 1Total current assets$600,000$560,000Total investments60,00040,000Total property, plant, and equipment900,000700,000Total current liabilities125,00065,000Total long-term liabilities350,000250,000Preferred 9% stock, $100 par100,000100,000Common stock, $10 par600,000600,000Paid-in capital in excess of par—Common stock75,00075,000Retained earnings310,000210,000 Using the balance sheets for Kellman Company, if net income is $250,000 and interest expense is $30,000 for Year 2, what are the earnings per share on common stock for Year 2?
$4.02
A company reports the following: Net income$160,000Preferred dividends$10,000Shares of common stock outstanding20,000Market price per share of common stock$35 The company's earnings per share on common stock is
$7.50
Privett CompanyAccounts payable$30,000Accounts receivable35,000Accrued liabilities7,000Cash25,000Intangible assets40,000Inventory72,000Long-term investments100,000Long-term liabilities75,000Marketable securities36,000Notes payable (short-term)20,000Property, plant, and equipment400,000Prepaid expenses2,000 Based on the data for Privett Company, what is the amount of quick assets?
$96,000
Brock Company's financial information is listed below. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. AssetsCash and short-term investments$40,000Accounts receivable (net)30,000Inventory25,000Property, plant, and equipment215,000Total assets$310,000 Liabilities and Stockholders' EquityCurrent liabilities$60,000Long-term liabilities95,000Common stock, $10 par60,000Retained earnings95,000Total liabilities and stockholders' equity$310,000 Income StatementSales$90,000Cost of goods sold45,000Gross margin$45,000Operating expenses20,000Net income$25,000 Number of shares of common stock6,000Market price of common stock$20 What is the current ratio? Round your answer to two decimal places.
1.58
Accounts payable$30,000Accounts receivable35,000Accrued liabilities7,000Cash25,000Intangible assets40,000Inventory72,000Long-term investments100,000Long-term liabilities75,000Marketable securities36,000Notes payable (short-term)20,000Property, plant, and equipment400,000Prepaid expenses2,000 Based on the data for Privett Company, what is the quick ratio, rounded to one decimal point?
1.7
Harding CompanyAccounts payable$40,000Accounts receivable65,000Accrued liabilities7,000Cash30,000Intangible assets40,000Inventory72,000Long-term investments110,000Long-term liabilities75,000Marketable securities36,000Notes payable (short-term)30,000Property, plant, and equipment625,000Prepaid expenses2,000 What is the quick ratio, rounded to one decimal point?
1.7
The following information pertains to Diane Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. AssetsCash and short-term investments$30,000Accounts receivable (net)20,000Inventory15,000Property, plant, and equipment185,000Total Assets$250,000 Liabilities and Stockholders' EquityCurrent liabilities$45,000Long-term liabilities70,000Common stock80,000Retained earnings55,000Total liabilities and stockholders' equity$250,000 Income StatementSales$85,000 Cost of goods sold45,000 Gross margin$40,000 Operating expenses(15,000)Interest expense(5,000)Net income$20,000 Number of shares of common stock outstanding6,000Market price of common stock$20Total dividends paid$9,000Cash provided by operations$30,000 What is the return on total assets for Diane Company?
10.0%
The balance sheets at the end of each of the first two years of operations indicate the following: Kellman Company Year 2Year 1Total current assets$600,000$560,000Total investments60,00040,000Total property, plant, and equipment900,000700,000Total current liabilities125,00065,000Total long-term liabilities350,000250,000Preferred 9% stock, $100 par100,000100,000Common stock, $10 par600,000600,000Paid-in capital in excess of par—Common stock75,00075,000Retained earnings310,000210,000 Using the balance sheets for Kellman Company, if net income is $150,000 and interest expense is $20,000 for Year 2, what is the return on total assets for the year?
11.9%
The following information pertains to Dallas Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. AssetsCash and short-term investments$40,000Accounts receivable (net)30,000Inventory25,000Property, plant, and equipment280,000Total Assets$375,000 Liabilities and Stockholders' EquityCurrent liabilities$60,000Long-term liabilities95,000Common stock, $20 par120,000Retained earnings100,000Total liabilities and stockholders' equity$375,000 Income StatementSales$90,000Cost of goods sold45,000Gross margin$45,000Operating expenses15,000Net income$30,000 Number of shares of common stock6,000Market price of common stock$20Dividends per share$1.00Cash provided by operations$40,000 What is the return on stockholders' equity?
13.6%
The balance sheets at the end of each of the first two years of operations indicate the following: Kellman Company Year 2Year 1Total current assets$600,000$560,000Total investments60,00040,000Total property, plant, and equipment900,000700,000Total current liabilities125,00065,000Total long-term liabilities350,000250,000Preferred 9% stock, $100 par100,000100,000Common stock, $10 par600,000600,000Paid-in capital in excess of par—Common stock75,00075,000Retained earnings310,000210,000 Using the balance sheets for Kellman Company, if net income is $150,000 and interest expense is $20,000 for Year 2, what is the return on stockholders' equity for Year 2?
14.5%
The following information pertains to Diane Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. AssetsCash and short-term investments$30,000Accounts receivable (net)20,000Inventory15,000Property, plant and equipment185,000Total Assets$250,000 Liabilities and Stockholders' EquityCurrent liabilities$45,000Long-term liabilities70,000Common stock80,000Retained earnings55,000Total liabilities and stockholders' equity$250,000 Income StatementSales$85,000 Cost of goods sold45,000 Gross margin$40,000 Operating expenses(15,000)Interest expense(5,000)Net income$20,000 Number of shares of common stock outstanding6,000Market price of common stock$20Total dividends paid$9,000Cash provided by operations$30,000 What is the return on common stockholders' equity for Diane Company?
14.8%
Based on the following data for the current year, what is the number of days' sales in inventory? Sales on account during year$1,204,500Cost of goods sold during year657,000Accounts receivable, beginning of year75,000Accounts receivable, end of year85,000Inventory, beginning of year85,600Inventory, end of year98,600
51.2
Based on the following data for the current year, what is the inventory turnover? Sales on account during year$700,000Cost of goods sold during year270,000Accounts receivable, beginning of year45,000Accounts receivable, end of year35,000Inventory, beginning of year90,000Inventory, end of year110,000
2.7
Based on the following data for the current year, what is the number of days' sales in receivables? Sales on account during year$584,000Cost of goods sold during year300,000Accounts receivable, beginning of year45,000Accounts receivable, end of year35,000Inventory, beginning of year90,000Inventory, end of year110,000
25
Assume the following sales data for a company: Current year$1,025,000Preceding year820,000 What is the percentage increase in sales from the preceding year to the current year?
25%
Based on the following data for the current year, what is the number of days' sales in receivables? Assume 365-Day year. Sales on account during year$557,162Cost of goods sold during year162,151Accounts receivable, beginning of year40,061Accounts receivable, end of year53,190Inventory, beginning of year92,099Inventory, end of year108,201 Round your answer up to the nearest whole day.
31
The following information pertains to Diane Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. AssetsCash and short-term investments$30,000Accounts receivable (net)20,000Inventory15,000Property, plant and equipment185,000Total Assets$250,000 Liabilities and Stockholders' EquityCurrent liabilities$45,000Long-term liabilities70,000Common stock80,000Retained earnings55,000Total liabilities and stockholders' equity$250,000 Income StatementSales$85,000 Cost of goods sold45,000 Gross margin$40,000 Operating expenses(15,000)Interest expense(5,000)Net income$20,000 Number of shares of common stock outstanding6,000Market price of common stock$20Total dividends paid$9,000Cash provided by operations$30,000 What is the price-earnings ratio for Diane Company?
6.0 times
The balance sheets at the end of each of the first two years of operations indicate the following: Kellman Company Year 2Year 1Total current assets$600,000$560,000Total investments60,00040,000Total property, plant, and equipment900,000700,000Total current liabilities125,00065,000Total long-term liabilities350,000250,000Preferred 9% stock, $100 par100,000100,000Common stock, $10 par600,000600,000Paid-in capital in excess of par—Common stock75,00075,000Retained earnings310,000210,000 Using the balance sheets for Kellman Company, if net income is $250,000 and interest expense is $20,000 for Year 2, and the market price of common shares is $30, what is the price-earnings ratio on common stock for Year 2? (Round intermediate calculation to two decimal places and final answers to one decimal place.)
7.5
The following information pertains to Diane Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. AssetsCash and short-term investments$30,000Accounts receivable (net)20,000Inventory15,000Property, plant and equipment185,000Total Assets$250,000 Liabilities and Stockholders' EquityCurrent liabilities$45,000Long-term liabilities70,000Common stock80,000Retained earnings55,000Total liabilities and stockholders' equity$250,000 Income StatementSales$85,000 Cost of goods sold45,000 Gross margin$40,000 Operating expenses(15,000)Interest expense(5,000)Net income$20,000 Number of shares of common stock outstanding6,000Market price of common stock$20Total dividends paid$9,000Cash provided by operations$30,000 What is the dividend yield for Diane Company?
7.5%
The following information pertains to Newman Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. AssetsCash and short-term investments$40,000Accounts receivable (net)30,000Inventory25,000Property, plant and equipment215,000Total Assets$310,000 Liabilities and Stockholders' EquityCurrent liabilities$60,000Long-term liabilities95,000Common stock80,000Retained earnings75,000Total liabilities and stockholders' equity$310,000 Income StatementSales$90,000Cost of goods sold45,000Gross margin$45,000Operating expenses20,000Net income$25,000 Number of shares of common stock6,000Market price of common stock$40Dividends per share$1.00Cash provided by operations$40,000 What is the return on total assets for this company?
8.1%