Chapter 14 ACCT 7080 Mr. Turner

4

A company had operating income (income before income taxes and interest) of $200,000 and net income of $185,000. Annual interest expense was $50,000. The interest coverage ratio was ____ times.

31 days Reason: $650,000/(($50,000 + $60,000)/2) = 11.8; 365 days/11.8 = 31 days

A company's sales for the year were $650,000. Its accounts receivable was $50,000 at the beginning of the year and $60,000 at the end of the year. What were the average number of days to collect accounts receivable, rounded to the nearest whole day?

horizontal analysis

Comparing amounts for a company over time in successive accounting periods is called

Industry Analysis

Comparing amounts for a company with other companies that have similar characteristics is called

cash inventories accounts receivable

Examples of current assets include which of the following?

the dividend yield.

Factors helpful in judging the quality of working capital include all of the following except

comparative

Financial statements that present multiyear information in side-by-side columns are called ____ (comparative/classified) financial statements.

$475,000 ÷ $3,500,000 = 13.6%

Flanders Company's operating income for the current year was $475,000. The company's average total assets for the same period were $3,500,000, and its total liabilities were $1,000,000. Calculate the company's return on assets. (Round your percentage value answer to 1 decimal place, i.e. 0.1234 as 12.3%.)

income before income taxes and interest expense.

In calculating the interest coverage ratio, the numerator should be

quality

Judging the impact on earnings of the specific accounting methods a company chooses is sometimes referred to as the _____ of earnings.

3 math: $810,000 − Current liabilities = $540,000 Current liabilities = $810,000 − $540,000 = $270,000 Current ratio = $810,000 ÷ $270,000 = 3.00

The Piazza Company has working capital of $540,000 and current assets of $810,000. The current ratio is:

Liquidity

The ability of a company to meet its continuing obligations is referred to as

Total assets financed by creditors.

The debt ratio indicates the percentage of:

leverage

The efficient use of debt to earn a return for common stockholders' equity is called

earnings per share

The final section or item you would expect to find in a classified income statement is

True

The inventory turnover rate indicates how quickly inventory sells.

Quick ratio

Which of the following is a measure of short-term liquidity?

70000 math:

company has cash of $20,000; accounts receivable of $45,000; inventory of $60,000; plant assets (net of depreciation) of $100,000; and accounts payable of $55,000. The amount of the company's working capital is $

$0.78 Reason: ($200,000 - $25,000)/(200,000 + 250,000 shares)/2 = $0.78

A company had $200,000 of net income during the year. Its dividend requirements for preferred stock were $25,000. Outstanding numbers for common stock were 200,000 at the beginning of the year, which increased to 250,000 at the end of the year as a result of selling additional stock at the halfway point during the year. What was the amount of the company's earnings per share (on common stock) for the year, rounded to the nearest whole cent?

110 days Reason: (365/5) + (365/10) = 109.5 days

A company had an accounts receivables turnover rate of 5 times and an inventory turnover rate of 10 times. How many days are in the company's operating cycle, rounded to the nearest whole day?

5.1% Reason: ($12,400 - $11,800)/$11,800 = 5.1%

A company had interest expense of $12,400 during a year. In the previous year, interest expense was $11,800. What was the percentage increase rounded to the nearest 1/10 percent?

True

A company whose sales are growing at less than the rate of inflation may actually be selling less merchandise every year.

multi-step

An income statement that includes subtotals of profitability at intermediate steps is called a(n) _____ - _____ income statement.

current

Assets that are relatively liquid and are expected to become cash in the relatively near future are called ____ assets.

combined financial statements of parent and subsidiary companies

Consolidated financial statements present which of the following?

operating profit

Gross profit minus operating expenses is called

2% math: 10k/500k=2%

If a company had sales of $500,000; gross profit of $360,000; interest expense of $10,000; and net income of $125,000, the component percentage for interest expense, is

True

If total current assets are $140,000 at the end of Year 1, increase by $50,000 by the end of Year 2, and increase by $50,000 in Year 3, the percentage increase over the preceding year is less in Year 3 than in Year 2.

Net income: $560,000 - ($255,000 + $130,000) = $175,000 Net income as a percentage of sales: $175,000 ÷ $560,000 = 31.3%

Lone Star, Inc., reported sales of $560,000, cost of sales of $255,000, and operating expenses of $130,000 for the current year. Calculate the amount of net income and net income as a percentage of sales. (Round your percentage value answer to 1 decimal place, i.e. 0.1234 as 12.3%.)

the nature of the current assets. the length of a company's operating cycle.

Primary factors in evaluating the quality of working capital include

the impact on earnings and assets of the accounting methods selected by a company.

Quality of earnings is a term used to describe

Cash, marketable securities, and receivables.

Quick assets include which of the following?

an increase in accounts receivable a decrease in accrued liabilities

Reconciling a company's net income to its net cash from operating activities includes subtractions for which of the following?

False

Return on equity (ROE) is measured by dividing net income by average number of shares outstanding.

comparisons with other companies in close geographic proximity.

Standards of comparison commonly used in financial analysis include all of the following except

average total assets.

The base number (denominator) in the calculation of the return on assets is the

the Year 1 amount

The basis or denominator for computing a percentage change from Year 1 to Year 2 is

net income

The best number to use for the numerator in the calculation of return on equity is

equipment. retained earnings.

The calculation of the current ratio includes all of the following in the numerator except

accounts receivable turnover rate

The financial statement ratio that measures how rapidly accounts receivable are collected is called the

net income divided by the number of shares of common stock outstanding.

The general formula for calculating earnings per share is

A company's ability to meet its obligations as they become due.

Which of the following best describe(s) what is meant by a company's liquidity?

Earning more on debt than the cost of debt, enhancing the investment of common stockholders.

Which of the following best describes the meaning of leverage?

It reflects a company's liquidity. It reflects a company's rate of inventory turnover.

Which of the following do(es) NOT accurately describe the price-earnings ratio?

the depreciation of plant assets

Which of the following is NOT a factor in judging a company's liquidity?

Earnings per share figures are not presented in a single-step income statement.

Which of the following is NOT correct about a single-step income statement?

They often include multiyear summaries of comparative information about the company. They include management's own discussion and analysis of important aspects of the company.

Which of the following is/are correct about the annual reports of companies?

The lower the debt ratio, the safer the position of creditors. Debt ratios of companies vary by industry.

Which of the following is/are correct about the debt ratio?

dividend yield earnings per share price-earnings ratio

Which of the following is/are particularly relevant to a company's common stockholders if they are interested in receiving regular cash income?

assets pledged to secure specific liabilities accounting policies and methods used in the financial statements significant commitments and contingencies

Which of the following would you expect to find in notes to a company's financial statements?

100%, 116%, 144% Reason: $45,000/$45,000 = 100%; $52,000/$45,000 = 116%; $65,000/$45,000 = 144%

A company had inventory in successive years of $45,000, $52,000, and $65,000. Which sequence represents the correct trend percentages, rounded to the nearest whole percentage, assuming the first year is the base year?

8.3% Reason: $1/$12 = 8.3%

A company had net income of $350,000 for the year, earnings per share for that year of $2.35, and paid dividends of $1 per share on its 10,000 outstanding shares of common stock. What was the dividend yield, assuming a market price of $12 per share?

34% Reason: $300,000/(($800,000 + $950,000)/2) = 34%

A company had operating income of $250,000 and net income of $300,000 for a year in which its total stockholders' equity was $800,000 at the beginning of the year and increased to $950,000 from the sale of additional capital stock during the year. What was the amount of the company's return on equity for the year, rounded to the nearest whole percentage?

$7.50 Reason: $75,000/10,000 = $7.50

A company had sales of $400,000; gross profit of $250,000; operating income of 150,000; and net income of $75,000. Dividends on preferred stock were $10,000. Throughout the year, 10,000 shares of common stock were outstanding and 1,000 shares of preferred stock were outstanding. What was the earnings per share for the year?

17.8 times Reason: $800,000/(($40,000 + $50,000)/2) = 17.8 times

A company had sales of $800,000 during a year in which the cost of goods sold was $500,000; beginning receivables were $40,000; and ending receivables were $50,000. Net income for the year was $130,000. What was the company's accounts receivables turnover rate, rounded to the nearest tenth?

86.7% Reason: $78,000/$90,000 = 86.7%

A company had sales of $90,000 in Year 1, the base year; $95,000 in Year 2; and $78,000 in Year 3. What is the trend percentage for Year 3? Round the answer to two decimal places?

5 times Reason: $700,000/(($150,000 + $130,000)/2) = 5 times

A company had sales of $900,000 and a cost of goods sold of $700,000 for the year. Its beginning inventory was $150,000, and its ending inventory was $130,000. What was the company's inventory turnover rate?

2 Reason: ($4,000 + $8,000)/$6,000 = 2

A company has cash of $4,000; accounts receivable of $8,000; inventories of $12,000; and accounts payable of $6,000. What is the amount of the company's quick ratio?

1.86 Reason: ($5,000 + $25,000 + $35,000)/$35,000 = 1.86

A company has cash of $5,000; accounts receivable of $25,000; inventories of $35,000; accounts payable of $35,000; and retained earnings of $30,000. What is the company's current ratio, rounded to the nearest hundredth?

60% Reason: ($175,000 + $425,000)/($300,000 + $700,000) = 60%

A company has current assets of $300,000; noncurrent assets of $700,000; current liabilities of $175,000; noncurrent liabilities of $425,000; and stockholders' equity of $400,000. What is the amount of the company's debt ratio?

20 times Reason: ($500,000 + $35,000 + $150,000)/$35,000 = 19.57 times

A company has net income of $500,000 after excluding interest expense of $35,000 and income taxes of $150,000. What is the interest coverage ratio, rounded to the nearest whole number?

liquidity

A company's ability to meet its obligations on an ongoing basis is generally referred to as the company's

2.88 Reason: ($6,000 + $10,000 + $56,000)/$25,000 = 2.88

A company's assets include cash of $6,000; accounts receivable of $10,000; inventories of $56,000; and plant assets of $28,000, totaling $100,000. Its liabilities include accounts payable of $25,000 and bonds payable of $45,000, totaling $70,000. Its stockholders' equity includes $10,000 of capital stock and $20,000 of retained earnings, totaling $30,000. What is the company's current ratio?

8 Reason: $12/$1.50 = 8

A company's current market price is $12 per share. Other items of key information from its financial statements include gross profit of $100,000; net income of $40,000; and earnings per share of $1.50. What is the company's price-earning ratio?

single

The income statement format that groups all revenues together, less all expenses grouped together, with no intermediate subtotals in arriving at a net income amount is the ____ -step income statement.

Operating Cycle

The length of time required to invest cash in inventory, sell the inventory, and collect the receivable is referred to as the company's

information about other companies in the same industry. information about the same company in different accounting periods.

The most common approaches used for financial analysis compare information about a company in a single accounting period with

component percentage.

The percentage that inventory represents of the total assets in a statement of financial position (balance sheet) is called the

False

The price-earnings ratio is calculated by dividing earnings per share by the current market price of a share of the company's stock.

Market value by earnings per share.

The price-earnings ratio is measured by dividing:

inventory turnover rate

The ratio that indicates the length of time required to sell inventory is called the

ratio

The relationship of one number to another related number is called a

assets

The return on ____ is a broad measure of profitability of a company based on the total investment in the company.

return divided by average amount invested during the period

The return on investment is calculated as follows:

operating activities section.

The section of a company's statement of cash flows that is most directly related to its ability to produce a continuing, dependable cash flow for ongoing activities is the

False

True or false: Annual reports of companies are made available only to that company's creditors and stockholders.

False

True or false: Notes to the financial statements are rare and usually include information that is not considered important in financial statement analysis

True

True or false: Public opinion polls show that people generally overstate the amount of profit earned by companies.

False

True or false: Ratios compare only amounts within a single financial statement, such as an income statement or a statement of financial position (balance sheet).

False

True or false: The quick ratio and the current ratio are two names for the same financial statement ratio.

False

True or false: The single-step income statement and the multiple-step income statement for the same company for the same year will result in different net income figures.

return on assets return on equity

Two common applications of the Return on investment concept include:

capital stock retained earnings bonds payable

Which of the following are NOT considered in calculating the amount of a company's working capital?

net income operating income gross profit

Which of the following are measures of different levels of profitability?