ACCOUNTING CH 11

Total liabilities were $200,000 at the beginning of the year and $240,000 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:

$240,000 / ($240,000 + $400,000) = 37.5%

Sales for Year 2 were $1,400,000. Accounts receivable was $350,000 at the end of Year 1 and $400,000 at the end of Year 2. The days' sales in accounts receivable for Year 2 (rounded to one decimal) was:

$400,000 / ($1,400,000 / 365) = 104.3 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 price/earnings ratio is:

$90 / $5 = $18 per share

Identify the correct statements about vertical common size financial statement analysis.

With vertical common size financial statement analysis, total current assets are expressed as a percentage of total assets. With vertical common size financial statement analysis, each item on the income statement is expressed as a percentage of sales.

Book value per share of common stock is usually calculated by dividing a company's _________ (average/year-end) total stockholders' equity by the____________ (average/year-end) number of shares of common stock ___________ (authorized/issued/outstanding).

YEAR-END YEAR-END OUTSTANDING

A company desiring to increase its total asset turnover could do so by using:

an accelerated depreciation method and the LIFO cost flow assumption.

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.

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:

life cycle stage of development Relative scale of operations selected accounting methods market segmentation strategies

Operating income is frequently substituted for net income in the calculation of ROI and ROE because:

operating income excludes the effects of discontinued operations and thus provides a more forward looking measure of the firm's profitability .operating income excludes income tax expense, which varies from firm to firm based on country-specific tax rates .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.

To calculate the plant and equipment turnover, you would divide:

sales by the average plant and equipment.

Firm E had 30,000 shares of $100 par value and 8 percent cumulative preferred stock authorized, issued, and outstanding during Year 1 and Year 2 but did not pay any preferred or common stock dividends in either year. Net income was $1,000,000 in Year 1 and $1,200,000 in Year 2. Firm E's preferred dividend coverage ratio for Year 2 (rounded to one decimal) is:

$1,200,000 / (30,000 x $100 x 8%) = 5.0 times

Cost of goods sold for Year 2 was $900,000. Sales for Year 2 was $1,500,000. Plant and equipment was $500,000 at the end of Year 1 and $750,000 at the end of Year 2. The plant and equipment turnover for Year 2 (rounded to one decimal) was:

$1,500,000 / (($500,000 + $750,000) / 2) = 2.4 times

For Year 2, sales were $1,000,000, and cost of goods sold was $500,000. Inventories amounted to $100,000 at the end of Year 1 and $140,000 at the end of Year 2. The days' sales in inventory for Year 2 (rounded to one decimal) was:

$140,000 / ($500,000 / 365) = 102.2 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

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%

Cost of goods sold was $200,000 and $300,000 in Year 1 and Year 2, respectively. Sales for Year 2 were $500,000. Inventory was $15,000 at the end of Year 1 and $25,000 at the end of Year 2. The inventory turnover for Year 2 (rounded to one decimal) was:

$300,000 / (($15,000 + $25,000) / 2) = 15.0 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 dividend yield (rounded to one decimal) is:

$4 / $72 = 5.6%

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%

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 yield (rounded to one decimal) is:

$5 / $80 = 6.3%

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

Cost of goods sold for Year 2 was $600,000. Sales for Year 2 were $800,000. Plant and equipment was $300,000 at the end of Year 1 and $500,000 at the end of Year 2. The plant and equipment turnover for Year 2 (rounded to one decimal) was:

$800,000 / (($300,000 + $500,000) / 2) = 2.0 times

Firm D had 20,000 shares of $50 par value and 6 percent cumulative preferred stock authorized, issued, and outstanding during Year 1 and Year 2 but did not pay any preferred or common stock dividends in either year. Net income was $800,000 in Year 1 and $900,000 in Year 2. Firm D's preferred dividend coverage ratio for Year 2 (rounded to one decimal) is:

$900,000 / (20,000 x $50 x 6%) = 15.0 times

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 plant and equipment turnover, you divide ______ (sales/CGS) by the _________ (beginning/ending/average) plant and equipment.

-SALES -AVERAGE

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.

LESS

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

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 ratios used to facilitate the interpretation of an entity's financial position and results of operations can be grouped into four (4) categories:

liquidity, activity, profitability, and debt

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 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.

Firm D had total stockholders equity of $1,000,000 at the end of Year 1 and $1,400,000 at the end of Year 2. Throughout Year 2, there were 100,000 shares of common stock authorized, 60,000 shares issued, and 50,000 shares outstanding. Firm D's book value per share at the end of Year 2 was:

$1,400,000 / 50,000 = $28 per share

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%

Suppliers or potential suppliers/creditors of a firm consider which of the following to be more important than the aggregate working capital or liquidity ratios of the firm?

-Cash discounts availed by the firm for prompt payments made -Current and recent payment experience of the firm

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:

market segmentation strategies selected accounting methods life cycle stage of development relative scale of operations

Examples of physical or combined physical/financial measures of activity that are sometimes disclosed in the notes to the financial statements include:

operating income per employee sales dollars per employee plant operating expenses per square foot gross profit per square foot of selling space number of employees sales in units

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 payout ratio (rounded to one decimal) is:

$2 / $5 = 40%

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

Identify the true statements about credit-rating firms.

-They evaluate the common and preferred stock issues of publicly traded companies. -They usually have a rating system and assign a credit risk value based on that system.

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%

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 accounts receivable turnover for Year 2 (rounded to one decimal) was:

$800,000 / (($100,000 + $150,000) / 2) = 6.4 times

Operating income is frequently substituted for net income in the calculation of ROI and ROE because:

-operating income excludes the effects of discontinued operations and thus provides a more forward looking measure of the firm's profitability. -operating income excludes income tax expense, which varies from firm to firm based on country-specific tax rates.

Firm E had total stockholders' equity of $600,000 at the end of Year 1 and $800,000 at the end of Year 2. Throughout Year 2, there were 100,000 shares of common stock authorized, 50,000 shares issued, and 40,000 shares outstanding. Firm E's book value per share at the end of Year 2 was:

$800,000 / 40,000 = $20 per share

Dividends that are stable, or gradually changing, and periodic in nature are known as _____ dividends.

regular

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.

PRICE EARNINGS

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.

Financial leverage refers to the use of _________ (debt/equity/revenues) to finance the assets of an entity.

DEBT

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.

INCREASE

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).

RESERVE

Which of the following statements are true regarding the price/earning (P/E) ratio?

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 ear 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.nings for a company.

Financial leverage magnifies a firm's _____ (ROI/ROE) relative to its _____ (ROI/ROE).

Blank 1: ROE Blank 2: ROI

To calculate the days' sales in inventory, you divide the __________ (beginning/ending/average) inventory by the average day's _________ (sales/CGS).

Blank 1: ending Blank 2: CGS

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.