Topic 3 - Accounting GCU

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. What was the debt/equity ratio at the end of the year (rounded to one decimal)?

$300,000 / $240,000 = 125%

Cost of goods sold for Year 2 was $300,000. Sales for Year 2 were $600,000. Inventory was $40,000 at the end of Year 1 and $60,000 at the end of Year 2. The inventory turnover for Year 2 (rounded to one decimal) was:

$300,000 / (($40,000 + $60,000) / 2) = 6.0 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. What is Firm B's dividend yield (rounded to one decimal)?

$4 / $72 = 5.6%

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 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. What is Firm C's dividend payout ratio (rounded to one decimal)?

$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. What is Firm C's dividend yield (rounded to one decimal)?

$5 / $80 = 6.3%

Total liabilities were $650,000 at the beginning of the year and $600,000 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. What was the debt/equity ratio at the end of the year (rounded to one decimal)?

$600,000 / $400,000 = 150%

Total liabilities were $650,000 at the beginning of the year and $600,000 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. What was the debt ratio at the end of the year (rounded to one decimal)?

$600,000 / ($600,000 + $400,000) = 60%

Sales were $500,000 in Year 1 and $600,000 in Year 2. Accounts receivable was $50,000 at the end of Year 1 and $30,000 at the end of Year 2. The accounts receivable turnover for Year 2 (rounded to one decimal) was:

$600,000 / (($50,000 + $30,000) / 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. What is Firm B's price/earnings ratio?

$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 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 $84. What is Firm C's price/earnings ratio?

$84 / $6 = $14 per share

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. What is Firm D's preferred dividend coverage ratio for Year 2 (rounded to one decimal)?

$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. What was Firm G's times interest earned for the year (rounded to one decimal)?

($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. What was Firm H's times interest earned for the year (rounded to one decimal)?

($180,000 + $30,000) / $30,000 = 7.0 times

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

- A high P/E ratio usually means that investors expect the firm to have strong future earnings and dividend growth. - Low P/E ratios usually indicate poor earnings expectations. - Firms with high P/E ratios generally have strong investor confidence.

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

The ratios used to facilitate the interpretation of an entity's financial position and results of operations can be grouped into which four categories?

- Debt (or financial leverage) - Liquidity - Profitability - Activity

Credit-rating firms gather and report data about which of the following?

- Individual companies - Segments of the economy - Industries

Which of these statements regarding financial leverage are true?

- It adds risk to the operation of the firm. - It magnifies the return to the owners (ROE) relative to the return on assets (ROI).

Which statements regarding financial leverage are true? (Check all that apply.)

- It can lead to bankruptcy if the firm cannot generate enough cash to make payments on the principal and interest of its loans. - It adds risk to the operation of the firm. - It can be arranged via debt and preferred stock, because of their fixed interest cost (or dividend rate).

Why is operating income frequently substituted for net income in the calculation of ROI and ROE?

- 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 excludes interest expense, which varies from firm to firm based on their capital structure decisions. - Operating income is a more direct measure of the results of a firm's activities.

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

- 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. - P/E ratios are shown in the stock listing tables of The Wall Street Journal.

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.

How do debt and preferred stock provide financial leverage?

- They have a fixed interest cost (or dividend rate). - The interest on debt can be deducted as an expense, lowering income taxes.

Identify the true statements about extra dividends.

- They indicate to stockholders that they should not expect to receive the larger amount every year. - They may be declared and paid after an especially profitable year.

What indicators help suppliers and creditors judge the liquidity of a company?

- Whether the company is taking all available cash discounts for prompt payment - How promptly the company has been paying its current and recent bills - How the company is portrayed in Dun & Bradstreet reports

Because firms within a given industry may vary considerably over time in terms of their Blank______, it is difficult to develop reliable rules of thumb for the evaluation of ratio results.

- relative scale of operations - life cycle stage of development - cost and capital structures

Because firms within a given industry may vary considerably over time in terms of their Blank______, it is difficult to develop reliable rules of thumb for the evaluation of ratio results.

- relative scale of operations - market segmentation strategies - selected accounting methods

Why is operating income frequently substituted for net income in the calculation of ROI and ROE?

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

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

Diluted earnings per share is usually the denominator of the P/E calculation. Analysts sometimes use expected future earnings per share and the current market price in the calculation to evaluate the prospects for changes in the stock's market price. The P/E ratio is one of the most important measures used by investors to evaluate the market price of a firm's common stock.

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.

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 Reserve

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

P/E ratios are significantly influenced by the company's reported earnings. An above-average P/E ratio indicates that the common stock price is high relative to the firm's current earnings. A low P/E ratio for a well-established company may be an indicator that the company's stock is undervalued.

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

To calculate the accounts receivable turnover, you divide _______________ (sales/CGS) by the ___________________ (beginning/ending/average) accounts receivable.

Sales / Average Account Receivable

To calculate the inventory turnover, you would normally divide:

cost of goods sold by the average inventory

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.

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 bayout

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

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

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

regular

Because firms within a given industry may vary considerably over time in terms of their Blank______, it is difficult to develop reliable rules of thumb for the evaluation of ratio results.

selected accounting methods relative scale of operations market segmentation strategies

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.

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. What is Firm E's preferred dividend coverage ratio for Year 2 (rounded to one decimal)?

$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

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

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. What is Firm A's dividend payout ratio (rounded to one decimal)?

$2 / $5 = 40%

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. What was the debt ratio at the end of the year (rounded to one decimal)?

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

For Year 2, sales were $300,000 and cost of goods sold was $180,000. Inventories amounted to $20,000 at the end of Year 1 and $30,000 at the end of Year 2. The days' sales in inventory for Year 2 (rounded to one decimal) was:

$30,000 / ($180,000 / 365) = 60.8 days

The ___________________ (pre/after) -tax cost of debt is its interest rate multiplied by the complement of the firm's tax rate.

After

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

an accelerated depreciation method and the LIFO cost flow assumption.