Chapter 6

The following data came from the financial statements of the Cheviot Company: Revenue $1,800,000 Assets $1,200,000 Expenses 1,200,000 Liabilities 200,000 Net income 600,000 Equity 1,000,000 Compute the return on equity. 50% 40% 30% 60%

$600,000 / $1,200,000 = 60%

Selected financial statement numbers for Frederick Company are given below: Sales $277,480 Cost of goods sold 179,155 Average accounts receivable 20,730 Average inventory 4,145 Average property, plant, and equipment 75,705 Using the information above, calculate Frederick's average collection period (round to two decimal places). 27.26 days 99.46 days 42.25 days 5.45 days

20,730 / 760.22 = 27.26 days

Cash paid for income taxes: $11,986 Cash paid for interest: 5,204 Cash from operations: 62,030 Using the above information, computer the company's cash times interest earned ratio. 11.9 times 4.6 times 15.2 times 12.9 times

79,220 / 5,204 = 15.2

Which one of these is NOT one of the benchmarking problems that arises when analyzing financial statements? Reported financial statement numbers may actually be a measurement of different things Companies that are being compared may be conglomerates Not all companies use the same accounting practices All of these are benchmarking problems

All of these are benchmarking problems

The balance sheet at the end of the first year of operations indicates the following: 2012 Total current assets $600,000 Total investments 85,000 Total property, plant, and equipment 900,000 Total current liabilities 250,000 Total long-term liabilities 350,000 Common stock, $10 par 600,000 Paid-in capital in excess of par-common stock 60,000 Retained earnings 325,000 If sales revenue for 2012 is $950,000, what is the asset turnover for 2012 (round to two decimal places)? 2.64 0.60 0.96 1.58

Asset turnover: $950,000 / ($600,000 + $85,000 + $900,000) = 0.60

Which cash flow ratio reflects a company's ability to finance its capital expansion through cash from operations? Cash flow adequacy Cash flow-to-operating profit Cash flow frequency Cash flow-to-net income

Cash flow adequacy

Which cash flow ratio reflects the extent to which accrual accounting adjustments and assumptions have been included in net income? Cash flow-to-net income Cash flow frequency Cash flow-to-operating profit Cash flow adequacy

Cash flow-to-net income

The following data came from the financial statements of the Green Company: Cash from operations $900,000 Cash from investing activities 350,000 Cash from financing activities 220,000 Cash paid for capital expenditures 55,000 Net income 425,000 Compute the cash flow-to-net income ratio. 4.09 2.12 2.57 16.36

Cash flow-to-net income: $900,000 / $425,000 = 2.12

Which cash flow ratio reflects a company's ability to make its interest payments from cash generated through operations? Cash times interest earned Cash flow to net income Cash flow adequacy Cash flow to operating profit

Cash times interest earned

Which of the following ratios is calculated using only balance sheet numbers? Current ratio Price earnings ratio Return on sales Asset turnover

Current ratio

When using common-size statements Data may be selected for the same business as of different dates, or for two or more businesses as of the same date Relationships should be stated in terms of ratios Dollar changes are reported over a period of at least three years All of these are correct

Data may be selected for the same business as of different dates, or for two or more businesses as of the same date

Relationships between financial statement amounts are called Financial statement analyses DuPont ratios Financial ratios Liquidity ratios

Financial ratios

Bookmark question for later Which of the following statements best describes financial statement analysis? All of these are correct. Measurements for a specific company should be compared only with the past. Financial statement analysis evaluates future performance. Financial statement analysis involves relationships and trends.

Financial statement analysis involves relationships and trends.

External users of financial statements use financial statement analysis for Operating and financing decisions Investing decisions Financing decisions Operating, investing, and financing decisions

Investing decisions

The return on equity ratio under the DuPont framework is computed as Net income/Revenue Revenue/Assets Assets/Equity Net income/Equity

Net income/Equity

On December 31, 2010 and 2011, Taft Corporation had 100,000 shares of common stock issued and outstanding. Additional information is as follows: Stockholders' equity at 12/31/2011 $4,500,000 Net income year ended 12/31/2011 1,200,000 Market value of common stock at 12/31/2011 144,000 The price-earnings ratio on common stock at December 31, 2011, was 10 16 14 12

Price-earnings ratio: (144,000) / $1,200,000 = 12

Bookmark question for later The particular analytical measures chosen to analyze a company may be influenced by all BUT which one of the following? Product quality or service effectiveness Industry type Companies are conglomerates Diversity of business operations

Product quality or service effectiveness

Selected information for Isaac Company is as follows: Common stock $1,200,000 Additional paid-in capital 500,000 Retained earnings 740,000 Sales revenue for year 1,830,000 Net income for year 480,000 Isaac's return on sales, rounded to the nearest percentage point, is 20 percent. 21 percent. 40 percent. 26 percent.

Return on Sales: $480,000 / 1,830,000 = 26%

Which of the following ratios is used to measure the profit earned on each dollar invested in a firm? Current ratio Asset turnover Return on equity Return on sales

Return on equity

In a common-size balance sheet, using the percent of sales method, each item on the balance sheet is typically expressed as a percentage of Sales revenue Equity Assets Net income

Sales revenue

Selected information for Alastair Company is as follows: 2012 Current assets $450,000 Total assets 725,000 Cost of goods sold 700,000 Sales revenue 915,000 Net income 145,000 What is the percentage that would be given to current assets on a common-size balance sheet using the percent of sales method (round to the nearest percent)? 77 percent 100 percent 20 percent. 49 percent

Sales revenue: $450,000 / $915,000 = 49%

Selected information for Alastair Company is as follows: 2012 Current assets $450,000 Total assets 725,000 Cost of goods sold 700,000 Sales revenue 915,000 Net income 145,000 What is the percentage that would be given to cost of goods sold on a common-size income statement (round to the nearest percent)? 100 percent 49 percent 20 percent. 77 percent

Sales revenue: $700,000 / $915,000 = 77%

Selected information for Alastair Company is as follows: 2012 Current assets $450,000 Total assets 725,000 Cost of goods sold 700,000 Sales revenue 915,000 Net income 145,000 What is the percentage that would be given to sales revenue on a common-size income statement (round to the nearest percent)? 100 percent 20 percent. 49 percent 77 percent

Sales revenue: $915,000 / $915,000 = 100%

Which of the following ratios is used to measure a firm's efficiency? Sales ÷ Assets Assets ÷ Equity Net income ÷ Equity Net income ÷ Sales

Sales ÷ Assets

When analyzing financial statements, diagnosis is The identification of where a business has problems The prediction of how a business will perform in the future The prediction of how many employees will lose their jobs in the coming year The identification of the trends in future numbers

The identification of where a business has problems

When analyzing financial statements, prognosis is The identification of the trends in past numbers The prediction of how a business will perform in the future The prediction of how many employees will lose their jobs in the coming year The identification of where a business has problems

The prediction of how a business will perform in the future

The following data came from the financial statements of Petrini Company: Total assets $205,000 Total liabilities 95,000 Total stockholders' equity 110,000 Net income 65,000 Tax expense 4,000 Interest expense 500 Compute the times interest earned ratio (rounded to two decimal places) for Petrini Company. 122 times 139 times 129 times 130 times

Times interest earned: ($65,000 + $4,000 + $500) / 500 = 139 times