Financial Accounting Chapter 4

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LaSalle Company has a receivable turnover of 15. What is the company's receivable collection period? A. 24.3 days B. 25.0 days C. 20.0 days D. 10.0 days

A. 24.3 days 365 / 15 = 24.3

Queen Company reported net income of $100,000, net sales of $1,200,000, total assets of $910,000, and total equity of $580,000. What is the company's asset turnover? A. 1.32 B. 0.87 C. 2.07 D. 0.76

A. 1.32 $1,200,000 / $910,000 = 1.32

The Fredrick Company reported an ROE of 14% and a ROA of 6% for the year. Which statement is true concerning the company? A. It generated more operating income than cash flows during the year. B. It effectively utilized financial leverage. C. It distributed 8% of its profits as dividends to its investors. D. Its debt is equal to 6% of total assets.

B. It effectively utilized financial leverage.

The following data is provided for Barrel Company: BARREL COMPANY Balance Sheet December 31 Cash $ 70,000 Current Liabilities $ 90,000 Accounts Receivable (net) 41,250 Bonds Payable 61,250 Inventory 66,2500 Common Stock 51,250 Plant and Equipment (net) 75,000 Retained Earnings 50,000 Total Assets $252,500 Total Liabilities and Shareholders' Equity $252,500 Net Sales for the year was $700,000, gross profit was $210,000, and net income was $35,000. The income tax rate was 30 percent. One year ago, accounts receivable (net) was $38,000, inventory was $55,000, and shareholders' equity was $130,000. The bonds payable was outstanding all year and the year's interest expense was $7,000. What was Barrel's receivable collection period? A. 21.5 days B. 37.4 days C. 36.5 days D. 18.3 days

A. 21.5 days 365 / [$700,000 / $41,250] = 21.5

The following financial data is provided for Jacquie Company: JACQUIE COMPANY Balance Sheet As of 31 December Cash $ 90,000 Current liabilities $142,500 Accounts receivable 70,000 Bonds payable 145,000 Inventory 140,000 Common stock 125,000 Plant assets (net) 200,000 Retained earnings 87,500 Total assets $500,000 Total liabilities and shareholders' equity $500,000 Sales revenue for the year was $1,400,000, gross profit was $320,000, and net income was $85,000. One year ago, accounts receivable was $76,000, inventory was $110,000, total assets was $460,000, and shareholders' equity was $170,000. What was the company's return on sales for the year? A. 22.9% B. 7.6% C. 6.1% D. 17.0%

6.1% $85,000 / $1,400,000 = 6.1%

Presented below is information from Seed Company, Inc.: In millions Year 2 Year 1 Balance sheet Total assets $34,310 $32,754 Shareholders' equity 6,304 7,878 Income statement Net sales $35,372 $35,034 Net income 4,330 3,930 During Year 2, Seed Company, Inc. paid preferred dividends totaling $1,440 million. How much is the rate of return Seed Company, Inc. generated during Year 2 for its common shareholders? A. 45.8% B. 6.7% C. 12.2% D. 68.7%

A. 45.8% ROE = [$4,330 - $1,440] / $6,304 = 45.8%

A. 59.4 days Receivable collection period: 365 / [$45,630 / $7,421] = 59.4 days

Presented below are selected amounts from New Mexico Grill's financial statements: Amounts in thousands Income statement Net sales $272,500 Net earnings 32,000 Balance sheet Shareholders' equity 132,500 Statement of cash flow Dividends to shareholders 19,600 What is New Mexico Grill's sustainable growth rate? A. 9.36% B. 18.11% C. 14.79% D. 8.44%

A. 9.36% ROE = $32,000 / $132,500 = 24.15% Dividend retention rate = [1 - ($19,600 / $32,000)] = 38.75% SGR = 24.15% × 38.75% = 9.36%

Which one of the following is not one of the components into which ROE is normally decomposed? A. Return on sales B. Financial leverage C. Asset turnover D. Dividend retention rate

A. Return on sales

The return on assets ratio can be broken down into two individual ratios, which are: A. Return on sales and asset turnover B. Return on sales and return on equity C. Return on sales and current ratio D. Asset turnover and return on equity

A. Return on sales and asset turnover

In 2016, Adams Company reported a return on assets of 16 percent and an asset turnover of 1.5. In 2017, the company reported a return on assets of 20 percent but an asset turnover of only 1.1. If sales revenue remained unchanged from 2016 to 2017, what would explain the two ratio results? A. Sales and net income increase while total assets remained unchanged. B. Sales and total assets increased at the same rate while net income grew less fast. C. Net income increased faster than total assets, while sales remained unchanged. D. None of the above

A. Sales and net income increase while total assets remained unchanged.

How does unlevered ROA differ from levered ROA? A. Unlevered ROA yields a measure of net income as if the firm were all equity financed. B. Unlevered ROA adjusts net income assuming no income taxes were incurred during the year. C. Levered ROA adjusts net income by removing preferred stock dividends. D. Levered ROA yields a measure of net income as if the company has zero systematic risk.

A. Unlevered ROA yields a measure of net income as if the firm were all equity financed.

The following financial data is provided for Jacquie Company: JACQUIE COMPANY Balance Sheet As of 31 December Cash $ 90,000 Current liabilities $142,500 Accounts receivable 70,000 Bonds payable 145,000 Inventory 140,000 Common stock 125,000 Plant assets (net) 200,000 Retained earnings 87,500 Total assets $500,000 Total liabilities and shareholders' equity $500,000 Sales revenue for the year was $1,400,000, gross profit was $320,000, and net income was $85,000. One year ago, accounts receivable was $76,000, inventory was $110,000, total assets was $460,000, and shareholders' equity was $170,000. What was the company's receivable turnover for the year? A.20.0 B. 0.3 C. 8.6 D. 6.6

A.20.0 $1,400,000 / $70,000 = 20.0

Presented below are the consolidated balance sheets and income statements for Travel Adventures, Inc.: (In thousands) Cash $ 12,300 Accounts receivable 13,7500 Inventory 10,700 Marketable securities 12,950 Equipment, net 79,500 Total assets $129,200 Accounts payable $ 10,500 Income taxes payable 5,000 Current portion of long-term debt 6,500 Long-term obligations 37,700 Common stock 27,500 Retained earnings 42,000 Total liabilities & shareholders' equity $129,200 Sales $142,500 Cost of goods sold 42,000 Depreciation expense 14,700 Other operating expenses 24,000 Interest expense 5,800 Income before taxes 56,000 Income taxes expense 15,000 Net income $ 41,000 How many accounts receivable collection cycles did Travel Adventures experience during the year? A. 2.98 B. 10.36 C. 41.82 D. 0.10

B. 10.36 Receivable turnover: $142,500 / $13,750 = 10.36

A company reports net income of $18,500, sales revenue of $48,500, total assets of $64,500 and total equity of $31,000. What is the company's return on assets? A. 38.1% B. 28.7% C. 59.7% D. 45.3%

B. 28.7% $18,500 / $64,500 = 28.7%

The following financial data is provided for Jacquie Company: JACQUIE COMPANY Balance Sheet As of 31 December Cash $ 90,000 Current liabilities $142,500 Accounts receivable 70,000 Bonds payable 145,000 Inventory 140,000 Common stock 125,000 Plant assets (net) 200,000 Retained earnings 87,500 Total assets $500,000 Total liabilities and shareholders' equity $500,000 Sales revenue for the year was $1,400,000, gross profit was $320,000, and net income was $85,000. One year ago, accounts receivable was $76,000, inventory was $110,000, total assets was $460,000, and shareholders' equity was $170,000. What was the company's inventory turnover for the year? A. 4.0 B. 7.7 C. 2.3 D. 9.8

B. 7.7 $1,400,000 - $320,000) / $140,000 = 7.7

The Gardeners' Store Co. reported an ROE of 9.2% and a ROA of 5.0% for the year. Which statement is true concerning The Gardeners' Store Co.? A. It generated more operating income than cash flows during the year B. It effectively utilized financial leverage C. It distributed 4.2% of its profits as dividends to its investors D. Its debt is equal to 4.2% of total assets

B. It effectively utilized financial leverage

When preparing proforma statements, a plug figure may be needed to balance the asset side of the balance sheet. Which account is normally used for this purpose when excess cash is produced from operations and why? A. Retained earnings, because excess profits are often retained by a company. B. Marketable securities, because excess cash from operations produced by the company is often invested in these securities. C. A short-term interest-bearing line of credit, because the company will likely need to borrow funds. D. Depreciation expense, because it does not reduce cash.

B. Marketable securities, because excess cash from operations produced by the company is often invested in these securities.

A company reports net income of $15,000, net sales of $32,000, total assets of $51,000, and total equity of $21,000. What is the company's asset turnover? A. 0.29 B. 1.59 C. 0.63 D. 3.40

C. 0.63 $32,000 / $51,000 = 0.63

Queen Company reported net income of $100,000, net sales of $1,200,000, total assets of $910,000, and total equity of $580,000. What is the company's return on assets? A. 17.2 % B. 8.3 % C. 11.0 % D. 30.3%

C. 11.0 % $100,000 / $910,000 = 11.0%

Presented below is information from Seed Company, Inc.: In millions Year 2 Year 1 Balance sheet Total assets $34,310 $32,754 Shareholders' equity 6,304 7,878 Income statement Net sales $35,372 $35,034 Net income 4,330 3,930 During the year, Seed Company, Inc. reported interest expense totaling $650 million. Its income tax rate was 35% for Year 2. What is Seed Company, Inc.'s Year 2 unlevered return on assets? A. 75.4% B. 67.1% C. 13.9% D. 13.3%

C. 13.9% [$4,330 + [$650 x (1 - 0.35)]] / $34,310 = 13.9%

Presented below is information for Pilgrim & Company: (In millions) Year 2 Year 1 Balance Sheet Total assets $40,000 $32,754 Shareholders' equity 6,600 7,878 Income Statement Net sales $30,000 $35,034 Cost of goods sold 19,220 23,850 Net income 5,513 4,520 What percentage of Pilgrim's Year 2 net income remains from each dollar of sales after subtracting all expenses (return on sales)? A. 35.9% B. 13.8% C. 18.4% D. 83.5%

C. 18.4% $5,513 / $30,000 = 18.4%

Presented below are selected ratios derived from Tropical Cafe's financial statements: Return on sales 15.7% Total asset turnover 1.20 Financial leverage 1.83 Dividend retention rate 0.45 Using the ROE model framework, what is Tropical Cafe's ROE? A. 12.9% B. 5.9% C. 34.5% D. 15.5%

C. 34.5% 15.7% ×1.20 × 1.83 = 34.5%

The following data is provided for Barrel Company: BARREL COMPANY Balance Sheet December 31 Cash $ 70,000 Current Liabilities $ 90,000 Accounts Receivable (net) 41,250 Bonds Payable 61,250 Inventory 66,2500 Common Stock 51,250 Plant and Equipment (net) 75,000 Retained Earnings 50,000 Total Assets $252,500 Total Liabilities and Shareholders' Equity $252,500 Net Sales for the year was $700,000, gross profit was $210,000, and net income was $35,000. The income tax rate was 30 percent. One year ago, accounts receivable (net) was $38,000, inventory was $55,000, and shareholders' equity was $130,000. The bonds payable was outstanding all year and the year's interest expense was $7,000. What was the Barrel's return on shareholders' equity? A. 68.3% B. 3.9% C. 34.6% D. 65.4%

C. 34.6% $35,000 / ($51,250 + $50,000) = 34.6%

The following financial data is provided for Jacquie Company: JACQUIE COMPANY Balance Sheet As of 31 December Cash $ 90,000 Current liabilities $142,500 Accounts receivable 70,000 Bonds payable 145,000 Inventory 140,000 Common stock 125,000 Plant assets (net) 200,000 Retained earnings 87,500 Total assets $500,000 Total liabilities and shareholders' equity $500,000 Sales revenue for the year was $1,400,000, gross profit was $320,000, and net income was $85,000. One year ago, accounts receivable was $76,000, inventory was $110,000, total assets was $460,000, and shareholders' equity was $170,000. What was the company's return on shareholders' equity? A. 68.0% B. 17.0% C. 40.0% D. 27.8%

C. 40.0% $85,000 / ($125,000 + $87,500) = 40%

What advantage exists in analyzing common-size statements rather than statements prepared using actual dollar amounts? A. Opportunity costs are minimized B. Pro forma amounts are reported C. Firms of different sizes can be readily compared D. Measurement concerns are eliminated

C. Firms of different sizes can be readily compared

As it pertains to incomplete data as a limitation of financial statement analysis, which of the following describes the concept of conservatism? A. Amounts should be measured at historical cost B. Prepare financial statement using alternative methods C. When in doubt, report accounts such that assets are understated, liabilities are overstated, the recognition of losses are accelerated, and recognition of gains are delayed D. Provide accounting information on a timely basis

C. When in doubt, report accounts such that assets are understated, liabilities are overstated, the recognition of losses are accelerated, and recognition of gains are delayed

Which of the following is correct regarding the process of benchmarking? A. It occurs when a company increases the price of its products and reduces operating expenses. B. It creates substantial sales growth for most companies. C. enhances financial analysis by comparing a company's financial ratios with those of competing companies in the same industry. D. It is also called trend analysis

C. enhances financial analysis by comparing a company's financial ratios with those of competing companies in the same industry.

Which of the following is not a limitation of financial statement analysis? There may be data measurement concerns Accounting data may be biased Consistency exists in any financial information provided The accounting information provided is untimely

Consistency exists in any financial information provided

Presented below is information from Seed Company, Inc.: In millions Year 2 Year 1 Balance sheet Total assets $34,310 $32,754 Shareholders' equity 6,304 7,878 Income statement Net sales $35,372 $35,034 Net income 4,330 3,930 During the year, Seed Company, Inc. paid preferred dividends totaling $1,440 million. What percentage of Seed Company, Inc.'s Year 2 net income remains from each dollar of sales after subtracting all expenses? A. 45.8% B. 13.0% C. 68.7% D. 12.2%

D. 12.2%

Presented below is information for Pilgrim & Company: (In millions) Year 2 Year 1 Balance Sheet Total assets $40,000 $32,754 Shareholders' equity 6,600 7,878 Income Statement Net sales $30,000 $35,034 Cost of goods sold 19,220 23,850 Net income 5,513 4,520 What is Pilgrim's Year 2 return on assets (ROA)? A. 18.4% B. 35.9% C. 83.5% D. 13.8%

D. 13.8% $5,513 / $40,000 = 13.8%

Presented below are selected amounts from Alsfeld Collectibles' financial statements: (In thousands) Balance sheet Accounts receivable $ 11,400 Inventory 20,500 Total assets 284,500 Accounts payable 17,750 Current portion of long-term debt 13,500 Long-term debt 39,000 Shareholders' equity 164,000 Income Statement Net sales $310,500 Cost of goods sold 165,000 Interest expense 11,000 Net income 62,000 What is the relative investment of long-term creditors versus shareholders in Alsfeld Collectibles? A. 23.8% B. 27.1% C. 42.8% D. 32.0%

D. 32.0% Long-term debt-to-shareholders' equity: [$13,500 + $39,000] / $164,000 = 32.0%

Presented below is information for Pilgrim & Company: (In millions) Year 2 Year 1 Balance Sheet Total assets $40,000 $32,754 Shareholders' equity 6,600 7,878 Income Statement Net sales $30,000 $35,034 Cost of goods sold 19,220 23,850 Net income 5,513 4,520 During Year 2, Pilgrim paid dividends totaling $1,600 million. What rate of return did the company generate during Year 2 for its shareholders (ROE)? A. 59.3% B. 29.0% C. 24.2% D. 83.5%

D. 83.5% $5,513 / $6,600 = 83.5%

Which of the following statements is not true? A. Benchmarking involves comparing a company's ratios to its industry's average ratios. B. Cross-sectional analysis involves comparing a company's ratios to its competitors' ratios. C. Trend analysis involves comparing a company's ratios over time. D. Benchmarking involves comparing a company's ratios over time.

D. Benchmarking involves comparing a company's ratios over time.

If a company with a current ratio of 2.3 pays $7,000 of its salaries payable, its current ratio will: A. Change, but not enough information is provided to determine if it will increase or decrease B. Decrease C. Remain the same D. Increase

D. Increase

The following information is provided for the Darmstadt Company. 2017 2016 Total assets $1,600,000 $1,220,000 Total liabilities 500,000 400,000 Stockholders' equity 1,100,000 820,000 Net sales 475,000 450,000 Net income 83,000 72,000 Interest expense 8,500 11.500 Income taxes 16,000 14,500 Dividends paid to common stockholders 16,000 15,000 Average common shares outstanding 100,000 72,000 Based on the total debt-to-total assets ratio, which of the following is true: A. Creditors had a higher claim on assets in 2016 than in 2017. B. Shareholders had a slightly higher claim on assets in 2016 than in 2017. C. Efficiency increased from 2016 to 2017. D. Liquidity increased from 2016 to 2017.

D. Liquidity increased from 2016 to 2017.

If you wanted to determine whether accounts receivable grew at the same rate as sales, what type of financial statement analysis would you perform? A. Cross-sectional analysis of the balance sheet and the income statement B. Longitudinal analysis of the balance sheet and horizontal analysis of the income statement C. Horizontal analysis of the balance sheet and longitudinal analysis of the income statement D. Longitudinal analysis of both the balance sheet and the income statement

D. Longitudinal analysis of both the balance sheet and the income statement

Assessing a company's inventory turnover helps evaluate the: A. Effectiveness of a company's receivable collection activities B. Ability to measure the quality of the inventory on hand C. Profitability of a company D. Speed at which inventories move through a company's operations

D. Speed at which inventories move through a company's operations

Presented below are select financial data from Leahy Inc.'s annual report: In millions Year 2 Year 1 Balance sheet Accounts receivable (net) $7,421 $6,882 Inventory 3,930 3,119 Income statement Net sales $45,630 $36,899 Cost of goods sold 5,936 4,617 What can be said about Leahy, Inc.'s receivable turnover for Year 2? A. Leahy, Inc.'s receivable turnover improved from Year 1 to Year 2. B. Leahy Inc.'s customers paid their account balances more slowly during Year 2 as compared to Year 1. C. Fewer of Leahy Inc.'s customers purchased items on account during Year 2 as compared to Year 1. D. Leahy, Inc. collected receivables less effectively in Year 2 as compared to Year 1.

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