Chapter 17 Financial Statement Analysis

Price/Earnings (P/E) Ratio

Market Price per share/EPS on Common Stock

Return on Stockholders' Equity

Net Income / Average Stockholders' Equity

Accounts Receivable Turnover Ratio

Sales / Average Accounts Receivable

Average Daily Sales

Sales/365

A Firm selling food should have a higher inventory turnover rate than a firm selling office furniture. True or False

True

A financial statement showing each item on the statement as a percentage of one key item on the statement is called a common-sized financial statement. True or False

True

The relationship of each asset item as a percent of total assets is and example of vertical analysis. True or False

True

Income statement information for Lucy Company is provided below. Accounts Amount Sales $175,000 Cost of goods sold 105,000 Gross profit $ 70,000 ​ Prepare a vertical analysis of the income statement for Lucy Company.

Your Answer: Sales 100% COGS 60% Gross Profit 40%

inventory turnover formula

cost of goods sold/average inventory

Working capital formula

current assets - current liabilities

Return on Operating Assets

operating income/average operating assets

Quick Ratio Formula

quick assets/current liabilities

Asset Turnover Ratio

sales/average total assets

Ratio of Liabilities to Stockholders' equity

total liabilities/total stockholders equity

Ratio of fixed assets to long-term liabilities

Fixed Assets (net) / Long-Term Liabilities

Return on Total Assets

(Income + Interest Expense )/ Average Total Assets

times interest earned ratio

(income before taxes + interest expense) / interest expense

Return on common stockholders' equity

(net income - preferred dividends) / average common stockholders' equity

Earning per share (EPS) on Common Stock

(net income - preferred dividends) / number of common shares outstanding

The following items are reported on a company's balance sheet: Accounts Amount Cash $230,000 Marketable securities 50,000 Accounts receivable 200,000 Inventory 240,000 Accounts payable 300,000 ​What is the quick ratio?

1.6

The following information pertains to Diane Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Use this information to answer the questions that follow. ​ AssetsAccounts Amount Cash and short-term investments $ 30,000 Accounts receivable (net) 20,000 Inventory 15,000 Property, plant, and equipment 185,000 Total assets $250,000 Liabilities and Stockholders' EquityAccounts Amount Current liabilities $ 45,000 Long-term liabilities 70,000 Stockholders' equity—Common 135,000 Total liabilities and stockholders' equity $250,000 Income StatementAccounts Amount Sales $ 85,000 Cost of goods sold 45,000 Gross margin $ 40,000 Operating expenses (15,000) Interest expense (5,000) Net income $ 20,000 Accounts Amount Number of shares of common stock outstanding 6,000 Market price of common stock $20 Total dividends paid $9,000 Cash provided by operations $30,000 Using the data provided for Diane Company, what is the return on total assets?

10%

A 15% change in sales will result in a 15% change in net income. True or False

False

The following information pertains to Diane Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Use this information to answer the questions that follow. ​ AssetsAccounts Amount Cash and short-term investments $ 30,000 Accounts receivable (net) 20,000 Inventory 15,000 Property, plant, and equipment 185,000 Total assets $250,000 Liabilities Liabilities and Stockholders' EquityAccounts Amount Current liabilities $ 45,000 Long-term liabilities 70,000 Stockholders' equity—Common 135,000 Total liabilities and stockholders' equity $250,000 Income StatementAccounts Amount Sales $ 85,000 Cost of goods sold 45,000 Gross margin $ 40,000 Operating expenses (15,000) Interest expense (5,000) Net income $ 20,000 Accounts Amount Number of shares of common stock outstanding 6,000 Market price of common stock $20 Total dividends paid $9,000 Cash provided by operations $30,000 Using the data provided for Diane Company, what is the return on common stockholders' equity?

14.8%

A company reports the following: Accounts Amount Sales $1,200,000 Average accounts receivable (net) 50,000 ​What is the number of days' sales in receivables?

15.2

The following items are reported on a company's balance sheet: Accounts Amount Cash $230,000 Marketable securities 50,000 Accounts receivable 200,000 Inventory 240,000 Accounts payable 300,000 ​What is the current ratio

2.4

Based on the following data for the current year, what is the inventory turnover? sales on account during year 700,000 cost of goods sold during year 270,000 accounts receivable, beginning of year 45,000 accounts receivable, end of year 35,000 Inventory beginning of year 90,000 inventory end of year 110,000

2.7

A company reports the following: Accounts Amount Sales $1,200,000 Average accounts receivable (net) 50,000 ​What is Accounts Receivable Turnover?

24

Based on the following data for the current year, what is the number of days' sales in receivables? Sales on account during year 584,000 cost of goods sold during year 300,000 accounts receivable, beginning of year 45,000 accounts receivable, end of year 35,000 inventory beginning of year 90,000 inventory, end of year 111,000

25

Assume the folowin Sales data for a company Current year 1,025,000 Preceding year 820,000 What is the percentage increase in sales from the preceding year to the current year?

25%

In horizontal analysis the current year is the basis. True or False

False

Hsu Company reported the following on its income statement: income before taxes 420,000 income tax expense 120,000 net income 300,000 interest expense was 80,000. Hsu Company's times interest earned is

6.25

A company reports the following: Accounts Amount Net income $150,000 Preferred dividends $10,000 Shares of common stock outstanding 20,000 Market price per share of common stock $35 ​ Calculate the company's earnings per share on common stock.

7

number of days' sales in receivables

Average Accounts Receivable / Average Daily Sales (liquidity)

number of days sales in inventory?

Average Inventory / Average Daily Cost of Goods Sold

Average daily COGS

COGS/365

Profitiblity

Company's ability to generate earnings

Solvency

Company's ability to make it's periodic interest payments and to repay the face amount of debt at maturity

Liquidity

Company's ability to turn assets into cash

Current Ratio Formula

Current Ratio = Current Assets / Current Liabilities

Dividends Per Share

Dividends on Common Stock / Shares of Common Stock Outstanding

Dividend Yield

dividend per share of common stock / market price per share of common stock