Chapter 9

Sarbanes-Oxley Act of 2002 requires which of the following report to be prepared by the management of the company?

A report showing management's assessment of internal control

Which of the following is included in the computation of the quick ratio?

Accounts receivable

If a firm has a quick ratio of 1, the subsequent payment of an account payable will cause the ratio to increase.

False

If the accounts receivable turnover for the current year has decreased when compared with the ratio for the preceding year, there has been an acceleration in the collection of receivables.

False

If the current credit terms are 2/10, n/30 for Jones Inc., an accounts receivable turnover of 3 for the current year would be considered normal.

False

The days' sales in inventory are one means of expressing the relationship between net sales and accounts receivable.

False

The excess of current liabilities over quick assets is referred to as working capital.

False

The rate earned on total common stockholders' equity for most thriving businesses will be less than the return on total assets.

False

The ratio of current assets to current liabilities is referred to as the acid-test ratio.

False

The relationship of each asset item as a percentage of total assets is an example of horizontal analysis.

False

Using vertical analysis of the income statement, a company's net income as a percentage of net sales is 10%; therefore, the income tax expenses as a percentage of net sales must be 90%.

False

Solvency analysis focuses on the ability of a business to make a profit.

False; profitability

The independent auditor's report does which of the following?

Gives the auditor's opinion regarding the fairness of the financial statements

Which of the following is true of liquidity?

Liquidity is the ability to convert assets to cash.

Which one of the following is not a characteristic generally evaluated in ratio analysis?

Marketability

_____ is a solvency metric and is computed as total assets minus total liabilities.

Net asset

The ability of a business to earn a reasonable amount of income is referred to as the factor of _____.

Profitability

Which of the following ratios provides a solvency measure that shows the margin of safety of noteholders or bondholders and also gives an indication of the potential ability of the business to borrow additional funds on a long-term basis?

Ratio of fixed assets to long-term liabilities

The following information is available for Morgan Corporation: 20Y8 Market price per share of common stock $25.00 Earnings per share on common stock 1.25 Which of the following statements is correct?

The price-earnings ratio is 20, and a share of common stock was selling for 20 times the amount of earnings per share at the end of 20Y8.

Which of the following focuses on the ability of a company to earn profits?

The return on total assets

Transic Corporation has the following financial data for 20Y7 and 20Y8. 20Y820Y7ASSETSCurrent Assets:Cash$ 48,000$ 14,000Marketable Securities9,00013,000Accounts Receivable35,00024,000Other Current Assets15,00018,000Total Current Assets107,00069,000Fixed Assets (net)140,000130,000Total Assets$247,000$199,000LIABILITIESCurrent Liabilities$ 72,000$ 52,000Long-term Liabilities50,00037,000Total Liabilities$122,000$ 89,000Total Stockholders' Equity$125,000$110,000Total Liabilities And Stockholders' Equity$247,000$199,000 Based on Transic's current ratio, which of the following statements regarding the company is true?

Transic's current ratio has increased, indicating that the company is in a more favorable position to obtain short-term credit than in 20Y7.

A decrease in the ratio of liabilities to stockholders' equity indicates an improvement in the margin of safety for creditors.

True

Current position analysis indicates a company's ability to liquidate current liabilities.

True

If a company has issued only one class of stock, the earnings per share are determined by dividing net income by the number of shares outstanding.

True

In computing the return on total assets, interest expense is added to net income before dividing by average total assets.

True

Interpreting financial analysis should be considered in light of conditions peculiar to the industry and the general economic conditions.

True

Ratios and various other analytical measures are not a substitute for sound judgment, nor do they provide definitive guides for action.

True

Statements in which all items are expressed as percentages with no dollar amounts are called common-sized statements.

True

The Sarbanes-Oxley Act requires management to prepare a report on internal control.

True

The comparison of the financial data of a single company for two or more years is called horizontal analysis.

True

The percentage analysis of increases and decreases in corresponding items in comparative financial statements is referred to as horizontal analysis.

True

The percentage analysis of the relationship of each component in a financial statement to a total within the statement is referred as vertical analysis.

True

The ratio of the market price per share of common stock on a specific date to the annual earnings per share is referred to as the price-earnings ratio.

True

The relationship of 120 to 100 can be expressed as 1.2, 1.2:1, or 120%.

True

The return on total assets is one of the measures of profitability.

True

The terms acid-test ratio and quick ratio refer to the same ratio, which measures the instant debt-paying ability of a company.

True

A basic analytical method in which all items are expressed only in relative terms (percentages of a common base), often useful for comparing one company with another or for comparing a company with industry averages, is a _____.

common-sized statement

Working capital is calculated as _____.

current assets minus current liabilities

A company's ability to pay its current liabilities is called _____.

current position analysis

The following is an example of _____. Increase (Decrease) Current YearPrior YearAmountPercentCurrent assets$420,000$500,000$(80,000)(16%)Fixed assets1,530,0001,500,00030,0002%

horizontal analysis

The percentage analysis of increases and decreases in related items in comparative financial statements is called _____.

horizontal analysis

The percentage change in long-term liabilities between two balance sheet dates is an example of _____.

horizontal analysis

An acceleration in the collection of receivables will tend to cause the accounts receivable turnover to _____.

increase

A company with $60,000 in current assets and $40,000 in current liabilities pays a $1,000 current liability. As a result of this transaction, the current ratio and working capital will _____.

increase and remain the same, respectively

The return on stockholders' equity is computed as ____

net income divided by average total stockholders' equity

The purpose of an audit is to _____.

render an opinion on the fairness of the statements

The ability of a business to pay its debts as they come due and to earn a reasonable amount of income is referred to as _____.

solvency and profitability

The debt ratio is computed as _____.

total liabilities divided by total assets

An analysis in which all the components of an income statement are expressed as a percentage of net sales is called _____.

vertical analysis

The percentage analysis of accounts payable to total liabilities is an example of _____.

vertical analysis

For most profitable companies, the return on total assets _____.

will be less than the return on stockholders' equity

A company with working capital of $600,000 and a current ratio of 3.25 pays a $200,000 short-term liability. The amount of working capital immediately after payment is _____.

$600,000

The balance sheets at the end of each of the first two years of operations indicate the following: 20Y820Y7Total current assets$600,000$560,000Total investments60,00040,000Total property, plant, and equipment900,000700,000Total current liabilities125,00080,000Total long-term liabilities350,000250,000Preferred 9% stock, $100 par100,000100,000Common stock, $10 par600,000600,000Paid-in capital in excess of par--common stock60,00060,000Retained earnings325,000210,000 Based on the above information, if net income is $130,000 and interest expense is $40,000 for 20Y8, what are the earnings per share on common stock for 20Y8 (round to two decimal places)?

$2.02

Based on the following data, calculate the amount of quick assets. Accounts payable $68,000 Accounts receivable 89,000 Accrued liabilities 12,000 Cash 58,500 Intangible assets 38,000 Inventory 61,000 Long-term investments 250,000 Long-term liabilities 66,000 Marketable securities 59,000 Notes payable (short-term) 47,000 Property, plant, and equipment 637,000 Supplies 17,000

$206,500; ($89,000 + 58,500 + 59,000)

Transic Corporation has the following financial data for 20Y7 and 20Y8. 20Y820Y7ASSETSCurrent Assets:Cash$ 48,000$ 14,000Marketable Securities9,00013,000Accounts Receivable35,00024,000Other Current Assets15,00018,000Total Current Assets107,00069,000Fixed Assets (net)140,000130,000Total Assets$247,000$199,000LIABILITIESCurrent Liabilities$ 72,000$ 52,000Long-term Liabilities50,00037,000Total Liabilities$122,000$ 89,000Total Stockholders' Equity$125,000$110,000Total Liabilities And Stockholders' Equity$247,000$199,000 What is Transic's working capital for 20Y8?

$35,000; ($107,000 - $72,000)

From the following data, calculate the amount of working capital. Accounts payable $58,000 Accounts receivable 47,000 Accrued liabilities 3,000 Cash 29,560 Intangible assets 57,000 Inventory 48,000 Long-term investments 127,000 Long-term liabilities 41,000 Marketable securities 32,000 Notes payable (short-term) 28,000 Property, plant, and equipment 784,000 Prepaid expenses 7,500

$75,060

Transic Corporation has the following financial data for 20Y7 and 20Y8. 20Y820Y7ASSETSCurrent Assets:Cash$ 48,000$ 14,000Marketable Securities9,00013,000Accounts Receivable35,00024,000Other Current Assets15,00018,000Total Current Assets107,00069,000Fixed Assets (net)140,000130,000Total Assets$247,000$199,000LIABILITIESCurrent Liabilities$ 72,000$ 52,000Long-term Liabilities50,00037,000Total Liabilities$122,000$ 89,000Total Stockholders' Equity$125,000$110,000Total Liabilities And Stockholders' Equity$247,000$199,000 What is Transic's current ratio for 20Y8?

1.49; ($107,000/$72,000)

Based on the following data, what is the quick ratio, rounded to one decimal place? Accounts payable $32,000 Accounts receivable 64,000 Accrued liabilities 7,000 Cash 20,000 Intangible assets 40,000 Inventory 72,000 Long-term investments 100,000 Long-term liabilities 75,000 Marketable securities 35,000 Notes payable (short-term) 25,000 Property, plant, and equipment 625,000 Prepaid expenses 2,000

1.9; ($64,000 + 20,000 + 35,000)/

Garnet Company reported the following on its income statement: Income before income taxes $450,000 Income tax expense 52,000 Net income $398,000 An analysis of the income statement revealed that interest expense was $50,000. Garnet Company's times interest earned are earned was _____.

10 times

The balance sheets at the end of each of the first two years of operations indicate the following: 20Y820Y7Total current assets$600,000$560,000Total investments60,00040,000Total property, plant, and equipment900,000700,000Total current liabilities125,00080,000Total long-term liabilities350,000250,000Preferred 9% stock, $100 par100,000100,000Common stock, $10 par600,000600,000Paid-in capital in excess of par--common stock60,00060,000Retained earnings325,000210,000 Based on the preceding information, if net income is $130,000 and interest expense is $40,000 for 20Y8, what is the return on stockholders' equity for 20Y8 (rounded to one decimal place)?

12.7%

The balance sheets at the end of each of the first two years of operations indicate the following: 20Y820Y7Total current assets$600,000$560,000Total investments60,00040,000Total property, plant, and equipment900,000700,000Total current liabilities125,00080,000Total long-term liabilities350,000250,000Preferred 9% stock, $100 par100,000100,000Common stock, $10 par600,000600,000Paid-in capital in excess of par--common stock60,00060,000Retained earnings325,000210,000 Based on the preceding information, if net income is $130,000 and interest expense is $40,000 for 20Y8, what is the return on common stockholders' equity for 20Y8 (rounded to one decimal place)?

13.0%

Based on the following data for the current year, determine the days' sales in accounts receivable. Net sales on account during the year $1,080,000 Cost of merchandise sold during the year 750,000 Accounts receivable, beginning of year 46,500 Accounts receivable, end of year 36,500 Inventory, beginning of year 170,000 Inventory, end of year 232,000

14.03

Based on the following data for the current year, determine the accounts receivable turnover. Net sales on account during the year $550,000 Cost of merchandise sold during the year 350,000 Accounts receivable, beginning of year 35,000 Accounts receivable, end of year 25,000 Inventory, beginning of year 80,000 Inventory, end of year 125,000

18.3; (($35,000 + $25,000) / 2) = $30,000, ($550,000 / $30,000)

The balance sheets at the end of each of the first two years of operations indicate the following: 20Y820Y7Total current assets$600,000$560,000Total investments60,00040,000Total property, plant, and equipment900,000700,000Total current liabilities125,00080,000Total long-term liabilities350,000250,000Preferred 9% stock, $100 par100,000100,000Common stock, $10 par600,000600,000Paid-in capital in excess of par--common stock60,00060,000Retained earnings325,000210,000 Based on the above information, if net income is $130,000 and interest expense is $40,000 for 20Y8, and the market price is $40, what is the price-earnings ratio on common stock (rounded to one decimal place)?

19.8

The relationship of $320,000 to $200,000, expressed as a ratio, is _____.

3.2 to 2

The balance sheet and income statement for the year ended 20Y8 indicate the following: Bonds payable, 10% (issued 20X8, due 2022) $1,200,000 Preferred 5% stock, $100 par (no change during year) 350,000 Common stock, $50 par (no change during year) 2,100,000 Income before income tax for year3100,000 Income tax for year 72,000 Common dividends paid 58,000 Preferred dividends paid 16,300 Based on the data presented above, what is the times interest earned?

3.6

Based on the following data for the current year, compute the inventory turnover. Net sales on account during the year $585,000 Cost of merchandise sold during the year 380,000 Accounts receivable, beginning of year 47,000 Accounts receivable, end of year 36,000 Inventory, beginning of year 92,000 Inventory, end of year 113,000

3.7

From the following data for the current year, compute the average accounts receivable. Net sales on account during the year $420,500 Cost of merchandise sold during the year 362,000 Accounts receivable at the beginning of the year 36,120 Accounts receivable at the end of the year 33,200 Inventory at the beginning of the year 63,000 Inventory at the end of the year 92,000

34,660; (($36,120 + $33,200 / 2)

From the given data for the current year, determine the inventory turnover. Net sales on account during the year $316,780 Cost of merchandise sold during the year 688,500 Accounts receivable, beginning of year4 7,000 Accounts receivable, end of year 62,000 Inventory, beginning of year1 57,000 Inventory, end of year 149,000

4.5

Based on the following data for the current year, what is the days' sales in inventory (rounded to the next whole day)? Net sales on account during the year $1,204,000 Cost of merchandise sold during the year 630,000 Accounts receivable, beginning of year 75,000 Accounts receivable, end of year 85,000 Inventory, beginning of year 81,600 Inventory, end of year 98,600

53 days

Using the following data for the current year, determine the accounts receivable turnover. Net sales on account during the year$ 457,065 Cost of merchandise sold during the year 461,280 Accounts receivable, beginning of year 75,290 Accounts receivable, end of year 26,280 Inventory, beginning of year1 85,000 Inventory, end of year 169,570

9; (($75,290 + $26,280 / 2) = $50,785, ($457,065/$50,785)

Which of the following is the formula to calculate current ratio?

Current assets/Current liabilities

"Working capital" is another term for the current ratio.

False

A balance sheet shows cash, $75,000; marketable securities, $110,000; receivables, $90,000; and $225,000 of inventories. Current liabilities are $200,000. The current ratio is 1.375 to 1.

False

Assuming that the quantities of inventory on hand during the current year were sufficient to meet all demands for sales, a decrease in the inventory turnover for the current year when compared with the turnover for the preceding year indicates an improvement in the management of inventory.

False

A company's assets are composed of the following: Cash, $25,000; Receivables, $5,600; Marketable Securities, $7,200; and Equipment, $65,000. The total of quick assets is $37,800.

True; ($25,000 + $5,600 + $7,200)

If a company has current assets totaling $56,000 and current liabilities totaling $40,500, then the company's working capital totals $15,500.

True; ($56,000 - $40,500)

Profitability refers to the ability of the business to _____.

earn a reasonable amount of income