Module 7 accounting

A company has sales revenue of $100,000; cost of goods sold of $40,000; operating expenses of $30,000; and nonoperating expenses of $5,000. What is the amount of gross profit?

Reason: $100,000 - $40,000 = $60,000

A company had operating income of $100,000 for the year. Other selected figures from the company's statement of financial position (balance sheet) were beginning plant assets of $40,000; ending plant assets of $45,000; beginning total assets of $120,000; and ending total assets of $150,000. What was the return on assets for the year, rounded to the nearest whole percentage?

Reason: $100,000/(($120,000 + $150,000)/2) = 74%

The basis or denominator for calculating a trend percentage is

a base-year amount.

The most common approaches used for financial analysis compare information about a company in a single accounting period with

information about other companies in the same industry. information about the same company in different accounting periods.

A company has total assets of $100,000; total liabilities of $65,000; and total stockholders' equity of $35,000. What is the amount of the company's debt ratio?

65%

A company had sales of $90,000 in Year 1, the base year; $95,000 in Year 2; and $78,000 in Year 3. What is the trend percentage for Year 3? Round the answer to two decimal places?

86.7% Reason: $78,000/$90,000 = 86.7%

Which of the following is/are correct about the debt ratio?

Debt ratios of companies vary by industry. The lower the debt ratio, the safer the position of creditors.

Which of the following do(es) NOT accurately describe the price-earnings ratio?

It reflects a company's rate of inventory turnover. It reflects a company's liquidity.

A company's current market price is $12 per share. Other items of key information from its financial statements include gross profit of $100,000; net income of $40,000; and earnings per share of $1.50. What is the company's price-earning ratio?

Reason: $12/$1.50 = 8

A company had operating income of $250,000 and net income of $300,000 for a year in which its total stockholders' equity was $800,000 at the beginning of the year and increased to $950,000 from the sale of additional capital stock during the year. What was the amount of the company's return on equity for the year, rounded to the nearest whole percentage?

Reason: $300,000/(($800,000 + $950,000)/2) = 34%

A company has cash of $4,000; accounts receivable of $8,000; inventory of $12,000; and accounts payable of $15,000. What is the amount of the company's working capital?

Reason: $4,000 + $8,000 + $12,000 - $15,000 = $9,000

A company had sales of $400,000; gross profit of $250,000; operating income of 150,000; and net income of $75,000. Dividends on preferred stock were $10,000. Throughout the year, 10,000 shares of common stock were outstanding and 1,000 shares of preferred stock were outstanding. What was the earnings per share for the year?

Reason: $75,000/10,000 = $7.50

A company had sales of $90,000 in Year 1, the base year; $95,000 in Year 2; and $78,000 in Year 3. What is the trend percentage for Year 3? Round the answer to two decimal places?

Reason: $78,000/$90,000 = 86.7%

A company had interest expense of $12,400 during a year. In the previous year, interest expense was $11,800. What was the percentage increase rounded to the nearest 1/10 percent?

Reason: ($12,400 - $11,800)/$11,800 = 5.1%

A company has current assets of $300,000; noncurrent assets of $700,000; current liabilities of $175,000; noncurrent liabilities of $425,000; and stockholders' equity of $400,000. What is the amount of the company's debt ratio?

Reason: ($175,000 + $425,000)/($300,000 + $700,000) = 60%

A company has cash of $5,000; accounts receivable of $25,000; inventories of $35,000; accounts payable of $35,000; and retained earnings of $30,000. What is the company's current ratio, rounded to the nearest hundredth?

Reason: ($5,000 + $25,000 + $35,000)/$35,000 = 1.86 Reason: Retained earnings is not considered in calculating the current ratio.

A company's assets include cash of $6,000; accounts receivable of $10,000; inventories of $56,000; and plant assets of $28,000, totaling $100,000. Its liabilities include accounts payable of $25,000 and bonds payable of $45,000, totaling $70,000. Its stockholders' equity includes $10,000 of capital stock and $20,000 of retained earnings, totaling $30,000. What is the company's current ratio?

Reason: ($6,000 + $10,000 + $56,000)/$25,000 = 2.88

True or false: Ratios compare only amounts within a single financial statement, such as an income statement or a statement of financial position (balance sheet).

Reason: One of the primary uses of ratios is to compare information from one financial statement to information in another financial statement.

Which of the following is/are correct about the annual reports of companies?

They often include multiyear summaries of comparative information about the company. They include management's own discussion and analysis of important aspects of the company.

Which of the following is NOT a goal of financial accounting information?

To demonstrate a company's compliance with income tax law.

Which of the following are NOT considered in calculating the amount of a company's working capital?

capital stock bonds payable retained earnings

The percentage that inventory represents of the total assets in a statement of financial position (balance sheet) is called the

component percentage.

The final section or item you would expect to find in a classified income statement is

earnings per share

The price-earnings ratio is calculated by dividing the current market price by

earnings per share

Ratios are used for which of the following purposes?

explaining the relative size of related items assisting in understanding the relationship of one financial statement to anther

True or false: The quick ratio and the current ratio are two names for the same financial statement ratio.

false

True or false: Calculating a percentage change starts with the second year and works backward to the first year.

false; Reason: Calculating a percentage change starts with first year and works toward the second year.

True or false: Ratios compare only amounts within a single financial statement, such as an income statement or a statement of financial position (balance sheet).

false; Reason: One of the primary uses of ratios is to compare information from one financial statement to information in another financial statement.

The difference between net sales and the cost of goods sold is called

gross profit

Comparing amounts for a company over time in successive accounting periods is called

horizontal analysis.

The ability of a company to meet its continuing obligations is referred to as

liquidity

Which of the following are measures of different levels of profitability?

net income gross profit operating income

Which of the following subtotals would you expect to find in a classified income statement?

net income gross profit operating income

The subtotal that follows operating expenses in a multiple-step income statement is called

operating income

Classified financial statements are statements that

place items with certain characteristics together in the statements.

The balance sheet ratio that measures liquidity by excluding inventory as an asset is called the

quick ratio

The relationship of one number to another related number is called a

ratio

The basis or denominator for computing a percentage change from Year 1 to Year 2 is

the Year 1 amount.

Which of the following is NOT a factor in judging a company's liquidity?

the depreciation of plant assets