Deck 14: Financial Statement Analysis

Question 1

The market price of XYZ Company's common stock dropped from $25 to $21 per share.The dividend paid per share remained unchanged.The company's dividend payout ratio would:

A)increase.
B)decrease.
C)be unchanged.
D)impossible to determine without more information.

Answer 1

C
Explanation: The dividend payout ratio is unaffected by market price (e.g. ,Dividend payout ratio = Dividends per share  Earnings per share)

Question 2

Financial leverage is negative when:

A)the return on total assets is less than the rate of return on common stockholders' equity.
B)total liabilities are less than stockholders' equity.
C)total liabilities are less than total assets.
D)the return on total assets is less than the rate of return demanded by creditors.

Answer 2

D
Explanation: If the rate of return on total assets is less than the rate of return the company pays its creditors,financial leverage is negative

Question 3

The gross margin percentage is computed by dividing the gross margin by sales.

Answer 3

True

Question 4

As the inventory turnover increases,the number of days required to sell the inventory one time also increases.

Question 5

All debt is considered in the computation of the acid-test ratio.

Question 6

Horizontal analysis involves comparing two or more years' financial data for a single company.

Question 7

Financial leverage is positive if the interest rate on debt is lower than the return on total assets.

Question 8

The purchase of marketable securities for cash will lower a firm's acid-test ratio.

Question 9

When computing the acid-test ratio,a short-term note receivable would be included in the numerator.

Question 10

The acid-test ratio is always smaller than the current ratio.

Question 11

Issuing common stock will increase a company's financial leverage.

Question 12

Negative working capital indicates that the sum of all current assets is negative.

Question 13

The dividend yield ratio is calculated by dividing dividends per share by earnings per share.

Question 14

One would expect the book value of a share of stock to be about the same as the stock's market value.

Question 15

Dividing the market price of a share of stock by the dividends per share gives the price-earnings ratio.

Question 16

The formula for the gross margin percentage is:

A)(Sales - Cost of goods sold)/Cost of goods sold
B)(Sales - Cost of goods sold)/Sales
C)Net income/Sales
D)Net income/Cost of goods sold

Question 17

The gross margin percentage is most likely to be used to assess:

A)how quickly accounts receivables can be collected.
B)how quickly inventories are sold.
C)the efficiency of administrative departments.
D)the overall profitability of the company's products.

Question 18

If the assets in which borrowed funds are invested are able to earn a rate of return greater than the interest rate required by the lender,then financial leverage is positive.

Question 19

If a company's return on assets is substantially higher than its cost of borrowing,then the common stockholders would normally want the company to have a relatively high debt/equity ratio.

Question 20

A drop in the market price of a firm's common stock will immediately affect its:

A)return on common stockholders' equity.
B)current ratio.
C)dividend payout ratio.
D)dividend yield ratio.

Question 21

Crandler Company's net income last year was $60,000.The company paid preferred dividends of $20,000 and its average common stockholders' equity was $500,000.The company's return on common stockholders' equity for the year was closest to:

A)16.0%
B)4.0%
C)8.0%
D)12.0%

Question 22

Which of the following is not a potential source of financial leverage?

A)Long-term debt.
B)Common stock.
C)Accounts payable.
D)Interest payable.

Question 23

Archer Company had net income of $40,000 last year.The company has 5,000 shares of common stock and 2,500 shares of preferred stock outstanding.There was no change in the number of common or preferred shares outstanding during the year.Preferred dividends were $2 per share.The earnings per share of common stock was:

A)$7.00
B)$8.00
C)$5.33
D)$7.50

Question 24

Assume a company has a current ratio that is greater than 1.Which of the following transactions will reduce the company's current ratio?

A)Selling office equipment at book value.
B)Paying a cash dividend already declared.
C)Borrowing by taking out a short-term loan.
D)Selling equipment at a loss.

Question 25

At the beginning of the year,a company's current ratio is 2.2.At the end of the year,the company has a current ratio of 2.5.Which of the following could help explain the change in the current ratio?

A)An increase in inventories.
B)An increase in accounts payable.
C)An increase in property,plant,and equipment.
D)An increase in bonds payable.

Question 26

A company's current ratio and acid-test ratios are both greater than 1.The collection of a current accounts receivable of $29,000 would:

A)increase the current ratio.
B)decrease the current ratio.
C)not affect the current ratio or the acid-test ratio.
D)decrease the acid-test ratio.

Question 27

Park Company purchased $100,000 in inventory from its suppliers,on account.The company's acid-test ratio would:

A)increase.
B)decrease.
C)remain unchanged.
D)be impossible to determine from the given information.

Question 28

The average stockholders' equity for Horn Co.last year was $2,000,000.Included in this figure was $200,000 of preferred stock.Preferred dividends were $16,000.If the return on common stockholders' equity was 12.5% for the year,net income was:

A)$225,000
B)$250,000
C)$241,000
D)$234,000

Question 29

Higgins Company presently has a current ratio of 0.6.It is currently negotiating a loan,but it has been informed it must improve its current ratio before the loan will be approved.Which of the following actions would improve its current ratio?

A)Pay off a portion of its long-term debt.
B)Use cash to pay off some current liabilities.
C)Purchase additional inventory on credit.
D)Collect some of the current accounts receivable.

Question 30

The following data have been taken from your company's financial records for the current year:

$\begin{array} { l } \text {Earnings per share }&\$8\\ \text {Market price per share. }&\$60\\ \text { Dividend per share}&\$6\\ \text { Book value per share.}&\$75\\\end{array}$
The price-earnings ratio is:

A)7.5
B)10.0
C)9.4
D)13.3

Question 31

Data concerning Bouerneuf Company's common stock follow: $$\begin{array} { l r } \text { Book value per share........... } & \$ 24.00 \\\text { Market value per share...... } & \$ 18.00 \\\text { Earnings per share ............. } & \$ 6.00 \\\text { Par value per share............. } & \$ 4.00 \\\text { Dividend per share ........... } & \$ 1.00\end{array}$$ The price-earnings ratio would be:

A)2.00
B)2.67
C)3.00
D)4.00

Question 32

Artist Company's net income last year was $500,000.The company has 150,000 shares of common stock and 40,000 shares of preferred stock outstanding.There was no change in the number of common or preferred shares outstanding during the year.The company declared and paid dividends last year of $1.70 per share on the common stock and $0.70 per share on the preferred stock.The earnings per share of common stock is closest to:

A)$3.15
B)$3.52
C)$1.63
D)$3.33

Question 33

A company's current ratio and acid-test ratios are both greater than 1.Issuing bonds to finance purchase of an office building with the first installment of the bonds due in the current year would:

A)decrease net working capital.
B)decrease the current ratio.
C)decrease the acid-test ratio.
D)affect all of the above as indicated.

Question 34

The following data have been taken from your company's financial records for the current year:

$\begin{array}{lr}\text { Earnings per share .............. } & \$ 15 \\\text { Dividend per share ............ } & \$ 9 \\\text { Market price per share ....... } & \$ 120 \\\text { Book value per share.......... } & \$ 90\end{array}$

The price-earnings ratio is:

A)12.5
B)6.0
C)8.0
D)7.5

Question 35

Wolbers Company has an acid-test ratio of 1.4.Which of the following events will cause this ratio to decrease?

A)Selling merchandise on account.
B)Paying a cash dividend already declared.
C)Borrowing using a short-term note.
D)Selling equipment at a loss.

Question 36

The ratio of cash,trade receivables,and marketable securities to current liabilities is:

A)the working capital of a company.
B)the acid-test ratio.
C)the current ratio.
D)the debt to equity ratio.

Question 37

What is the effect of a purchase of inventory on account on the current ratio and on working capital,respectively? (Assume a current ratio greater than one prior to this transaction. ) $\begin{array}{lll}&\text { Current ratio}&\text { Working capital }\\\text { A) } & \text { decrease } & \text { no effect } \\\text { B) } & \text { no effect } & \text { decrease } \\\text { C) } & \text { decrease } & \text { decrease } \\\text { D) } & \text { no effect } & \text { no effect }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 38

Issuing new shares of stock in a five-for-one split of common stock would:

A)decrease the book value per share of common stock.
B)increase the book value per share of common stock.
C)increase total stockholders' equity.
D)decrease total stockholders' equity.

Question 39

Ozols Corporation's most recent income statement appears below:
The gross margin percentage is closest to:

A)33.2%
B)55.7%
C)300.8%
D)125.6%

Question 40

Assuming stable business conditions,an increase in the accounts receivable turnover ratio could be explained by:

A)stricter policies with respect to the granting of credit to customers.
B)an easing of policies with respect to the granting of credit to customers.
C)a slowdown in collecting accounts receivables from customers.
D)none of these.

Question 41

Grasse Company had $160,000 in sales on account last year.The beginning accounts receivable balance was $10,000 and the ending accounts receivable balance was $12,000.The company's average collection period was closest to:

A)25.09 days
B)22.81 days
C)50.19 days
D)27.38 days

Question 42

Cotuit Company has a current ratio of 3.2 and an acid-test ratio of 2.4.The company's current assets consist of cash,marketable securities,accounts receivable,and inventory.The company's inventory is $40,000.Cotuit Company's current liabilities must be:

A)$40,000
B)$120,000
C)$50,000
D)$32,000

Question 43

Boggs Company has 40,000 shares of common stock outstanding.The book value per share of this stock was $60.00 and the market value per share was $75.00 at the end of the year.Net income for the year was $400,000.Interest on long term debt was $40,000.Dividends paid to common stockholders were $3.00 per share.The tax rate was 30%.The company's price-earnings ratio at the end of the year was:

A)25
B)20
C)7.50
D)6.00

Question 44

Selected year-end data for the Brayer Company are presented below: $\begin{array}{lr}\text { Current liabilities.. }&\$600,000\\\text { Acid-test ratio }&2.5\\\text { Current ratio }&3.0\\\text { Cost of goods sold }&\$500,000\end{array}$
The company has no prepaid expenses and inventories remained unchanged during the year.Based on these data,the company's inventory turnover ratio for the year was closest to:

A)1.20
B)2.40
C)1.67
D)2.33

Question 45

Harbor Company,a retailer,had cost of goods sold of $170,000 last year.The beginning inventory balance was $20,000 and the ending inventory balance was $24,000.The company's inventory turnover was closest to:

A)7.08
B)7.73
C)3.86
D)8.50

Question 46

Hagerman Corporation's most recent income statement appears below:
The beginning balance of total assets was $140,000 and the ending balance was $90,000.The return on total assets is closest to:

A)18.3%
B)24.3%
C)34.8%
D)26.1%

Question 47

Last year the return on total assets in Jeffrey Company was 8.5%.The total assets were 2.9 million at the beginning of the year and 3.1 million at the end of the year.The tax rate was 30%,interest expense totaled $110 thousand,and sales were $5.2 million.Net income for the year was:

A)$145,000
B)$222,000
C)$332,000
D)$178,000

Question 48

Last year,Shadow Corporation's dividend on common stock was $9.90 per share and the dividend on preferred stock was $1.00 per share.The market price of common stock at the end of the year was $68.10 per share.The dividend yield ratio is closest to:

A)0.15
B)0.16
C)0.91
D)0.01

Question 49

Delatrinidad Corporation's net income last year was $7,736,000.The dividend on common stock was $12.60 per share and the dividend on preferred stock was $2.80 per share.The market price of common stock at the end of the year was $53.30 per share.Throughout the year,400,000 shares of common stock and 200,000 shares of preferred stock were outstanding.The dividend payout ratio is closest to:

A)0.70
B)0.65
C)2.36
D)1.87

Question 50

Tronnes Corporation's net income last year was $1,750,000.The dividend on common stock was $2.60 per share and the dividend on preferred stock was $2.50 per share.The market price of common stock at the end of the year was $57.70 per share.Throughout the year,300,000 shares of common stock and 100,000 shares of preferred stock were outstanding.The price-earnings ratio is closest to:

A)17.85
B)11.54
C)24.04
D)9.89

Question 51

Drama Company's working capital is $16,000 and its current liabilities are $94,000.The company's current ratio is closest to:

A)1.17
B)0.17
C)6.88
D)0.83

Question 52

Irastan Company,a retailer,had cost of goods sold of $250,000 last year.The beginning inventory balance was $28,000 and the ending inventory balance was $20,000.The company's average sale period was closest to:

A)40.88 days
B)29.20 days
C)35.03 days
D)70.08 days

Question 53

Brandon Company's net income last year was $65,000 and its interest expense was $20,000.Total assets at the beginning of the year were $640,000 and total assets at the end of the year were $690,000.The company's income tax rate was 30%.The company's return on total assets for the year was closest to:

A)9.8%
B)10.7%
C)12.8%
D)11.9%

Question 54

Brewster Company has an acid-test ratio of 1.5 and a current ratio of 2.5.Current assets equal $200,000,of which $10,000 is prepaid expenses.The company's current assets consist of cash,marketable securities,accounts receivable,prepaid expenses,and inventory.Brewster Company's inventory must be:

A)$30,000
B)$110,000
C)$70,000
D)$80,000

Question 55

Erastic Company has $14,000 in cash,$8,000 in marketable securities,$34,000 in account receivable,$40,000 in inventories,and $42,000 in current liabilities.The company's current assets consist of cash,marketable securities,accounts receivable,and inventory.The company's acid-test ratio is closest to:

A)1.33
B)0.81
C)2.29
D)1.14

Question 56

Excerpts from Lasso Corporation's most recent balance sheet appear below Net income for Year 2 was $145,000.Dividends on common stock were $55,000 in total and dividends on preferred stock were $20,000 in total.The return on common stockholders' equity for Year 2 is closest to:

A)12.3%
B)8.1%
C)13.0%
D)14.3%

Question 57

Vessels Corporation's net income for the most recent year was $2,532,000.A total of 200,000 shares of common stock and 200,000 shares of preferred stock were outstanding throughout the year.Dividends on common stock were $3.80 per share and dividends on preferred stock were $1.25 per share.The earnings per share of common stock is closest to:

A)$12.66
B)$8.86
C)$7.61
D)$11.41

Question 58

Fraser Company had $130,000 in sales on account last year.The beginning accounts receivable balance was $10,000 and the ending accounts receivable balance was $14,000.The company's accounts receivable turnover was closest to:

A)5.42
B)13.00
C)9.29
D)10.83

Question 59

Data from Saldivar Corporation's most recent balance sheet appear below:
A total of 150,000 shares of common stock and 40,000 shares of preferred stock were outstanding at the end of the year.The book value per share is closest to:

A)$2.73
B)$5.00
C)$6.53
D)$7.87

Question 60

The following account balances have been provided for the end of the most recent year:

$\begin{array}{lr}\text { Total assets }&\$150,000\\\text { Total stockholders' equity. }&\$120,000\\\text { Total common stock ( } 5,000 \text { shares })&\$50,000\\\text { Total preferred stock }(1,000 \text { shares })&\$10,000\end{array}$

The book value per share of common stock is:

A)$22
B)$25
C)$20
D)$28

Question 61

Hartzog Corporation's most recent balance sheet and income statement appear below: Dividends on common stock during Year 2 totaled $60 thousand. Dividends on preferred stock totaled $5 thousand. The market price of common stock at the end of Year 2 was $7.04 per share.

-The return on common stockholders' equity for Year 2 is closest to:

A)11.33%
B)10.00%
C)10.67%
D)9.41%

Question 62

Hartzog Corporation's most recent balance sheet and income statement appear below: Dividends on common stock during Year 2 totaled $60 thousand. Dividends on preferred stock totaled $5 thousand. The market price of common stock at the end of Year 2 was $7.04 per share.

-The book value per share at the end of Year 2 is closest to:

A)$6.60
B)$4.30
C)$3.80
D)$0.40

Question 63

Pia Corporation has provided the following data from its most recent income statement:

$\begin{array}{l}\text { Net operating income}&\$ 71,000 \\\text {Interest expense.. }&\$ 34,000 \\\text {Net income before taxes. }&\$ 37,000 \\\text {Income taxes }&\$ 11,000 \\\text {Net income }&\$ 26,000\end{array}$

The times interest earned ratio is closest to:

A)2.09
B)1.09
C)0.76
D)2.98

Question 64

Damon Corporation has provided the following data from its most recent balance sheet:

$\begin{array}{lr}\text { Total assets. }&\$ 630,000 \\\text { Total liabilities }&\$ 540,000 \\\text { Total stockholders' equity }&\$ 90,000\end{array}$

The debt-to-equity ratio is closest to:

A)0.17
B)6.00
C)0.86
D)7.00

Question 65

Hartzog Corporation's most recent balance sheet and income statement appear below: Dividends on common stock during Year 2 totaled $60 thousand. Dividends on preferred stock totaled $5 thousand. The market price of common stock at the end of Year 2 was $7.04 per share.

-The price-earnings ratio for Year 2 is closest to:

A)9.64
B)16.37
C)11.54
D)17.60

Question 66

Bonine Corporation has provided the following data: $\begin{array}{lrr}&\text { This Year } & \text { Last Year } \\\text {Accounts receivable }&\$ 88,000 & \$ 106,000 \\\text { Inventory}&\$ 178,000 & \$ 191,000 \\\text {Sales on account }&\$ 867,000 & \\\text {Cost of goods sold }&\$ 685,000 &\end{array}$

The accounts receivable turnover for this year is closest to:

A)0.83
B)8.94
C)9.85
D)1.20

Question 67

Data from Concepcion Corporation's most recent balance sheet and income statement appear below: $$\begin{array} { l r r } & \text { This Year } & \text { Last Year } \\\text { Accounts receivable......... } & \$ 120,000 & \$ 118,000 \\\text { Inventory ..................... } & \$ 193,000 & \$ 183,000 \\\text { Sales on account ............ } & \$ 800,000 & \\\text { Cost of goods sold ........... } & \$ 512,000 &\end{array}$$ The average collection period for this year is closest to:

A)54.3 days
B)7.4 days
C)7.2 days
D)54.7 days

Question 68

Hartzog Corporation's most recent balance sheet and income statement appear below: Dividends on common stock during Year 2 totaled $60 thousand. Dividends on preferred stock totaled $5 thousand. The market price of common stock at the end of Year 2 was $7.04 per share.

-The dividend yield ratio for Year 2 is closest to:

A)0.36%
B)92.31%
C)4.26%
D)4.62%

Question 69

Hartzog Corporation's most recent balance sheet and income statement appear below: Dividends on common stock during Year 2 totaled $60 thousand. Dividends on preferred stock totaled $5 thousand. The market price of common stock at the end of Year 2 was $7.04 per share.

-The dividend payout ratio for Year 2 is closest to:

A)81.3%
B)75.0%
C)70.6%
D)1250.0%

Question 70

Hartzog Corporation's most recent balance sheet and income statement appear below: Dividends on common stock during Year 2 totaled $60 thousand. Dividends on preferred stock totaled $5 thousand. The market price of common stock at the end of Year 2 was $7.04 per share.

-The earnings per share of common stock for Year 2 is closest to:

A)$0.40
B)$0.73
C)$0.61
D)$0.43

Question 71

Last year Jason Company had a net income of $250,000,income tax expense of $78,000,and interest expense of $30,000.The company's times interest earned was closest to:

A)4.73
B)9.33
C)11.93
D)8.33

Question 72

Hartzog Corporation's most recent balance sheet and income statement appear below: Dividends on common stock during Year 2 totaled $60 thousand. Dividends on preferred stock totaled $5 thousand. The market price of common stock at the end of Year 2 was $7.04 per share.

-The gross margin percentage for Year 2 is closest to:

A)41.5%
B)70.9%
C)15.2%
D)658.8%

Question 73

Deschambault Corporation's total current assets are $260,000,its noncurrent assets are $700,000,its total current liabilities are $130,000,its long-term liabilities are $510,000,and its stockholders' equity is $320,000.Working capital is:

A)$260,000
B)$320,000
C)$190,000
D)$130,000

Question 74

Krast Company has total assets of $160,000 and total liabilities of $70,000.The company's debt-to-equity ratio is closest to:

A)0.56
B)0.44
C)0.30
D)0.78

Question 75

Ladabouche Corporation's total current assets are $390,000,its noncurrent assets are $630,000,its total current liabilities are $330,000,its long-term liabilities are $420,000,and its stockholders' equity is $270,000.The current ratio is closest to:

A)0.85
B)0.79
C)1.18
D)0.62

Question 76

Kaelker Corporation has provided the following data: $\begin{array}{lrr}&\text { This Year } & \text { Last Year } \\\text { Accounts receivable. }&\$ 95,000 & \$ 101,000 \\\text { Inventory. }&\$ 213,000 & \$ 186,000 \\\text { Sales on account }&\$ 854,000 & \\\text { Cost of goods sold }&\$ 671,000 &\end{array}$

The inventory turnover for this year is closest to:

A)3.36
B)0.87
C)1.15
D)3.15

Question 77

Data from Adamis Corporation's most recent balance sheet appear below: $\begin{array}{lr}\text {Cash }&\$ 10,000 \\\text {Marketable securities. }&\$ 24,000 \\\text {Accounts receivable. }&\$ 40,000 \\\text {Inventory }&\$ 55,000 \\\text {Prepaid expenses. }&\$ 10,000 \\\text {Current liabilities. }&\$ 104,000\end{array}$

The company's acid-test ratio is closest to:

A)0.33
B)0.71
C)0.81
D)0.10

Question 78

Hartzog Corporation's most recent balance sheet and income statement appear below: Dividends on common stock during Year 2 totaled $60 thousand. Dividends on preferred stock totaled $5 thousand. The market price of common stock at the end of Year 2 was $7.04 per share.

-The return on total assets for Year 2 is closest to:

A)7.85%
B)7.77%
C)6.51%
D)6.44%

Question 79

Data from Davoren Corporation's most recent balance sheet and income statement appear below: $\begin{array}{lrr}&\text { This Year } & \text { Last Year } \\\text { Accounts receivable. }&\$ 114,000 & \$ 112,000 \\\text { Inventory. }&\$ 160,000 & \$ 189,000 \\\text { Sales on account }&\$ 716,000 & \\\text { Cost of goods sold }&\$ 522,000 &\end{array}$

The average sale period for this year is closest to:

A)55.7 days
B)64.4 days
C)112.0 days
D)122.1 days

Question 80

Jersey Corporation has total interest expense of $10,000,sales of $1 million,a tax rate of 40%,and net income (after taxes)of $60,000.What is this firm's times interest earned ratio?

A)16
B)11
C)10
D)7