Question 1

Which profitability ratio requires the use of earnings per share in its calculation?

Accepted Answer

The price-earnings ratio is calculated by dividing the market price per share by the earnings per share. Therefore, the use of earnings per share is required in its calculation. The other ratios listed do not require the use of earnings per share.

Question 2

Ruby Company's net income was $100,000 last year.The company has 25,000 shares of common stock and 6,000 shares of $50 par value, 6% preferred stock outstanding.There was no change in the number of common or preferred shares outstanding during the year.The earnings per share of common stock was:

Accepted Answer

Earnings per Share = (Net Income - Preferred Dividends) / Average Common Shares 
= {$100,000 - [(6,000 preferred shares × $50 × 6% )]} / 25,000 common shares
= $3.28

Question 3

Chaney Inc.wants to measure the relationship between profitability and the investment made by stockholders.Chaney should use

Accepted Answer

Return on common stockholders' equity measures a company's ability to generate profits from the investment made by its common stockholders. It is a ratio that shows how much profit the company has generated for every dollar of common stockholder's equity. This ratio provides a good measure of the relationship between profitability and the investment made by stockholders as it directly relates to the profits earned by the company from the funds invested by the stockholders.

Question 4

Last year the return on total assets in Justin Company was 8.5%.The total assets were $2,900,000 at the beginning of the year and $3,100,000 at the end of the year.The tax rate was 30%, interest expense totaled $110,000, and sales were $5,200,000.Net income for the year was

Accepted Answer

The answer of Last year the return on total assets...

Question 5

Clover Company's net income last year was $80,000.The company paid preferred dividends of $12,000 and its average common stockholders' equity was $340,000.The company's return on common stockholders' equity for the year was closest to

Accepted Answer

The answer of Clover Company's net income last year was...

Question 6

A common measure of profitability is

Accepted Answer

The return on common stockholders' equity ratio is a measure of profitability as it indicates how much profit a company is generating from the money invested by its common stockholders. This ratio is calculated by dividing net income by the average common stockholders' equity. The other options listed are measures of liquidity (quick ratio) and solvency (debt ratio) or measures of the ability to meet debt obligations (times-interest-earned ratio), but not profitability.

Question 7

Match the classifications of ratios with each description.
-Measures the earning ability of a company

Accepted Answer

Profitability ratios measure how effectively a company is generating earnings or profits. Examples of profitability ratios include return on equity (ROE), return on assets (ROA), and gross profit margin.

Question 8

The average stockholders' equity for Holloway Co.last year was $2,000,000.Included in this figure was $200,000 par value of 8% preferred stock.If the return on common stockholders' equity was 12.5% for the year, net income was

Accepted Answer

$241,000
$225,000 + $16,000* = Net Income
 
0.125 = (Net income - $16,000) / ($2,000,000 - $200,000)
0.125 × $1,800,000 = Net Income - $16,000
 
*$16,000 = Preferred Dividend ($200,000 × 8%)

Question 9

Which of the following is an effect of issue of shares for cash?

Accepted Answer

When a company issues shares for cash, it increases its cash balance, which in turn increases the numerator of the quick ratio. As a result, the quick ratio increases, reflecting the company's ability to meet short-term liabilities. The return on sales, debt-to-equity ratio, and receivables turnover ratio are not directly affected by the issue of shares for cash.

Question 10

Pearl Company has 80,000 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.Preferred stockholders received dividends totaling $150,000 in the year.Common stockholders received dividends totaling $300,000.If the dividend payout ratio for the year was 40%, then the net income was:

Accepted Answer

Dividend Payout Ratio = Common Dividends / (Net Income - Preferred Dividends)
0.4 = $300,000 / (Net income - $150,000)
Net income = $900,000

Question 11

Selected financial data from Harlow Company for the most recent year appear below:
 The income tax rate is 30%.
The return on sales ratio was closest to

Accepted Answer

The answer of Selected financial data from Harlow Company for...

Question 12

Bogart Company has 40,000 shares of common stock outstanding.The book value per share of this stock was $60 and the market value per share was $75 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 per share.The tax rate was 30%.The company's price-earnings ratio at the end of the year was

Accepted Answer

7.5
 
Market price / Earnings per share = $75 / $10
Earnings Per Share = $10 = ($400,000 - $0) / 40,000

Question 13

Dowling Company's net income last year was $40,000 and its interest expense was $8,000.Total assets at the beginning of the year were $260,000 and total assets at the end of the year were $315,000.The company's income tax rate was 35%.The company's return on total assets for the year was closest to

Accepted Answer

The answer of Dowling Company's net income last year was...

Question 14

Wellston Company's net income last year was $300,000.The company has 100,000 shares of common stock and 30,000 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 $1.90 per share on the common stock and $1.70 per share on the preferred stock.The earnings per share of common stock is closest to

Accepted Answer

We can calculate the earnings per share of common stock using the formula:

Earnings per share of common stock = (Net income - Preferred dividends) / Number of common shares outstanding

First, let's calculate the total amount of preferred dividends paid:

Preferred dividends = Number of preferred shares outstanding * Dividend per share on preferred stock
= 30,000 * $1.70
= $51,000

Next, we can calculate the earnings available to common stockholders:

Earnings available to common stockholders = Net income - Preferred dividends
= $300,000 - $51,000
= $249,000

Finally, we can calculate the earnings per share of common stock:

Earnings per share of common stock = Earnings available to common stockholders / Number of common shares outstanding
= $249,000 / 100,000
= $2.49

So the correct answer is A) $2.49.

Question 15

Which of the following is used to compute return on sales?

Accepted Answer

Return on sales is computed by dividing net income by sales. Net income is the profit after accounting for all expenses, while sales represent the total revenue generated by the company. Therefore, option D represents the most suitable choice for computing return on sales.

Question 16

Refer to the information given below for Bronze Company's common stock: The price-earnings ratio would be

Accepted Answer

Price-Earnings Ratio = Market Price per Share / Earnings per Share 
= $20 / $5
= 4.0

Question 17

Which profitability ratio requires the use of earnings per share and the current market price?

Accepted Answer

The price-earnings ratio is a profitability ratio that measures the current market price of a company's stock relative to its earnings per share. It is calculated by dividing the market price per share by the earnings per share. Therefore, option D requires the use of earnings per share and the current market price. Option A requires net income and common stockholders' equity, option B requires dividends paid and net income, and option C requires dividends per share and current market price.

Question 18

Refer to the information taken from a company's financial records for the current year: The price-earnings ratio is:

Accepted Answer

Price-Earnings Ratio = Market Price per Share / Earnings per Share
= $60 / $5
= 12

Question 19

Earnings per share is an indication of how much

Accepted Answer

Earnings per share (EPS) is the portion of a company's profit that's allocated to each outstanding share of common stock. Therefore, EPS reflects how much the company earned for each share of outstanding common stock.

Question 20

Profitability ratios include _____.

Accepted Answer

Profitability ratios are meant to measure a company's ability to generate profits. Return on sales is a profitability ratio that shows how much profit a company is able to generate based on their sales. The other options listed (B, C, and D) are all liquidity ratios, not profitability ratios.

Quiz 15: Financial Statement Analysis