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Exam 14: Financial Statement Analysis

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Question 51

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A clean audit opinion is not the same as an unmodified opinion.

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B) False

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Question 52

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What is a major advantage of using percentages rather than dollar changes in doing horizontal and vertical analysis?

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When percentages are utilized rather tha...

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CorpCo gathered the following information at the end of the current fiscal year: ​ $\begin{array} { | l | r | } \hline \text { Dividends on common stock } & \$ 125,000 \\\hline \text { Market price per share of common stock } & \$ 115.00 \\\hline \text { Shares of common stock outstanding } & 5,000 \\\hline \text { Dividends on preferred stock } & \$ 65,000 \\\hline \text { Shares of preferred stock outstanding } & 600 \\\hline \text { Earnings per share on common stock } & \$ 102.00 \\\hline \text { Dividends per share of common stock } & \$ 25.00 \\\hline \text { Net income } & \$ 575,000 \\\hline\end{array}$ ​ What is CorpCo's price-earnings ratio? Round your answer to one decimal place. ​

The independent auditor's report

What information is generally included in the Management Discussion and Analysis (MD&A) section of a corporate annual report?

The following items were taken from the financial statements of Tilden, Inc., over a three-year period: ​ $\begin{array}{|l|r|r|r|}\hline \text { Item } & \text { Year 3 } & \text { Year 2 } & \text { Year 1 } \\\hline \text { Sales } & \$ 360,000 & \$ 335,000 & \$ 290,000 \\\hline \text { Cost of goods sold } & 225,000 & 205,000 & 185,000 \\\hline \text { Gross profit } & \$ 135,000 & \$ 130,000 & \$ 105,000 \\\hline\end{array}$ ​ Compute the following for each of the items listed. ​ (a) The amount and percentage change from Year 2 to Year 3. (b) The amount and percentage change from Year 1 to Year 2. Round percentages to one decimal place.

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. Assets $\begin{array}{lr}\text { Cash and short-term investments } & \$ 30,000 \\\text { Accounts receivable (net) } & 20,000 \\\text { Inventory } & 15,000 \\\text { Property, plant, and equipment } & 185,000 \\\text { Total assets } & \$ 250,000\end{array}$ Liabilities and Stockholders' Equity $\begin{array}{lr}\text { Current liabilities } & \$ 45,000 \\\text { Long-term liabilities } & 70,000 \\\text { Common stock } & 80,000 \\\text { Retained earnings } & 55,000 \\\text { Total liabilities and stockhol ders' equity } & \$ 250,000\end{array}$ Income Statement $\begin{array}{lr}\text { Sales } & \$ 85,000 \\\text { Cost of goods sold } & 45,000 \\\text { Gross margin } & \$ 40,000 \\\text { Operating expenses } & (15,000) \\\text { Interest expense } & (5,000) \\\text { Net income } & \$ 20,000\end{array}$ $\begin{array} { l r } \text { Number of shares of common stock outstanding } & 6,000 \\\text { Market price of common stock } & \$ 20 \\\text { Total dividends paid } & \$ 9,000 \\\text { Cash provided by operations } & \$ 30,000\end{array}$ -What is the price-earnings ratio for Diane Company?

A company reports the following: $\begin{array} { | l | r | } \hline \text { Net income } & \$ 350,000 \\\hline \text { Preferred dividends } & 50,000 \\\hline \text { Average stockhol ders' equity } & 1,000,000 \\\hline \text { Average common stockholders' equity } & 800,000 \\\hline\end{array}$ ​ Determine the (a) return on stockholders' equity, and (b) return on common stockholders' equity. Round your answer to one decimal place.

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

Hsu Company reported the following on its income statement: $\begin{array}{lr}\text { Income before income taxes } & \$ 420,000 \\\text { Income tax expense } & \$ 120,000 \\\text { Net income } & \$ 300,000 \\\end{array}$ Interest expense was $80,000. Hsu Company's times interest earned ratio is

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

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

Match each definition that follows with the term (a-h) it defines. -the percentage analysis of the relationship of each component in a financial statement to a total within the statement

The following information was taken from Slater Company's balance sheet: $\begin{array} { | l | r | } \hline \text { Fixed assets (net) } & \$ 1,250,000 \\\hline \text { Long-term liabilities } & 500,000 \\\hline \text { Total liabilities } & 672,000 \\\hline \text { Total stockholders' equity } & 1,680,000 \\\hline\end{array}$ ​ Determine the company's (a) ratio of fixed assets to long-term liabilities, and (b) ratio of liabilities to stockholders' equity. Round your answer to one decimal place.

In horizontal analysis, each item is expressed as a percentage of the

The following selected data were taken from the financial statements of the Winter Group for the three most recent years of operations: $\begin{array}{|l|r|r|r|}\hline& \begin{array}{c}\text { Dec. 31, } \\\text { Year 3 }\end{array} & \begin{array}{c}\text { Dec. 31, } \\\text { Year 2 }\end{array} & \begin{array}{c}\text { Dec. 31, } \\\text { Year 1 }\end{array} \\\hline \text { Total assets } & \$ 3,000,000 & \$ 2,700,000 & \$ 2,400,000 \\\hline \text { Notes payable }(10 \% \text { interest) } & 1,000,000 & 1,000,000 & 1,000,000 \\\hline \text { Common stock } & 400,000 & 400,000 & 400,000 \\\hline \text { Preferred } \$ 6 \text { stock } \$ 100 \text { par } & 200,000 & 200,000 & 200,000 \\\hline \text { Retained earnings } & 1,126,000 & 896,000 & 600,000 \\\hline\end{array}$ ​ The Year 3 net income was $242,000 and the Year 2 net income was $308,000. No dividends on common stock were declared during the 3 years. ​ (a) Determine the return on total assets, the return on stockholders' equity, and the return on common stockholders' equity for Years 2 and 3. Round to one decimal place. (b) What conclusion can be drawn from these data as to the company's profitability?

Match each ratio that follows to its use (items a-h) . Items may be used more than once. -return on total assets

The following information was taken from the financial statement of Fox Resources for December 31 of the current fiscal year: ​ $\begin{array} { | l | r | } \hline \text { Common stock, } \$ 20 \text { par value (no change during the year) } & \$ 5,000,000 \\\hline \text { Preferred } 10 \% \text { stock, } \$ 40 \text { par (no change during the year) } & 2,000,000 \\\hline\end{array}$ ​ The net income was $600,000, and the declared dividends on the common stock were $125,000 for the current year. The market price of the common stock is $20 per share. ​ Calculate for the common stock: (a) earnings per share (b) the price-earnings ratio (c) the dividends per share and the dividend yield ​ Round to one decimal place except earnings per share, which should be rounded to two decimal places.

The number of days' sales in inventory is one means of expressing the relationship between the cost of goods sold and inventory.

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