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Exam 14: Financial Statement Analysis

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Question 71

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A firm selling food should have higher inventory turnover rate than a firm selling office furniture.

A) True
B) False

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Question 72

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The percentage analysis of increases and decreases in individual items in comparative financial statements is called

A) vertical analysis
B) solvency analysis
C) profitability analysis
D) horizontal analysis

E) C) and D)
F) All of the above

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Question 73

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The denominator of the return on total assets ratio is the average total assets.

Which of the following would appear as an unusual item on the income statement?

$\begin{array} { l r } { \text { Privett Company } } & \\\text { Accounts payable } & 30,000 \\\text { Accounts receivable } & 35,000 \\\text { Accrued liabilities } & 7,000 \\\text { Cash } & 25,000 \\\text { Intangible assets } & 40,000 \\\text { Inventory } & 72,000 \\\text { Long-term investments } & 100,000 \\\text { Long-term liabilities } & 75,000 \\\text { Marketable securities } & 36,000 \\\text { Notes payable (short-term) } & 20,000 \\\text { Property, plant, and equipment } & 400,000 \\\text { Prepaid expenses } & 2,000\end{array}$ -Based on the data for Privett Company, what is the amount of working capital?

For Garrison Corporation, the working capital at the end of the current year is $10,000 more than the working capital at the end of the preceding year, reported as follows: ​ $\begin{array}{|l|r|r|}\hline &{\text { Year 2 }} & {\text { Year } 1} \\\hline \text { Current assets: } & & \\\hline \text { Cash, marketable securities, and receivables } & \$ 80,000 & \$ 84,000 \\\hline \text { Inventories } & 120,000 & 66,000 \\\hline \text { Total current assets } & \$ 200,000 & \$ 150,000 \\\hline \text { Current liabilities } & 100,000 & 60,000 \\\hline \text { Working capital } & \$ 100,000 & \$ 90,000 \\\hline\end{array}$ ​ Has the current position of Garrison Corporation improved? Explain.

Match each ratio that follows to its use (items a-h) . Items may be used more than once. -dividends per share

Cash and accounts receivable for Ashfall Co. are provided below: $\begin{array}{lrr} & \text { Current Year } & \text { Prior Year } \\\text { Cash } & \$ 62,400 & \$ 58,000 \\\text { Accounts receivable (net) } & 42,000 & 50,000\end{array}$ ​ Based on this information, what is the amount and percentage of increase or decrease that would be shown on a balance sheet with horizontal analysis? Round percentages to one decimal place.

Balance sheet and income statement data indicate the following: $\begin{array}{lr}\text { Bonds payable, } 10 \% \text { (due in two years) } & \$ 1,000,000 \\\text { Preferred } 5 \% \text { stock, } \$ 100 \text { par (no change during year) } & 300,000 \\\text { Common stock, } \$ 50 \text { par (no change during year) } & 2,000,000 \\\text { Income before income tax for year } & 550,000 \\\text { Income tax for year } & 80,000 \\\text { Common dividends paid } & 50,000 \\\text { Preferred dividends paid } & 15,000\end{array}$ Based on the data presented, what is the times interest earned ratio? (Round to one decimal point.)

Condensed data taken from the ledger of St. Louis Company at December 31, for the current and preceding years, are as follows: $\begin{array}{lrr} & \text { Year } 2 & \text { Year 1 } \\\text { Current assets } & \$ 160,000 & \$ 130,000 \\\text { Property, plant, and equipment } & 450,000 & 400,000 \\\text { Intangible assets } & 20,700 & 30,000 \\\text { Current liabilities } & 70,000 & 80,000 \\\text { Long-term liabilities } & 210,000 & 250,000 \\\text { Common stock } & 225,000 & 150,000 \\\text { Retained earnings } & 125,700 & 80,000\end{array}$ ​ Prepare a comparative balance sheet, with horizontal analysis, for December 31, Year 2 and Year 1. (Round percents to one decimal point.)

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 return on common stockholders' equity for Diane Company?

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

When the return on total assets is greater than the return on common stockholders' equity, the management of the company has effectively used leverage.

Match each definition that follows with the term (a-h) it defines. -use debt to increase the return on an investment

Match each ratio that follows to its use (items a-h) . Items may be used more than once. -earnings per share (EPS) on common stock

A company reports the following: $\begin{array} { l r } \text { Net income } & \$ 150,000 \\\text { Preferred dividends } & \$ 10,000 \\\text { Shares of common stock outstanding } & 20,000 \\\text { Market price per share of common stock } & \$ 35\end{array}$ ​ Calculate the company's earnings per share on common stock.

Dollar amounts of working capital are difficult to assess when comparing companies of different sizes or in comparing such amounts with industry figures.

A balance sheet shows cash, $75,000; marketable securities, $115,000; receivables, $150,000; and inventories, $222,500. Current liabilities are $225,000. The current ratio is 2.5.

One reason that a common-sized statement is a useful tool in financial analysis is that it enables the user to

The percent of fixed assets to total assets is an example of