Exam 12: Analysis and Interpretation of Financial Statements

The balance sheets and income statements for Sunshine Communications follow: a. Compute the company's current ratio for both years. Comment on any observed trend. b. Compute the debt-to-equity ratios for both years. Comment on any observed trend.

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Question 1

Correct Answer:

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a. 2019 current ratio = $86,842 / $77,624 = 1.12
2018 current ratio = $109,822 / $81,511 = 1.35
During the year, the company's current ratio has deteriorated. The decline from 2018 to 2019 warrants attention as liquidity dropped significantly.
b. 2019 debt-to-equity ratio = ($473,187 - $171,075) / $171,075 = 1.77
2018 debt-to-equity ratio = ($542,599 - $168,062) / $168,062 = 2.23
Overall levels of debt have decreased during the year and the debt-to-equity ratio has also decreased, which signifies improved solvency.

Selected recent balance sheet and income statement information for Business Products, Inc. follows (in $ millions): Compute accounts receivable turnover and inventory turnover.

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Question 2

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Accounts receivable turnover = Sales / Average accounts receivable = $16,144 / $1,188 = 13.59
Inventory turnover = Cost of goods sold / Average inventory = $8,752 / $1,292 = 6.77

Westminster, Inc. has net income of $185,000. At January 1, the company had outstanding 54,000 shares of $25 par value common stock and 10,000 shares of 6%, $50 par value cumulative preferred stock. On September 1, an additional 18,000 shares of common stock were issued. What is the earnings per share (to the nearest cent)?

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Question 3

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Pooly Inc. has net income of $136,000 for the current year. At January 1, the company had outstanding 37,000 shares of $10 par value common stock and 5,000 shares of 8%, $50 par value cumulative preferred stock. On October 1, an additional 12,000 shares of common stock were issued. What is the earnings per share (to the nearest cent)?

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Question 4

Selected recent balance sheet and income statement information for Somerset, Inc. follows: a. Calculate accounts receivable turnover for both years. Has it improved during the year or worsened? b. Calculate inventory turnover for both years. Has it improved during the year or worsened?

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Question 5

At December 31, McKensie's price-earnings ratio was 13.4. McKensie's net income was $330,000, its earnings per share was $3.50, and its annual dividend per share was $2.00. What was the per share market price of McKensie's stock at December 31?

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Question 6

Benson Company sells a segment of its operations at a loss. Benson has not previously experienced such an event and does not expect to again. The loss from the disposal of the segment should be reported in the income statement as:

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Question 7

Liquidity analysis of a company includes the following useful measures: (select all that apply)

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Question 8

Listed below are six items or sections that may be found in a multiple-step income statement. -Gross profit

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Question 9

Big K Grocer's financial statements show net income of $700 million, sales of $76,733 million, and average total assets of $23,175 million. How much is Big K Grocer's profit margin for the year?

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Question 10

The balance sheets for Beldon Corporation for the years ending January 30, 2019 and January 31, 2018 follow: a. Prepare common-size statements for the asset section of Beldon's balance sheet for 2019 and 2018. Round to one decimal place. b. Comment on the most significant changes.

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Question 11

Gains and losses related to the disposal of a segment of a business, and any related income tax effects, are reported in the discontinued operations section of the income statement.

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Question 12

Ratios provide one way to compare companies in the same industry regardless of their size.

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Question 13

Stern Company's net income was $75,000 for 2018, $81,250 for 2019, and $69,800 for 2020. Assume trend percentages for net income over the three-year period are computed, with 2018 serving as the base year. The trend percentage for 2020's net income is:

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Question 14

At December 31, Mendez Company has total assets of $900,000, total liabilities of $200,000, and total owner's equity of $700,000. At December 31, Mendez Company's debt-to-equity ratio is:

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Question 15

Rodriguez Company reported net income of $1,300 million for the current year. The weighted average number of common shares outstanding was 554 million shares. Rodriguez paid $30 million in dividends on preferred stock. How much is basic earnings per share amount for the current year?

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Question 16

On the income statement of a merchandising company, interest income and interest expense are reported:

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Question 17

A common size balance sheet expresses the balance sheet items as a percentage of total assets.

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Question 18

Selected recent balance sheet and income statement information from Dress Co. and Purse Inc. follows: a. Compute the following turnover rates for each company: 1. Accounts receivable turnover 2. Inventory turnover 3. Asset turnover b. Interpret and comment on any differences you observe between the turnover rates for these two companies.

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Question 19

During the current year, Tapir Corporation had 160,000 shares of $5 par value common stock and 30,000 shares of 5%, $20 par value preferred stock outstanding. Tapir Corporation's net income is $480,000. Compute the primary earnings per share for the year.

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Question 20

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The balance sheets and income statements for Sunshine Communications follow: a. Compute the company's current ratio for both years. Comment on any observed trend. b. Compute the debt-to-equity ratios for both years. Comment on any observed trend.

Selected recent balance sheet and income statement information for Business Products, Inc. follows (in $ millions): Compute accounts receivable turnover and inventory turnover.

Selected recent balance sheet and income statement information for Somerset, Inc. follows: a. Calculate accounts receivable turnover for both years. Has it improved during the year or worsened? b. Calculate inventory turnover for both years. Has it improved during the year or worsened?

At December 31, McKensie's price-earnings ratio was 13.4. McKensie's net income was $330,000, its earnings per share was $3.50, and its annual dividend per share was $2.00. What was the per share market price of McKensie's stock at December 31?

Benson Company sells a segment of its operations at a loss. Benson has not previously experienced such an event and does not expect to again. The loss from the disposal of the segment should be reported in the income statement as:

Liquidity analysis of a company includes the following useful measures: (select all that apply)

Listed below are six items or sections that may be found in a multiple-step income statement. -Gross profit

Big K Grocer's financial statements show net income of $700 million, sales of $76,733 million, and average total assets of $23,175 million. How much is Big K Grocer's profit margin for the year?

The balance sheets for Beldon Corporation for the years ending January 30, 2019 and January 31, 2018 follow: a. Prepare common-size statements for the asset section of Beldon's balance sheet for 2019 and 2018. Round to one decimal place. b. Comment on the most significant changes.

Gains and losses related to the disposal of a segment of a business, and any related income tax effects, are reported in the discontinued operations section of the income statement.

Ratios provide one way to compare companies in the same industry regardless of their size.

Stern Company's net income was $75,000 for 2018, $81,250 for 2019, and $69,800 for 2020. Assume trend percentages for net income over the three-year period are computed, with 2018 serving as the base year. The trend percentage for 2020's net income is:

At December 31, Mendez Company has total assets of $900,000, total liabilities of $200,000, and total owner's equity of $700,000. At December 31, Mendez Company's debt-to-equity ratio is:

Rodriguez Company reported net income of $1,300 million for the current year. The weighted average number of common shares outstanding was 554 million shares. Rodriguez paid $30 million in dividends on preferred stock. How much is basic earnings per share amount for the current year?

On the income statement of a merchandising company, interest income and interest expense are reported:

A common size balance sheet expresses the balance sheet items as a percentage of total assets.

During the current year, Tapir Corporation had 160,000 shares of $5 par value common stock and 30,000 shares of 5%, $20 par value preferred stock outstanding. Tapir Corporation's net income is $480,000. Compute the primary earnings per share for the year.

Financial Accounting and Business Decisions

Processing Accounting Information

Accrual Basis of Accounting

Understanding Accounting Information

Internal Control and Cash

Receivables

Inventory

Property, Plant and Equipment and Intangible Assets

Liabilities

Stockholders Equity

Statement of Cash Flows

Appendix A: The Language of Accountants: Debits and Credits

Appendix B: Accounting for Investments and Consolidated Financial Statements

Appendix C: Accounting and the Time Value of Money

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