Chat with AIExam 14: Financial Statement Analysis Online
Exam 1: Managerial Accounting and the Business Environment49 Questions
Exam 2: Cost Terms, Concepts, and Classifications103 Questions
Exam 3: Cost Behaviour: Analysis and Use106 Questions
Exam 4: Cost-Volume-Profit Relationships401 Questions
Exam 5: Systems Design: Job-Order Costing108 Questions
Exam 6: Systems Design: Process Costing130 Questions
Exam 7: Activity-Based Costing: a Tool to Aid Decision Making120 Questions
Exam 8: Variable Costing: a Tool for Management135 Questions
Exam 9: Budgeting128 Questions
Exam 10: Standard Costs and Overhead Analysis223 Questions
Exam 11: Reporting for Control193 Questions
Exam 12: Relevant Costs for Decision Making88 Questions
Exam 13: Capital Budgeting Decisions180 Questions
Exam 14: Financial Statement Analysis Online200 Questions
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If a company's bonds bear an interest rate of 8%,its tax rate is 30%,and its assets are generating an after-tax return of 7%,what would be the leverage?
Free
(Multiple Choice)
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(34) Correct Answer:
Verified
VerifiedA
Orange Company's times interest earned for Year 2 was closest to which of the following?
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(Multiple Choice)
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(44) Correct Answer:Verified
VerifiedC
Financial statements for Sarosa Company appear below: 
Required:
a)Calculate Sarosa Company's return on total assets for Year 2.
b)Calculate Sarosa Company's return on common shareholders' equity for Year 2.
c)Financial leverage was positive for Year 2.Why?
d)Assume all current liabilities are interest free and that the interest expense of $40 is for the bonds payable.
(i)Calculate the dollar amount of the financial leverage (in $1,000)
(ii)Allocate the dollar amount of the financial leverage to the following sources of financing: Preferred Shares,Bonds Payable,and Current Liabilities (rounded to the nearest $1,000)
Required:
a)Calculate Sarosa Company's return on total assets for Year 2.
b)Calculate Sarosa Company's return on common shareholders' equity for Year 2.
c)Financial leverage was positive for Year 2.Why?
d)Assume all current liabilities are interest free and that the interest expense of $40 is for the bonds payable.
(i)Calculate the dollar amount of the financial leverage (in $1,000)
(ii)Allocate the dollar amount of the financial leverage to the following sources of financing: Preferred Shares,Bonds Payable,and Current Liabilities (rounded to the nearest $1,000)Free
(Essay)
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(28) Correct Answer:Verified
Verifieda)Return on total assets = Adjusted net income*/Average total assets**
= $245/$2,485
= 9.86%
* Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]
= $217 + 40 × (1 - 0.30)
= $217 + $28
= $245
** Average total assets = ($2,520 + $2,450)/2
= $2,485
b)Return on common shareholders' equity = (Net income - Preferred dividends)
/Average common shareholders' equity*
= [($217 - ($100 × 0.10)]/$1,625
= 12.74%
* Average common shareholders' equity = [($1,810 - $100)+ ($1,640 - $100)]/2
= ($1,710 + $1,540)/2
= $1,625
c)Financial leverage is positive because return on common shareholders' equity is greater than return on total assets.
d) ![a)Return on total assets = Adjusted net income*/Average total assets** = $245/$2,485 = 9.86% * Adjusted net income = Net income + [Interest expense × (1 - Tax rate)] = $217 + 40 × (1 - 0.30) = $217 + $28 = $245 ** Average total assets = ($2,520 + $2,450)/2 = $2,485 b)Return on common shareholders' equity = (Net income - Preferred dividends) /Average common shareholders' equity* = [($217 - ($100 × 0.10)]/$1,625 = 12.74% * Average common shareholders' equity = [($1,810 - $100)+ ($1,640 - $100)]/2 = ($1,710 + $1,540)/2 = $1,625 c)Financial leverage is positive because return on common shareholders' equity is greater than return on total assets. d) (ii)Allocations: Note:The dollar amount of return on common shareholders' equity is $207 (that is,net income of $217 less $10 dividends to preferred shareholders)is made up of $160 (assuming zero financial leverage calculated as 9.86% × $1,625)and net positive financial leverage of $47](https://storage.examlex.com/TB2484/11ea82f6_1e81_5782_9299_abb8a705c6d2_TB2484_00.jpg)
(ii)Allocations: ![a)Return on total assets = Adjusted net income*/Average total assets** = $245/$2,485 = 9.86% * Adjusted net income = Net income + [Interest expense × (1 - Tax rate)] = $217 + 40 × (1 - 0.30) = $217 + $28 = $245 ** Average total assets = ($2,520 + $2,450)/2 = $2,485 b)Return on common shareholders' equity = (Net income - Preferred dividends) /Average common shareholders' equity* = [($217 - ($100 × 0.10)]/$1,625 = 12.74% * Average common shareholders' equity = [($1,810 - $100)+ ($1,640 - $100)]/2 = ($1,710 + $1,540)/2 = $1,625 c)Financial leverage is positive because return on common shareholders' equity is greater than return on total assets. d) (ii)Allocations: Note:The dollar amount of return on common shareholders' equity is $207 (that is,net income of $217 less $10 dividends to preferred shareholders)is made up of $160 (assuming zero financial leverage calculated as 9.86% × $1,625)and net positive financial leverage of $47](https://storage.examlex.com/TB2484/11ea82f6_1e81_5783_9299_73d12eb3e7c5_TB2484_00.jpg)
![a)Return on total assets = Adjusted net income*/Average total assets** = $245/$2,485 = 9.86% * Adjusted net income = Net income + [Interest expense × (1 - Tax rate)] = $217 + 40 × (1 - 0.30) = $217 + $28 = $245 ** Average total assets = ($2,520 + $2,450)/2 = $2,485 b)Return on common shareholders' equity = (Net income - Preferred dividends) /Average common shareholders' equity* = [($217 - ($100 × 0.10)]/$1,625 = 12.74% * Average common shareholders' equity = [($1,810 - $100)+ ($1,640 - $100)]/2 = ($1,710 + $1,540)/2 = $1,625 c)Financial leverage is positive because return on common shareholders' equity is greater than return on total assets. d) (ii)Allocations: Note:The dollar amount of return on common shareholders' equity is $207 (that is,net income of $217 less $10 dividends to preferred shareholders)is made up of $160 (assuming zero financial leverage calculated as 9.86% × $1,625)and net positive financial leverage of $47](https://storage.examlex.com/TB2484/11ea82f6_1e81_7e94_9299_bfeec02ce49e_TB2484_00.jpg)
![a)Return on total assets = Adjusted net income*/Average total assets** = $245/$2,485 = 9.86% * Adjusted net income = Net income + [Interest expense × (1 - Tax rate)] = $217 + 40 × (1 - 0.30) = $217 + $28 = $245 ** Average total assets = ($2,520 + $2,450)/2 = $2,485 b)Return on common shareholders' equity = (Net income - Preferred dividends) /Average common shareholders' equity* = [($217 - ($100 × 0.10)]/$1,625 = 12.74% * Average common shareholders' equity = [($1,810 - $100)+ ($1,640 - $100)]/2 = ($1,710 + $1,540)/2 = $1,625 c)Financial leverage is positive because return on common shareholders' equity is greater than return on total assets. d) (ii)Allocations: Note:The dollar amount of return on common shareholders' equity is $207 (that is,net income of $217 less $10 dividends to preferred shareholders)is made up of $160 (assuming zero financial leverage calculated as 9.86% × $1,625)and net positive financial leverage of $47](https://storage.examlex.com/TB2484/11ea82f6_1e81_7e95_9299_adaf2c41526d_TB2484_00.jpg)
Note:The dollar amount of return on common shareholders' equity is $207 (that is,net income of $217 less $10 dividends to preferred shareholders)is made up of $160 (assuming zero financial leverage calculated as 9.86% × $1,625)and net positive financial leverage of $47
The total assets of the Philbin Company on January 1 were $2.3 million and on December 31 were $2.5 million.Net income for the year was $188,000.Dividends for the year were $75,000,interest expense was $70,000,and the tax rate was 30%.The return on total assets for the year was closest to which of the following?
(Multiple Choice)
4.9/5 (35)
(35) What will happen to the ratios below if CPZ Enterprises uses cash to pay 50% of its accounts payable? 
(Multiple Choice)
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(36) If the market value of a common share is greater than its book value,the common share is probably overpriced.
(True/False)
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(40) If a firm has a high current ratio but a low acid-test ratio,one can conclude which of the following?
(Multiple Choice)
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(39) Orantes Company's average sale period (turnover in days)for Year 2 was closest to which of the following? Do not round intermediate calculations.
(Multiple Choice)
4.9/5 (40)
(40) Larned Company's dividend yield ratio on December 31,Year 2 was closest to which of the following?
(Multiple Choice)
5.0/5 (43)
(43) Financial statements for Rarity Company appear below: 
Required:
Calculate the following for Year 2:
a)Current ratio.
b)Acid-test (quick)ratio.
c)Average collection period (age of receivables).
d)Inventory turnover.
e)Times interest earned.
f)Debt-to-equity ratio.
Required:
Calculate the following for Year 2:
a)Current ratio.
b)Acid-test (quick)ratio.
c)Average collection period (age of receivables).
d)Inventory turnover.
e)Times interest earned.
f)Debt-to-equity ratio. (Essay)
4.9/5 (39)
(39) Frabine Company had $150,000 in sales on account last year.The beginning accounts receivable balance was $14,000,and the ending accounts receivable balance was $18,000.The company's accounts receivable turnover was closest to which of the following?
(Multiple Choice)
4.9/5 (40)
(40) A positive fully diluted earnings per share can sometimes exceed basic (undiluted)earnings per share.
(True/False)
4.8/5 (39)
(39) Orange Company's return on total assets for Year 2 was closest to which of the following?
(Multiple Choice)
4.8/5 (46)
(46) Laroche Company's price-earnings ratio on December 31,Year 2 was closest to which of the following?
(Multiple Choice)
4.8/5 (31)
(31) Financial statements for Rarig Company appear below: 
Required:
Calculate the following for Year 2:
a)Current ratio.
b)Acid-test (quick)ratio.
c)Average collection period (age of receivables).
d)Inventory turnover.
e)Times interest earned.
f)Debt-to-equity ratio.
Required:
Calculate the following for Year 2:
a)Current ratio.
b)Acid-test (quick)ratio.
c)Average collection period (age of receivables).
d)Inventory turnover.
e)Times interest earned.
f)Debt-to-equity ratio. (Essay)
4.7/5 (44)
(44) Larned Company's earnings per common share for Year 2 was closest to which of the following?
(Multiple Choice)
4.7/5 (37)
(37) Orange Company's earnings per common share for Year 2 was closest to which of the following?
(Multiple Choice)
4.7/5 (41)
(41) Selected data from Sheridan Corporation's year-end financial statements are presented below.The difference between average and ending inventory is immaterial. 
What were Sheridan's sales for the year?
What were Sheridan's sales for the year? (Multiple Choice)
4.8/5 (32)
(32) 
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