Deck 11: Financial Statement Analysis

Question 1

The price/earnings ratio:

A)is a measure of the relative expensiveness of a firm's common stock.
B)does not usually change by more than 1.0 during the year.
C)can be used to determine the cash dividend to be received during the year.
D)is calculated by dividing the earnings multiple by net income.

Answer 1

A

Question 2

If a firm's debt ratio was 25%, its debt/equity ratio would be:

A)25%.
B)50%.
C)33.33%.
D)75%.

Answer 2

C

Question 3

When a firm has financial leverage:

A)ROI will be greater than ROE.
B)ROI will usually be less than it would be without leverage.
C)risk is greater than if there wasn't any leverage.
D)the firm will always have a higher ROE than it would without leverage.

Answer 3

C

Question 4

When a corporation has both common stock and preferred stock outstanding:

A)dividends on preferred stock are paid only if the company has current earnings.
B)dividends on preferred stock must be paid before dividends on common stock can be paid.
C)preferred stockholders receive the same dividend per share as common stockholders.
D)dividends on preferred stock are paid only if dividends are to be paid on the common stock.

Question 5

A common size income statement:

A)uses the same dollar amount of net sales for each year.
B)expresses items as a percentage of net sales.
C)makes comparisons between years more difficult.
D)is useful in estimating the impact of inflation.

Question 6

The dividend payout ratio describes:

A)the proportion of earnings paid as dividends.
B)the relationship of dividends per share to market price per share.
C)the percentage change in dividends this year compared to last year.
D)dividends as a percentage of the price/earnings ratio.

Question 7

The inventory turnover calculation:

A)is wrong unless cost of goods sold is used in the numerator.
B)is wrong unless sales is used in the numerator.
C)is an alternative way of expressing the number of days' sales in inventory.
D)requires knowledge of the inventory cost flow assumption being used.

Question 8

Book value per share of common stock of a manufacturing company:

A)is not a very useful measure most of the time.
B)is calculated by dividing market value per share by earnings per share.
C)reflects the fair value of the company's stock.
D)is the same as the total balance sheet asset value per share of common stock.

Question 9

An entity's current ratio will be influenced by:

A)the inventory cost flow assumption used.
B)writing off an overdue account receivable against the allowance for uncollectible accounts.
C)the depreciation method used.
D)issuance of a stock dividend.

Question 10

Which of the following is not a category of financial statement ratios?

A)Financial leverage.
B)Liquidity.
C)Profitability.
D)Marketability.

Question 11

A leveraged buyout refers to:

A)one firm issues stock to take over another firm.
B)one firm trades its stock for the stock of another firm.
C)a firm goes heavily into debt in order to obtain the funds to purchase the shares of the public stockholders and thus take the firm private.
D)one firm pays cash for the shares of a takeover firm's shares.

Question 12

A higher P/E ratio means that:

A)the stock is more reasonably priced.
B)the stock is relatively expensive.
C)investors are wary of the stock.
D)earnings are expected to decrease.

Question 13

An individual interested in making a judgment about the profitability of a company should:

A)review the trend of working capital for several years.
B)calculate the company's ROI for the most recent year.
C)review the trend of the company's ROI for several years.
D)compare the company's ROI for the most recent year with the industry average ROI for the most recent year.

Question 14

Management's use of resources can best be evaluated by focusing on measures of:

A)liquidity.
B)activity.
C)leverage.
D)book value.

Question 15

If the P/E ratio of a company's common stock were 12, and its earnings were $2.50 per common share:

A)the market value of the common stock would be $20.83 per share.
B)the market value of the common stock would be $25.00 per share.
C)an increase in earnings of $0.20 per share, with no change in the multiple, would result in a market price increase of $2.40 per share.
D)an increase in earnings of $0.20 per share, with no change in the multiple, would result in a market price increase of $1.67 per share.

Question 16

The comparison of activity measures of different companies is complicated by the fact that:

A)different inventory cost flow assumptions may be used.
B)dollar amounts of assets may be significantly different.
C)only one of the companies may have preferred stock outstanding.
D)the number of shares of common stock issued may be significantly different.

Question 17

If a firm's payment terms for sales made on account to its customers were 2/10, n30, the number of days' sales in accounts receivable would be expected to be:

A)less than 10.
B)between 10 and 25.
C)between 25 and 40.
D)over 40.

Question 18

A management that wanted to increase the financial leverage of its firm would:

A)raise additional capital by selling common stock.
B)try to increase its ROI by increasing margin.
C)raise additional capital by selling fixed interest rate long-term bonds.
D)try to increase its ROI by increasing asset turnover.

Question 19

Another term for the price/earnings ratio is:

A)cost ratio.
B)sales multiple.
C)earnings multiple.
D)profit ratio.

Question 20

Asset turnover calculations:

A)are made by dividing the average asset balance during the year by the sales for the year.
B)are made by dividing sales for the year by the asset balance at the end of the year.
C)communicate information about how promptly the entity pays its bills.
D)should be evaluated by observing the turnover trend over a period of time.

Question 21

Which of the following are examples of physical measures of activity that are sometimes disclosed in corporate annual reports?

A)Sales in units.
B)Number of employees.
C)Gross profit per square foot of selling space.
D)Each of these are all examples of physical measures of activity that are sometimes reported in corporate annual reports.

Question 22

The following information was available for the year ended December 31, 2019: $\begin{array}{lr}\text { Net sales } & \$ 300,000 \\\text { Cost of goods sold } & 210,000 \\\text { Average accounts receivable for the year } & 15,000 \\ \text { Accounts receivable at year-end } & 18,000 \\\text { Average inventory for the year } & 60,000 \\\text { Inventory at year-end } & 70,000\end{array}$ The number of days' sales in inventory for 2019, using year-end inventories were:

A)73.0 days
B)85.2 days
C)104.3 days
D)121.7 days

Question 23

The following amounts were reported on the December 31, 2019, balance sheet: $$\begin{array} { l r } \text { Cash } &\$ 8,000 \\\text { Land } & 20,000 \\\text { Accounts payable } & 15,000 \\\text { Bonds payable } & 120,000 \\\text { Merchardise irventory } & 30,000 \\\text { Retained earnirgs } & 80,000 \\\text { Buildings and equipment, net of accumulated depreciation } & 180,000 \\\text { Accounts receivable } & 22,000 \\\text { Common stock } & 40,000 \\\text { Wages payable } & 5,000\end{array}$$ The current ratio at December 31, 2019 was:

A)1.5
B)3.0
C)4.0
D)6.0

Question 24

The following information was available for the year ended December 31, 2019: $\begin{array}{lr}\text { Net income } & \$ 50,000 \\\text { Average total assets } & 600,000 \\\text { Dividends per share } & 1.40 \\\text { Earnings per share } & 5.00 \\\text { Market price per share at year-end } & 70.00\end{array}$ The dividend payout ratio for 2019 was:

A)2.0%
B)8.3%
C)28.0%
D)40.0%

Question 25

The following information was available for the year ended December 31, 2019: $\begin{array}{lr}\text { Net sales } & \$ 300,000 \\\text { Cost of goods sold } & 210,000 \\ \text { Average accounts receivable for the year } & 15,000 \\ \text { Accounts receivable at year-end } & 18,000 \\\text { Average inventory for the year } & 60,000 \\\text { Inventory at year-end } & 70,000\end{array}$ The inventory turnover for 2019 was:

A)3.0 times
B)3.5 times
C)4.3 times
D)5.0 times

Question 26

The following information was available for the year ended December 31, 2019: $$\begin{array} { l r } \text { Net income } & \$ 50,000 \\\text { Average total assets } & 600,000 \\\text { Dividends per share } & 1.40 \\\text { Earnings per share } & 5.00 \\\text { Market price per share at year-end } & 70.00\end{array}$$ The price/earnings ratio for 2019 was:

A)12.0
B)14.0
C)28.0
D)50.0

Question 27

Financial leverage:

A)arises because most borrowed funds have a fixed interest rate.
B)arises because most borrowed funds have a variable interest rate.
C)usually has no bearing on the risk associated with a company.
D)is a concept that does not apply to individuals.

Question 28

The following information was available for the year ended December 31, 2019: $\begin{array}{lr}\text { Earnings before interest and taxes (operating income) } & \$ 50,000 \\\text { Interest expense } & 10,000 \\\text { Income tax expense } & 12,000 \\\text { Net income } & 28,000 \\\text { Total assets at year-end } & 200,000 \\\text { Total liabilities at year-end } & 120,000\end{array}$ The debt/equity ratio at December 31, 2019 was:

A)40.0%
B)60.0%
C)66.7%
D)150.0%

Question 29

The following information was available for the year ended December 31, 2019: $\begin{array}{lr}\text { Net sales } & \$ 300,000 \\\text { Cost of goods sold } & 210,000 \\\text { Average accounts receivable for the year } & 15,000 \\ \text { Accounts receivable at year-end } & 18,000 \\\text { Average inventory for the year } & 60,000 \\\text { Inventory at year-end } & 70,000\end{array}$ The number of days' sales in accounts receivable for 2019, using year- end accounts receivable were:

A)18.3 days
B)21.9 days
C)26.1 days
D)31.1 days

Question 30

The following information was available for the year ended December 31, 2019: $$\begin{array} { l r } \text { Sales } & \$ 300,000 \\\text { Net income } & 50,000 \\\text { Average total assets } & 750,000 \\\text { Average total stockholders' equity } & 500,000\end{array}$$ ROE for the year ended December 31, 2019 was:

A)6.7%
B)10.0%
C)16.7%
D)20.0%

Question 31

The following amounts were reported on the December 31, 2019, balance sheet: $$\begin{array} { l r } \text { Cash } & \mathbf {\$ 8 , 0 0 0 } \\\text { Land } & 20,000 \\\text { Accounts payable } & 15,000 \\\text { Bonds payable } & 120,000 \\\text { Merchandise irventory } & 30,000 \\\text { Retained earnings } & 80,000 \\\text { Buildings and equipment, net of accumulated depreciation } & 180,000 \\\text { Accounts receivable } & 22,000 \\\text { Common stock } & 40,000 \\\text { Wages payable } & 5,000\end{array}$$ The acid-test ratio at December 31, 2019 was:

A)1.5
B)2.0
C)3.0
D)4.0

Question 32

The following information was available for the year ended December 31, 2019: $$\begin{array} { l r } \text { Sales } & \$ 300,000 \\\text { Net incone } & 50,000 \\\text { Average total assets } & 750,000 \\\text { Average total stockholders' equity } & 500,000\end{array}$$ ROI for the year ended December 31, 2019 was:

A)6.7%
B)10.0%
C)16.7%
D)20.0%

Question 33

The following information was available for the year ended December 31, 2019: $\begin{array}{lr}\text { Net sales } & \$ 300,000 \\\text { Cost of goods sold } & 210,000 \\\text { Average accounts receivable for the year } & 15,000 \\ \text { Accounts receivable at year-end } & 18,000 \\\text { Average inventory for the year } & 60,000 \\\text { Inventory at year-end } & 70,000\end{array}$ The accounts receivable turnover for 2019 was:

A)11.7 times
B)14.0 times
C)16.7 times
D)20.0 times

Question 34

The following information was available for the year ended December 31, 2019: $$\begin{array} { l r } \text { Sales } & \$ 300,000 \\\text { Net incone } & 50,000 \\\text { Average total assets } & 750,000 \\\text { Average total stockholders' equity } & 500,000\end{array}$$ Turnover for the year ended December 31, 2019 was:

A)0.2
B)0.4
C)0.5
D)0.8

Question 35

The following information was available for the year ended December 31, 2019: $$\begin{array} { l r } \text { Sales } & \$ 300,000 \\\text { Net incone } & 50,000 \\\text { Average total assets } & 750,000 \\\text { Average total stockholders' equity } & 500,000\end{array}$$ Margin for the year ended December 31, 2019 was:

A)6.7%
B)10.0%
C)16.7%
D)20.0%

Question 36

The following information was available for the year ended December 31, 2019: $$\begin{array} { l r } \text { Net income } & \$ 50,000 \\\text { Average total assets } & 600,000 \\\text { Dividends per share } & 1.40 \\\text { Earnings per share } & 5.00 \\\text { Market price per share at year-end } & 70.00\end{array}$$ The dividend yield for 2019 was:

A)1.4%
B)2.0%
C)8.3%
D)28.0%

Question 37

The following amounts were reported on the December 31, 2019, balance sheet: $$\begin{array} { l r } \text { Cash } &\$ 8,000 \\\text { Land } & 20,000 \\\text { Accounts payable } & 15,000 \\\text { Bonds payable } & 120,000 \\\text { Merchardise irventory } & 30,000 \\\text { Retained earnirgs } & 80,000 \\\text { Buildings and equipment, net of accumulated depreciation } & 180,000 \\\text { Accounts receivable } & 22,000 \\\text { Common stock } & 40,000 \\\text { Wages payable } & 5,000\end{array}$$ Working capital at December 31, 2019 was:

A)$10,000.
B)$40,000.
C)$60,000.
D)$120,000.

Question 38

For the year ended December 31, 2019, a company reported earnings per share of $1.95 and cash dividends per share of $0.30.During 2020, the company had a 3-for-2 stock split.In the annual report for the year ended December 31, 2020, earnings per share and cash dividends for 2019 would be reported, respectively, as:

A)$1.95 and $0.30
B)$2.91 and $0.45
C)$1.30 and $0.20
D)$0.65 and $0.10

Question 39

Which of the following is (are)an example of a measure of leverage?

A)Debt yield.
B)Debt payout ratio.
C)Preferred dividend coverage ratio.
D)Debt/equity ratio.

Question 40

The following information was available for the year ended December 31, 2019: $\begin{array}{lr}\text { Earnings before interest and taxes (operating income) } & \$ 50,000 \\\text { Interest expense } & 10,000 \\\text { Income tax expense } & 12,000 \\\text { Net income } & 28,000 \\\text { Total assets at year-end } & 200,000 \\\text { Total liabilities at year-end } & 120,000\end{array}$
The debt ratio at December 31, 2019 was:

A)40.0%
B)60.0%
C)66.7%
D)150.0%

Question 41

The following information was available for the year ended December 31, 2019:
$$\begin{array} { l r } \text { Net income } & \$ 180,000 \\\text { Average total assets } & 2,000,000 \\\text { Dividends per share } & 1.44 \\\text { Earnings per share } & 4.00 \\\text { Market price per share at year-end } & 72.00\end{array}$$ Required:
(a.)Calculate the price/earnings ratio for 2019.
(b.)Calculate the dividend payout ratio for 2019.
(c.)Calculate the dividend yield for 2019.

Question 42

The following information was available for the year ended December 31, 2019:
$$\begin{array} { l r } \text { Earnings before interest and taxes (operating income) } & \$ 9 7 , 5 0 0 \\\text { Interest expense } & 15,000 \\\text { Income tax expense } & 22,500 \\\text { Net incorne } & 60,000 \\\text { Total assets at year-end } & 288,000 \\\text { Total liabilities at year-end } & 216,000\end{array}$$ Required:
(a.)Calculate the debt ratio at December 31, 2019.
(b.)Calculate the debt/equity ratio at December 31, 2019.
(c.)Calculate the times interest earned for the year ended December 31, 2019.

Question 43

The following information was available for the year ended December 31, 2019:
$\begin{array}{lrr} \text {Net sales } &\$438,000\\ \text {Cost of goods sold } &350,400\\ \text {Average accounts receivable for the year } &29,200\\ \text { Accounts receivable at year-end } &33,600\\ \text { Average inventory for the year } &116,800\\ \text { Inventory at year-end} &110,400\\\end{array}$
Required:
(a.)Calculate the inventory turnover for 2019.
(b.)Calculate the number of days' sales in inventory for 2019, using year-end inventories.
(c.)Calculate the accounts receivable turnover for 2019.
(d.)Calculate the number of days' sales in accounts receivable for 2019, using year-end accounts receivable.

Question 44

The following information was available for the year ended December 31, 2019: $$\begin{array} { l r } \text { Earnings before interest and taxes (operating income) } &\$ 50,000 \\\text { Interest expense } & 10,000 \\\text { Income tax expense } & 12,000 \\\text { Net income } & 28,000 \\\text { Total assets at year-end } & 200,000 \\\text { Total liabilities at year-end } & 120,000\end{array}$$ The times interest earned for the year ended December 31, 2019 was:

A)2.8 times
B)4.2 times
C)5.0 times
D)6.0 times

Question 45

The following amounts were reported on the December 31, 2019, balance sheet:
$$\begin{array} { l r } \text { Cash } & \$9,000 \\\text { Accounts receivable } & 33,000 \\\text { Common stock } & 50,000 \\\text { Wages payable } & 16,000 \\\text { Retained earnings } & 125,000 \\\text { Land } & 30,000 \\\text { Accounts payable } & 19,000 \\\text { Bonds payable } & 110,000 \\\text { Merchandise inventory } & 28,000 \\\text { Buildings and equipment, net of accumulated depreciation } & 220,000\end{array}$$
Required:
(a.)Calculate working capital at December 31, 2019.
(b.)Calculate the current ratio at December 31, 2019.
(c.)Calculate the acid-test ratio at December 31, 2019.