Question 1

Justin Company has total assets, liabilities, and shareholders' equity of $38,000, $17,000, and $21,000, respectively, at the beginning of 2017. At the end of 2017, total assets, liabilities, and shareholders' equity were reported at $32,000, $13,000, and $19,000, respectively. What is Justin's 2017 debt to equity ratio?

Accepted Answer

A) 0.70 
B) 1.17 
C) 0.75 
D) 1.13

Question 2

Which of the following ratios would be of primary importance to a manager in evaluating the success of a new policy of reducing the stock of goods needed to meet customer demand?

Accepted Answer

A) Total asset turnover 
B) Fixed assets turnover 
C) Receivables turnover 
D) Inventory turnover

Question 3

Book value fails to reflect true value primarily because:

Accepted Answer

A) financial statements are irrelevant. 
B) financial statements are backward-looking. 
C) financial statements are forward-looking. 
D) financial statements are typically biased.

Question 4

How might a company overstate performance? Why might this occur?

Accepted Answer

The answer of How might a company overstate performance? Why...

Question 5

Buchanan Company has the following financial data on December 31, 2017 and 2016:
 $\begin{array}{lrr}
&12 / 31 / 16 &12 / 31 / 17\
\text { Cash } & \$ 16,000 & \$ 21,000 \
\text { Accounts receivable } & 12,000 & 4,000 \
\text { Inventory } & 15,000 & 12,000 \
\text { Net plant and equipment } & 5,000 & 3,000 \
\text { Current liabilities } & 8,000 & 18,000 \
\text { Common stock } & 5,000 & 5,000 \
\text { Retained earnings } & 31,000 & 2,000
\end{array}$

$\begin{array}{lr}
\text { Buchanan 's } 2017 \text { income statement reported }\
\text { Revenue } & \$ 160,000 \
\text { Cost of goods sold } & 150,000 \
\text { Gross margin } & \$ 10,000 \
\text { Depreciation expense } & 2,000 \
\text { Net income } & \$ 8,000 \
\end{array}$

$\begin{array}{lr}
\text { Buchanan's } 2017 \text { data from its statement of cash flows: }\
 \text { Cash flow from operations } & \$ 42,000 \
\text { Cash flow from investing activities } & 0 \
\text { Cash flow from financing activities, (all dividends paid) } & (22,000)
\end{array}$ 
Required: Using appropriate ratios, comment on the change in Buchanan's solvency position and assess the probable cause of the change from 2016 to 2017.

Accepted Answer

The answer of Buchanan Company has the following financial data...

Question 6

Financial flexibility is

Accepted Answer

A) a good indicator of a company's ability to grow through operations. 
B) evident when a company's assets are greater than its liabilities. 
C) the ability to convert existing assets into money. 
D) the ability to generate cash from sources other than regular operations.

Question 7

Operating performance is a company's ability to

Accepted Answer

A) control acquisitions of other companies in the same industry. 
B) generate cash from sources other than regular operations. 
C) increase its net assets through regular operations. 
D) employ off-balance-sheet financing.

Question 8

An analyst assessed a company and determined the company reported a "high quality of earnings." This implies that

Accepted Answer

A) management issued a press release indicating it was not aware of any fraud during the current year. 
B) the company's management exercised little or no discretionary influence in reporting financial statement information to shareholders. 
C) management has used its influence in determining the dollar amounts reported on financial statements. 
D) income statement items reported during the current period can be expected to reflect future income levels.

Question 9

The price-earnings ratio is

Accepted Answer

A) the market price of an equity share divided by earnings per share. 
B) the amount of a company's retained earnings. 
C) the purchase price of a firm's assets divided by net income. 
D) used to measure the speed at which the company sells its inventories.

Question 10

Use the information that follows taken from Campbell Company's financial statements for the years ending December 31, 2017 and 2016.
$\begin{array}{lrr}
\text { Balance Sheet Information }&2017&2016\
\hline \text { Assets}\
\text { Cash } & \$ 25 & \$ 50 \
\text { Accounts receivable } & 60 & 70 \
\text { Inventory } & 40 & 30 \
\text { Land, building, and equipment } & \underline{225} & \underline{250} \
\text { Total Assets } & \$ \underline{350} & \$ \underline{400} \
\end{array}$

$\begin{array}{l}
\text { Liabilities and Shareholders' Equity }\
\hline \text { Accounts payable } & \$ 85 & \$ 100 \
\text { Long term note payable } & 180 & 200 \
\text { Common stock } & 150 & 150 \
\text { Retained earnings } & \underline{(65)} &\underline{ (50)} \
\text { Total Liabilities \& Shareholders' Equity }& \underline{\$ 350 }& \underline{\$ 400 }\
\end{array}$

$\begin{array}{lr}
\text { Income Statement Information }\
\text { Sales (all sales are on credit) } & \$ 850 \
\text { Cost of goods sold } & \underline{425} \
\text { Gross profit } & {425}\
\text { Operating expenses } & \underline{ 440} \
\text { Net income } &\$(15) 
\end{array}$ 
Calculate Campbell's return on equity and return on assets for the year ended December 31, 2017. Assume that the income tax rate is 30%. Also assume that in Campbell's industry, the industry average return on equity is 19% and the average return on assets is 11%.

Accepted Answer

A) Campbell's return on equity and return on assets are better than average for Campbell's industry. 
B) Campbell's return on equity and return on assets are worse than average for Campbell's industry. 
C) Campbell's return on equity is better but return on assets is worse than average for Campbell's industry. 
D) Campbell's return on equity is worse but return on assets is better than average for Campbell's industry.

Question 11

Norton Company has the following assets on January 1, 2017 and January 1, 2016.
$$\begin{array} { l r r r } 
& 1 / 1 / 17 & 1 / 1 / 16 \
\hline \text { Cash } & \$ 430,000 & \$ 370,000 \
\text { Accounts receivables } & ? & 333,000 \
\text { Marketable securities } & 186,000 & 130,000 \
\text { Irventory } & 220,000 & ? \
\text { Net plant and equipment } & 120,000 & 129,000
\end{array}$$
If Norton's quick ratio is 2.50 for 2017 and its current liabilities are $500,000, what is the amount of its accounts receivables?

Accepted Answer

A) $324,000 
B) $204,000 
C) $634,000 
D) There is not enough information to answer this question.

Question 12

What must an analyst learn first when assessing a particular business environment?

Accepted Answer

The answer of What must an analyst learn first when...

Question 13

What type of audit report do most companies receive from their auditors?

Accepted Answer

A) standard audit reports 
B) no report unless the company has problems 
C) a GAAP report 
D) a comprehensive report

Question 14

Identify two forms of analyzing financial statements at a particular point in time. Which of these forms is subject to great variation among different analysts?

Accepted Answer

The answer of Identify two forms of analyzing financial statements...

Question 15

Which of the following ratios would be of primary importance to a supplier in deciding to extend credit for goods delivered?

Accepted Answer

A) Earnings per share 
B) Debt/equity ratio 
C) Accounts receivable turnover 
D) Quick ratio

Question 16

A company would likely "take a bath"

Accepted Answer

A) in periods of extraordinarily high net income. 
B) just prior to creating hidden reserves. 
C) when it has experienced an extremely poor year. 
D) when its quality of earnings is very high.

Question 17

Use the information that follows taken from Campbell Company's financial statements for the years ending December 31, 2017 and 2016.
$\begin{array}{lrr}
\text { Balance Sheet Information }&2017&2016\
\hline \text { Assets}\
\text { Cash } & \$ 25 & \$ 50 \
\text { Accounts receivable } & 60 & 70 \
\text { Inventory } & 40 & 30 \
\text { Land, building, and equipment } & \underline{225} & \underline{250} \
\text { Total Assets } & \$ \underline{350} & \$ \underline{400} \
\end{array}$

$\begin{array}{l}
\text { Liabilities and Shareholders' Equity }\
\hline \text { Accounts payable } & \$ 85 & \$ 100 \
\text { Long term note payable } & 180 & 200 \
\text { Common stock } & 150 & 150 \
\text { Retained earnings } & \underline{(65)} &\underline{ (50)} \
\text { Total Liabilities \& Shareholders' Equity }& \underline{\$ 350 }& \underline{\$ 400 }\
\end{array}$

$\begin{array}{lr}
\text { Income Statement Information }\
\text { Sales (all sales are on credit) } & \$ 850 \
\text { Cost of goods sold } & \underline{425} \
\text { Gross profit } & {425}\
\text { Operating expenses } & \underline{ 440} \
\text { Net income } &\$(15) 
\end{array}$ 
Calculate Campbell's inventory turnover ratio and accounts receivable turnover ratio for the year ended 2017. Further, assume that in Campbell's industry, the industry average inventory turnover ratio is 12 and the industry average receivables turnover ratio is 14.

Accepted Answer

A) Campbell's inventory turnover ratio and accounts receivable turnover ratios are better than average for Campbell's industry. 
B) Campbell's inventory turnover ratio and accounts receivable turnover ratios are worse than average for Campbell's industry. 
C) Campbell's inventory turnover ratio is better but the accounts receivable turnover ratio is worse than average for Campbell's industry. 
D) Campbell's inventory turnover ratio is worse and accounts receivable turnover ratio is better than average for Campbell's industry.

Question 18

Use the information that follows taken from Carter Company's financial statements for the years ending December 31, 2017 and 2016.
 $\begin{array}{lrr}
\text { Balance Sheet Information }&2017&2016\
\hline \text { Assets}\
\text { Cash } & \$ 70 & \$ 80 \
\text { Accounts receivable } & 40 & 40 \
\text { Inventory } & 40 & 60 \
\text { Land, building, and equipment } & \underline{290} & \underline{310} \
\text { Total Assets } & \$ \underline{440} & \$ \underline{490} \
\end{array}$

$\begin{array}{l}
\text { Liabilities and Shareholders' Equity }\
\hline \text { Accounts payable } & \$ 95 & \$ 245 \
\text { Common stock } & 210 & 210 \
\text { Retained earnings }  & 135& 35\
\text { Total Liabilities \& Shareholders' Equity }& \underline{\$440} &\underline{ \$490} \
\end{array}$

$\begin{array}{lr}
\text { Income Statement Information }\
\text { Sales (all sales are on credit) } & \$ 900 \
\text { Cost of goods sold } & \underline{300} \
\text { Gross profit } & {\$600}\
\text { Operating expenses } & \underline{ 500} \
\text { Net income } & \underline{ \$(100)} 
\end{array}$  
If the industry in which Carter is a member has an average return on equity of 22%, determine if in 2017, Carter is more or less profitable than the average firm in its industry.

Accepted Answer

The answer of Use the information that follows taken from...

Question 19

Harrison Company has common stock of $50,000 and retained earnings of $40,000 at yearend. During the year, 10,000 shares of stock were outstanding. Net income was reported as $6,000.
A. Calculate earnings per share.
B. How does earnings per share differ from most of the other ratios with respect to financial statements?

Accepted Answer

The answer of Harrison Company has common stock of $50,000...

Question 20

Explain the concept of leverage.

Accepted Answer

The answer of Explain the concept of leverage....

Exam 5: Using Financial Statement Information