Question 1

King Products Corporation
 
King Products Corporation
Statement of Financial Position
(in thousands)
$\begin{array}{lll}&\text { June } 30\
&\text { Year } 6&\text { Year } 5\
\text { Cash } & \$ 60 & \$ 50 \
\text { Marketable securities (at market) } & 40 & 30 \
\text { Accounts receivable (net) } & 90 & 60 \
\text { Inventories (at lower of cost or market) } & 120 & 100 \
\text { Prepaid items } & {30} & 40\\text { Total current assets }&\$340&\$280\
\text { Long-term investments (at cost) } & 50 & 40 \
\text { Land (at cost) } & 150 & 150 \
\text { Building (net) } & 160 & 180 \
\text { Equipment (net) } & 190 & 200 \
\text { Patents (net) } & 70 & 34\
 \text {Gondwill (net) }&40&26\
\text { Total long-term assets }&\$660&\$630\
\text { Total assets }&\$1,000&\$910\\text { Notes payable } & \$ 46 & \$ 24 \
\text { Accounts payable } & 94 & 56 \
\text { Accrued interest } & 30 & 30\
(\text { Total current liabilities }&\$170&\$110\
 \text {Notes payable, $ 10 \% $ due $ 12 / 31 / $ Year 12 }&20 & 20 \
 \text {Bonds payable, $ 12 \% $ due $ 6 / 30 / $ Year 15 }&30 & 30 \
 \text {Total long-term debt }&\$50&\$50\
 \text {Total liabilities }&\$220&\$160\
 \text { \text { Preferred stock- } 5 \% \text { cumulative, } \$ 100 \text { par, non-participating, authorized, issued }}&200&200\ \text {and outstanding, 2,000 shares }\
\text { Common stock- } \$ 10 \text { par, } 40,000 \text { shares authorized, } 30,000 \text { shares issued and }&300&300\
\text { outstanding }\
\text { Additional paid-in capital--common } & 150 & 150 \
\text { Retained earnings } & 130 & 100\
\text { Total shareholders' equity }&\$780&\$750\
\text { Total liabilities and shareholders' equity }&\$1,000&\$910
\end{array}$
King Products Corporation
Income Statement
For the year ended June 30
(in thousands)
$\begin{array}{lc}&\text { Year } 6\
\text { Net sales } & \$ 600 \
\text { Costs and expenses } & \
\text { Cost of goods sold } & 440 \
\text { Selling, general, and administrative } & 60 \
\text { Interest expense } & 10\
\text { Income before taxes } & \$ 90 \
\text { Income taxes } & 45\
\text { Net income }&\$45
\end{array}$ (CMA adapted, Dec 96 #17) Refer to the King Products Corporation example.King Products Corporation's average collection period for the fiscal year ended at June 30, Year 6, using a 360-day year, was.

Accepted Answer

A) 36 days 
B) 45 days 
C) 54 days 
D) 61 days 
E) none of the above

Question 2

Igor Corporation's accounts receivable, net of allowance for uncollectibles, were $250,000 at December 31, Year 3, and $350,000 at December 31, Year 4.Net cash sales for Year 4 were $300,000.The accounts receivable turnover was 6.0.Igor's net sales for Year 4 were

Accepted Answer

A) $1,500,000 
B) $1,800,000 
C) $2,000,000 
D) $2,100,000 
E) $2,200,000

Question 3

Ratios provide little information unless the analyst places them in a context.After calculating the ratios, the analyst must compare them with some standard.Which of the following is not a possible standard?

Accepted Answer

A) The planned ratio for the period. 
B) The corresponding ratio during the preceding period for the same firm. 
C) The corresponding ratio for a similar firm in the same industry. 
D) The average ratio for other firms in the same industry. 
E) The corresponding ratio during the succeeding period for the same firm.

Question 4

Most firms that sell to other businesses, as opposed to consumers, sell on account and collect within 30 to 90 days.Interpreting any particular firm's accounts receivable turnover and days receivable outstanding requires knowing the terms of sale.If a firm's terms of sale are "net 30 days" and the firm collects its accounts receivable in 45 days, then the

Accepted Answer

A) collections are not in accord with the stated terms. 
B) situation warrants a review of the credit and collection activity to ascertain the cause. 
C) situation warrants a review of the credit and collection activity to guide corrective action. 
D) situation indicates that the firm handles accounts receivable well. 
E) choices a, b and c

Question 5

Given the following information for the Siri Company, calculate the ratios as requested.
 $\begin{array}{lll}&\text { December } 31, & \text { December } 31, \
&\text { Year } 1 & \text { Year } 2\
\text { Current assets } & \$ 100,000 & \$ 150,000 \
\text { Noncurrent assets } & 400,000 & 500,000 \
\text { Current liabilities } & 50,000 & 100,000 \
\text { Long-term debt } & 300,000 & 300,000 \
\text { Common stock, } 10,000 \text { shares } & 100,000 & 100,000 \
\text { Retained earmings } & 50,000 & 150,000
\end{array}$

$\begin{array}{lc}&\text { Year } 2\
\text { Net income } & \$ 100,000 \
\text { Interest expense } & 40,000 \
\text { Income taxes } & 30,000 \
\text { Total revenues } & 1,000,000
\end{array}$

a. Interest coverage ratio
b. Long-term debt ratio at December 31, Year 2
c. Total assets tumover

Accepted Answer

The answer of Given the following information for the Siri...

Question 6

Comparing firms using a common-size balance sheet rests on the assumption that

Accepted Answer

A) the size or scale of a business does not affect the relation between a given balance sheet item and total assets. 
B) the size or scale of a business does affect the relation between a given balance sheet item and total assets. 
C) the large purchaser can negotiate better terms, including lower per-unit prices. 
D) more negotiating power would appear on the large purchaser's balance sheet as proportionately smaller amounts reported for inventory relative to the amounts reported by a smaller purchaser with less negotiating power. 
E) more negotiating power would appear on the large purchaser's balance sheet as proportionately larger amounts reported for accounts payable relative to the amounts reported by a smaller purchaser with less negotiating power.

Question 7

ROCE will exceed ROA whenever ROA exceeds the after-tax cost of borrowing plus any dividends required for preferred shareholders.Which of the following is/are true?

Accepted Answer

A) The bond holders earn a higher return, but they undertook more risk in their investment. 
B) The preferred shareholders earn a lower return, but they undertook more risk than the common shareholders in their investment. 
C) The common shareholders earn a higher return, but they undertook more risk in their investment. 
D) Using lower-cost borrowed funds and then earning a rate of return on those funds higher than their cost increases the return to the common shareholders. 
E) Choices c and d.

Question 8

Management can take deliberate steps to produce a financial statement that presents a better current ratio at the balance sheet date than the average, or normal, current ratio during the rest of the year. Analysts refer to such actions as window dressing:

Accepted Answer

A) near the end of its accounting period a firm might delay normal purchases on account. 
B) hasten the collections of a loan receivable, classified as noncurrent assets, and use the proceeds to reduce current liabilities. 
C) near the end of its accounting period a firm might accelerate normal purchases on account. 
D) hasten the collections of a loan receivable, classified as current assets, and use the proceeds to reduce long-term liabilities. 
E) choices a and b.

Question 9

As a practical matter, most firms report segment information by _____ indicating that most firms appear to be organized on these same lines.

Accepted Answer

A) geographical markets 
B) products and services 
C) major customers 
D) resource inputs 
E) production methods

Question 10

Measures for assessing short-term liquidity risk include all of the following except:

Accepted Answer

A) current ratio. 
B) quick ratio. 
C) cash flow from operations to current liabilities ratio. 
D) working capital turnover ratios. 
E) price earnings ratio.

Question 11

A common-sized income statement permit(s)

Accepted Answer

A) analysis of changes or differences in relations between revenues, expenses, and net income. 
B) identification of relations that the analyst should explore further. 
C) analysis of changes or differences in relations between assets, liabilities, and shareholders' equity. 
D) both choices a and b. 
E) both choices a and c.

Question 12

Using lower cost borrowed funds and earning a higher rate of return on those funds than their cost

Accepted Answer

A) increases the return to the common shareholders. 
B) is a phenomenon called financial leverage. 
C) requires the common shareholders to take on more risk in their investment. 
D) all of the above 
E) none of the above

Question 13

_____ measures the amount of sales generated from a particular level of investments in fixed assets.

Accepted Answer

A) Fixed asset ratio 
B) Fixed asset turnover ratio 
C) Asset ratio 
D) Fixed asset ratio. 
E) Inventory turnover ratio.

Question 14

The following ratio relates the results of operating performance to the investments (assets) of a firm without regard to how the firm financed those investments. $\frac{\text { Net Income + Interest Expense Net of Income Tax Savings}}{\text {Average Total Assets }}$

The ratio is called a rate of return on:

Accepted Answer

A) assets. 
B) long-term investments. 
C) shareholders' equity. 
D) net income. 
E) net income and interest expense net of income tax savings.

Question 15

Ratio analysis is one tool management may use to examine a firm's profitability and risk.Another tool often used by management are pro forma financial statements.
Required:
 a.	Describe the purpose of pro forma financial statements.
b.	Describe how pro forma financial statements may be constructed.

Accepted Answer

The answer of Ratio analysis is one tool management may...

Question 16

A firm desires to increase its ratio of cash flow from operations divided by average current liabilities from its anticipated level of 30 percent for the coming year to a more desirable level of 40 percent.Which of the following actions is consistent with this increase?

Accepted Answer

A) increase short-term bank borrowing 
B) decrease the number of days that accounts receivable are outstanding 
C) decrease the number of days accounts payable are outstanding 
D) increase the number of days inventories are held 
E) none of the above

Question 17

Most financial statement analysis explores some aspect of a firm's

Accepted Answer

A) profitability, only. 
B) risk, only. 
C) value, only. 
D) profitability, or its risk, or both. 
E) employee turnover.

Question 18

Analysis of the Return on Assets has particular relevance to the

Accepted Answer

A) lenders. 
B) employees. 
C) lower-level managers. 
D) government regulators. 
E) unions.

Question 19

Rate of return on common shareholders' equity (ROCE)

Accepted Answer

A) measures a firm's performance in using and financing assets to generate earnings and explicitly considers financing costs. 
B) a measure of profitability that incorporates the results of operating, investing, and financing activities. 
C) equals net income (less dividends on preferred stock, if any) divided by average common shareholders' equity. 
D) all of the above 
E) none of the above

Question 20

Inventory turnover ratio

Accepted Answer

A) indicates how fast firms sell their inventory items. 
B) measured in terms of the rate of movement of goods into and out of the firm. 
C) equals cost of goods sold divided by the average inventory during the period. 
D) all of the above 
E) none of the above

Exam 7: Introduction to Financial Statement Analysis