Deck 16: Financial Statement Analysis

Question 1

Foreman Company provided income statements for the past five years. In looking at the percentage columns for each year, you notice that sales are 46 percent higher in Year 5 than in Year 1. Foreman has most likely provided

A) a horizontal analysis using year 1 as the base year.
B) a vertical analysis using sales as the base.
C) a horizontal analysis using the prior period as the base year.
D) a vertical analysis using net income as the base.
E) none of the above.

Answer 1

Horizontal analysis:
This can also be called as a vertical analysis, in horizontal analysis explains one line item with respect of same of last year taking that year as a base or past year base that is 1 st year for all future years.
The correct answer for the given statement is. a that is, horizontal analysis by using year one as its base.

Question 2

A small pizza restaurant, founded and owned by the Martinelli sisters, would be expected to have which of the following

A) Low inventory turnover and high gross margin
B) Low accounts receivable turnover and low gross margin
C) High price-earnings ratio
D) High inventory turnover and low gross margin
E) All of these.

Answer 2

The correct answer for the given statement is D)
Small pizza restaurant should have high inventory turnover and low gross margin as by doing this they have very low inventory and sell much more quantities which is good for company and also earn more as there quantity supply is in effective manner, this will results to good reputation to the company and for future growth.

Question 3

The income statement, statement of retained earnings, and balance sheet for Somerville Company are as follows:
Calculating the Return on Sales
Refer to the information for Somerville Company on the previous page.
Required:
Calculate the return on sales. (Note: Round the answer to one decimal place.)

Answer 3

Return on sales indicates how much return or earning can be made by doing sales or selling of goods to customers. Hence, return on sales

Question 4

Profitability Ratios
Bryce Company manufactures pet supplies. However, Bryce's electronic accounting system recently crashed and, unfortunately, only a partial recovery of the company's year-end accounting records (which included several profitability ratios) was possible. As a result, Bryce's controller, a bright young CMA named Jeanette, must compute various lost financial account balances using the recovered information listed below:
• Long-term liabilities: $1,500,000
• Ending inventory is the same as beginning inventory.
• Gross margin: $3,000,000
• Net sales: $8,000,000
• Accounts receivable turnover: 50
• Ending accounts receivable is the same as beginning accounts receivable.
• Total liabilities: $2,000,000
• Current ratio: 2.5
•. Cash: $600,000
• Quick ratio: 2.0
• Inventory turnover in days: 3.65
Required:
1. Calculate current liabilities.
2. Calculate current assets.
3. Calculate average accounts receivable
4. Calculate marketable securities.
5. Calculate average inventory.

Question 5

Profitability Ratios
Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the company's financial statements for the 2 most recent years.
Refer to the information for Kepler Company above. Also, assume that for last year and for the current year, the market price per share of common stock is $2.98. In addition, for last year, assets and equity were the same at the beginning and end of the year.
Required :
Note : Round all answers to two decimal places.
1. Compute the following for each year: (a) return on assets, (b) return on stockholders' equity, (c) earnings per share, (d) price-earnings ratio, (e) dividend yield, and (f) dividend payout.
2. CONCEPTUAL CONNECTION Based on the analysis in Requirement 1, would you invest in the common stock of Kepler

Question 6

What is horizontal analysis Vertical analysis Should both horizontal and vertical analyses be done Why

Question 7

A manager decided to acquire some expensive equipment through the use of an operating lease even though a capital budgeting analysis showed that it was more profitable to buy than to lease. However, the purchase alternative would have required the issuance of some bonds. Offer some reasons that would explain the manager's choice.

Question 8

The income statement, statement of retained earnings, and balance sheet for Somerville Company are as follows:
Calculating the Average Total Assets and the Return on Assets
Refer to the information for Somerville Company on the previous page. Assume a tax rate of 40%.
Required:
Note: Round answers to two decimal places.
1. Calculate the average total assets.
2. Calculate the return on assets.

Question 9

Times-Interest-Earned
Tsao Company provided the following income statement for last year:
Required:
Calculate the times-interest-earned ratio.

Question 10

Profitability Analysis
Albion Inc. provided the following information for its most recent year of operation. The tax rate is 40%.
Required:
1. Compute the following: (a) return on sales, (b) return on assets, (c) return on stockholders' equity, (d) earnings per share, (e) price-earnings ratio, (f) dividend yield, and (g) dividend payout ratio.
2. CONCEPTUAL CONNECTION If you were considering purchasing stock in Albion, which of the above ratios would be of most interest to you Explain.

Question 11

An advantage of common-size analysis is that

A) the size of dollar amounts impact the analysis.
B) larger companies will have higher common-size percentages.
C) it focuses only on vertical analysis.
D) the effects of size are eliminated.
E) it focuses only on horizontal analysis.

Question 12

The after-tax cost of interest expense is used in calculating which of the following

A) Times-interest-earned
B) Return on assets
C) Debt ratio
D) Inventory turnover ratio
E) All of these.

Question 13

The income statement, statement of retained earnings, and balance sheet for Somerville Company are as follows:
Calculating the Average Common Stockholders Equity and the Return on Stockholders Equity
Refer to the information for Somerville Company on the previous page.
Required:
Note: Round answers to two decimal places.
1. Calculate the average common stockholders' equity.
2. Calculate the return on stockholders' equity.

Question 14

Debt Ratio, Debt-to-Equity Ratio
Busch Company's balance sheet shows total liabilities of $510,900, total equity of $126,000, and total assets of $636,900.
Required:
Note : Round answers to two decimal places.
1. Calculate the debt ratio.
2. Calculate the debt-to-equity ratio.
3. CONCEPTUAL CONNECTION Based on the ratios calculated in Requirements 1 and 2, comment on the riskiness of Busch's financing decisions.

Question 15

Analysis of Accounts Receivable and Credit Policy
Based on customer feedback, Ted Pendleton, manager of Gray Company, which produces photo supplies, decided to grant more liberal credit terms. Ted chose to allow customers to have 60 days before full payment of the account was required. From 2008 through 2010, Gray's credit policy for sales on account was 2/10, n/30. In 2011, the policy of 2/10, n/60 became effective. By the end of 2012, Gray was beginning to experience cash flow problems. Although sales were strong, collections were sluggish, and the company was having a difficult time meeting its shortterm obligations. Ted noted that the cash flow problems materialized after the credit policy was changed and wondered if there was a connection. To help assess the situation, he gathered the following data pertaining to the collection of accounts receivable (balances are end-of-year balances; the 2008 balance was the same as that in 2007):
Required:
Note: Round answers to two decimal places.
1. Compute the number of times that receivables turned over per year for each of the five years. Also express the turnover in days instead of times per year.
2. Conceptual Connection: Based on your computation in Requirement 1, evaluate the effect of the new credit policy. Include in this assessment the impact on the company's cash inflows.
3. Conceptual Connection: Assume that the industry has an average receivables turnover of six times per year. If this knowledge had been available in 2010, along with knowledge of the company's receivable turnover rate, do you think that Ted Pendleton would have liberalized his company's credit policy

Question 16

Explain how creditors, investors, and managers can use common-size analysis as an aid in decision making.

Question 17

Scherer Company provided the following income statements for its first three years of operation:
Preparing Common-Size Income Statements by Using Base Period Horizontal Analysis
Refer to the information for Scherer Company above.
Required:
Prepare common-size income statements by using Year 1 as the base period. ( Note: Round answers to the nearest whole percentage.)

Question 18

The income statement, statement of retained earnings, and balance sheet for Somerville Company are as follows:
Computing Earnings per Share
Refer to the information for Somerville Company on the previous page.
Required:
Note: Round answers to two decimal places.
1. Compute the dollar amount of preferred dividends.
2. Compute the number of common shares.
3. Compute earnings per share.

Question 19

Times-Interest-Earned Ratio, Debt Ratio, Debt-to-Equity Ratio
Juroe Company provided the following income statement for last year:
Juroe's balance sheet as of December 31 last year showed total liabilities of $10,250,000, total equity of $6,150,000, and total assets of $16,400,000.
Refer to the information for Juroe Company above.
Required:
Note : Round answers to two decimal places.
1. Calculate the times-interest-earned ratio.
2. Calculate the debt ratio.
3. Calculate the debt-to-equity ratio.

Question 20

Profitability Analysis for an Investment Decision
Suppose that you are considering investing in one of two companies, each in the same industry. The most recent income statements for each company and other relevant information are as follows:
Required:
Note : Round answers to two decimal places.
1. Compute the following for each company: (a) earnings per share, (b) dividend yield, (c) dividend payout ratio, (d) price-earnings ratio, (e) return on assets, and (f) return on stockholders' equity.
2. CONCEPTUAL CONNECTION In which of the two companies would you invest Explain.

Question 21

Fractions or percentages computed by dividing one account or line-item amount by another are called

A) returns.
B) industry averages.
C) common-size statements.
D) dividend yields.
E) ratios.

Question 22

Explain why an investor would be interested in a company's debt ratio.

Question 23

The income statement, statement of retained earnings, and balance sheet for Somerville Company are as follows:
Computing the Price-Earnings Ratio
Refer to the information for Somerville Company on the previous page. Also, assume that the price per common share for Somerville is $8.10.
Required:
Compute the price-earnings ratio. (Note: Round the answer to two decimal places.)

Question 24

Return on Sales
Juroe Company provided the following income statement for last year:
Juroe's balance sheet as of December 31 last year showed total liabilities of $10,250,000, total equity of $6,150,000, and total assets of $16,400,000.
Refer to the information for Juroe Company above.
Required:
1. Calculate the return on sales. ( Note : Round the percent to two decimal places.)
2. CONCEPTUAL CONNECTION Briefly explain the meaning of the return on sales ratio, and comment on whether Juroe's return on sales ratio appears appropriate.

Question 25

Manipulation of Ratios and Ethical Behavior
Pete Donaldson, president and owner of Donaldson Mining Supplies, was concerned about the firm's liquidity. He had an easy time selling supplies to the local coal mines but had a difficult time collecting the receivables. He had even tried offering discounts for prompt payment. The outcome wasn't as expected. The coal mines still took as long to pay as before but took the discount as well. Although he had complained about the practice, he was told that other suppliers would provide the supplies for the same terms. Collections were so slow that he was unable to pay his own payables on time and was receiving considerable pressure from his own creditors.
The solution was a line of credit that could be used to smooth his payment patterns. Getting the line of credit was another matter, however. One bank had turned him down, indicating that he already had too much debt and that his short-term liquidity ratios were marginal. Pete had begun the business with $5,000 of his own capital and a $30,000 loan from his father-in-law. He was making interest payments of $3,000 per year to his father-in-law with a promise to pay the principal back in 5 years (3 years from now).
While mulling over his problem, Pete suddenly saw the solution. By changing accountants, he could tell the next accountant that the $30,000 had been donated to the business and therefore would be reclassified into the equity section. This would dramatically improve the debt ratio. He would simply not disclose the $3,000 annual payment-or he could call it a dividend. Additionally, he would not tell the next accountant about the $6,000 of safety gear that was now obsolete. That gear could be added back, and the current ratio would also improve. With an improved financial statement, the next bank would be more likely to grant the needed line of credit.
Required:
1. Evaluate Pete Donaldson's ethical behavior.
2. Suppose that you have been hired as the chief finance officer for Donaldson Mining Supplies. You have been told that the $30,000 has been donated to the company. During the second week of your employment, the father-in-law drops in unexpectedly and introduces himself. He then asks you how the company is doing and wants to know if his $30,000 loan is still likely to be repaid in 3 years. Suppose also that same day you overhear an employee mention that the safety equipment is no longer usable because regulations now require a newer and different model.
a. Assume that you have yet to prepare the financial statements for the loan application. What should you do
b. Suppose that the financial statements have been prepared and submitted to the bank. In fact, that morning, you had received a call from the bank, indicating that a decision was imminent and that the line of credit would likely be approved. What should you do under these circumstances
3. Suppose that Pete invites you in as a consultant. He describes his problem to you. Can you think of a better solution

Question 26

What are liquidity ratios Leverage ratios Profitability ratios

Question 27

Scherer Company provided the following income statements for its first three years of operation:
Preparing Income Statements by Using Net Sales as the Base: Vertical Analysis
Refer to the information for Scherer Company above.
Required:
Prepare common-size income statements by using net sales as the base. ( Note: Round answers to the nearest whole percentage.)

Question 28

The income statement, statement of retained earnings, and balance sheet for Somerville Company are as follows:
Computing the Dividend Yield and the Dividend Payout Ratio
Refer to the information for Somerville Company on the previous page. Also, assume that the market price per common share is $8.10.
Required:
Note: Round answers to two decimal places.
1. Compute the dividends per share.
2. Compute the dividend yield.
3. Compute the dividend payout ratio.

Question 29

Average Total Assets, Return on Assets
Juroe Company provided the following income statement for last year:
Juroe's balance sheet as of December 31 last year showed total liabilities of $10,250,000, total equity of $6,150,000, and total assets of $16,400,000.
Refer to the information for Juroe Company above. Also, assume that Juroe's total assets at the beginning of last year equaled $17,350,000 and that the tax rate applicable to Juroe is 40%.
Required:
Note : Round answers to two decimal places.
1. Calculate the average total assets.
2. Calculate the return on assets.

Question 30

Interpreting the Meaning of Ratios from the Financial Statements
Using the Internet, locate the most recent financial statements for two companies from the same industry. Find (or calculate) the ratios listed below, and compare the two companies. (If you cannot calculate a particular ratio, explain why.) Which company do you think is performing better Why Ratios:
a. Current ratio
b. Quick ratio
c. Accounts receivable turnover ratio
d. Inventory turnover ratio
e. Turnover in days
f. Times-interest-earned ratio
g. Debt ratio
h. Debt-to-equity ratio
i. Return on sales
j. Return on assets
k. Return on stockholders' equity
l. Earnings per share
m. Price-earnings ratio
n. Dividend yield
o. Dividend payout ratio

Question 31

The measures of the ability of a company to meet its current obligations are called

A) ratios.
B) liquidity ratios.
C) leverage ratios.
D) profitability ratios.
E) percentage changes.

Question 32

Assume that you have been given the responsibility to invest some funds in the stock market to provide an annuity to an individual who has just retired. Explain how you might use the dividend yield and the dividend payout ratio to help you with this investment decision.

Question 33

Horizontal Analysis
Sundahl Company's income statements for the past 2 years are as follows:
Refer to the information for Sundahl Company above.
Required:
Prepare a common-size income statement for Year 2 by expressing each line item for Year 2 as a percentage of that same line item from Year 1. ( Note : Round percentages to the nearest tenth of a percent.)

Question 34

Average Common Stockholders' Equity, Return on Stockholders' Equity
Rebert Inc. showed the following balances for last year:
Rebert's net income for last year was $3,182,000.
Refer to the information for Rebert Inc. above.
Required:
1. Calculate the average common stockholders' equity.
2. Calculate the return on stockholders' equity.

Question 35

Identify two types of standards used in ratio analysis. Explain why it is desirable to use both types.1. Name the two major types of financial statement analysis discussed in this chapter.

Question 36

Calculating the Current Ratio and the Quick (or Acid-Test) Ratio
Chen Company has current assets equal to $3,500,000. Of these, $1,000,000 is cash, $2,000,000 is accounts receivable, $400,000 is inventory, and the remainder is marketable securities. Current liabilities total $2,000,000.
Required:
Note: Round answers to one decimal place.
1. Calculate the current ratio.
2. Calculate the quick ratio (acid-test ratio).

Question 37

Vertical Analysis
Sundahl Company's income statements for the past 2 years are as follows:
Refer to the information for Sundahl Company on the previous page.
Required:
1. Prepare a common-size income statement for Year 1 by expressing each line item as a percentage of sales revenue. ( Note : Round percentages to the nearest tenth of a percent.)
2. Prepare a common-size income statement for Year 2 by expressing each line item as a percentage of sales revenue. ( Note : Round percentages to the nearest tenth of a percent.)

Question 38

Earnings per Share, Price-Earnings Ratio
Rebert Inc. showed the following balances for last year:
Rebert's net income for last year was $3,182,000.
Refer to the information for Rebert Inc. above. Also, assume that the market price per share for Rebert is $51.50.
Required:
1. Compute the dollar amount of preferred dividends.
2. Compute the number of common shares.
3. Compute earnings per share. ( Note : Round to two decimals.)
4. Compute the price-earnings ratio. ( Note : Round to the nearest whole number.)

Question 39

Pedee Company's inventory turnover in days is 80 days. Which of the following actions could help to improve that ratio

A) Increase sales price.
B) Increase manufacturing costs.
C) Reduce cost of goods sold.
D) Reduce average inventory.
E) All of these.

Question 40

Explain how an investor might use the price-earnings ratio to value the stock of a company.

Question 41

Horizontal Analysis
Cuneo Company's income statements for the last 3 years are as follows:
Refer to the information for Cuneo Company above.
Required:
1. Prepare a common-size income statement for Year 2 by expressing each line item for Year 2 as a percentage of that same line item from Year 1. ( Note : Round percentages to the nearest tenth of a percent.)
2. Prepare a common-size income statement for Year 3 by expressing each line item for Year 3 as a percentage of that same line item from Year 1. ( Note : Round percentages to the nearest tenth of a percent.)

Question 42

Dividend Yield Ratio, Dividend Payout Ratio
Rebert Inc. showed the following balances for last year:
Rebert's net income for last year was $3,182,000.
Refer to the information for Rebert Inc. above. Also, assume that the dividends paid to common stockholders for last year were $2,600,000 and that the market price per share of common stock is $51.50.
Required:
1. Compute the dividends per share.
2. Compute the dividend yield. ( Note : Round to two decimal places.)
3. Compute the dividend payout ratio. ( Note : Round to two decimal places.)

Question 43

What information does the quick ratio supply that the current ratio does not

Question 44

Last year, Nikkola Company had net sales of $12,358,000 and cost of goods sold o: $7,847,500. Nikkola had the following balances:
Calculate the Average Accounts Receivable, the Accounts Receivable Turnover Ratio, and the Accounts Receivable Turnover in Days Refer to the information for Nikkola Company on the previous page.
Required:
Note: Round answers to one decimal place.
1. Calculate the average accounts receivable.
2. Calculate the accounts receivable turnover ratio.
3. Calculate the accounts receivable turnover in days.

Question 45

Vertical Analysis
Cuneo Company's income statements for the last 3 years are as follows:
Refer to the information for Cuneo Company above.
Required:
1. Prepare a common-size income statement for Year 1 by expressing each line item as a percentage of sales revenue. ( Note : Round percentages to the nearest tenth of a percent.)
2. Prepare a common-size income statement for Year 2 by expressing each line item as a percentage of sales revenue. ( Note : Round percentages to the nearest tenth of a percent.)
3. Prepare a common-size income statement for Year 3 by expressing each line item as a percentage of sales revenue. ( Note : Round percentages to the nearest tenth of a percent.)

Question 46

Liquidity Analysis
The following selected information is taken from the financial statements of Arnn Company for its most recent year of operations:
During the year, Arnn had net sales of $2.45 million. The cost of goods sold was $1.3 million.
Required:
Note : Round all answers to two decimal places.
1. Compute the current ratio.
2. Compute the quick or acid-test ratio.
3. Compute the accounts receivable turnover ratio.
4. Compute the accounts receivable turnover in days.
5. Compute the inventory turnover ratio.
6. Compute the inventory turnover in days.

Question 47

Etchey Company shows that 46% of its assets are financed by creditors. Which of the following shows this result

A) Current ratio
B) Times-interest-earned ratio
C) Debt ratio
D) Inventory turnover in days
E) Return on sales

Question 48

Why would investors and creditors be interested in knowing the dilutive effects of convertible securities on earnings per share

Question 49

Current Ratio and Quick (Acid-Test) Ratio
Jordan Company provided the following information:
Required:
Note: Round answers to one decimal place.
1. Compute the current ratio.
2. Compute the quick (acid-test) ratio.

Question 50

Leverage Ratios
Grammatico Company has just completed its third year of operations. The income statement is as follows:
Selected information from the balance sheet is as follows:
Required:
Note: Round answers to two decimal places.
1. Compute the times-interest-earned ratio.
2. Compute the debt ratio.
3. CONCEPTUAL CONNECTION Assume that the lower quartile, median, and upper quartile values for debt and times-interest-earned ratios in Grammatico's industry are as follows:
How does Grammatico compare with the industrial norms Does it have too much debt

Question 51

Suppose that the accounts receivable turnover ratio of a company is low when compared with other firms within its industry. How would this information be useful to the managers of a company

Question 52

Last year, Nikkola Company had net sales of $12,358,000 and cost of goods sold o: $7,847,500. Nikkola had the following balances:
Calculating the Average Inventory, the Inventory Turnover Ratio, and the Inventory Turnover in Days
Refer to the information for Nikkola Company on the previous page.
Required:
Note: Round answers to one decimal place.
1. Calculate the average inventory.
2. Calculate the inventory turnover ratio.
3. Calculate the inventory turnover in days.
4. Conceptual Connection: Based on these ratios, does Nikkola appear to be performing well or poorly

Question 53

Current Ratio and Quick (Acid-Test) Ratio
Smith Company has current assets equal to $250,000. Of these, $135,000 is cash, $55,000 is accounts receivable, and the remainder is inventories. Current liabilities total $200,000.
Required:
Note: Round answers to two decimal places.
1. Compute the current ratio.
2. Compute the quick (acid-test) ratio.

Question 54

Profitability Ratios
The following information has been gathered for Malette Manufacturing:
Assume that the firm has no common stock equivalents. The tax rate is 34%.
Required:
1. Compute the return on assets.
2. Compute the return on common stockholders' equity.
3. Compute the earnings per share.
4. Compute the price-earnings ratio.
5. Compute the dividend yield.
6. Compute the dividend payout ratio.

Question 55

Profitability ratios are used by which of the following groups

A) Company managers
B) Creditors
C) Lenders
D) Investors
E) All of these.

Question 56

Explain the significance of the inventory turnover ratio in a JIT manufacturing environment.

Question 57

Average Accounts Receivable, Accounts Receivable Turnover Ratio, Accounts Receivable Turnover in Days
Knowlton Company had net sales of $3,906,000. Knowlton had the following balances:
Required:
Note : Round answers to one decimal place.
1. Calculate the average accounts receivable.
2. Calculate the accounts receivable turnover ratio.
3. Calculate the accounts receivable turnover in days.

Question 58

Horizontal Analysis
Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the company's financial statements for the 2 most recent years.
Refer to the information for Kepler Company above.
Required:
Note : Round all percentages to one decimal place.
1. Compute the percentage change for each item in the balance sheet and income statement.
2. CONCEPTUAL CONNECTION Comment on any significant trends.

Question 59

A high inventory turnover ratio provides evidence that a company is having problems with stockouts and disgruntled customers. Do you agree Explain.

Question 60

Calculating the Times-Interest-Earned Ratio
Paxton Company provided the following income statement for last year:
Required:
Calculate the times-interest-earned ratio. (Note: Round the answer to one decimal place.)

Question 61

Average Accounts Receivable, Accounts Receivable Turnover Ratio, Accounts Receivable Turnover in Days
Whalen Company had net sales of $6,500,300. Whalen had the following balances:
Required:
Note : Round answers to two decimal places.
1. Calculate the average accounts receivable.
2. Calculate the accounts receivable turnover ratio.
3. Calculate the accounts receivable turnover in days.

Question 62

Vertical Analysis
Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the company's financial statements for the 2 most recent years.
Refer to the information for Kepler Company above.
Required:
Note : Round all percentages to one decimal place.
1. Express each item in the asset section of the balance sheet as a percentage of total assets for each year.
2. Express each item in the liabilities and equity section as a percentage of total liabilities and equity for each year.
3. Express each item in the income statement as a percentage of sales for each year.

Question 63

Fred and Torrie Jones are a retired couple looking for income. They are currently rebalancing their portfolio of stocks to include more with high dividends. Fred and Torrie will be most interested in which of the following

A) Current ratio
B) Dividend payout ratio
C) Return on assets
D) Price-earnings ratio
E) Dividend yield

Question 64

In a JIT manufacturing environment, the current ratio and the quick ratio are virtually the same. Do you agree Why

Question 65

Average Inventory, Inventory Turnover Ratio, Inventory Turnover in Days
Belt Company had net sales of $2,225,500,000 and cost of goods sold of $1,557,850,000. Belt had the following balances:
Required:
Note : Round answers to two decimal places.
1. Calculate the average inventory.
2. Calculate the inventory turnover ratio.
3. Calculate the inventory turnover in days.

Question 66

Liquidity Ratios
Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the company's financial statements for the 2 most recent years.
Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the company's financial statements for the 2 most recent years.
Refer to the information for Kepler Company above.
Required:
Note : Round all answers to two decimal places.
1. Compute the following ratios for each year: (a) current ratio, (b) quick ratio, (c) receivables turnover (in days), and (d) inventory turnover (in days).
2. CONCEPTUAL CONNECTION Has the liquidity of Kepler improved over the past year Explain why industrial liquidity performance would be useful information in assessing Kepler's liquidity performance.

Question 67

Name the two major types of financial statement analysis discussed in this chapter.

Question 68

A loan agreement between a bank and a customer specified that the debt ratio could not exceed 60%. Explain the purpose of this restrictive agreement.

Question 69

Calculating the Debt Ratio and the Debt-to-Equity Ratio
Ernst Company's balance sheet shows total liabilities of $27,600,100, total stockholders' equity of $12,355,000, and total assets of $39,955,100.
Required:
Note: Round answers to two decimal places.
1. Calculate the debt ratio.
2. Calculate the debt-to-equity ratio.

Question 70

Average Inventory, Inventory Turnover Ratio, Inventory Turnover in Days
Delater Company had sales of $3,948,340 and a gross margin of $1,859,260. Delater had beginning inventory of $53,420 and ending inventory of $62,640.
Required:
Note : Round answers to one decimal place.
1. Calculate the average inventory.
2. Calculate the inventory turnover ratio.
3. Calculate the inventory turnover in days.

Question 71

Leverage Ratios
Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the company's financial statements for the 2 most recent years.
Refer to the information for Kepler Company above.
Required:
Note : Round all answers to two decimal places.
1. Compute the following for each year: (a) the times-interest-earned ratio and (b) the debt ratio
2. CONCEPTUAL CONNECTION Does Kepler have too much debt What other information would help in answering this question