Deck 4: Analyzing and Interpreting Financial Statements

Question 1

The Body Store has annual credit sales of $75,372,500 in average level of accounts receivable of $5,162,500. What is the Company's average collection period for receivables?

A) 2 days
B) 3 days
C) 15 days
D) 25 days
E) 53 days

Answer 1

D

Question 2

Blauker Auto Sales & Service Ltd's accounts make $27,740,000 purchases on credit each year. The level of its accounts payable is $2,660,000. Due to a slowdown in car sales, Blauker would like to extend its accounts payables to 45 days. If Blauker would have to pay 7% per annum for short-term financing, how much interest will the company save in a year by extending its payment period?

A) $16,226
B) $53,200
C) $186,200
D) $239,400
E) $1,757,880

Answer 2

B

Question 3

Financial ratios are used to assess a company's statements because they

A) Eliminate the difference of scale between companies
B) Allow a comparison of companies from different industrial sectors
C) Eliminate the effects of inflation from period to period
D) Immediately identify problems that must be corrected in a business
E) Provide a standard set of calculations to analyze any business

Answer 3

A

Question 4

A company's statements provided the following data: sales revenue equals $4,482,000, gross margin equals $2,689,000, EBIT equals $538,000, net income equals $204,000, current liabilities equal $700,000, long-term liabilities equal $2,800,000, common shares equal $3 million, preferred shares equal $1 million, retained earnings equal $275,000. The return on capital employed (ROCE) for the company is

A) 2.6%
B) 3%
C) 6.9%
D) 7.6%
E) 8.9%

Question 5

Rattray Interiors and Design Ltd. has four managers and six support staff who generate $2,400,000 of revenue. If the company wants to expand its business and to hire 2 design technicians to assist the partners, how much more revenue must each manager bring in to maintain their current sales revenue per employee ratio?

A) $80,000
B) $120,000
C) $200,000
D) $240,000
E) $480,000

Question 6

Mount Blanc's Dairy's sales inventory at the start of the previous year was valued at $310,000 and the company's ending inventory was $374,000. The cost of goods sold for that period for the company was $13,870,000. Because stocked-outs have been a problem, a new refrigerated warehouse will allow the company to hold three more days worth of inventory. Mount Blanc will then be carrying an average inventory of

A) $342,000
B) $228,000
C) $114,000
D) $380,000
E) $456,000

Question 7

Rafters, Inc. has year-end retained earnings of $250,000, 100,000 cumulative preferred shares each with a dividend of $.80 each and $1,000,000 common shares. If Rafters Inc. achieved a net income after tax of $330,000 for the period, what is the company's return on equity?

A) 20%
B) 22.8%
C) 25.5%
D) 27.5%
E) 30.1%

Question 8

The company's leverage ratio has moved from 15.2% to 32%. Its return on equity ratio has also moved up, from 20.5% to 45.3%. Its times interest earned ratio has dropped to 3.5. Which of the following is the best statement to describe the company?

A) Is not in a risky financial position
B) Is depending on debt to finance its expansion
C) Cannot pay the interest on its long-term debt
D) Is depending on equity to finance its expansion
E) Has a sizable cushion to pay the interest on its debt

Question 9

Two companies have the same sales revenue for the year which equalled $22,550,000. Co. A has average total assets of $10,560,000 and current liabilities of $1,200,000. Co. B has average long-term liabilities of $3,750,000 in total shareholder equity of $5,610,000. When examining how well a company uses its assets

A) Co. B. is 2.4 times more efficient than Co. A
B) The data provided are insufficient to make a reliable comparison
C) Co. A. is as efficient as Co. B
D) Co. B. is more efficient than Co. A. by 12%
E) Co. A. is 3x more efficient than Co. B

Question 10

Zeechan Landscaping Company Limited had sales revenues of $1,400,000 last year and $1,200,000 the year before. Cost of Goods Sold was $980,000 last year and $780,000 the year before. Operating expenses were $300,000 for both last year and the year before. Comparing gross profit and operating profit margins, it could be concluded that

A) The operating profit margin remained unchanged over the previous two years as increases in cost of goods sold, CGOS, were offset by improvements in operating expenses
B) The operating margin remained unchanged over the previous two years as cost of goods sold increases were approximately proportional to gains in sales revenue
C) The operating margin declined last year over the year before due to increases in costs per unit sold.
D) The operating margin declined last year over the year before as operating expenses did not respond to economies of scale
E) The gross profit margin of the operating profit margin were unchanged resulting in no change in earnings before interest and taxes

Question 11

Mehal Mechanics Ltd's leverage ratio moved from 15.3% to 9% between 2005 and 2007. No common or preferred shares were issued in the year. Which of the following situations is most likely to achieve this result?

A) Higher net income and a decrease in the dividend payout ratio
B) Higher net income and increase in the dividend payout ratio
C) Lower return on capital employed and a higher debt to equity ratio
D) Higher return on capital employed and a higher debt to equity ratio
E) Higher net income regardless of dividend payout ratio

Question 12

The gross profit margin will be impacted by

A) Higher productivity from their production equipment
B) A $50,000 loss of an uninsured warehouse to fire
C) An interest rate hike on the Company's variable rate mortgage
D) Retiring the outstanding principal of a bank loans
E) A reduction in the number of people employed

Question 13

Before undertaking ratio analysis, a prudent first step is to

A) Select the specific ratios to be used
B) Determine who the target user is and their needs
C) Assemble the information required for the analysis
D) Review the economic and competitive environment
E) Select either a trend analysis or benchmark analysis

Question 14

A company had sales revenue of $665,000 and $692,000 in two successive quarters. The cost of goods sold was $226,000 and $277,000 respectively. Operating expenses in each quarter were: selling expenses of $95,000, distribution expenses of $85,000, and administration expenses of $170,000. Interest expenses were $20,000 in each of the two quarters. What was the change in operating margin?

A) 4%
B) 14.7%
C) 32.7%
D) 42.5%
E) 55.2%

Question 15

Analysts who make recommendations on credit policies, inventory levels and sales per employee would be most interested in ratios dealing with

A) Profitability
B) Efficiency
C) Liquidity
D) Financial Leverage
E) Investment

Question 16

The current ratio for Joshua Wines is 2.2 and the acid test ratio for the business is 0.7. These ratios suggest that the company

A) Is carrying too much inventory
B) Is carrying too many current liabilities
C) Has sufficient liquidity to meet a long-term financial commitments
D) Has sufficient liquidity to meet short-term financial commitments
E) Has too much investment in Accounts Receivables

Question 17

Coronation Computers opened the fiscal year with a balance sheet showing retained earnings at $355,000, and common shares at $1.2 million. It added another $500,000 from the sale of 200,000 preferred shares, which paid $.35 a share in dividends in the last quarter of the fiscal year. If the Company's net income for the year was a $412,100 and there were no dividends paid to common shareholders, what was its return on equity?

A) 19.8%
B) 22.0%
C) 23.6%
D) 28.5%
E) 29.6%

Question 18

The ratio that is the fundamental measure of business performance is

A) EPS - earnings per share
B) ROCE - return on capital employed
C) ROE - return on equity
D) Leverage ratio
E) Gross profit margin ratio

Question 19

The ratio that is the best measure of a company's day-to-day operating performance is the

A) Gross Profit Margin
B) Return on Capital Employed (ROCE)
C) Return on Sales
D) Operating Profit Margin
E) Return on Equity

Question 20

A basis of comparison for financial ratios that is determined from an industrial sector, historical data, direct competitors or pro forma statements is called a

A) Performance standard
B) Financial trendline
C) Comparable
D) Benchmark
E) Hurdle rate

Question 21

The impact of increasing financial leverage, all else remaining equal, is to cause

A) A reduction in the return on equity
B) Increases the level of risk in the company
C) Increases the return on capital employed
D) A commensurate increase in operating leverage
E) An improvement in liquidity

Question 22

The ________ is the highest price that potential buyers are willing to pay for a company's share in the stock market.

A) Bid
B) Ask
C) Offer
D) Inter-Day
E) Intra-Day

Question 23

Which of the following represents the most appropriate description of vertical analysis?

A) An analyst prepares pro forma financial statements for the next five years.
B) An analyst compares financial ratios of a company over the last five years.
C) An analyst compares financial ratios for the current year for two companies.
D) An analyst prepares ratios to determine what sales are required to earn a profit.
E) An analyst develops ratios to determine how much the company needs to borrow.

Question 24

CapiCal Industries declared a quarterly dividend of $.56 to its 250,000 common shares from quarterly earnings of $306,250. It has no preferred shares. Universal Hotels declared a quarterly dividend of $.35 to its one million shares on quarterly earnings of $1,225,000, net of preferred shares. Both companies are trading at a P/E ratio around 14. What is the dividend payout ratio for each company?

A) Capical $0.20; Universal $0.46
B) Capical $0.46; Universal $0.20
C) Capical $1.83; Universal $0.82
D) Capical $0.82; Universal $1.83
E) Capical $0.82; Universal $0.11

Question 25

For the previous five-year period, Galhadi Telecommunications Limited has had EBIT of $28.6 million, $28 million, $33.2 million, $34.1 million, $33.8 million, respectively, and a corresponding EBITDA of $15.5 million, $15.4 million, $15.5 million, $17.5 million, and $17 million. Which of the following statements is the best conclusion to draw about year 3?

A) There are significant depreciation and amortization expenses
B) Realized a capital gain on the sale of equipment
C) Experienced a significant decrease in income taxes
D) Invested in equipment that improved operational efficiency
E) Improved earnings due to a significant decrease in interest rates charged on long-term debt

Question 26

Which of the following represents the most appropriate description of breakeven analysis?

A) An analyst prepares pro forma financial statements for the next five years.
B) An analyst compares financial ratios of a company over the last five years.
C) An analyst compares financial ratios for the current year for two companies.
D) An analyst prepares ratios to determine what sales are required to earn a profit.
E) An analyst develops ratios to determine how much the company needs to borrow.

Question 27

Tuscarora Transportation Limited currently trades for $70 with a P/E ratio of 16.4. Python Logistics trades for $54 with a P/E ratio of 38.6. A conclusion that could be drawn from these numbers, is that the market believes

A) Tuscarora Transportation is less risky than Python Logistics
B) Python Logistics earnings will overtake Tuscarora Transportation
C) Tuscarora Transportation's assets are undervalued relative to its share price
D) Python Logistics is no longer a good investment
E) Python Logistics has higher earnings than Tuscarora Transportation

Question 28

There are 3 million common and one million preferred Kline Inc shares outstanding. Common shares closed on the TSX November 18 at $80.64 each, after an announcement that net income for the year was $22,500,000, and that a dividend of $2.25 would be paid on common shares and a dividend of $.90 would be paid on preferred shares. What was Kline's P/E ratio on that date?

A) 5.6
B) 7.2
C) 9.6
D) 10.8
E) 11.2

Question 29

The sales revenue to capital employed ratio for Miralonge Manufacturing is 3.2. The industry benchmark is 3. One conclusion that would be consistent with the ratio, is that the company

A) Has a lower book value for assets than the industry in general
B) Is using its assets more efficiently than its closest competitor's
C) Has a higher operating profit than its closest competitors
D) Has amortized the assets of less fully than the industry in general
E) Is in a serious over trading situation

Question 30

Which of the following ratio patterns over the past five years would predict the bankruptcy of a company?

A) The ratios are consistently about the same over the five years.
B) The ratios start to get smaller over the five years.
C) The ratios start to get larger over the five years.
D) The ratios start to somewhat worse over the five years.
E) The ratios start to have large changes over the five years.

Question 31

Which of the following may suggest that a financial statements are unreliable?

A) The reported profits are far less than the operating cash flow for the period.
B) The income tax expense is low compared to profits and the balance sheet shows a significant deferral.
C) Inventory valuation and revenue recognition has changed significantly.
D) There is an increase in Notes to the financial statements.
E) Modifications in general accounting policies are similar to those adopted by a large part of the industry.

Question 32

Which of the following represents the most appropriate description of horizontal analysis?

A) An analyst prepares pro forma financial statements for the next five years.
B) An analyst compares financial ratios of a company over the last five years.
C) An analyst compares financial ratios for the current year for two companies.
D) An analysis prepares ratios to determine what sales are required to earn a profit.
E) An analyst develops ratios to determine how much the company needs to borrow.

Question 33

The ________ displays several years worth of key financial indicators for comparative companies plotted on a graph.

A) Regression line
B) Linear comparisons
C) Ratio charts
D) Longitudinal plots
E) Trend line

Question 34

The company has 14 million common shares outstanding for market price of $18.90 each. It has 3 million preferred shares outstanding at market price of $12 on which a dividend of $1.50 was paid out. If the company has a Price/Earnings ratio of 12, what after-tax net income did the company earn?

A) $2,646,000
B) $2,601,000
C) $17,550,000
D) $22,050,000
E) $26,550,000

Question 35

Halveston Aeronautics, with 130,000 common shares outstanding, declared a dividend of $148,200. Share price is $54. The dividend yield is

A) 45.7%
B) 25%
C) 19%
D) 2.1%
E) 1.1%

Question 36

Bowden Building Supplies Ltd. year-end financial statements show working capital at $1,107,655, total assets of $3,971,090, total liabilities at $2,078,405, retained earnings at $192,685, sales revenue at $5,460,400, EBIT at $326,746, and the market value of common shares at $2,182,020. Using the value from Altman's Z-score model, what can be concluded about the business?

A) Will probably fail in two years.
B) Will probably survive over the next two years.
C) Difficult to classify with any degree of confidence.
D) Will probably fail in three to five years.
E) Will probably expand significantly in the next two years.

Question 37

The reliability of liquidity ratios are significantly affected by

A) Competitive environment
B) Company size
C) Company profitability
D) Seasonality
E) Age of capital assets

Question 38

Early recognition of sales revenue is consistent with

A) Accrual basis accounting practices
B) Cash based accounting practices
C) The accounting Matching Principal
D) Calendar based accounting practices
E) Fraudulent accounting practices

Question 39

Which Altman Z-score indicates a company will likely decare bankruptcy eventually?

A) 1.50
B) 2.00
C) 2.50
D) 3.00
E) 3.50

Question 40

Which of the following pairs of ratios would reveal over trading best?

A) Revenue to capital employed and return on equity
B) Operating profit margin and average payment period for payables
C) Acid test and revenue to capital employed
D) Acid test and average payment period for payable
E) Operating profit margin and acid test

Question 41

Last year the price earning ratio was 10 for the market as a whole and was 20 for Hi Tek Plastics Ltd. Hi Tek's share price ended the year at $50.00. This year the economy is expected to boom and P/E multiple expansion is underway. At the end of the year, the P/E multiple is expected to be 20 for the market. If Hi Tek's is expected to be in the same risk class as last year and its net income is supposed to triple, at what price should Hi Tek's shares finish the year?

A) $25.00
B) $75.00
C) $100.00
D) $150.00
E) $300.00

Question 42

An analyst is comparing financial results at two Canadian companies that only have domestic sales. The Metro Canoe Company manufactures and sells canoes. The Country Ski Company manufactures and sells snow skis. Both companies have about the same gross margins, level of sales, credit policies, and have chosen December 31 as their fiscal year end. Which of the following statements is likely to be correct?

A) The average inventory turnover period will be lower for Metro Canoe.
B) The average inventory turnover period will be lower for Country Ski.
C) The average collection period for receivables will be higher for Metro Canoe.
D) The average collection period for receivables will be lower for Country Ski.
E) The sales revenue to capital employed will be the same for both companies.

Question 43

At the end of this year the Full Glass Company has cash of $100,000, accounts receivable of $200,000, inventory of $300,000, total property, plant, and equipment of $300,000 and total assets of $1,000,000. The corresponding figures at the end of last year were $65,000, $140,000, $225,000, $250,000 and $730,000 respectively. What is the percentage change in patents?

A) 20%
B) 43%
C) 50%
D) 54%
E) 100%

Question 44

At the end of this year the Full Glass Company has cash of $100,000, accounts receivable of $200,000, inventory of $300,000, total property, plant, and equipment of $300,000 and total assets of $1,000,000. The corresponding figures at the end of last year were $65,000, $140,000, $225,000, $250,000 and $730,000 respectively. What is the vertical analysis percent the current year for accounts receivable and copyrights?

A) 19%; 7%
B) 10%; 30%
C) 20%; 10%
D) 31%; 9%
E) 7%; 30%

Question 45

At the end of this year the Full Glass Company has cash of $100,000, accounts receivable of $200,000, inventory of $300,000 and total assets of $1,000,000. The corresponding figures at the end of last year were $65,000, $140,000, $225,000, and $730,000 respectively. What is the percentage change in inventory?

A) 25% by horizontal analysis
B) 43% by vertical analysis
C) 25% by vertical analysis
D) 33% horizontal analysis
E) 33% by vertical analysis