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Exam 14: Financial Statement Analysis

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Question 61

Multiple Choice

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The relationship of $325,000 to $125,000, expressed as a ratio, is

A) 2.0
B) 2.6
C) 2.5
D) 0.45

E) C) and D)
F) A) and C)

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Question 62

Multiple Choice

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Match each definition that follows with the term (a-h) it defines. -focuses on a company's ability to generate net income

A) solvency
B) leverage
C) times interest earned
D) horizontal analysis
E) vertical analysis
F) common-sized financial statements
G) current position analysis
H) profitability analysis

I) C) and F)
J) A) and C)

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Question 63

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An unusual item is often related to current operations and occurs infrequently.

Match each ratio that follows to its use (items a-h) . Items may be used more than once. -price-earnings (P/E) ratio

Comparative financial statements are designed to compare the financial statements of two or more corporations.

Why would you or why wouldn't you compare an organization like Ford Motor Company to the local car dealer "Johnson City Ford/Lincoln/Mercury" using vertical and horizontal analysis?

In computing the return on total assets, interest expense is subtracted from net income before dividing by average total assets.

Abigail Company reports the following: $\begin{array} { | l | r | } \hline \text { Net income } & \$ 295,000 \\\hline \text { Preferred dividends } & 30,000 \\\hline \text { Average stockhol ders' equity } & 1,000,000 \\\hline \text { Average common stockholders' equity } & 700,000 \\\hline\end{array}$ ​ Determine the (a) return on stockholders' equity, and (b) return on common stockholders' equity. Round your answer to one decimal place.

Gallant Company reported net income of $2,500,000. The income statement included a $200,000 loss on discontinued operations, after applicable income tax. There were 100,000 shares of $10 par common stock and 40,000 shares of 4% preferred stock of $100 par outstanding throughout the current year. ​ Prepare the earnings per share section of Gallant Company's income statement.

The purpose of an audit is to

Match each definition that follows with the term (a-h) it defines. -an analysis of a company's ability to pay its current liabilities

Current position analysis is used by short-term creditors to assess how quickly they will be repaid.

Accumulated other comprehensive income is presented in the financial statements

The tendency of the return on stockholders' equity to vary disproportionately from the return on total assets is because of

When you are interpreting financial ratios, it is useful to compare a company's ratios to the same ratios from a prior period or to the ratios of another company in the same industry.

A balance sheet that displays only component percentages is a

The following information pertains to Newman Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Assets $\begin{array} { l r } \text { Cash and short-term investments } & \$ 40,000 \\\text { Accounts receivable (net) } & 30,000 \\\text { Inventory } & 25,000 \\\text { Property, plant, and equipment } & 215,000 \\\text { Total Assets } & \$ 310,000\end{array}$ Liabilities and Stockholders' Equity $\begin{array} { l r } \text { Current liabilities } & \$ 60,000 \\\text { Long-term liabilities } & 95,000 \\\text { Common stock, no par } & 80,000 \\\text { Retained earnings } & 75,000 \\\text { Total liabilities and stockhol ders' equity } & \$ 310,000\end{array}$ Income Statement $\begin{array} { l r } \text { Sales } & \$ 90,000 \\\text { Cost of goods sold } & 45,000 \\\text { Gross margin } & \$ 45,000 \\\text { Operating expenses } & 20,000 \\\text { Net income } & \$ 25,000\end{array}$ $\begin{array} { l r } \text { Number of shares of common stock } & 6,000 \\\text { Market price of common stock } & \$ 40 \\\text { Dividends per share } & \$ 1.00 \\\text { Cash provided by operations } & \$ 40,000\end{array}$ What is the return on total assets for this company?

The following information pertains to Diane Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Assets $\begin{array}{lr}\text { Cash and short-term investments } & \$ 30,000 \\\text { Accounts receivable (net) } & 20,000 \\\text { Inventory } & 15,000 \\\text { Property, plant, and equipment } & 185,000 \\\text { Total assets } & \$ 250,000\end{array}$ Liabilities and Stockholders' Equity $\begin{array}{lr}\text { Current liabilities } & \$ 45,000 \\\text { Long-term liabilities } & 70,000 \\\text { Common stock } & 80,000 \\\text { Retained earnings } & 55,000 \\\text { Total liabilities and stockhol ders' equity } & \$ 250,000\end{array}$ Income Statement $\begin{array}{lr}\text { Sales } & \$ 85,000 \\\text { Cost of goods sold } & 45,000 \\\text { Gross margin } & \$ 40,000 \\\text { Operating expenses } & (15,000) \\\text { Interest expense } & (5,000) \\\text { Net income } & \$ 20,000\end{array}$ $\begin{array} { l r } \text { Number of shares of common stock outstanding } & 6,000 \\\text { Market price of common stock } & \$ 20 \\\text { Total dividends paid } & \$ 9,000 \\\text { Cash provided by operations } & \$ 30,000\end{array}$ -What is the dividend yield for Diane Company?

The following information pertains to Diane Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Assets $\begin{array}{lr}\text { Cash and short-term investments } & \$ 30,000 \\\text { Accounts receivable (net) } & 20,000 \\\text { Inventory } & 15,000 \\\text { Property, plant, and equipment } & 185,000 \\\text { Total assets } & \$ 250,000\end{array}$ Liabilities and Stockholders' Equity $\begin{array}{lr}\text { Current liabilities } & \$ 45,000 \\\text { Long-term liabilities } & 70,000 \\\text { Common stock } & 80,000 \\\text { Retained earnings } & 55,000 \\\text { Total liabilities and stockhol ders' equity } & \$ 250,000\end{array}$ Income Statement $\begin{array}{lr}\text { Sales } & \$ 85,000 \\\text { Cost of goods sold } & 45,000 \\\text { Gross margin } & \$ 40,000 \\\text { Operating expenses } & (15,000) \\\text { Interest expense } & (5,000) \\\text { Net income } & \$ 20,000\end{array}$ $\begin{array} { l r } \text { Number of shares of common stock outstanding } & 6,000 \\\text { Market price of common stock } & \$ 20 \\\text { Total dividends paid } & \$ 9,000 \\\text { Cash provided by operations } & \$ 30,000\end{array}$ -What is the return on total assets for Diane Company?

A company with working capital of $720,000 and a current ratio of 2.2 pays a $125,000 short-term liability. The amount of working capital immediately after payment is