“How Well Am I Doing?”--Financial Statement Analysis · Web viewMarket price per share on December 31 $36.00 Book value per share on December 31 $27.00 Earnings per share for

Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis

True/False Questions

1. Common-size statements are financial statements of companies of similar size.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

2. One limitation of vertical analysis is that it cannot be used to compare two companies that are significantly different in size.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

3. The gross margin percentage is computed by dividing the gross margin by total assets.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

4. The sale of used equipment at book value for cash will increase earnings per share.

Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium

5. Earnings per share is computed by dividing net income (after deducting preferred dividends) by the average number of common shares outstanding.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy

6. The dividend payout ratio divided by the dividend yield ratio equals the price-earnings ratio.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard

7. An increase in the number of shares of common stock outstanding will decrease a company's price-earnings ratio if the market price per share remains unchanged.

Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 16-5


8. A company's financial leverage is negative when its return on total assets is less than its return on common stockholders' equity.

Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard

9. When computing return on common stockholders' equity, retained earnings should be included as part of common stockholders' equity.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard

10. When a retailing company purchases inventory, the book value per share of the company increases.


11. If a company's acid-test ratio increases, its current ratio will also increase.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium

12. Assuming a current ratio greater than 1, acquiring land by issuing more of the company's common stock will increase the current ratio.


13. If a company successfully implements lean production, its inventory turnover ratio should decrease.


14. Short-term borrowing is not a source of working capital.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium

16-6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


15. Working capital is computed by subtracting long-term liabilities from long-term assets.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium

Multiple Choice Questions

16. Common size financial statements help an analyst to:A) Evaluate financial statements of companies within a given industry of the

approximate same size.B) Determine which companies in a similar industry are at approximately the same

stage of development.C) Compare the mix of assets, liabilities, capital, revenue, and expenses within a

company over a period of time or between companies within a given industry without respect to size.

D) Ascertain the relative potential of companies of similar size in different industries.

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Source: CMA, adapted

17. Which of the following ratios would be least useful in determining a company's ability to pay its expenses and liabilities?A) current ratioB) acid-test ratioC) price-earnings ratioD) times interest earned ratio

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,3,4 Level: Medium

18. Most stockholders would ordinarily be least concerned with which of the following ratios:A) earnings per share.B) dividend yield ratio.C) price-earnings ratio.D) acid-test ratio.

Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,3 Level: Easy



19. What effect will the issuance of common stock for cash at year-end have on the following ratios?

Return on Total Assets Debt-to-Equity RatioA) Increase IncreaseB) Increase DecreaseC) Decrease IncreaseD) Decrease Decrease

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,4 Level: Medium

20. The market price of Friden Company's common stock increased from $15 to $18. Earnings per share of common stock remained unchanged. The company's price-earnings ratio would:A) increase.B) decrease.C) remain unchanged.D) impossible to determine.

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy

21. If a company is profitable and is effectively using leverage, whichone of the following ratios is likely to be the largest?A) Return on total assets.B) Return on total liabilities.C) Return on common stockholders' equity.D) Cannot be determined.

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium

22. Clark Company issued bonds with an interest rate of 10%. The company's return on assets is 12%. The company's return on common stockholders' equity would most likely:A) increase.B) decrease.C) remain unchanged.D) cannot be determined.




23. Which of the following transactions could generate positive financial leverage for a corporation?A) acquiring assets through the issuance of long-term debt.B) acquiring assets through the use of accounts payable.C) acquiring assets through the issuance of common stock.D) both A and B above

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard

24. Book value per common share is the amount of stockholders' equity per outstanding share of common stock. Which one of the following statements about book value per common share is most correct?A) Market price per common share usually approximates book value per common

share.B) Book value per common share is based on past transactions whereas the market

price of a share of stock mainly reflects what investors expect to happen in the future.

C) A market price per common share that is greater than book value per common share is an indication of an overvalued stock.

D) Book value per common share is the amount that would be paid to stockholders if the company were sold to another company.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy Source: CMA, adapted

25. The ratio of total cash, marketable securities, accounts receivable, and short-term notes to current liabilities is:A) the debt-to-equity ratio.B) the current ratio.C) the acid-test ratio.D) working capital.

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,4 Level: Easy



26. A company has just converted a long-term note receivable into a short-term note receivable. The company's acid-test and current ratios are both greater than 1. This transaction will:A) increase the current ratio and decrease the acid-test ratio.B) increase the current ratio and increase the acid-test ratio.C) decrease the current ratio and increase the acid-test ratio.D) decrease the current ratio and decrease the acid-test ratio.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Hard

27. Broca Corporation has a current ratio of 2.5. Which of the following transactions will increase Broca's current ratio?A) the purchase of inventory for cash.B) the collection of an account receivable.C) the payment of an account payable.D) none of the above.

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Hard

28. Allen Company's average collection period for accounts receivable was 25 days in year 1, but increased to 40 days in year 2. Which of the following would most likely be the cause of this change:A) a decrease in accounts receivable relative to sales in year 2.B) an increase in credit sales in year 2 as compared to year 1.C) a relaxation of credit policies in year 2.D) a decrease in accounts receivable in year 2 as compared to year 1.


29. Wolbers Company wrote off $100,000 in obsolete inventory. The company's inventory turnover ratio would:A) increase.B) decrease.C) remain unchanged.D) impossible to determine.

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium



30. Gottlob Corporation's most recent income statement appears below:

Sales (all on account)................................. $824,000Cost of goods sold...................................... 477,000 Gross margin.............................................. 347,000Selling and administrative expense............ 208,000 Net operating income................................. 139,000Interest expense.......................................... 37,000 Net income before taxes............................. 102,000Income taxes.............................................. 30,000 Net income................................................. $ 72,000

The gross margin percentage is closest to:A) 20.7%B) 72.7%C) 42.1%D) 481.9%

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Gross margin percentage = Gross margin ÷ Sales = $347,000 ÷ $824,000 = 42.1%

31. Crandall Company's net income last year was $60,000. The company paid preferred dividends of $10,000 and its average common stockholders' equity was $480,000. The company's return on common stockholders' equity for the year was closest to:A) 12.5%B) 10.4%C) 2.1%D) 14.6%

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy

Solution:

Return on common stockholders' equity = (Net income − Preferred dividends)÷ Average common stockholders' equity= ($60,000 − $10,000) ÷ $480,000 = 10.4%



32. Ardor Company's net income last year was $500,000. The company has 150,000 shares of common stock and 30,000 shares of preferred stock outstanding. There was no change in the number of common or preferred shares outstanding during the year. The company declared and paid dividends last year of $1.00 per share on the common stock and $0.70 per share on the preferred stock. The earnings per share of common stock is closest to:A) $3.33B) $3.19C) $2.33D) $3.47

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding= ($500,000 − $21,000) ÷ [(150,000 shares + 150,000 shares) ÷ 2] = $3.19 per share

33. The following information relates to Konbu Corporation for last year:

Price earnings ratio............ 15Dividend payout ratio........ 30%Earnings per share.............. $5

What is Konbu's dividend yield ratio for last year?A) 1.5%B) 2.0%C) 4.5%D) 10.0%

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard



Solution:

Dividend yield ratio = Dividends per share* ÷ Market price per share **= $0.06 ÷ $3 = 2.0%* Dividends per share = Dividend payout ratio ÷ Earnings per share= 30% ÷ $5 = $0.06 per share** Market price per share = Price earnings ratio ÷ Earnings per share= 15 ÷ $5 = $3 per share

34. Richmond Company has 100,000 shares of $10 par value common stock issued and outstanding. Total stockholders' equity is $2,800,000 and net income for the year is $800,000. During the year Richmond paid $3.00 per share in dividends on its common stock. The market value of Richmond's common stock is $24. What is the price-earnings ratio?A) 3.0B) 3.5C) 4.8D) 8.0

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Source: CPA, adapted

Solution:

Price-earnings ratio = Market price per share ÷ Earnings per share*= $24 ÷ $8 = 3.0* Earnings per share = (Net income - Preferred dividends) ÷ Average # of common shares outstanding= ($800,000 - $0) ÷ [(100,000 shares + 100,000 shares) ÷ 2] = $8 per share

35. Hurst Company has 20,000 shares of common stock outstanding. These shares were originally issued at a price of $15 per share. The current book value is $25.00 per share and the current market value is $30.00 per share. The dividends on common stock for the year totaled $45,000. The dividend yield ratio is:A) 9%B) 7.5%C) 15%D) 10%




Solution:

Dividend yield ratio = Dividends per share ÷ Market price per share= ($45,000 ÷ 20,000) ÷ $30.00 = 7.5%

36. Bramble Company's net income last year was $65,000 and its interest expense was $15,000. Total assets at the beginning of the year were $620,000 and total assets at the end of the year were $650,000. The company's income tax rate was 40%. The company's return on total assets for the year was closest to:A) 11.7%B) 10.2%C) 12.6%D) 11.2%


Solution:

Return on total assets = Adjusted net income* ÷ Average total assets**= $74,000 ÷ $635,000 = 11.7%*Adjusted net income = Net income + [Interest expense × (1-Tax rate)]= $65,000 + 15,000 × (1 − 0.40) = $74,000**Average total assets = ($620,000 + $650,000) ÷ 2 = $635,000

37. Dahl Company can borrow funds at 15% interest. Since the company's tax rate is 40%, its after-tax cost of interest is only 9%. Thus, the company reasons that if it can earn $70,000 per year before interest and taxes on a new investment of $500,000, then it will be better off by $25,000 per year.A) The company's reasoning is correct.B) The company's reasoning is not correct, since the after-tax cost of interest would

be 6 percent, rather than 9%.C) The company's reasoning is not correct, since interest is not tax-deductible.D) The company's reasoning is not correct, since it would be worse off by $3,000

per year after taxes.




38. Bucatini Corporation is contemplating the expansion of operations. This expansion will generate a 11% return on the funds invested. To finance this operation, Bucatini can either issue 12% bonds, issue 12% preferred stock, or issue common stock. Bucatini currently has a return on common stockholders' equity of 16%. Bucatini's tax rate is 30%. In which of the financing options above is positive financial leverage being generated?A) none of the options generate positive financial leverageB) the bondsC) the common stockD) the preferred stock


39. Consolo Corporation's net income for the most recent year was $809,000. A total of 100,000 shares of common stock and 200,000 shares of preferred stock were outstanding throughout the year. Dividends on common stock were $2.05 per share and dividends on preferred stock were $1.80 per share. The earnings per share of common stock is closest to:A) $2.44B) $8.09C) $4.49D) $6.04


Solution:

Earnings per share = (Net Income - Preferred Dividends)÷ Average number of common shares outstanding= [$809,000 − (200,000 × $1.80)] ÷ [(100,000 shares + 100,000 shares) ÷ 2] = $4.49



40. Bary Corporation's net income last year was $2,604,000. The dividend on common stock was $2.50 per share and the dividend on preferred stock was $2.40 per share. The market price of common stock at the end of the year was $73.50 per share. Throughout the year, 300,000 shares of common stock and 100,000 shares of preferred stock were outstanding. The price-earnings ratio is closest to:A) 9.33B) 11.89C) 13.66D) 8.47


Solution:

Price-earnings ratio = Market price per share ÷ Earnings per share*= $73.50 ÷ $7.88 = 9.33* Earnings per share = (Net income − Preferred dividends) ÷ Average number of common shares outstanding= [$2,604,000 − (100,000 × $2.40)] ÷ [(300,000 shares + 300,000 shares) ÷ 2] = $7.88

41. Arntson Corporation's net income last year was $7,975,000. The dividend on common stock was $8.20 per share and the dividend on preferred stock was $3.50 per share. The market price of common stock at the end of the year was $59.10 per share. Throughout the year, 500,000 shares of common stock and 200,000 shares of preferred stock were outstanding. The dividend payout ratio is closest to:A) 1.06B) 0.51C) 0.56D) 1.29


Solution:

Dividend payout ratio = Dividends per share ÷ Earnings per share*= $8.20 ÷ $14.55 = 0.56* Earnings per share = (Net income − Preferred dividends) ÷ Average number of common shares outstanding= [$7,975,000 − (200,000 × $3.50)] ÷ [(500,000 shares + 500,000 shares) ÷ 2] = $14.55



42. Last year, Soley Corporation's dividend on common stock was $11.60 per share and the dividend on preferred stock was $1.10 per share. The market price of common stock at the end of the year was $54.80 per share. The dividend yield ratio is closest to:A) 0.02B) 0.21C) 0.23D) 0.91


Solution:

Dividend yield ratio = Dividends per share (see above) ÷ Market price per share= $11.60 ÷ $54.80 = 0.21

43. Inglish Corporation's most recent income statement appears below:

Sales (all on account)................................. $610,000Cost of goods sold...................................... 350,000 Gross margin.............................................. 260,000Selling and administrative expense............ 110,000 Net operating income................................. 150,000Interest expense.......................................... 30,000 Net income before taxes............................. 120,000Income taxes (30%)................................... 36,000 Net income................................................. $ 84,000

The beginning balance of total assets was $560,000 and the ending balance was $580,000. The return on total assets is closest to:A) 18.4%B) 14.7%C) 26.3%D) 21.1%




Solution:

Return on total assets = Adjusted net income* ÷ Average total assets**= $105,000 ÷ $570,000 = 18.4%*Adjusted net income= Net income + [Interest expense × (1 − Tax rate)]= $84,000 + [$30,000 × (1 − 0.30)] = $105,000**Average total assets = ($560,000 + $580,000) ÷ 2 = $570,000

44. Excerpts from Bellis Corporation's most recent balance sheet appear below:

Year 2 Year 1Preferred stock................................................. $ 100,000 $ 100,000Common stock................................................. 300,000 300,000Additional paid-in capital–common stock....... 370,000 370,000Retained earnings............................................. 480,000 390,000 Total stockholders’ equity................................ $1,250,000 $1,160,000

Net income for Year 2 was $160,000. Dividends on common stock were $47,000 in total and dividends on preferred stock were $23,000 in total. The return on common stockholders' equity for Year 2 is closest to:A) 9.4%B) 13.3%C) 12.4%D) 14.5%


Solution:

Return on common stockholders' equity = (Net income − Preferred dividends)÷ Average common stockholders' equity*= ($160,000 − $23,000) ÷ $1,105,000 = 12.4%*Average common stockholders' equity = ($1,060,000 + $1,150,000) ÷ 2 = $1,105,000



45. Data from Baca Corporation's most recent balance sheet appear below:

Preferred stock................................................. $ 100,000Common stock................................................. 400,000Additional paid-in capital–common stock....... 360,000Retained earnings............................................. 580,000 Total stockholders’ equity................................ $1,440,000

A total of 400,000 shares of common stock and 20,000 shares of preferred stock were outstanding at the end of the year. The book value per share is closest to:A) $3.35B) $5.00C) $1.90D) $3.60


Solution:

Book value per share= Common stockholders' equity ÷ Number of common shares outstanding* = $1,340,000 ÷ 400,000 shares = $3.35 per share

46. Dravis Company's working capital is $10,000 and its current liabilities are $84,000. The company's current ratio is closest to:A) 0.88B) 0.12C) 9.40D) 1.12

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium

Solution:

Current ratio = Current assets ÷ Current liabilities = ($84,000 + $10,000) ÷ $84,000 = 1.12



47. Erascible Company has $13,000 in cash, $7,000 in marketable securities, $27,000 in accounts receivable, $20,000 in inventories, and $30,000 in current liabilities. The company's current assets consist of cash, marketable securities, accounts receivable, and inventory. The company's acid-test ratio is closest to:A) 1.57B) 0.90C) 1.33D) 2.23


Solution:

Acid-test ratio = Quick assets* ÷ Current liabilities = $47,000 ÷ $30,000 = 1.57*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $13,000 + $7,000 + $27,000 = $47,000

48. Frame Company had $160,000 in sales on account last year. The beginning accounts receivable balance was $10,000 and the ending accounts receivable balance was $16,000. The company's accounts receivable turnover was closest to:A) 12.31B) 6.15C) 16.00D) 10.00


Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $160,000 ÷ $13,000 = 12.31*Average accounts receivable = ($10,000 + $16,000) ÷ 2 = $13,000



49. Graber Company had $130,000 in sales on account last year. The beginning accounts receivable balance was $18,000 and the ending accounts receivable balance was $12,000. The company's average collection period was closest to:A) 33.69 daysB) 42.12 daysC) 84.23 daysD) 50.54 days


Solution:

Average collection period = 365 days ÷ Accounts receivable turnover* = 365 days ÷ 8.6667 = 42.12 days* Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance= $130,000 ÷ [($18,000 + $12,000) ÷ 2] = 8.6667

50. Harold Company, a retailer, had cost of goods sold of $260,000 last year. The beginning inventory balance was $20,000 and the ending inventory balance was $26,000. The company's inventory turnover was closest to:A) 5.65B) 10.00C) 13.00D) 11.30

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy

Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory*= $260,000 ÷ $23,000 = 11.30*Average inventory = ($20,000 + $26,000) ÷ 2 = $23,000



51. Ira Company, a retailer, had cost of goods sold of $160,000 last year. The beginning inventory balance was $26,000 and the ending inventory balance was $24,000. The company's average sale period was closest to:A) 114.06 daysB) 54.75 daysC) 59.31 daysD) 57.03 days


Solution:

Average sale period = 365 days ÷ Inventory turnover*= 365 days ÷ 6.4 = 57.03 days* Inventory turnover = Cost of goods sold ÷ Average inventory = $160,000 ÷ [($26,000 + $24,000) ÷ 2] = 6.4

52. Raatz Corporation's total current assets are $370,000, its noncurrent assets are $660,000, its total current liabilities are $220,000, its long-term liabilities are $410,000, and its stockholders' equity is $400,000. Working capital is:A) $370,000B) $150,000C) $250,000D) $400,000


Solution:

Working capital = Current assets − Current liabilities = $370,000 − $220,000 = $150,000



53. Stubbs Corporation's total current assets are $390,000, its noncurrent assets are $630,000, its total current liabilities are $230,000, its long-term liabilities are $290,000, and its stockholders' equity is $500,000. The current ratio is closest to:A) 0.62A) 0.59B) 1.70C) 0.79


Solution:

Current ratio = Current assets ÷ Current liabilities = $390,000 ÷ $230,000 = 1.70

54. Data from Hollingworth Corporation's most recent balance sheet appear below:

Cash.................................... $12,000Marketable securities......... $29,000Accounts receivable........... $37,000Inventory............................ $51,000Prepaid expenses................ $20,000Current liabilities............... $115,000

The company's acid-test ratio is closest to:A) 0.85B) 0.10C) 0.68D) 0.36


Solution:

Acid-test ratio = Quick assets* ÷ Current liabilities = $78,000 ÷ $115,000 = 0.68* Quick assets = Cash + Marketable securities + Accounts receivable= $12,000 + $29,000 + $37,000 = $78,000



55. Eachus Corporation has provided the following data:

This Year Last YearAccounts receivable........... $135,000 $119,000Inventory............................ $136,000 $155,000Sales on account................. $698,000Cost of goods sold.............. $429,000

The accounts receivable turnover for this year is closest to:A) 0.88B) 5.50C) 5.17D) 1.13


Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $698,000 ÷ $127,000 = 5.50

*Average accounts receivable = ($135,000 + $119,000) ÷ 2 = $127,000

56. Data from Millier Corporation's most recent balance sheet and income statement appear below:


The average collection period for this year is closest to:A) 48.7 daysB) 70.6 daysC) 85.6 daysD) 54.4 days




Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $758,000 ÷ $113,000 = 6.71


Average collection period = 365 days ÷ Accounts receivable turnover*= 365 ÷ 6.71 = 54.4 days *See above

57. Laware Corporation has provided the following data:


The inventory turnover for this year is closest to:A) 2.55B) 0.94C) 2.48D) 1.06


Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory* = $447,000 ÷ $175,000 = 2.55

*Average inventory = ($170,000 + $180,000) ÷ 2 = $175,000



58. Data from Buker Corporation's most recent balance sheet and income statement appear below:


The average sale period for this year is closest to:A) 142.0 daysB) 3.6 daysC) 140.9 daysD) 3.7 days


Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory* = $399,000 ÷ $154,000 = 2.59


Average sale period = 365 days ÷ Inventory turnover* = 365 ÷ 2.59= 140.9 days *See above

59. Last year Jar Company had a net income of $290,000, income tax expense of $66,000, and interest expense of $20,000. The company's times interest earned was closest to:A) 10.20B) 14.50C) 15.50D) 18.80


Solution:

Times interest earned = Net operating income ÷ Interest expense= ($290,000 + $66,000 + $20,000) ÷ $20,000 = 18.80



60. The times interest earned ratio of Whiting Company is 4.0. The interest expense for the year is $15,000, and the company's tax rate is 30%. Whiting Company's after-tax net income must be:A) $60,000B) $42,000C) $31,500D) $16,500


Solution:

Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense4.0 = (Before-tax income + $15,000) ÷ $15,000$60,000 = Earnings before income taxes + $15,000Earnings before income taxes = $45,000After-tax net income = Earnings before income taxes × (1 − Tax rate)= $45,000 × (1 − 0.30) = $31,500

61. Karver Company has total assets of $180,000 and total liabilities of $130,000. The company's debt-to-equity ratio is closest to:A) 0.28B) 0.72C) 0.42D) 2.60


Solution:

Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $130,000 ÷ ($180,000 - $130,000) = 2.60



62. Brewster Company's debt-to-equity ratio is 0.8. Current liabilities total $100,000 and long term liabilities total $200,000. Brewster Company's total assets must be:A) $375,000B) $450,000C) $550,000D) $675,000


Solution:

Debt-to-equity ratio = Liabilities ÷ Stockholders' equity= ($100,000 + $200,000) ÷ Stockholders' equity = 0.8Stockholders' equity = $300,000 ÷ 0.8 = $375,000Total assets = Liabilities + Stockholders' equity = $300,000 + $375,000= $675,000

63. Boyington Corporation has provided the following data from its most recent income statement:

Net operating income......... $87,000Interest expense.................. $49,000Net income before taxes..... $38,000Income taxes...................... $11,000Net income......................... $27,000

The times interest earned ratio is closest to:A) 0.55B) 0.78C) 2.54D) 1.78


Solution:

Times interest earned = Net operating income ÷ Interest expense= $87,000 ÷ $49,000 = 1.78



64. Wohlfarth Corporation has provided the following data from its most recent balance sheet:

Total assets..................................... $760,000Total liabilities............................... $570,000Total stockholders’ equity.............. $190,000

The debt-to-equity ratio is closest to:A) 4.00B) 3.00C) 0.75D) 0.33


Solution:

Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $570,000 ÷ $190,000 = 3.00



Use the following to answer questions 65-81:

Gschwend Corporation's most recent balance sheet and income statement appear below:

Statement of Financial PositionDecember 31, Year 2 and Year 1

(in thousands of dollars)Assets Year 2 Year 1Current assets:

Cash.................................................................... $ 140 $ 130Accounts receivable............................................ 160 140Inventory............................................................. 170 150Prepaid expenses................................................. 90 90

Total current assets................................................ 560 510Plant and equipment, net........................................ 840 900 Total assets............................................................. $1,400 $1,410

Liabilities and Stockholders’ EquityCurrent liabilities:

Accounts payable................................................ $ 150 $ 150Accrued liabilities............................................... 60 60Notes payable, short term................................... 60 60

Total current liabilities........................................... 270 270Bonds payable........................................................ 230 270 Total liabilities....................................................... 500 540 Stockholders’ equity:

Preferred stock, $100 par value, 5%................... 200 200Common stock, $1 par value.............................. 100 100Additional paid-in capital–common stock.......... 100 100Retained earnings................................................ 500 470

Total stockholders’ equity...................................... 900 870 Total liabilities & stockholders’ equity.................. $1,400 $1,410



Income StatementFor the Year Ended December 31, Year 2

(in thousands of dollars)Sales (all on account)............................................. $1,370Cost of goods sold.................................................. 800 Gross margin.......................................................... 570Selling and administrative expense........................ 439 Net operating income............................................. 131Interest expense...................................................... 31 Net income before taxes......................................... 100Income taxes (30%)............................................... 30 Net income............................................................. $ 70

Dividends on common stock during Year 2 totaled $30 thousand. Dividends on preferred stock totaled $10 thousand. The market price of common stock at the end of Year 2 was $4.86 per share.

65. The gross margin percentage for Year 2 is closest to:A) 814.3%B) 71.3%C) 41.6%D) 12.3%


Solution:

Gross margin percentage = Gross margin ÷ Sales = $570 ÷ $1,370 = 41.6%

66. The earnings per share of common stock for Year 2 is closest to:A) $0.60B) $0.70C) $1.00D) $1.31




Solution:

Earnings per share = (Net Income - Preferred Dividends) ÷Average number of common shares outstanding* = ($70 − $10) ÷ 100 = $0.60

*Number of common shares outstanding = Common stock ÷ Par value= $100 ÷ $1 = 100

67. The price-earnings ratio for Year 2 is closest to:A) 8.10B) 3.71C) 6.94D) 4.86


Solution:



Price-earnings ratio = Market price per share ÷ Earnings per share= $4.86 ÷ $0.60 = 8.10

68. The dividend payout ratio for Year 2 is closest to:A) 66.7%B) 50.0%C) 833.3%D) 42.9%




Solution:



Dividend payout ratio = Dividends per share* ÷ Earnings per share= $0.30 ÷ $0.60 = 50.0%*Dividends per share = Common dividends ÷ Common shares= $30 ÷ 100 shares = $0.30 per share

69. The dividend yield ratio for Year 2 is closest to:A) 75.00%B) 8.23%C) 2.06%D) 6.17%


Solution:

Earnings per share = (Net Income − Preferred Dividends) ÷Average number of common shares outstanding* = ($70 − $10) ÷ 100 = $0.60


Dividend payout ratio = Dividends per share* ÷ Earnings per share= $0.30 ÷ $0.60 = 50.0%*Dividends per share = Common dividends ÷ Common shares= $30 ÷ 100 shares = $0.30 per share

Dividend yield ratio = Dividends per share ÷ Market price per share = $0.30 ÷ $4.86 = 6.17%



70. The return on total assets for Year 2 is closest to:A) 5.00%B) 6.55%C) 6.53%D) 4.98%


Solution:

Return on total assets = Adjusted net income* ÷ Average total assets**= $91.70 ÷ $1,405 = 6.53%*Adjusted net income= Net income + [Interest expense × (1 − Tax rate)]= $70 + [$31 × (1 − 0.30)] = $91.70**Average total assets = ($1,410 + $1,400) ÷ 2 = $1,405

71. The return on common stockholders' equity for Year 2 is closest to:A) 6.78%B) 7.91%C) 8.76%D) 10.22%


Solution:

Return on common stockholders' equity= (Net income - Preferred dividends) ÷ Average common stockholders' equity*= ($70 − $10) ÷ $685 = 8.76%*Average common stockholders' equity= [($870 - $200) + ($900 − $200)] ÷ 2 = $685



72. The book value per share at the end of Year 2 is closest to:A) $0.60B) $7.00C) $9.00D) $14.00


Solution:

Book value per share = Common stockholders' equity÷ Number of common shares outstanding* = $700 ÷ 100 shares = $7.00 per share*Number of common shares outstanding = Common stock ÷ Par value= $100 ÷ $1 per share = 100 shares

73. The working capital at the end of Year 2 is:A) $840 thousandB) $560 thousandC) $290 thousandD) $900 thousand


Solution:

Working capital = Current assets - Current liabilities = $560 thousand − $270 thousand = $290 thousand

74. The current ratio at the end of Year 2 is closest to:A) 0.36B) 0.40C) 0.89D) 2.07


Solution:

Current ratio = Current assets ÷ Current liabilities = $560 ÷ $270 = 2.07



75. The acid-test ratio at the end of Year 2 is closest to:A) 1.11B) 1.12C) 2.07D) 1.44


Solution:

Acid-test ratio = Quick assets* ÷ Current liabilities = $300 ÷ $270 = 1.11*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $140 + $0 + $160 = $300

76. The accounts receivable turnover for Year 2 is closest to:A) 1.14B) 8.56C) 0.88D) 9.13


Solution:Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,370 ÷ $150 = 9.13*Average accounts receivable = ($140 + $160) ÷ 2 = $150

77. The average collection period for Year 2 is closest to:A) 1.1 daysB) 42.6 daysC) 0.9 daysD) 40.0 days




Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,370 ÷ $150 = 9.13*Average accounts receivable = ($140 + $160) ÷ 2 = $150

Average collection period = 365 days ÷ Accounts receivable turnover= 365 days ÷ 9.13 = 40.0 days

78. The inventory turnover for Year 2 is closest to:A) 4.71B) 0.88C) 5.00D) 1.13


Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory* = $800 ÷ $160 = 5.00*Average inventory = ($150 + $170) ÷ 2 = $160

79. The average sale period for Year 2 is closest to:A) 45.3 daysB) 77.5 daysC) 213.1 daysD) 73.0 days


Solution:


Average sale period = 365 days ÷ Inventory turnover (see above)= 365 days ÷ 5.00 = 73.0 days



80. The times interest earned for Year 2 is closest to:A) 4.23B) 6.04C) 2.26D) 3.23


Solution:

Times interest earned = Net operating income ÷ Interest expense= $131 ÷ $31 = 4.23

81. The debt-to-equity ratio at the end of Year 2 is closest to:A) 0.71B) 0.26C) 0.56D) 0.32


Solution:

Debt-to-equity ratio = Liabilities ÷ Stockholders' equity= $500 ÷ $900 = 0.56




Orgeron Corporation's most recent balance sheet and income statement appear below:



Cash.............................................................. $ 260 $ 120Accounts receivable...................................... 160 190Inventory....................................................... 180 160Prepaid expenses........................................... 60 70

Total current assets.......................................... 660 540Plant and equipment, net.................................. 680 750 Total assets....................................................... $1,340 $1,290


Accounts payable.......................................... $ 170 $ 150Accrued liabilities......................................... 40 40Notes payable, short term............................. 80 90

Total current liabilities..................................... 290 280Bonds payable.................................................. 290 300 Total liabilities................................................. 580 580 Stockholders’ equity:Preferred stock, $100 par value, 5%................ 100 100

Common stock, $2 par value........................ 200 200Additional paid-in capital–common stock.... 100 100Retained earnings.......................................... 360 310

Total stockholders’ equity................................ 760 710 Total liabilities & stockholders’ equity............ $1,340 $1,290




(in thousands of dollars)Sales (all on account)....................................... $1,260Cost of goods sold............................................ 800 Gross margin.................................................... 460Selling and administrative expense.................. 272 Net operating income....................................... 188Interest expense................................................ 38 Net income before taxes................................... 150Income taxes (30%)......................................... 45 Net income....................................................... $ 105


82. The gross margin percentage for Year 2 is closest to:A) 57.5%B) 22.8%C) 438.1%D) 36.5%


Solution:

Gross margin percentage = Gross margin ÷ Sales = $460 ÷ $1,260 = 36.5%





Solution:

Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($105 − $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $2 per share = 100 shares



Solution:

Earnings per share = (Net Income - Preferred Dividends)÷ Average number of common shares outstanding*= ($105 - $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $2 per share = 100 sharesPrice-earnings ratio = Market price per share ÷ Earnings per share= $11.30 ÷ $1.00 = 11.30





Solution:

Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($105 − $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $2 per share = 100 sharesDividend payout ratio = Dividends per share* ÷ Earnings per share= $0.50 ÷ $1.00 = 50.0%*Dividends per share = Common dividends ÷ Common shares= $50 ÷ 100 shares = $0.50 per share



Solution:

Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($105 − $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $2 per share = 100 sharesDividend payout ratio = Dividends per share* ÷ Earnings per share= $0.50 ÷ $1.00 = 50.0%*Dividends per share = Common dividends ÷ Common shares= $50 ÷ 100 shares = $0.50 per shareDividend yield ratio = Dividends per share ÷ Market price per share = $0.50 ÷ $11.30 = 4.42%





Solution:

Return on total assets = Adjusted net income* ÷ Average total assets**= $131.60 ÷ $1,315 = 10.01%*Adjusted net income= Net income + [Interest expense × (1 − Tax rate)]= $105 + [$38 × (1 − 0.30)] = $131.60**Average total assets = ($1,290 + $1,340) ÷ 2 = $1,315



Solution:

Return on common stockholders' equity= (Net income − Preferred dividends) ÷ Average common stockholders' equity*= ($105 − $5) ÷ $635 = 15.75%*Average common stockholders' equity = ($610 + $660) ÷ 2 = $635





Solution:

Book value per share = Common stockholders' equity÷ Number of common shares outstanding* = $660 ÷ 100 shares = $6.60 per share*Number of common shares outstanding = Common stock ÷ Par value= $200 ÷ $2 per share = 100 shares


Payne Company's sales and current assets have been reported as follows over the last four years:

Year 4 Year 3 Year 2 Year 1Sales................................... $810,000 $720,000 $630,000 $600,000

Cash.................................... $ 36,000 $ 30,000 $ 25,000 $ 20,000Accounts receivable........... 74,000 60,000 59,200 50,000Inventory............................ 77,800 72,000 90,000 80,000Prepaid expenses................ 46,200 38,000 10,800 30,000 Total current assets............ $234,000 $200,000 $185,000 $180,000



90. Suppose that Payne Company employs trend percentages to analyze performance with Year 1 as the base year. Sales for Year 4 expressed as a trend percentage would be closest to:A) 128.6%B) 74.1%C) 112.5%D) 135.0%


Solution:

Sales as trend percentage = Year 4 sales ÷ Year 1 sales = ($810,000 ÷ $600,000) = 135.0%

91. Suppose that Payne Company employs trend percentages to analyze performance with Year 2 as the base year. Inventory for Year 3 expressed as a trend percentage would be closest to:A) 125%B) 80%C) 90%D) 36%


Solution:

Inventory as trend percentage = Year 3 inventory ÷ Year 2 inventory = $72,000 ÷ $90,000 = 80%



92. Suppose that Payne Company employs common size statements to analyze changes in the current assets. The increase in the Accounts Receivable account when comparing Year 3 to Year 2 would be closest to:A) 1.3% increaseB) 0.4% increaseC) 5.3% increaseD) 4.2% increase


Solution:

Increase in Accounts Receivable account = ($60,000 − $59,200) ÷ $59,200 = 1.3%




Financial statements for Orahood Company appear below:

Orahood CompanyStatement of Financial Position

December 31, Year 2 and Year 1(dollars in thousands)

Year 2 Year 1Current assets:

Cash and marketable securities........................ $ 200 $ 170Accounts receivable, net.................................. 170 140Inventory.......................................................... 120 120Prepaid expenses.............................................. 20 30

Total current assets............................................. 510 460Noncurrent assets:

Plant & equipment, net.................................... 1,530 1,540 Total assets.......................................................... $2,040 $2,000

Current liabilities:Accounts payable............................................. $ 170 $ 160Accrued liabilities............................................ 60 50Notes payable, short term................................ 270 290

Total current liabilities........................................ 500 500Noncurrent liabilities:

Bonds payable.................................................. 290 300Total liabilities................................................. 790 800

Stockholders’ equity:Preferred stock, $10 par, 10%.......................... 100 100Common stock, $5 par..................................... 200 200Additional paid-in capital–common stock....... 280 280Retained earnings............................................. 670 620

Total stockholders’ equity................................... 1,250 1,200 Total liabilities & stockholders’ equity............... $2,040 $2,000



Orahood CompanyIncome Statement

For the Year Ended December 31, Year 2(dollars in thousands)

Sales (all on account).......................................... $1,740Cost of goods sold............................................... 1,210 Gross margin....................................................... 530Selling and administrative expense..................... 210 Net operating income.......................................... 320Interest expense................................................... 30 Net income before taxes...................................... 290Income taxes (30%)............................................ 87 Net income.......................................................... $ 203

Dividends during Year 2 totaled $153 thousand, of which $10 thousand were preferred dividends. The market price of a share of common stock on December 31, Year 2 was $80.

93. Orahood Company's earnings per share of common stock for Year 2 was closest to:A) $7.25B) $2.14C) $4.83D) $5.08


Solution:

Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($203 − $10) ÷ (40 shares + 40 shares)/2 = $4.83 per share*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $5 per share = 40 shares



94. Orahood Company's dividend yield ratio on December 31, Year 2 was closest to:A) 4.2%B) 4.5%C) 2.1%D) 4.8%


Solution:

Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($203 − $10) ÷ (40 shares + 40 shares)/2 = $4.83 per share*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $5 per share = 40 sharesDividends per share = Common dividends ÷ Common shares = $143 ÷ 40 shares = $3.58 per shareDividend yield ratio = Dividends per share ÷ Market price per share = $3.58 ÷ $80 = 4.5%

95. Orahood Company's return on total assets for Year 2 was closest to:A) 11.1%B) 10.0%C) 9.0%D) 10.5%


Solution:

Return on total assets = Adjusted net income* ÷ Average total assets**= $224 ÷ $2,020 = 11.1%*Adjusted net income= Net income + [Interest expense × (1 − Tax rate)]= $203 + [$30 × (1 − 0.30)] = $224**Average total assets = ($2,000 + $2,040) ÷ 2 = $2,020



96. Orahood Company's current ratio at the end of Year 2 was closest to:A) 0.63B) 1.02C) 0.55D) 1.25


Solution:


97. Orahood Company's accounts receivable turnover for Year 2 was closest to:A) 14.5B) 10.1C) 11.2D) 7.8


Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,740 ÷ $155 = 11.2

*Average accounts receivable = ($140 + $170) ÷ 2 = $155

98. Orahood Company's average sale period for Year 2 was closest to:A) 25.2 daysB) 46.8 daysC) 32.5 daysD) 36.2 days


Solution:

Average sale period = 365 days ÷ Inventory turnover*= 365 days ÷ 10.08 = 36.2 days*Inventory turnover = Cost of goods sold ÷ Average inventory = $1,210 ÷ ($120 + $120)/2 = 10.08



99. Orahood Company's times interest earned for Year 2 was closest to:A) 9.7B) 17.7C) 6.8D) 10.7


Solution:





Financial statements for Matti Company appear below:

Matti CompanyBalance Sheet

As of December 31Year 2 Year 1

Current assets......................................................... $ 90,000 $ 70,000Long term investments........................................... 110,000 110,000Plant, property, and equipment (net)...................... 500,000 420,000 Total assets............................................................. $700,000 $600,000

Current liabilities................................................... $110,000 $80,000Bonds payable........................................................ 140,000 100,000Preferred stock (par value $100, 8%).................... 75,000 75,000Common stock (par value $5)................................ 125,000 125,000Additional paid-in capital–common stock............. 220,000 220,000Retained earnings................................................... 30,000 0 Total liabilities and equities................................... $700,000 $600,000

Matti CompanyIncome Statement

For the Year Ended December 31, Year 2

Sales....................................................................... $800,000Cost of goods sold.................................................. 450,000 Gross margin.......................................................... 350,000Selling and administrative expense........................ 250,000 Net operating income............................................. 100,000Interest expense...................................................... 10,000 Net income before taxes......................................... 90,000Income taxes (30%)............................................... 27,000 Net Income............................................................. $ 63,000

Dividends were $33,000 for the year, of which $6,000 were for preferred stock.



100. The return on common stockholders' equity for Matti Company for Year 2 is closest to:A) 15.8%B) 17.5%C) 14.0%D) 15.2%


Solution:

Return on common stockholders' equity = (Net income − Preferred dividends) ÷Average common stockholders' equity* = ($63,000 - $6,000) ÷ $360,000 = 15.8%

*Average common stockholders' equity = ($375,000 + $345,000) ÷ 2 = $360,000

101. The return on total assets for Matti Company for Year 2 is closest to:A) 10.8%B) 10.0%C) 9.0%D) 10.2%


Solution:

Return on total assets = Adjusted net income* ÷ Average total assets**= $70,000 ÷ $650,000 = 10.8%*Adjusted net income = Net income + [Interest expense × (1 − Tax rate)]= $63,000 + [$10,000 × (1 − 0.30)] = $70,000**Average total assets = ($600,000 + $700,000) ÷ 2 = $650,000



102. The times interest earned for Matti Company for Year 2 is closest to:A) 6.3B) 7.3C) 9.0D) 10.0


Solution:


103. The book value per share for Matti Company as of December 31, Year 2 is closest to:A) $18.00B) $13.80C) $28.00D) $15.00


Solution:

Book value per share = Common stockholders' equity ÷Number of common shares outstanding* = $375,000 ÷ 25,000 = $15.00

*Number of common shares outstanding = Common stock ÷ Par value= $125,000 ÷ $5 = 25,000




Financial statements for Lardy Company appear below:

Lardy CompanyStatement of Financial Position



Cash and marketable securities........................... $ 180 $ 180Accounts receivable, net..................................... 220 190Inventory............................................................. 170 180Prepaid expenses................................................. 30 20

Total current assets................................................ 600 570Noncurrent assets:

Plant & equipment, net....................................... 1,830 1,820 Total assets............................................................. $2,430 $2,390

Current liabilities:Accounts payable................................................ $ 120 $ 130Accrued liabilities............................................... 90 60Notes payable, short term................................... 140 160

Total current liabilities........................................... 350 350Noncurrent liabilities:

Bonds payable..................................................... 360 400Total liabilities.................................................... 710 750

Stockholders’ equity:.............................................Preferred stock, $20 par, 10%............................. 120 120Common stock, $10 par...................................... 140 140Additional paid-in capital–common stock.......... 160 160Retained earnings................................................ 1,300 1,220

Total stockholders’ equity...................................... 1,720 1,640 Total liabilities & stockholders’ equity.................. $2,430 $2,390



Lardy CompanyIncome Statement


Sales (all on account)............................................. $2,060Cost of goods sold.................................................. 1,440 Gross margin.......................................................... 620Selling and administrative expense........................ 240 Net operating income............................................. 380Interest expense...................................................... 40 Net income before taxes......................................... 340Income taxes (30%)............................................... 102 Net income............................................................. $ 238


104. Lardy Company's earnings per share of common stock for Year 2 was closest to:A) $16.14B) $24.29C) $17.00D) $3.65


Solution:

Earnings per share = (Net Income − Preferred Dividends) ÷Average number of common shares outstanding*= ($238 − $12) ÷ 14 = $16.14

*Number of common shares outstanding = Common stock ÷ Par value= $140 ÷ $10 =14



105. Lardy Company's price-earnings ratio on December 31, Year 2 was closest to:A) 8.65B) 13.01C) 57.61D) 12.35


Solution:



Price-earnings ratio = Market price per share ÷ Earnings per share= $210 ÷ $16.14 = 13.01

106. Lardy Company's dividend payout ratio for Year 2 was closest to:A) 38.4%B) 23.5%C) 66.4%D) 64.6%




Solution:



Dividend payout ratio = Dividends per share* ÷ Earnings per share= $10.43 ÷ $16.14 = 64.6%

*Dividends per share = Common dividends ÷ Common shares= $146 ÷ 14 = $10.43

107. Lardy Company's dividend yield ratio on December 31, Year 2 was closest to:A) 5.4%B) 1.2%C) 5.0%D) 4.6%


Solution:



Dividend payout ratio = Dividends per share* ÷ Earnings per share= $10.43 ÷ $16.14 = 64.6%


Dividend yield ratio = Dividends per share ÷ Market price per share= $10.43 ÷ $210 = 5.0%



108. Lardy Company's return on total assets for Year 2 was closest to:A) 11.0%B) 8.7%C) 9.9%D) 10.4%


Solution:

Return on total assets = Adjusted net income* ÷ Average total assets**= $266 ÷ $2,410 = 11.0%

*Adjusted net income = Net income + [Interest expense × (1 − Tax rate)]= $238 + 40 x (1 − .30) = $266

**Average total assets = ($2,390 + $2,430) ÷ 2 = $2,410

109. Lardy Company's return on common stockholders' equity for Year 2 was closest to:A) 14.5%B) 15.3%C) 13.5%D) 14.2%


Solution:

Return on common stockholders' equity = (Net income − Preferred dividends) ÷Average common stockholders' equity* = ($238 − $12) ÷ $1,560 = 14.5%




110. Lardy Company's book value per share at the end of Year 2 was closest to:A) $21.43B) $114.29C) $10.00D) $122.86


Solution:

Book value per share = Common stockholders' equity ÷Number of common shares outstanding* = $1,600 ÷ 14 = $114.29



Information concerning the common stock of Hopkins Company follows:

Market price per share on December 31.... $36.00Book value per share on December 31...... $27.00Earnings per share for the year.................. $4.50Par value per share..................................... $10.00Dividend per share for the year.................. $1.80

111. Hopkins Company's dividend payout ratio is:A) 60%B) 40%C) 5%D) 18%


Solution:

Dividend payout ratio = Dividends per share* ÷ Earnings per share= $1.80 ÷ $4.50 = 40%



112. Hopkins Company's price-earnings ratio is:A) 8.0B) 6.67C) 6.0D) 20.0


Solution:


113. Hopkins Company's dividend yield ratio is:A) 18%B) 12.5%C) 6%D) 5%


Solution:

Dividend yield ratio = Dividends per share ÷ Market price per share= $1.80 ÷ $36.00 = 5%




Erichsen Corporation's most recent balance sheet and income statement appear below:


(in thousands of dollars)Year 2 Year 1

AssetsCurrent assets:















Solution:







Solution:






Solution:



Dividend payout ratio = Dividends per share** ÷ Earnings per share= $0.40 ÷ $0.65 = 61.5%

**Dividends per share = Common dividends ÷ Common shares= $80 ÷ 200 = $0.40





Solution:



Dividend payout ratio = Dividends per share** ÷ Earnings per share= $0.40 ÷ $0.65 = 61.5%

**Dividends per share = Common dividends ÷ Common shares= $80 ÷ 200 = $0.40

Dividend yield ratio = Dividends per share ÷ Market price per share= $0.40 ÷ $11.05 = 3.62%





Solution:

Return on total assets = Adjusted net income* ÷ Average total assets**= $158.10 ÷ $1,375 = 11.50%

*Adjusted net income = Net income + [Interest expense × (1 − Tax rate)]= $135 + 33 x (1 − 0.30) = $158.10




Solution:

Return on common stockholders' equity = (Net income − Preferred dividends) ÷Average common stockholders' equity* = ($135 − $5) ÷ $815 = 15.95%

*Average common stockholders' equity = ($790 + $840) ÷ 2 = $815



Solution:

Book value per share = Common stockholders' equity ÷Number of common shares outstanding* = $840 ÷ 200 = $4.20





Excerpts from Jameel Corporation's most recent balance sheet and income statement appear below:

Year 2 Year 1Total assets............................................................. $1,540 $1,530

Total liabilities....................................................... $470 $490

Stockholders’ equity:Preferred stock, $100 par value, 5%................... $ 100 $ 100Common stock, $1 par value.............................. 200 200Additional paid-in capital–common stock.......... 150 150Retained earnings................................................ 620 590

Total stockholders’ equity...................................... $1,070 $1,040

Sales (all on account) $1,290Cost of goods sold 790 Gross margin 500Selling and administrative expense 334 Net operating income 166Interest expense 30 Net income before taxes 136Income taxes (30%) 41 Net income $ 95






Solution:





Solution:



Price-earnings ratio = Market price per share ÷ Earnings per share (see above)= $3.87 ÷ $0.45 = 8.60





Solution:

Number of common shares outstanding = Common stock ÷ Par value= $200 ÷ $1 = 200

Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)= $0.30 ÷ $0.45 = 66.7%




Solution:

Number of common shares outstanding = Common stock ÷ Par value= $200 ÷ $1 = 200


Dividend yield ratio = Dividends per share* ÷ Market price per share= $0.30 ÷ $3.87 = 7.75%





Solution:

Return on total assets = Adjusted net income* ÷ Average total assets**= $116 ÷ $1,535 = 7.56%

*Adjusted net income = Net income + [Interest expense × (1 − Tax rate)]= $95 + [$30 × (1 − 0.30)] = $116




Solution:

Return on common stockholders' equity = (Net income − Preferred dividends) ÷Average common stockholders' equity* = ($95 − $5) ÷ $955 = 9.42%

*Average common stockholders' equity = ($940 + $970) ÷ 2 = $955





Solution:

Book value per share = Common stockholders' equity ÷Number of common shares outstanding* = $970 ÷ 200 = $4.85





Financial statements for Spencer Company appear below:

Spencer CompanyBalance SheetDecember 31

Cash........................................................................ $ 200,000Accounts receivable............................................... 240,000Inventories.............................................................. 340,000Prepaid expenses.................................................... 20,000Plant and equipment (net)...................................... 400,000 Total assets............................................................. $1,200,000

Accounts payable................................................... $ 300,000Taxes payable......................................................... 90,000Interest payable...................................................... 10,000Long-term bonds payable...................................... 200,000Common stock $(14 par)....................................... 280,000Retained earnings................................................... 320,000 Total liabilities & stockholders’ equities............... $1,200,000

Spencer CompanyIncome Statement

For the Year Ended December 31

Sales (all on account)............................................. $1,800,000Cost of goods sold.................................................. 1,120,000 Gross margin.......................................................... 680,000Selling and administrative expenses...................... 520,000 Net operating income............................................. 160,000Interest expense...................................................... 20,000 Net income before taxes......................................... 140,000Income taxes (30%)............................................... 42,000 Net income............................................................. $ 98,000



128. At December 31, Spencer Company's current ratio was closest to:A) 1.10B) 1.33C) 2.00D) 2.67


Solution:

Current ratio = Current assets ÷ Current liabilities = ($1,200,000 − $400,000) ÷ ($300,000 + $90,000 + $10,000) = 2.00

129. At December 31, Spencer Company's acid-test ratio was closest to:A) 1.10B) 0.50C) 0.90D) 1.15


Solution:

Acid-test ratio = Quick assets* ÷ Current liabilities = $440,000 ÷ $400,000 = 1.10

*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $200,000 + $240,000 = $440,000

130. Suppose that the Inventory account had a balance of $300,000 at the beginning of the year. Spencer Company's inventory turnover for the year was closest to:A) 3.50B) 6.00C) 5.63D) 3.23




Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,120,000 ÷ $320,000 = 3.50


131. Suppose that the balance of Accounts Receivable remained unchanged between the beginning and end of the year. Spencer Company's average collection period for the year was closest to:A) 27 daysB) 28 daysC) 49 daysD) 75 days


Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,800,000 ÷ $240,000 = 7.5


Average collection period = 365 days ÷ Accounts receivable turnover= 365 ÷ 7.5 = 49

132. Spencer Company's debt-to-equity ratio on December 31 was closest to:A) 0.333B) 0.500C) 1.000D) 0.375


Solution:

Debt-to-equity ratio = Liabilities ÷ Stockholders' equity= ($300,000 + $90,000 + $10,000 + $200,000) ÷ ($280,000 + $320,000) = 1.000




Financial statements for Marbet Company appear below:

Marbet CompanyStatement of Financial Position








Bonds payable..................................................... 500 500Total liabilities.................................................... 900 900

Stockholders’ equity:Preferred stock, $10 par, 8%............................... 120 120Common stock, $5 par........................................ 200 200Additional paid-in capital–common stock.......... 280 280Retained earnings................................................ 900 860




Marbet CompanyIncome Statement



133. Marbet Company's working capital (in thousands of dollars) at the end of Year 2 was closest to:A) $90B) $1,500C) $490D) $600


Solution:

Working capital = Current assets − Current liabilities = $490 − $400 = $90

134. Marbet Company's current ratio at the end of Year 2 was closest to:A) 0.37B) 1.20C) 1.23D) 0.44


Solution:




135. Marbet Company's acid-test ratio at the end of Year 2 was closest to:A) 0.85B) 2.27C) 0.31D) 0.44


Solution:

Acid-test ratio = Quick assets* ÷ Current liabilities = $340 ÷ $400 = 0.85

*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $160 + $180 = $340

136. Marbet Company's accounts receivable turnover for Year 2 was closest to:A) 9.3B) 13.3C) 6.6D) 9.4


Solution:





137. Marbet Company's average collection period for Year 2 was closest to:A) 27.4 daysB) 39.1 daysC) 55.4 daysD) 38.8 days


Solution:



Average collection period = 365 days ÷ Accounts receivable turnover= 365 ÷ 9.4 = 38.8 days

138. Marbet Company's inventory turnover for Year 2 was closest to:A) 13.3B) 6.6C) 9.4D) 9.3


Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,120 ÷ $120 = 9.3

*Average inventory = ($130 + $110) ÷ 2 = $120



139. Marbet Company's average sale period for Year 2 was closest to:A) 38.8 daysB) 55.4 daysC) 39.1 daysD) 27.4 days


Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,120 ÷ $120 = 9.3


Average sale period = 365 days ÷ Inventory turnover = 365 ÷ 9.3= 39.1 days


Selected financial data for Drew Company appear below:

Drew CompanySelected Financial Data

As of December 31Year 2 Year 1

Cash........................................................................ $75,000 $35,000Accounts receivable (net)...................................... $225,000 $200,000Inventory................................................................ $270,000 $210,000Short-term marketable securities........................... $40,000 $20,000Land and building (net).......................................... $500,000 $500,000Mortgage payable-current portion......................... $30,000 $25,000Accounts payable and accrued liabilities............... $120,000 $110,000Short-term notes payable....................................... $50,000 $70,000

Year Ended December 31Year 2 Year 1

Sales (all on credit)................................................ $1,500,000 $1,300,000Cost of goods sold.................................................. $900,000 $800,000



140. Drew Company's acid-test ratio as of December 31, Year 2, was closest to:A) 3.6B) 3.1C) 2.0D) 1.7

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium Source: CPA, adapted

Solution:

Acid-test ratio = Quick assets* ÷ Current liabilities = $340,000 ÷ ($30,000 + $120,000 + $50,000) = 1.7

*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $75,000 + $225,000 + $40,000 = $340,000

141. Drew Company's average sale period for Year 2 was closest to:A) 97 daysB) 34 daysC) 58 daysD) 219 days

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium Source: CPA, adapted

Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory* = $900,000 ÷ $240,000 = 3.75*Average inventory = ($210,000 + $270,000) ÷ 2 = $240,000

Average sale period = 365 days ÷ Inventory turnover= 365 days ÷ 3.75 = 97 days



142. Drew Company's average collection period for Year 2 was closest to:A) 86 daysB) 52 daysC) 55 daysD) 304 days

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium Source: CPA, adapted

Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,500,000 ÷ $212,500 = 7.06*Average accounts receivable = ($200,000 + $225,000) ÷ 2 = $212,500

Average collection period = 365 days ÷ Accounts receivable turnover = 365 days ÷ 7.06 = 52 days




Rosenfield Corporation's most recent balance sheet and income statement appear below:







Total current liabilities........................................... 280 320Bonds payable........................................................ 70 110Total liabilities....................................................... 350 430Stockholders’ equity:









Solution:

Working capital = Current assets − Current liabilities = $320 thousand − $280 thousand = $40 thousand



Solution:






Solution:




Solution:






Solution:


Average collection period = 365 days ÷ Accounts receivable turnover = 365 days ÷ 9.14 = 39.9 days



Solution:




Solution:


Average sale period = 365 days ÷ Inventory turnover= 365 days ÷ 6.69 = 54.6 days




Excerpts from Debnam Corporation's most recent balance sheet appear below:


Cash............................................ $150 $150Accounts receivable.................... 130 110Inventory..................................... 160 150Prepaid expenses......................... 90 90

Total current assets........................ $530 $500Total current liabilities................... $200 $210

Sales on account in Year 2 amounted to $1,170 and the cost of goods sold was $700.

150. The working capital at the end of Year 2 is:A) $330 thousandB) $530 thousandC) $1,030 thousandD) $860 thousand


Solution:




Solution:






Solution:




Solution:






Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,170 ÷ $120 = 9.75*Average accounts receivable = ($110 + $130) ÷ 2 = $120Average collection period = 365 days ÷ Accounts receivable turnover = 365 days ÷ 9.75 = 37.4 days



Solution:




Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory* = $700 ÷ $155 = 4.52*Average inventory = ($150 + $160) ÷ 2 = $155Average sale period = 365 days ÷ Inventory turnover= 365 days ÷ 4.52 = 80.8 days




Excerpts from Jordison Corporation's most recent balance sheet appear below:





157. The working capital at the end of Year 2 is:A) $320 thousandB) $840 thousandC) $1,000 thousandD) $610 thousand


Solution:




Solution:






Solution:




Solution:




Solution:





Data from Carrel Corporation's most recent balance sheet appear below:







Solution:




Solution:






Solution:




Solution:

Average collection period = 365 days ÷ Accounts receivable turnover*= 365 days ÷ 5.24 = 69.7 days*Accounts receivable turnover = Net credit sales ÷ Average accounts receivable= $1,440 ÷ [($300 + $250) ÷ 2] = 5.24





Solution:


Average sale period = 365 days ÷ Inventory turnover= 365 days ÷ 7.73 = 47.2 days




Financial statements for Narasaki Company appear below:

Narasaki CompanyStatement of Financial Position








Bonds payable..................................................... 510 500 Total liabilities....................................................... 870 850 Stockholders’ equity:

Preferred stock, $10 par, 6%............................... 100 100Common stock, $2 par........................................ 160 160Additional paid-in capital–common stock.......... 240 240Retained earnings................................................ 560 510




Narasaki CompanyIncome Statement



167. Narasaki Company's times interest earned for Year 2 was closest to:A) 17.8B) 10.8C) 9.8D) 6.9


Solution:


168. Narasaki Company's debt-to-equity ratio at the end of Year 2 was closest to:A) 0.48B) 0.34C) 1.55D) 0.82


Solution:

Debt-to-equity ratio = Liabilities ÷ Stockholders' equity= $870 ÷ $1,060 = 0.82




Parmeter Corporation's most recent balance sheet and income statement appear below:




Cash................................................................. $ 80 $ 140Accounts receivable......................................... 120 110Inventory.......................................................... 130 110Prepaid expenses.............................................. 100 90

Total current assets............................................. 430 450Plant and equipment, net..................................... 670 730 Total assets.......................................................... $1,100 $1,180


Accounts payable............................................. $ 170 $ 190Accrued liabilities............................................ 40 50Notes payable, short term................................ 80 90

Total current liabilities........................................ 290 330Bonds payable..................................................... 70 120 Total liabilities.................................................... 360 450 Stockholders’ equity:..........................................

Preferred stock, $100 par value, 5%................ 100 100Common stock, $2 par value........................... 200 200Additional paid-in capital–common stock....... 120 120Retained earnings............................................. 320 310

Total stockholders’ equity................................... 740 730 Total liabilities & stockholders’ equity............... $1,100 $1,180




(in thousands of dollars)Sales (all on account).......................................... $1,270Cost of goods sold............................................... 790 Gross margin....................................................... 480Selling and administrative expense..................... 369 Net operating income.......................................... 111Interest expense................................................... 18 Net income before taxes...................................... 93Income taxes (30%)............................................ 28 Net income.......................................................... $ 65



Solution:




Solution:





Data from Pruette Corporation's most recent balance sheet and the company's income statement appear below:

Year 2 Year 1Total assets..................................... $1,260 $1,230Total liabilities............................... $580 $560Total stockholders’ equity.............. $680 $670


(in thousands of dollars)Sales (all on account)................................. $1,270Cost of goods sold.................................................. 860 Gross margin..........................................................410Selling and administrative expense........................ 280 Net operating income.............................................130Interest expense...................................................... 30 Net income before taxes.........................................100Income taxes (30%)............................................... 30 Net income.............................................................$ 70



Solution:






Solution:




Essay Questions

173. Espinola Corporation's most recent balance sheet and income statement appear below:




Cash................................................................... $ 320 $ 180Accounts receivable.......................................... 220 240Inventory........................................................... 140 130Prepaid expenses............................................... 20 20

Total current assets............................................... 700 570Plant and equipment, net...................................... 860 920 Total assets........................................................... $1,560 $1,490


Accounts payable.............................................. $ 200 $ 170Accrued liabilities.............................................. 80 80Notes payable, short term.................................. 40 40

Total current liabilities......................................... 320 290Bonds payable...................................................... 210 220 Total liabilities...................................................... 530 510 Stockholders’ equity:

Preferred stock, $100 par value, 5%.................. 100 100Common stock, $1 par value............................. 100 100Additional paid-in capital–common stock........ 150 150Retained earnings.............................................. 680 630

Total stockholders’ equity.................................... 1,030 980 Total liabilities & stockholders’ equity................ $1,560 $1,490




(in thousands of dollars)Sales (all on account)............................................ $1,220Cost of goods sold................................................ 790 Gross margin........................................................ 430Selling and administrative expense...................... 268 Net operating income........................................... 162Interest expense.................................................... 26 Net income before taxes....................................... 136Income taxes (30%).............................................. 41 Net income............................................................ $ 95


Required:

Compute the following for Year 2:a. Gross margin percentage.b. Earnings per share (of common stock).c. Price-earnings ratio.d. Dividend payout ratio.e. Dividend yield ratio.f. Return on total assets.g. Return on common stockholders' equity.h. Book value per share.i. Working capital.j. Current ratio.k. Acid-test ratio.l. Accounts receivable turnover.m. Average collection period.n. Inventory turnover.o. Average sale period.p. Times interest earned.q. Debt-to-equity ratio.



Ans:

a. Gross margin percentage = Gross margin ÷ Sales = $430 ÷ $1,220 = 35.2%

b. Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($95 − $5) ÷ (100 shares + 100 shares)/2 = $0.90 per share*Number of common shares outstanding= Common stock ÷ Par value = $100 ÷ $1 per share = 100 shares

c. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)= $12.87 ÷ $0.90 = 14.3

d. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)= $0.40 ÷ $0.90 = 44.4%*Dividends per share = Common dividends ÷ Common shares (see above)= $40 ÷ 100 shares = $0.40 per share

e. Dividend yield ratio = Dividends per share (see above) ÷ Market price per share= $0.40 ÷ $12.87 = 3.11%

f. Return on total assets = Adjusted net income* ÷ Average total assets**= $113.2 ÷ $1,525 = 7.42%*Adjusted net income= Net income + [Interest expense × (1−Tax rate)]= $95 + 26 × (1-0.30) = $113.2**Average total assets = ($1,560 + $1,490) ÷ 2 = $1,525

g. Return on common stockholders' equity = (Net income − Preferred dividends)÷ Average common stockholders' equity*= ($95 − $5) ÷ $905 = 9.94%*Average common stockholders' equity = ($930 + $880) ÷ 2 = $905

h. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding* = $930 ÷ 100 shares = $9.30 per share*Number of common shares outstanding = Common stock ÷ Par value= $100 ÷ $1 per share = 100 shares

i. Working capital = Current assets − Current liabilities = $700 - $320 = $380



j. Current ratio = Current assets ÷ Current liabilities = $700 ÷ $320 = 2.19

k. Acid-test ratio = Quick assets* ÷ Current liabilities = $540 ÷ $320 = 1.69*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $320 + $0 + $220 = $540

l. Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,220 ÷ $230 = 5.30*Average accounts receivable = ($220 + $240) ÷ 2 = $230

m. Average collection period = 365 days ÷ Accounts receivable turnover (see above) = 365 days ÷ 5.30 = 68.9 days

n. Inventory turnover = Cost of goods sold ÷ Average inventory*= $790 ÷ $135 = 5.85*Average inventory = ($140 + $130) ÷ 2 = $135

o. Average sale period = 365 days ÷ Inventory turnover (see above)= 365 days ÷ 5.85 = 62.4 days

p. Times interest earned = Net operating income ÷ Interest expense= $162 ÷ $26 = 6.23

q. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity= $530 ÷ $1,030 = 0.51

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,2,3,4 Level: Medium



174. Slaubaugh Corporation's most recent balance sheet and income statement appear below:









Preferred stock, $100 par value, 10%................. 200 200Common stock, $1 par value.............................. 200 200Additional paid-in capital–common stock.......... 130 130Retained earnings................................................ 450 410







Required:

Compute the following for Year 2:a. Gross margin percentage.b. Earnings per share (of common stock).c. Price-earnings ratio.d. Dividend payout ratio.e. Dividend yield ratio.f. Return on total assets.g. Return on common stockholders' equity.h. Book value per share.

Ans:a. Gross margin percentage = Gross margin ÷ Sales = $530 ÷ $1,350 = 39.3%

b. Earnings per share = (Net Income - Preferred Dividends)÷ Average number of common shares outstanding*= ($80 - $20) ÷ (200 shares + 200 shares)/2 = $0.30 per share*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $1 per share = 200 shares

c. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)= $2.88 ÷ $0.30 = 9.6



d. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)= $0.10 ÷ $0.30 = 33.3%*Dividends per share = Common dividends ÷ Common shares (see above)= $20 ÷ 200 shares = $0.10 per share

e. Dividend yield ratio = Dividends per share (see above) ÷ Market price per share= $0.10 ÷ $2.88 = 3.47%

f. Return on total assets = Adjusted net income* ÷ Average total assets**= $91.9 ÷ $1,375 = 6.68%*Adjusted net income = Net income + [Interest expense × (1−Tax rate)]= $80 + 17 × (1−0.30) = $91.9**Average total assets = ($1,370 + $1,380) ÷ 2 = $1,375

g. Return on common stockholders' equity = (Net income − Preferred dividends)÷ Average common stockholders' equity*= ($80 − $20) ÷ $760 = 7.89%*Average common stockholders' equity = ($780 + $740) ÷ 2 = $760

h. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding*= $780 ÷ 200 shares = $3.90 per share*Number of common shares outstanding = Common stock ÷ Par value= $200 ÷ $1 per share = 200 shares

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,2 Level: Medium



175. Philo Corporation's most recent income statement appears below:

Sales (all on account)................................. $561,000Cost of goods sold...................................... 325,000 Gross margin.............................................. 236,000Selling and administrative expense............ 106,000 Net operating income................................. 130,000Interest expense.......................................... 35,000 Net income before taxes............................. 95,000Income taxes.............................................. 30,000 Net income................................................. $ 65,000

Required:

Compute the gross margin percentage.

Ans:

Gross margin percentage = Gross margin ÷ Sales = $236,000 ÷ $561,000 = 42.1%

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy



176. Financial statements for Pratt Company appear below:

Pratt CompanyStatement of Financial Position









Preferred stock, $5 par, 10%............................... 120 120Common stock, $5 par........................................ 180 180Additional paid-in capital–common stock.......... 210 210Retained earnings................................................ 790 680




Pratt CompanyIncome Statement




Required:

Compute the following for Year 2:a. Earnings per share of common stock.b. Price-earnings ratio.c. Dividend payout ratio.d. Dividend yield ratio.e. Return on total assets.f. Return on common stockholders' equity.g. Book value per share.h. Working capital.i. Current ratio.j. Acid-test ratio.k. Accounts receivable turnover.l. Average collection period.m. Inventory turnover.n. Average sale period.o. Times interest earned.p. Debt-to-equity ratio.



Ans:

a. Earnings per share = (Net Income − Preferred Dividends) ÷Average number of common shares outstanding*= ($231 − $12) ÷ 36 = $6.08


b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)= $80 ÷ $6.08 = 13.2

c. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)= $3.03 ÷ $6.08 = 49.8%

*Dividends per share = Common dividends ÷ Common shares**= $109 ÷ 36 = $3.03**See above

d. Dividend yield ratio = Dividends per share* ÷ Market price per share= $3.03 ÷ $80.00 = 3.78% *See above

e. Return on total assets = Adjusted net income* ÷ Average total assets**= $252 ÷ $2,000 = 12.60%

*Adjusted net income = Net income + [Interest expense × (1−Tax rate)]= $231 + 30 × (1 − 0.30) = $252


f. Return on common stockholders' equity = (Net income − Preferred dividends) ÷Average common stockholders' equity* = ($231 − $12) ÷ $1,125 = 19.47%


g. Book value per share = Common stockholders' equity ÷Number of common shares outstanding* = $1,180 ÷ 36 = $32.78




h. Working capital = Current assets − Current liabilities = $550 − $440 = $110

i. Current ratio = Current assets ÷ Current liabilities = $550 ÷ $440 = 1.25

j. Acid-test ratio = Quick assets* ÷ Current liabilities = $330 ÷ $440 = 0.75


k. Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $2,000 ÷ $185 = 10.81


l. Average collection period = 365 days ÷ Accounts receivable turnover*= 365 ÷ 10.81 = 33.8 days *See above

m. Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,400 ÷ $150 = 9.33


n. Average sale period = 365 days ÷ Inventory turnover* = 365 ÷9.33= 39.1 days *See above

o. Times interest earned = Net operating income ÷ Interest expense= $360 ÷ $30 = 12.00

p. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $740 ÷ $1,300 = 0.57

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,3,4 Level: Medium



177. Financial statements for Qadri Company appear below:

Qadri CompanyStatement of Financial Position









Preferred stock, $10 par, 5%............................... 120 120Common stock, $10 par...................................... 220 220Additional paid-in capital–common stock.......... 110 110Retained earnings................................................ 1,190 1,080




Qadri CompanyIncome Statement




Required:

Compute the following for Year 2:a. Earnings per share of common stock.b. Price-earnings ratio.c. Dividend yield ratio.d. Return on total assets.e. Return on common stockholders' equity.f. Book value per share.

Ans:

a. Earnings per share = (Net Income − Preferred Dividends) ÷Average number of common shares outstanding* = ($273 − $6) ÷ 22 = $12.14


b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)= $150 ÷ $12.14 = 12.4



c. Dividend yield ratio = Dividends per share* ÷ Market price per share= $7.14 ÷ $150.00 = 4.76%

*Dividends per share = Common dividends ÷ Common shares**= $157 ÷ 22 = $7.14**See above

d. Return on total assets = Adjusted net income* ÷ Average total assets**= $294 ÷ $2,185 = 13.46%

*Adjusted net income = Net income + [Interest expense × (1−Tax rate)]= $273 + 30 × (1 − 0.30) = $294


e. Return on common stockholders' equity = (Net income − Preferred dividends) ÷Average common stockholders' equity* = ($273 − $6) ÷ $1,465 = 18.23%


f. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding* = $1,520 ÷ 22 = $69.09


AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium



178. Maranville Corporation's most recent balance sheet and income statement appear below:








Total current liabilities........................................... 240 250Bonds payable........................................................ 90 100Total liabilities....................................................... 330 350Stockholders’ equity:

Preferred stock, $100 par value, 10%................. 200 200Common stock, $2 par value.............................. 400 400Additional paid-in capital–common stock.......... 140 140Retained earnings................................................ 340 320







Required:

Compute the following for Year 2:a. Earnings per share (of common stock).b. Price-earnings ratio.c. Dividend payout ratio.d. Dividend yield ratio.e. Return on total assets.f. Return on common stockholders' equity.g. Book value per share.

Ans:

a. Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($60 - $20) ÷ (200 shares + 200 shares)/2 = $0.20 per share*Number of common shares outstanding = Common stock ÷ Par value = $400 ÷ $2 per share = 200 shares

b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)= $2.36 ÷ $0.20 = 11.8



c. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)= $0.10 ÷ $0.20 = 50.0%*Dividends per share = Common dividends ÷ Common shares (see above)= $20 ÷ 200 shares = $0.10 per share

d. Dividend yield ratio = Dividends per share (see above) ÷ Market price per share = $0.10 ÷ $2.36 = 4.24%

e. Return on total assets = Adjusted net income* ÷ Average total assets**= $70.5 ÷ $1,410 = 5.00%*Adjusted net income= Net income + [Interest expense × (1−Tax rate)]= $60 + 15 × (1 − 0.30) = $70.5**Average total assets = ($1,410 + $1,410) ÷ 2 = $1,410

f. Return on common stockholders' equity= (Net income − Preferred dividends) ÷ Average common stockholders' equity*= ($60 − $20) ÷ $870 = 4.60%*Average common stockholders' equity = ($880 + $860) ÷ 2 = $870

g. Book value per share = Common stockholders' equity÷ Number of common shares outstanding* = $880 ÷ 200 shares = $4.40 per share*Number of common shares outstanding = Common stock ÷ Par value= $400 ÷ $2 per share = 200 shares




179. Isidro Corporation has provided the following financial data (in thousands of dollars):

Year 2 Year 1Total assets............................................................. $1,520 $1,490Stockholders’ equity:

Preferred stock, $100 par value, 5%................... $200 $200Common stock, $2 par value.............................. $400 $400Additional paid-in capital–common stock.......... $160 $160Retained earnings................................................ $380 $320

Net income for Year 2 was $110 thousand. Interest expense was $21 thousand. The tax rate was 30%. Dividends on common stock during Year 2 totaled $40 thousand. Dividends on preferred stock totaled $10 thousand. The market price of common stock at the end of Year 2 was $9.15 per share.

Required:

Compute the following for Year 2:a. Earnings per share (of common stock).b. Price-earnings ratio.c. Dividend payout ratio.d. Dividend yield ratio.e. Return on total assets.f. Return on common stockholders' equity.g. Book value per share.

Ans:

a. Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($110 − $10) ÷ (200 shares + 200 shares)/2 = $0.50 per share*Number of common shares outstanding = Common stock ÷ Par value= $400 ÷ $2 per share = 200 shares

b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)= $9.15 ÷ $0.50 = 18.3

c. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)= $0.20 ÷ $0.50 = 40.0%*Dividends per share = Common dividends ÷ Common shares (see above)= $40 ÷ 200 shares = $0.20 per share



d. Dividend yield ratio = Dividends per share (see above) ÷ Market price per share = $0.20 ÷ $9.15 = 2.19%

e. Return on total assets = Adjusted net income* ÷ Average total assets**= $124.7 ÷ $1,505 = 8.29%*Adjusted net income = Net income + [Interest expense × (1−Tax rate)]= $110 + 21 × (1 − 0.30) = $124.7**Average total assets = ($1,520 + $1,490) ÷ 2 = $1,505

f. Return on common stockholders' equity = (Net income − Preferred dividends)÷ Average common stockholders' equity* = ($110 − $10) ÷ $910 = 10.99%*Average common stockholders' equity = ($940 + $880) ÷ 2 = $910

g. Book value per share = Common stockholders' equity÷ Number of common shares outstanding*= $940 ÷ 200 shares = $4.70 per share*Number of common shares outstanding = Common stock ÷ Par value= $400 ÷ $2 per share = 200 shares


180. Mikolajczyk Corporation's net income for the most recent year was $1,379,000. A total of 100,000 shares of common stock and 200,000 shares of preferred stock were outstanding throughout the year. Dividends on common stock were $1.15 per share and dividends on preferred stock were $1.30 per share.

Required:

Compute the earnings per share of common stock. Show your work!

Ans:

Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding= ($1,379,000 − $260,000) ÷ 100,000 shares = $11.19 per share




181. Hoa Corporation's net income last year was $7,460,000. The dividend on common stock was $8.40 per share and the dividend on preferred stock was $4.30 per share. The market price of common stock at the end of the year was $78.90 per share. Throughout the year, 500,000 shares of common stock and 100,000 shares of preferred stock were outstanding.

Required:

Compute the price-earnings ratio. Show your work!

Ans:

Price-earnings ratio = Market price per share ÷ Earnings per share*= $78.90 ÷ $14.06 = 5.61*Earnings per share= (Net Income - Preferred Dividends) ÷ Average number of common shares outstanding = ($7,460,000 - $430,000) ÷ 500,000 shares = $14.06 per share


182. Dupas Corporation's net income last year was $7,330,000. The dividend on common stock was $12.70 per share and the dividend on preferred stock was $1.70 per share. The market price of common stock at the end of the year was $47.20 per share. Throughout the year, 500,000 shares of common stock and 200,000 shares of preferred stock were outstanding.

Required:

Compute the dividend payout ratio. Show your work!

Ans:

Dividend payout ratio = Dividends per share ÷ Earnings per share*= $12.70 ÷ $13.98 = 0.91*Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding= ($7,330,000 − $340,000) ÷ 500,000 shares = $13.98 per share




183. Last year, Sheline Corporation's dividend on common stock was $13.00 per share and the dividend on preferred stock was $2.10 per share. The market price of common stock at the end of the year was $68.60 per share.

Required:

Compute the dividend yield ratio. Show your work!

Ans:

Dividend yield ratio = Dividends per share ÷ Market price per share= $13.00 ÷ $68.60 = 0.19


184. Allaman Corporation's most recent income statement appears below:

Sales (all on account)................................. $760,000Cost of goods sold...................................... 450,000 Gross margin.............................................. 310,000Selling and administrative expense............ 100,000 Net operating income................................. 210,000Interest expense.......................................... 40,000 Net income before taxes............................. 170,000Income taxes (30%)................................... 51,000 Net income................................................. $119,000

The beginning balance of total assets was $930,000 and the ending balance was $970,000.

Required:

Compute the return on total assets. Show your work!



Ans:

Return on total assets = Adjusted net income* ÷ Average total assets**= $147,000 ÷ $950,000 = 15.5%*Adjusted net income = Net income + [Interest expense × (1−Tax rate)]= $119,000 + 40,000 × (1 − 0.30) = $147,000**Average total assets = ($930,000 + $970,000) ÷ 2 = $950,000


185. Excerpts from Orr Corporation's most recent balance sheet appear below:

Year 2 Year 1Preferred stock....................................................... $ 200,000 $ 200,000Common stock....................................................... 400,000 400,000Additional paid-in capital–common stock............. 390,000 390,000Retained earnings................................................... 420,000 350,000 Total stockholders’ equity...................................... $1,410,000 $1,340,000

Net income for Year 2 was $147,000. Dividends on common stock were $50,000 in total and dividends on preferred stock were $27,000 in total.

Required:

Compute the return on common stockholders' equity. Show your work!

Ans:

Return on common stockholders' equity = (Net income − Preferred dividends)÷ Average common stockholders' equity* = ($147,000 − $27,000) ÷ $1,175,000 = 10.2%*Average common stockholders' equity = ($1,210,000 + $1,140,000) ÷ 2 = $1,175,000




186. Data from Speir Corporation's most recent balance sheet appear below:

Preferred stock....................................................... $ 200,000Common stock....................................................... 300,000Additional paid-in capital–common stock............. 380,000Retained earnings................................................... 490,000 Total stockholders’ equity...................................... $1,370,000

A total of 150,000 shares of common stock and 20,000 shares of preferred stock were outstanding at the end of the year.

Required:

Compute the book value per share. Show your work!

Ans:

Book value per share = Common stockholders' equity ÷ Number of common shares outstanding = $1,170,000 ÷ 150,000 shares = $7.80 per share




187. Financial statements for Rarick Company appear below:

Rarick CompanyStatement of Financial Position









Preferred stock, $10 par, 10%............................. 100 100Common stock, $5 par........................................ 240 240Additional paid-in capital–common stock.......... 250 250Retained earnings................................................ 910 810




Rarick CompanyIncome Statement



Required:

Compute the following for Year 2:a. Current ratio.b. Acid-test ratio.c. Average collection period.d. Inventory turnover.e. Times interest earned.f. Debt-to-equity ratio.

Ans:

a. Current ratio = Current assets ÷ Current liabilities = $410 ÷ $430 = 0.95

b. Acid-test ratio = Quick assets* ÷ Current liabilities = $300 ÷ $430 = 0.70


c. Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $2,400 ÷ $165 = 14.55


Average collection period = 365 days ÷ Accounts receivable turnover= 365 ÷ 14.55 = 25.1 days



d. Inventory turnover = Cost of goods sold ÷ Average inventory*= $1,680 ÷ $100 = 16.80


e. Times interest earned = Net operating income ÷ Interest expense= $440 ÷ $30 = 14.67

f. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity= $740 ÷ $1,500 = 0.49

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,4 Level: Medium



188. Carleton Corporation's most recent balance sheet and income statement appear below:















Required:

Compute the following for Year 2:a. Working capital.b. Current ratio.c. Acid-test ratio.d. Accounts receivable turnover.e. Average collection period.f. Inventory turnover.g. Average sale period.

Ans:

a. Working capital = Current assets − Current liabilities = $500 thousand − $210 thousand = $290 thousand

b. Current ratio = Current assets ÷ Current liabilities = $500 ÷ $210 = 2.38

c. Acid-test ratio = Quick assets* ÷ Current liabilities = $240 ÷ $210 = 1.14*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $30 + $0 + $210 = $240

d. Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,260 ÷ $235 = 5.36*Average accounts receivable = ($210 + $260) ÷ 2 = $235

e. Average collection period = 365 days ÷ Accounts receivable turnover (see above) = 365 days ÷ 5.36 = 68.1 days



f. Inventory turnover = Cost of goods sold ÷ Average inventory* = $770 ÷ $180 = 4.28*Average inventory = ($190 + $170) ÷ 2 = $180

g. Average sale period = 365 days ÷ Inventory turnover (see above)= 365 days ÷ 4.28 = 85.3 days


189. Excerpts from Beaty Corporation's most recent balance sheet (in thousands of dollars) appear below:


Cash............................................ $ 70 $140Accounts receivable.................... 250 280Inventory..................................... 150 140Prepaid expenses......................... 20 20

Total current assets........................ $490 $580Current liabilities:

Accounts payable........................ $150 $170Accrued liabilities....................... 90 90Notes payable, short term........... 80 80

Total current liabilities................... $320 $340

Sales on account during the year totaled $1,320 thousand. Cost of goods sold was $730 thousand.

Required:

Compute the following for Year 2:a. Working capital.b. Current ratio.c. Acid-test ratio.d. Accounts receivable turnover.e. Average collection period.f. Inventory turnover.g. Average sale period.



Ans:

a. Working capital = Current assets − Current liabilities = $490 thousand − $320 thousand = $170 thousand

b. Current ratio = Current assets ÷ Current liabilities = $490 ÷ $320 = 1.53

c. Acid-test ratio = Quick assets* ÷ Current liabilities = $320 ÷ $320 = 1.00*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $70 + $0 + $250 = $320

d. Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,320 ÷ $265 = 4.98*Average accounts receivable = ($250 + $280) ÷ 2 = $265

e. Average collection period = 365 days ÷ Accounts receivable turnover (see above) = 365 days ÷ 4.98 = 73.3 days

f. Inventory turnover = Cost of goods sold ÷ Average inventory* = $730 ÷ $145 = 5.03*Average inventory = ($150 + $140) ÷ 2 = $145

g. Average sale period = 365 days ÷ Inventory turnover (see above)= 365 days ÷ 5.03 = 72.6 days


190. Romaine Corporation's total current assets are $300,000, its noncurrent assets are $570,000, its total current liabilities are $270,000, its long-term liabilities are $360,000, and its stockholders' equity is $240,000.

Required:

Compute the company's working capital. Show your work!

Ans:

Working capital = Current assets − Current liabilities = $300,000 − $270,000 = $30,000




191. Wayment Corporation's total current assets are $310,000, its noncurrent assets are $680,000, its total current liabilities are $270,000, its long-term liabilities are $460,000, and its stockholders' equity is $260,000.

Required:

Compute the company's current ratio. Show your work!

Ans:

Current ratio = Current assets ÷ Current liabilities = $310,000 ÷ $270,000 = 1.15


192. Data from Furnia Corporation's most recent balance sheet appear below:

Cash.................................... $13,000Marketable securities......... $21,000Accounts receivables......... $32,000Inventory............................ $52,000Prepaid expenses................ $16,000Current liabilities............... $118,000

Required:

Compute the company's acid-test ratio. Show your work!

Ans:Acid-test ratio = Quick assets* ÷ Current liabilities = $66,000 ÷ $118,000 = 0.56*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $13,000 + $21,000 + $32,000 = $66,000




193. Cozzolino Corporation has provided the following data:


Required:

Compute the accounts receivable turnover for this year. Show your work!

Ans:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable*= $687,000 ÷ $120,500 = 5.70*Average accounts receivable = ($118,000 + $123,000) ÷ 2 = $120,500


194. Data from Ringwald Corporation's most recent balance sheet and income statement appear below:


Required:

Compute the average collection period for this year:



Ans:

Average collection period = 365 days ÷ Accounts receivable turnover*= 365 days ÷ 6.58 = 55.5 days*Accounts receivable turnover = Sales on account ÷ Average accounts receivable** = $727,000 ÷ $110,500 = 6.58**Average accounts receivable = ($118,000 + $103,000) ÷ 2 = $110,500


195. Hsieh Corporation has provided the following data:


Required:

Compute the inventory turnover for this year:

Ans:

Inventory turnover = Cost of goods sold ÷ Average inventory*= $575,000 ÷ $153,500 = 3.75*Average inventory = ($150,000 + $157,000) ÷ 2 = $153,500




196. Data from Buttler Corporation's most recent balance sheet and income statement appear below:


Required:

Compute the average sale period for this year:

Ans:

Average sale period = 365 days ÷ Inventory turnover*= 365 days ÷ 4.19 = 87.1 days*Inventory turnover = Cost of goods sold ÷ Average inventory*= $675,000 ÷ $161,000 = 4.19**Average inventory = ($151,000 + $171,000) ÷ 2 = $161,000




197. Erke Corporation's most recent balance sheet and income statement appear below:















Required:

Compute the following for Year 2:a. Times interest earned.b. Debt-to-equity ratio.

Ans:

a. Times interest earned = Net operating income ÷ Interest expense= $82 ÷ $18 = 4.56

b. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity= $430 ÷ $820 = 0.52


198. Froemming Corporation's net operating income last year was $193,000; its interest expense was $22,000; its total stockholders' equity was $950,000; and its total liabilities were $400,000.

Required:

Compute the following for Year 2:a. Times interest earned.b. Debt-to-equity ratio.



Ans:

a. Times interest earned = Net operating income ÷ Interest expense= $193,000 ÷ $22,000 = 8.77b. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity= $400,000 ÷ $950,000 = 0.42


199. Brandy Corporation has provided the following data from its most recent income statement:

Net operating income..................... $51,000Interest expense.............................. $37,000Net income before taxes................. $14,000Income taxes.................................. $4,000Net income..................................... $10,000

Required:

Compute the times interest earned ratio. Show your work!

Ans:





200. Molony Corporation has provided the following data from its most recent balance sheet:

Total assets..................................... $740,000Total liabilities............................... $610,000Total stockholders’ equity.............. $130,000

Required:

Compute the debt-to-equity ratio. Show your work!

Ans:

Debt-to-equity ratio = Liabilities ÷ Stockholders' equity= $610,000 ÷ $130,000 = 4.69



Documents

“How Well Am I Doing?”--Financial Statement Analysis · Web viewMarket price per share on December 31 $36.00 Book value per share on December 31 $27.00 Earnings per share for