Test Bank - Chapter18 FS Analysis

Ch ap t e r1 8 “ Ho w We l l Am IDo i n g?”Fi n an ci al St a t e me me ntAn al y s i s

True/False 1. F Medium

In determining whether a company's financial condition is improving or deteriorating over time, vertical analysis of financial statement data would be more useful than horizontal analysis.

2. T Easy

Trend percentages state several years' financial data in terms of a base year. For example, sales for every year would be stated as a percentage of the sales in the base year.

3. T Easy

The gross margin percentage is computed taking the difference between sales and cost of goods and then dividing the result by sales.

4. F Medium

The gross margin percentage is computed by dividing net income before interest and taxes by sales.

5. F Easy

The price-earnings ratio is determined by dividing the price of a product by its profit margin.

6. T Easy

The price-earnings ratio is computed by dividing the market price per share by the current earnings per share.

7. F Medium

When computing the return on total assets, the after-tax effect of interest expense must be subtracted from net income.

8. F Medium

If the assets in which funds are invested have a rate of return lower than the fixed rate of return paid to the supplier of the funds, then financial leverage is positive.

9. F Easy

If the market value of a share of stock is greater than its book value, the stock is probably overpriced.

10. T Hard

Working capital equals current assets, plus noncurrent liabilities and stockholders' equity, less total assets.

Managerial Accounting, 9/e

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11. T Medium

Assuming that a company has a current ratio greater than 1.0 to 1, repaying a short-term note payable will increase the current ratio.

12. F Medium

The acid-test ratio is a test of the quality of accounts receivable--in other words, whether they are likely to be collected.

13. T Medium

When computing the acid-test ratio, prepaid expenses are ignored.

14. T Easy

Only credit sales (i.e., sales on account) are included in the computation of the accounts receivable turnover.

15. F Easy

The inventory turnover ratio is equal to the average inventory balance divided by the cost of goods sold.

Multiple Choice 16. D Easy

Horizontal analysis of financial statements is accomplished through: a. placing statement items on an after-tax basis. b. common-size statements. c. computing both earnings per share and the price-earnings ratio. d. trend percentages.

17. D Easy

The gross margin percentage is most likely to be used to assess: a. how quickly accounts receivables can be collected. b. how quickly inventories are sold. c. the efficiency of administrative departments. d. the overall profitability of the company's products.

18. C Medium

Earnings per share of common stock will immediately increase as a result of: a. the sale of additional shares of common stock by the company. b. an increase in the dividends paid to common stockholders by the company. c. an increase in the company's net income. d. the issuance of bonds by the company to finance construction of new buildings.

153Managerial Accounting, 9/e

11. T Medium

Assuming that a company has a current ratio greater than 1.0 to 1, repaying a short-term note payable will increase the current ratio.

12. F Medium

The acid-test ratio is a test of the quality of accounts receivable--in other words, whether they are likely to be collected.

13. T Medium

When computing the acid-test ratio, prepaid expenses are ignored.

14. T Easy

Only credit sales (i.e., sales on account) are included in the computation of the accounts receivable turnover.

15. F Easy

The inventory turnover ratio is equal to the average inventory balance divided by the cost of goods sold.

Multiple Choice 16. D Easy

Horizontal analysis of financial statements is accomplished through: a. placing statement items on an after-tax basis. b. common-size statements. c. computing both earnings per share and the price-earnings ratio. d. trend percentages.

17. D Easy

The gross margin percentage is most likely to be used to assess: a. how quickly accounts receivables can be collected. b. how quickly inventories are sold. c. the efficiency of administrative departments. d. the overall profitability of the company's products.

18. C Medium

Earnings per share of common stock will immediately increase as a result of: a. the sale of additional shares of common stock by the company. b. an increase in the dividends paid to common stockholders by the company. c. an increase in the company's net income. d. the issuance of bonds by the company to finance construction of new buildings.


19. C Easy

The market price of XYZ Company's common stock dropped from $25 to $21 per share. The dividend paid per share remained unchanged. The company’s dividend payout ratio would: a. increase. b. decrease. c. be unchanged. d. impossible to determine without more information.

20. A Medium CMA adapted

An increase in the market price of a company’s common stock will immediately affect its: a. dividend yield ratio. b. debt-to-equity ratio. c. earnings per share of common stock. d. dividend payout ratio.

21. D Medium

Which of the following is true regarding the calculation of return on total assets? a. The numerator of the ratio consists only of net income. b. The denominator of the ratio consists of the balance of total assets at the end of the period under consideration. c. The numerator of the ratio consists of net income plus interest expense times the tax rate. d. The numerator of the ratio consists of net income plus interest expense times one minus the tax rate.

22. D Medium

Financial leverage is negative when: a. the return on total assets is less than the rate of return on common stockholders' equity. b. total liabilities are less than stockholders' equity. c. total liabilities are less than total assets. d. the return on total assets is less than the rate of return demanded by creditors.

23. D Medium

Which of the following is not a source of financial leverage? a. Bonds payable. b. Accounts payable. c. Preferred stock. d. Retained earnings.

24. A Medium

If a company's bonds bear an interest rate of 8%, the tax rate is 30%, and the company's assets are generating an after-tax return of 7%, then the leverage would be: a. positive. b. negative. c. neither positive or negative. d. impossible to determine without knowing the return on common stockholders' equity.


154

25. D Medium CMA adapted

A company’s than 1.0 to would: a. decrease b. increase c. increase d. decrease

current ratio and acid-test ratios are both greater 1. If obsolete inventory is written off, this

26. D Medium

If a company converts a short-term note payable into a longterm note payable, this transaction would: a. decrease working capital and increase the current ratio. b. decrease working capital and decrease the current ratio. c. decrease the current ratio and decrease the acid-test ratio. d. increase working capital and increase the current ratio.

27. B Hard CMA adapted

Which one of the following would increase the working capital of a company? a. Cash payment of payroll taxes payable. b. Refinancing a short-term note payable with a two year note payable. c. Cash collection of accounts receivable. d. Payment of a 20-year mortgage payable with cash.

28. A Medium

Sale of a piece of equipment at book value for cash will: a. increase working capital. b. decrease working capital. c. decrease the debt-to-equity ratio. d. increase net income.

29. B Medium CMA adapted

If a firm has a high current ratio but a low acid-test ratio, one can conclude that: a. the firm has a large outstanding accounts receivable balance. b. the firm has a large investment in inventory. c. the firm has a large amount of current liabilities. d. the firm's financial leverage is very high.

30 B Hard

Desktop Co. presently has a current ratio of 1.2 to 1 and an acid-test ratio of 0.8 to 1. Prepaying next year's office rent of $50,000 will: a. have no effect on either the company's current ratio or its acid-test ratio. b. have no effect on the company's current ratio but will decrease its acid-test ratio. c. decrease the company's current ratio and decrease its acidtest ratio. d. increase the company's current ratio and increase its acidtest ratio.

the the net the

acid-test ratio. acid-test ratio. working capital. current ratio.


31. A Medium

The Miller Company paid off some of its accounts payable using cash. The company's current ratio is greater than 1.0 to 1. The company’s current ratio would: a. increase. b. decrease. c. remain unchanged. d. impossible to determine from the information given.

32. A Hard

Rahner Company has a current ratio of 1.75 to 1. This ratio will decrease if Rahner Company: a. borrows cash using a six-month note. b. pays the taxes payable which have been a current liability. c. pays the following month's rent on the last day of the year. d. sells inventory for more than their cost.

33. D Easy

Which of the following accounts would be included in the calculation of the acid-test ratio:

a. b. c. d.

Accounts Receivable yes no no yes

Prepaid Expense yes yes no no

Inventory no yes yes no

34. C Medium

Allen Company's average collection period for accounts receivable was 40 days last year, but increased to 60 days this year. Which of the following would most likely account for this change? a. a decrease in accounts receivable relative to sales. b. a decrease in sales. c. a relaxation of credit policies. d. an increase in sales.

35. B Hard

The net accounts receivable for Andante Company were $150,000 at the beginning of the most recent year and $190,000 at the end of the year. If the accounts receivable turnover for the year was 8.5, and 15% of total sales were cash sales, then the total sales for the year were: a. $1,445,000. b. $1,700,000. c. $1,900,000. d. $1,500,000.


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36. A Hard CMA adapted

Selected data from Sheridan Corporation’s year-end financial statements are presented below. The difference between average and ending inventory is immaterial. Current ratio ............ Acid-test ratio .......... Current liabilities ...... Inventory turnover ....... Gross profit margin ......

2.0 1.5 $120,000 8 times 40%

Sheridan's sales for the year was: a. $800,000. b. $480,000. c. $1,200,000. d. $240,000. 37. C Hard

Fulton Company's price-earnings ratio is 8.0 and the market price of a share of common stock is $32. The company has 3,000 shares of preferred stock outstanding with each share receiving a dividend of $3 per share. The earnings per share of common stock is: a. $10. b. $7. c. $4. d. $3.

38. C Hard

Perlman Company had 100,000 shares of common stock and 20,000 shares of preferred stock at the end of the year just completed. Preferred stockholders received dividends totaling $140,000. Common stockholders received dividends totaling $210,000. If the dividend payout ratio for the year was 70%, then the net income for the year was: a. $300,000. b. $287,000. c. $440,000. d. $147,000.

39. C Medium

NOTE TO THE INSTRUCTOR: Questions 39, 40, and 41 are different versions of the same question. Arlberg Company's net income last year was $250,000. The company has 150,000 shares of common stock and 80,000 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 $1.30 per share on the common stock and $1.40 per share on the preferred stock. The earnings per share of common stock is closest to: a. $1.67. b. $2.41. c. $0.92. d. $0.37.


40. C Medium

NOTE TO THE INSTRUCTOR: Questions 39, 40, and 41 are different versions of the same question. Arget Company's net income last year was $600,000. The company has 150,000 shares of common stock and 60,000 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 $1.10 per share on the common stock and $0.60 per share on the preferred stock. The earnings per share of common stock is closest to: a. $4.24. b. $4.00. c. $3.76. d. $2.90.

41. D Medium

NOTE TO THE INSTRUCTOR: Questions 39, 40, and 41 are different versions of the same question. Arquandt Company's net income last year was $550,000. The company has 150,000 shares of common stock and 50,000 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 $1.20 per share on the common stock and $1.70 per share on the preferred stock. The earnings per share of common stock is closest to: a. $3.67. b. $2.47. c. $4.23. d. $3.10.

42. C Easy

NOTE TO THE INSTRUCTOR: Questions 42 and 43 are different versions of the same question. The following data have been taken from your company's financial records for the current year: Earnings per share ...... Dividend per share ...... Market price per share .. Book value per share ....

$10 $6 $90 $70

The price-earnings ratio is: a. 1.67 to 1. b. 15.0 to 1. c. 9.0 to 1. d. 7.0 to 1.


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43. C Easy

NOTE TO THE INSTRUCTOR: Questions 42 and 43 are different versions of the same question. The following data have been taken from your company's financial records for the current year: Earnings per share ...... $15 Dividend per share ...... $9 Market price per share .. $120 Book value per share .... $90 The price-earnings ratio is: a. 12.5 to 1. b. 6.0 to 1. c. 8.0 to 1. d. 7.5 to 1.

44. D Medium

Information concerning the common stock of Morris Company as of the end of the company's fiscal year is presented below. Number of shares outstanding ...... 460,000 Par value per share ............... $5.00 Dividends paid per share .......... $6.00 Market price per share ............ $54.00 Earnings per share ................ $18.00 The dividend yield ratio is closest to: a. 50.0%. b. 33.3%. c. 120.0%. d. 11.1%.

45. D Hard

Cameron Company had 50,000 shares of common stock issued and outstanding during the year just ended. The following information pertains to these shares: Price originally issued ................... Book value at end of current year ......... Market value, beginning of current year ... Market value, end of current year .........

$40 $70 $85 $90

The total dividend on common stock for the year was $400,000. Cameron Company's dividend yield ratio for the year was: a. 20.00% b. 11.43%. c. 9.41%. d. 8.89%.


46. C Medium

NOTE TO THE INSTRUCTOR: Questions 46, 47, and 48 are different versions of the same question. Braverman Company's net income last year was $75,000 and its interest expense was $10,000. Total assets at the beginning of the year were $650,000 and total assets at the end of the year were $610,000. The company's income tax rate was 30%. The company's return on total assets for the year was closest to: a. 13.5%. b. 12.4%. c. 13.0%. d. 11.9%.

47. D Medium

NOTE TO THE INSTRUCTOR: Questions 46, 47, and 48 are different versions of the same question. Brachlan Company's net income last year was $80,000 and its interest expense was $20,000. Total assets at the beginning of the year were $660,000 and total assets at the end of the year were $620,000. The company's income tax rate was 30%. The company's return on total assets for the year was closest to: a. 12.5%. b. 13.4%. c. 15.6%. d. 14.7%.

48. A Medium

NOTE TO THE INSTRUCTOR: Questions 46, 47, and 48 are different versions of the same question. Brawer Company's net income last year was $55,000 and its interest expense was $20,000. Total assets at the beginning of the year were $660,000 and total assets at the end of the year were $620,000. The company's income tax rate was 30%. The company's return on total assets for the year was closest to: a. 10.8%. b. 8.6%. c. 11.7%. d. 9.5%.

49. C Medium

The total assets of the Philbin Company on January 1, 19x9 were $2.3 million and on December 31, 19x9 were $2.5 million. Net income for 19x9 was $188,000. Dividends for 19x9 totaled $75,000, interest expenses totaled $70,000, and the tax rate was 30%. The return on total assets for 19x9 was closest to: a. 9.5%. b. 6.8%. c. 9.9%. d. 10.8%.


160

50. C Medium CPA adapted

Selected financial data for Irvington Company appear below: Account Balances o Beginning End of of year year Preferred stock ......... $125,000 $125,000 Common stock ............. 300,000 400,000 Retained earnings......... 75,000 185,000 During the year, the company paid dividends of $10,000 on its preferred stock. The company's net income for the year was $120,000. The company's return on common stockholders' equity for the year is closest to: a. 17%. b. 19%. c. 23%. d. 25%.

51. A Easy

NOTE TO THE INSTRUCTOR: Questions 51, 52, and 53 are different versions of the same question. Crasler Company's net income last year was $100,000. The company paid preferred dividends of $20,000 and its average common stockholders' equity was $580,000. The company's return on common stockholders' equity for the year was closest to: a. 13.8%. b. 3.4%. c. 20.7%. d. 17.2%.

52. D Easy

NOTE TO THE INSTRUCTOR: Questions 51, 52, and 53 are different versions of the same question. Crawler Company's net income last year was $80,000. The company paid preferred dividends of $10,000 and its average common stockholders' equity was $400,000. The company's return on common stockholders' equity for the year was closest to: a. 20.0%. b. 22.5%. c. 2.5%. d. 17.5%.


53. C Easy

NOTE TO THE INSTRUCTOR: Questions 51, 52, and 53 are different versions of the same question. Crabtree Company's net income last year was $50,000. The company paid preferred dividends of $20,000 and its average common stockholders' equity was $440,000. The company's return on common stockholders' equity for the year was closest to: a. 15.9%. b. 11.4%. c. 6.8%. d. 4.5%.

54. A Medium

The following account balances have been provided for the end of the most recent year: Total Total Total Total

assets stockholders' equity common stock preferred stock

$150,000 $120,000 $50,000 $10,000

(5,000 shares) (1,000 shares)

The book value per share of common stock is: a. $22. b. $25. c. $20. d. $28. 55. A Medium

NOTE TO THE INSTRUCTOR: Questions 55, 56, and 57 are different versions of the same question. Dratif Company's working capital is $33,000 and its current liabilities are $80,000. The company's current ratio is closest to: a. 1.41 to 1. b. 0.59 to 1. c. 3.42 to 1. d. 0.41 to 1.

56. D Medium

NOTE TO THE INSTRUCTOR: Questions 55, 56, and 57 are different versions of the same question. Dragin Company's working capital is $36,000 and its current liabilities are $61,000. The company's current ratio is closest to: a. 2.69 to 1. b. 0.41 to 1. c. 0.59 to 1. d. 1.59 to 1.


162

57. B Medium

NOTE TO THE INSTRUCTOR: Questions 55, 56, and 57 are different versions of the same question. Draban Company's working capital is $38,000 and its current liabilities are $59,000. The company's current ratio is closest to: a. 0.36 to 1. b. 1.64 to 1. c. 0.64 to 1. d. 2.55 to 1.

58. C Hard

At the end of the year just completed, Orem Company's current liabilities totaled $75,000, and its long-term liabilities totaled $225,000. Working capital at year-end was $100,000. If the company's debt-to-equity ratio is 0.30 to 1, total longterm assets must equal: a. $1,000,000. b. $1,300,000. c. $1,125,000. d. $1,225,000.

59. B Hard CMA adapted

Starrs Company has current assets of $300,000 and current liabilities of $200,000. Which of the following transactions would increase its working capital? a. Prepayment of $50,000 of next year’s rent. b. Refinancing $50,000 of short-term debt with long-term debt. c. Acquisition of land valued at $50,000 by issuing new common stock. d. Purchase of $50,000 of marketable securities for cash.

60. C Hard CMA adapted

Selected year-end data for the Brayer Company are presented below: Current liabilities ........ $600,000 Acid-test ratio ............ 2.5 to 1 Current ratio .............. 3.0 to 1 Cost of goods sold ......... $500,000 The company has no prepaid expenses and inventories remained unchanged during the year. Based on these data, the company's inventory turnover ratio for the year was closest to: a. 1.20 times. b. 2.40 times. c. 1.67 times. d. 2.33 times.


61. A Hard

Harwichport Company has a current ratio of 3.5 to 1 and an acid-test ratio of 2.8 to 1. Current assets equal $175,000 of which $5,000 consists of prepaid expenses. Harwichport Company's inventory must be: a. $30,000. b. $40,000. c. $50,000. d. $35,000.

62. A Hard

Ben Company has the following data for the year just ended: Cash .................... Accounts Receivable ..... Inventory ............... Current ratio ........... Acid test ratio .........

? $28,000 $35,000 2.4 to 1 1.6 to 1

Ben Company's current liabilities were: a. $43,750. b. $50,400. c. $35,000. d. $63,000.

63. C Hard CMA adapted

Marcy Corporation's current ratio is currently 1.75 to 1. The firm’s current ratio cannot fall below 1.5 to 1 without violating agreements with its bondholders. If current liabilities are presently $250 million, the maximum new shortterm debt that can be issued to finance an equivalent amount of inventory expansion is: a. $ 41.67 million. b. $375.00 million. c. $125.00 million. d. $ 62.50 million.

64. B Easy

NOTE TO THE INSTRUCTOR: Questions 64, 65, and 66 are different versions of the same question. Eral Company has $17,000 in cash, $3,000 in marketable securities, $36,000 in current receivables, $24,000 in inventories, and $45,000 in current liabilities. The company's acid-test (quick) ratio is closest to: a. 1.78 to 1. b. 1.24 to 1. c. 0.80 to 1. d. 0.44 to 1.


164

65. C Easy

NOTE TO THE INSTRUCTOR: Questions 64, 65, and 66 are different versions of the same question. Erambo Company has $11,000 in cash, $6,000 in marketable securities, $27,000 in current receivables, $8,000 in inventories, and $51,000 in current liabilities. The company's acid-test (quick) ratio is closest to: a. 0.75 to 1. b. 1.02 to 1. c. 0.86 to 1. d. 0.53 to 1.

66. A Easy

NOTE TO THE INSTRUCTOR: Questions 64, 65, and 66 are different versions of the same question. Erack Company has $15,000 in cash, $4,000 in marketable securities, $38,000 in current receivables, $18,000 in inventories, and $40,000 in current liabilities. The company's acid-test (quick) ratio is closest to: a. 1.43 to 1. b. 0.95 to 1. c. 1.33 to 1. d. 1.88 to 1.

67. D Hard CPA adapted

Eastham Company's accounts receivable were $600,000 at the beginning of the year and $800,000 at the end of the year. Cash sales for the year were $300,000. The accounts receivable turnover for the year was 5 times. Eastham Company's total sales for the year were: a. $ 800,000. b. $1,300,000. c. $3,300,000. d. $3,800,000.

68. C Easy

NOTE TO THE INSTRUCTOR: Questions 68, 69, and 70 are different versions of the same question. Frantic Company had $130,000 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. 5.00 times. b. 13.00 times. c. 10.00 times. d. 8.13 times.


69. D Easy

NOTE TO THE INSTRUCTOR: Questions 68, 69, and 70 are different versions of the same question. Fracus Company had $100,000 in sales on account last year. The beginning accounts receivable balance was $14,000 and the ending accounts receivable balance was $16,000. The company's accounts receivable turnover was closest to: a. 6.25 times. b. 7.14 times. c. 3.33 times. d. 6.67 times.

70. B Easy

NOTE TO THE INSTRUCTOR: Questions 68, 69, and 70 are different versions of the same question. Frabine Company had $150,000 in sales on account last year. The beginning accounts receivable balance was $14,000 and the ending accounts receivable balance was $18,000. The company's accounts receivable turnover was closest to: a. 4.69 times. b. 9.38 times. c. 8.33 times. d. 10.71 times.

71. B Easy

NOTE TO THE INSTRUCTOR: Questions 71, 72, and 73 are different versions of the same question. Granger Company had $180,000 in sales on account last year. The beginning accounts receivable balance was $10,000 and the ending accounts receivable balance was $18,000. The company's average collection period (age of receivables) was closest to: a. 20.28 days. b. 28.39 days. c. 36.50 days. d. 56.78 days.

72. A Easy

NOTE TO THE INSTRUCTOR: Questions 71, 72, and 73 are different versions of the same question. Grapp 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 $16,000. The company's average collection period (age of receivables) was closest to: a. 47.73 days. b. 50.54 days. c. 44.92 days. d. 95.46 days.


166

73. D Easy

NOTE TO THE INSTRUCTOR: Questions 71, 72, and 73 are different versions of the same question. Grave Company had $150,000 in sales on account last year. The beginning accounts receivable balance was $14,000 and the ending accounts receivable balance was $10,000. The company's average collection period (age of receivables) was closest to: a. 24.33 days. b. 58.40 days. c. 34.07 days. d. 29.20 days.

74. B Easy

NOTE TO THE INSTRUCTOR: Questions 74, 75, and 76 are different versions of the same question. Harris Company, a retailer, had cost of goods sold of $290,000 last year. The beginning inventory balance was $26,000 and the ending inventory balance was $24,000. The company's inventory turnover was closest to: a. 12.08 times. b. 11.60 times. c. 5.80 times. d. 11.15 times.

75. D Easy

NOTE TO THE INSTRUCTOR: Questions 74, 75, and 76 are different versions of the same question. Harton Company, a retailer, had cost of goods sold of $250,000 last year. The beginning inventory balance was $20,000 and the ending inventory balance was $22,000. The company's inventory turnover was closest to: a. 5.95 times. b. 11.36 times. c. 12.50 times. d. 11.90 times.

76. C Easy

NOTE TO THE INSTRUCTOR: Questions 74, 75, and 76 are different versions of the same question. Harker 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 $20,000. The company's inventory turnover was closest to: a. 6.15 times. b. 8.00 times. c. 6.96 times. d. 3.48 times.


77. A Easy

NOTE TO THE INSTRUCTOR: Questions 77, 78, and 79 are different versions of the same question. Irawaddy Company, a retailer, had cost of goods sold of $230,000 last year. The beginning inventory balance was $24,000 and the ending inventory balance was $22,000. The company's average sale period (turnover in days) was closest to: a. 36.50 days. b. 73.00 days. c. 38.09 days. d. 34.91 days.

78. D Easy

NOTE TO THE INSTRUCTOR: Questions 77, 78, and 79 are different versions of the same question. Irappa Company, a retailer, had cost of goods sold of $170,000 last year. The beginning inventory balance was $28,000 and the ending inventory balance was $26,000. The company's average sale period (turnover in days) was closest to: a. 55.82 days. b. 60.12 days. c. 115.94 days. d. 57.97 days.

79. A Easy

NOTE TO THE INSTRUCTOR: Questions 77, 78, and 79 are different versions of the same question. Irally Company, a retailer, had cost of goods sold of $150,000 last year. The beginning inventory balance was $26,000 and the ending inventory balance was $24,000. The company's average sale period (turnover in days) was closest to: a. 60.83 days. b. 63.27 days. c. 58.40 days. d. 121.67 days.

80. C Hard CPA adapted

Last year Dunn Company purchased $1,920,000 of inventory. The cost of good sold was $1,800,000 and the ending inventory was $360,000. What was the inventory turnover? a. 5.0 times. b. 5.3 times. c. 6.0 times. d. 6.4 times.

81. A Hard

During the year just ended, James Company purchased $425,000 of inventory. The inventory balance at the beginning of the year was $175,000. If the cost of goods sold for the year was $450,000, then the inventory turnover for the year was: a. 2.77 times. b. 2.57 times. c. 3.00 times. d. 2.62 times.


168

82. D Easy

NOTE TO THE INSTRUCTOR: Questions 82, 83, and 84 are different versions of the same question. Last year Javer Company had a net income of $200,000, income tax expense of $74,000, and interest expense of $20,000. The company's times interest earned was closest to: a. 10.00 times. b. 11.00 times. c. 5.30 times. d. 14.70 times.

83. C Easy

NOTE TO THE INSTRUCTOR: Questions 82, 83, and 84 are different versions of the same question. Last year Jabber Company had a net income of $180,000, income tax expense of $62,000, and interest expense of $20,000. The company's times interest earned was closest to: a. 9.00 times. b. 4.90 times. c. 13.10 times. d. 10.00 times.

84. B Easy

NOTE TO THE INSTRUCTOR: Questions 82, 83, and 84 are different versions of the same question. Last year Jackson Company had a net income of $160,000, income tax expense of $66,000, and interest expense of $20,000. The company's times interest earned was closest to: a. 9.00 times. b. 12.30 times. c. 8.00 times. d. 3.70 times.

85. B Hard

The times interest earned ratio of McHugh Company is 4.5 times. The interest expense for the year was $20,000, and the company's tax rate is 40%. The company's net income is: a. $22,000. b. $42,000. c. $54,000. d. $66,000.

86. D Hard

Mariah Company has a times interest earned ratio of 3.0 for the year just ended. The company's tax rate is 40% and the interest expense for the year was $25,000. Mariah Company's after-tax net income was: a. $50,000. b. $75,000. c. $25,000. d. $30,000.


87. A Hard

PFM Company has sales of $210,000, interest expense of $8,000, a tax rate of 30%, and a net profit after tax of $35,000. PFM Company's times interest earned ratio is: a. 7.25 times. b. 4.375 times. c. 5.375 times. d. 15.5 times.

88. B Easy

NOTE TO THE INSTRUCTOR: Questions 88, 89, and 90 are different versions of the same question. Karma Company has total assets of $190,000 and total liabilities of $90,000. The company's debt-to-equity ratio is closest to: a. 0.47 to 1. b. 0.90 to 1. c. 0.53 to 1. d. 0.32 to 1.

89. D Easy

NOTE TO THE INSTRUCTOR: Questions 88, 89, and 90 are different versions of the same question. Karl Company has total assets of $170,000 and total liabilities of $110,000. The company's debt-to-equity ratio is closest to: a. 0.39 to 1. b. 0.65 to 1. c. 0.35 to 1. d. 1.83 to 1.

90. A Easy

NOTE TO THE INSTRUCTOR: Questions 88, 89, and 90 are different versions of the same question. Krakov Company has total assets of $170,000 and total liabilities of $80,000. The company's debt-to-equity ratio is closest to: a. 0.89 to 1. b. 0.32 to 1. c. 0.47 to 1. d. 0.53 to 1.


170

Reference: 18-1 Selected financial data for Barnstable Company appear below:

Sales ......................... Operating Expenses ............ Interest Expense .............. Cost of Goods Sold ............ Dividends Declared and Paid ...

19x9 19x8 (in thousands) $1,500 $1,200 450 400 75 30 900 720 30 0

91. D Easy Refer To: 18-1

For 19x9, the gross margin as a percentage of sales was: a. 5%. b. 60%. c. 10%. d. 40%.

92. D Easy Refer To: 18-1

For 19x9, the net income before taxes as a percentage of sales was: a. 10%. b. 3%. c. 8%. d. 5%.

93. C Easy Refer To: 18-1

For 19x9, the net operating income as a percentage of sales was: a. 70%. b. 8%. c. 10%. d. 40%.

94. B Medium Refer To: 18-1

Between 19x8 and 19x9, the times interest earned ratio: a. increased. b. decreased. c. remained the same. d. cannot be determined from the data provided.


Reference: 18-2 NOTE TO THE INSTRUCTOR: Questions 95 to 101, 102 to 108, and 109 to 115 are different versions of the same question. Financial statements for Larned Company appear below: Larned Company Statement of Financial Position December 31, 19X6 and 19X5 (dollars in thousands) 19X6 Current assets: Cash and marketable securities ............. $ 130 Accounts receivable, net ................... 150 Inventory .................................. 100 Prepaid expenses ........................... 20 Total current assets ..................... 400 Noncurrent assets: Plant & equipment, net ..................... 1,640 Total assets ................................. $2,040 Current liabilities: Accounts payable ........................... $ 120 Accrued liabilities ........................ 110 Notes payable, short term .................. 170 Total current liabilities ............... 400 Noncurrent liabilities: Bonds payable .............................. 370 Total liabilities ........................ 770 Stockholders' equity: Preferred stock, $20 par, 10% .............. 120 Common stock, $10 par ...................... 180 Additional paid-in capital--common stock ... 110 Retained earnings .......................... 860 Total stockholders' equity ............... 1,270 Total liabilities & stockholders' equity ..... $2,040


19X5 $

100 130 100 20 350

1,600 $1,950

$

120 80 160 360 400 760

120 180 110 780 1,190 $1,950

172

Larned Company Income Statement For the Year Ended December 31, 19X6 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (30%) ....................... Net income ...............................

$2,930 2,050 880 350 530 40 490 147 $ 343

Dividends during 19X6 totalled $263 thousand, of which $12 thousand were preferred dividends. The market price of a share of common stock on December 31, 19X6 was $160. 95. A Medium Refer To: 18-2

Larned Company's earnings per share of common stock for 19X6 was closest to: a. $18.39. b. $27.22. c. $19.06. d. $11.03.

96. C Medium Refer To: 18-2

Larned Company's price-earnings ratio on December 31, 19X6 was closest to: a. 5.88. b. 14.50. c. 8.70. d. 8.40.

97. A Medium Refer To: 18-2

Larned Company's dividend payout ratio for 19X6 was closest to: a. 75.8%. b. 28.5%. c. 76.7%. d. 47.4%.


Larned Company's dividend yield ratio on December 31, 19X6 was closest to: a. 8.7%. b. 9.1%. c. 8.3%. d. 5.5%.


Larned Company's return on total assets for 19X6 was closest to: a. 15.8%. b. 17.2%. c. 18.6%. d. 17.8%.



Larned Company's return on common stockholders' equity for 19X6 was closest to: a. 29.8%. b. 26.9%. c. 30.9%. d. 27.9%.


Larned Company's book value per share at the end of 19X6 was closest to: a. $16.11. b. $63.89. c. $70.56. d. $10.00.

Reference: 18-3 NOTE TO THE INSTRUCTOR: Questions 95 to 101, 102 to 108, and 109 to 115 are different versions of the same question. Financial statements for Laroche Company appear below: Laroche Company Statement of Financial Position December 31, 19X6 and 19X5 (dollars in thousands) 19X6 Current assets: Cash and marketable securities ............. $ 180 Accounts receivable, net ................... 140 Inventory .................................. 160 Prepaid expenses ........................... 50 Total current assets ..................... 530 Noncurrent assets: Plant & equipment, net ..................... 1,370 Total assets ................................. $1,900 Current liabilities: Accounts payable ........................... $ 150 Accrued liabilities ........................ 70 Notes payable, short term .................. 140 Total current liabilities ............... 360 Noncurrent liabilities: Bonds payable .............................. 280 Total liabilities ........................ 640 Stockholders' equity: Preferred stock, $20 par, 10% .............. 100 Common stock, $10 par ...................... 240 Additional paid-in capital--common stock ... 180 Retained earnings .......................... 740 Total stockholders' equity ............... 1,260 Total liabilities & stockholders' equity ..... $1,900


19X5 $

170 120 180 40 510

1,370 $1,880

$

190 80 150 420 300 720

100 240 180 640 1,160 $1,880

174

Laroche Company Income Statement For the Year Ended December 31, 19X6 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (30%) ....................... Net income ...............................

$2,250 1,570 680 270 410 30 380 114 $ 266

Dividends during 19X6 totaled $166 thousand, of which $10 thousand were preferred dividends. The market price of a share of common stock on December 31, 19X6 was $150. 102. A Medium Refer To: 18-3

Laroche Company's earnings per share of common stock for 19X6 was closest to: a. $10.67. b. $15.83. c. $3.71. d. $11.08.


Laroche Company's price-earnings ratio on December 31, 19X6 was closest to: a. 13.53. b. 40.43. c. 14.06. d. 9.47.


Laroche Company's dividend payout ratio for 19X6 was closest to: a. 22.9%. b. 62.4%. c. 60.9%. d. 38.0%.


Laroche Company's dividend yield ratio on December 31, 19X6 was closest to: a. 4.6%. b. 4.1%. c. 4.3%. d. 1.6%.


Laroche Company's return on total assets for 19X6 was closest to: a. 14.1%. b. 15.2%. c. 14.6%. d. 13.0%.


107. D Medium Refer To: 18-3

Laroche Company's return on common stockholders' equity for 19X6 was closest to: a. 24.0%. b. 21.2%. c. 22.0%. d. 23.1%.


Laroche Company's book value per share at the end of 19X6 was closest to: a. $52.50. b. $10.00. c. $48.33. d. $17.50.

Reference: 18-4 NOTE TO THE INSTRUCTOR: Questions 95 to 101, 102 to 108, and 109 to 115 are different versions of the same question. Financial statements for Larosa Company appear below: Larosa Company Statement of Financial Position December 31, 19X6 and 19X5 (dollars in thousands) 19X6 Current assets: Cash and marketable securities ............. $ 150 Accounts receivable, net ................... 190 Inventory .................................. 150 Prepaid expenses ........................... 40 Total current assets ..................... 530 Noncurrent assets: Plant & equipment, net ..................... 1,990 Total assets ................................. $2,520 Current liabilities: Accounts payable ........................... $ 140 Accrued liabilities ........................ 10 Notes payable, short term .................. 190 Total current liabilities ............... 340 Noncurrent liabilities: Bonds payable .............................. 370 Total liabilities ........................ 710 Stockholders' equity: Preferred stock, $20 par, 10% .............. 100 Common stock, $10 par ...................... 220 Additional paid-in capital--common stock ... 250 Retained earnings .......................... 1,240 Total stockholders' equity ............... 1,810 Total liabilities & stockholders' equity ..... $2,520


19X5 $

120 160 150 40 470

1,980 $2,450

$

170 40 200 410 400 810

100 220 250 1,070 1,640 $2,450

176

Larosa Company Income Statement For the Year Ended December 31, 19X6 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (30%) ....................... Net income ...............................

$1,870 1,300 570 220 350 40 310 93 $ 217

Dividends during 19X6 totaled $47 thousand, of which $10 thousand were preferred dividends. The market price of a share of common stock on December 31, 19X6 was $70. 109. B Medium Refer To: 18-4

Larosa Company's earnings per share of common stock for 19X6 was closest to: a. $3.09. b. $9.41. c. $14.09. d. $9.86.


Larosa Company's price-earnings ratio on December 31, 19X6 was closest to: a. 7.10. b. 22.66. c. 7.44. d. 4.97.


Larosa Company's dividend payout ratio for 19X6 was closest to: a. 21.7%. b. 17.9%. c. 6.5%. d. 10.6%.


Larosa Company's dividend yield ratio on December 31, 19X6 was closest to: a. 1.8%. b. 3.1%. c. 2.4%. d. 1.0%.


Larosa Company's return on total assets for 19X6 was closest to: a. 8.7%. b. 9.9%. c. 7.6%. d. 9.2%.



178


Larosa Company's return on common stockholders' equity for 19X6 was closest to: a. 12.0%. b. 12.7%. c. 13.4%. d. 12.6%.


Larosa Company's book value per share at the end of 19X6 was closest to: a. $77.73. b. $82.27. c. $10.00. d. $21.36.

Reference: 18-5 The Dawson Corporation projects the following for the upcoming year: Earnings before interest and taxes ............. Interest expense ............................... Preferred stock dividends ...................... Common stock dividend payout ratio ............. Average number of common shares outstanding .... Effective corporate income tax rate ............

$35 million $ 5 million $ 4 million 30% 2 million 40%

116. A Hard CMA adapted Refer To: 18-5

The expected dividend per share of common stock is a. $2.10. b. $2.70. c. $1.80. d. $3.90.

117. B Hard CMA adapted Refer To: 18-5

If Dawson corporation’s common stock has a price-earnings ratio of eight, the market price per share (to the nearest dollar) would be a. $125. b. $56. c. $72. d. $68.

Reference: 18-6 NOTE TO THE INSTRUCTOR: Questions 118 to 124, 125 to 131, and 132 to 138 are different versions of the same question. Financial statements for Orange Company appear below:


Orange Company Statement of Financial Position December 31, 19X6 and 19X5 (dollars in thousands) 19X6 Current assets: Cash and marketable securities ............. $ 130 Accounts receivable, net ................... 180 Inventory .................................. 160 Prepaid expenses ........................... 60 Total current assets ..................... 530 Noncurrent assets: Plant & equipment, net ..................... 1,680 Total assets ................................. $2,210 Current liabilities: Accounts payable ........................... $ 90 Accrued liabilities ........................ 60 Notes payable, short term .................. 160 Total current liabilities ............... 310 Noncurrent liabilities: Bonds payable .............................. 250 Total liabilities ........................ 560 Stockholders' equity: Preferred stock, $10 par, 15% ............... 120 Common stock, $5 par ....................... 220 Additional paid-in capital--common stock ... 210 Retained earnings .......................... 1,100 Total stockholders' equity ............... 1,650 Total liabilities & stockholders' equity ..... $2,210

19X5 $

110 180 160 60 510

1,620 $2,130

$

100 80 180 360 300 660

120 220 210 920 1,470 $2,130

Orange Company Income Statement For the Year Ended December 31, 19X6 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (30%) ....................... Net income ...............................

$2,830 1,980 850 340 510 30 480 144 $ 336

Dividends during 19X6 totaled $156 thousand, of which $18 thousand were preferred dividends. The market price of a share of common stock on December 31, 19X6 was $100.


180


Orange Company's earnings per share of common stock for 19X6 was closest to: a. $7.23. b. $2.27. c. $10.91. d. $7.64.


Orange Company's dividend yield ratio on December 31, 19X6 was closest to: a. 3.1%. b. 1.1%. c. 3.5%. d. 2.7%.


Orange Company's return on total assets for 19X6 was closest to: a. 15.5%. b. 15.9%. c. 16.5%. d. 14.5%.


Orange Company's current ratio at the end of 19X6 was closest to: a. 1.24 to 1. b. 0.55 to 1. c. 0.44 to 1. d. 1.71 to 1.


Orange Company's accounts receivable turnover for 19X6 was closest to: a. 15.7 times. b. 11.0 times. c. 17.7 times. d. 12.4 times.


Orange Company's average sale period (turnover in days) for 19X6 was closest to: a. 23.2 days. b. 29.5 days. c. 33.2 days. d. 20.6 days.


Orange Company's times interest earned for 19X6 was closest to: a. 16.0 times. b. 28.3 times. c. 17.0 times. d. 11.2 times.


Reference: 18-7 NOTE TO THE INSTRUCTOR: Questions 118 to 124, 125 to 131, and 132 to 138 are different versions of the same question. Financial statements for Orantes Company appear below: Orantes Company Statement of Financial Position December 31, 19X6 and 19X5 (dollars in thousands) 19X6 Current assets: Cash and marketable securities ............. $ 120 Accounts receivable, net ................... 180 Inventory .................................. 130 Prepaid expenses ........................... 50 Total current assets ..................... 480 Noncurrent assets: Plant & equipment, net ..................... 2,010 Total assets ................................. $2,490 Current liabilities: Accounts payable ........................... $ 120 Accrued liabilities ........................ 30 Notes payable, short term .................. 170 Total current liabilities ............... 320 Noncurrent liabilities: Bonds payable .............................. 270 Total liabilities ........................ 590 Stockholders' equity: Preferred stock, $10 par, 10% ............... 120 Common stock, $10 par ....................... 200 Additional paid-in capital--common stock ... 270 Retained earnings .......................... 1,310 Total stockholders' equity ............... 1,900 Total liabilities & stockholders' equity ..... $2,490

19X5 $

100 160 130 50 440

1,970 $2,410

$

120 40 170 330 300 630

120 200 270 1,190 1,780 $2,410

Orantes Company Income Statement For the Year Ended December 31, 19X6 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (30%) ....................... Net income ...............................


$2,510 1,750 760 300 460 30 430 129 $ 301

182

Dividends during 19X6 totaled $181 thousand, of which $12 thousand were preferred dividends. The market price of a share of common stock on December 31, 19X6 was $280. 125. B Medium Refer To: 18-7

Orantes Company's earnings per share of common stock for 19X6 was closest to: a. $3.61. b. $14.45. c. $15.05. d. $21.50.


Orantes Company's dividend yield ratio on December 31, 19X6 was closest to: a. 3.0%. b. 0.8%. c. 2.8%. d. 3.2%.


Orantes Company's return on total assets for 19X6 was closest to: a. 12.3%. b. 11.4%. c. 13.1%. d. 12.7%.


Orantes to: a. 0.54 b. 1.19 c. 0.35 d. 1.50

Company's current ratio at the end of 19X6 was closest


Orantes closest a. 19.3 b. 13.5 c. 14.8 d. 10.3

Company's accounts receivable turnover for 19X6 was to: times. times. times. times.


Orantes Company's average sale period (turnover in days) for 19X6 was closest to: a. 24.7 days. b. 27.1 days. c. 18.9 days. d. 35.5 days.


Orantes to: a. 10.0 b. 15.3 c. 14.3 d. 25.3

to to to to

1. 1. 1. 1.

Company's times interest earned for 19X6 was closest times. times. times. times.


Reference: 18-8 NOTE TO THE INSTRUCTOR: Questions 118 to 124, 125 to 131, and 132 to 138 are different versions of the same question. Financial statements for Oratz Company appear below: Oratz Company Statement of Financial Position December 31, 19X6 and 19X5 (dollars in thousands) 19X6 Current assets: Cash and marketable securities ............. $ 150 Accounts receivable, net ................... 130 Inventory .................................. 180 Prepaid expenses ........................... 30 Total current assets ..................... 490 Noncurrent assets: Plant & equipment, net ..................... 1,430 Total assets ................................. $1,920 Current liabilities: Accounts payable ........................... $ 70 Accrued liabilities ........................ 100 Notes payable, short term .................. 230 Total current liabilities ............... 400 Noncurrent liabilities: Bonds payable .............................. 300 Total liabilities ........................ 700 Stockholders' equity: Preferred stock, $10 par, 5% ............... 120 Common stock, $15 par ....................... 140 Additional paid-in capital--common stock ... 240 Retained earnings .......................... 720 Total stockholders' equity ............... 1,220 Total liabilities & stockholders' equity ..... $1,920

19X5 $

150 130 180 30 490

1,370 $1,860

$

100 70 220 390 300 690

120 140 240 670 1,170 $1,860

Oratz Company Income Statement For the Year Ended December 31, 19X6 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (30%) ....................... Net income ...............................


$1,630 1,140 490 190 300 30 270 81 $ 189

184

Dividends during 19X6 totaled $139 thousand, of which $6 thousand were preferred dividends. The market price of a share of common stock on December 31, 19X6 was $260.



Oratz Company's earnings per share of common stock for 19X6 was closest to: a. $1.74. b. $28.93. c. $20.25. d. $19.61.


Oratz Company's dividend yield ratio on December 31, 19X6 was closest to: a. 5.7%. b. 5.2%. c. 5.5%. d. 0.5%.


Oratz Company's return on total assets for 19X6 was closest to: a. 8.9%. b. 11.1%. c. 10.5%. d. 10.0%.


Oratz Company's current ratio at the end of 19X6 was closest to: a. 0.57 to 1. b. 1.23 to 1. c. 0.51 to 1. d. 1.26 to 1.


Oratz Company's accounts receivable turnover for 19X6 was closest to: a. 9.1 times. b. 12.5 times. c. 8.8 times. d. 6.3 times.


Oratz Company's average sale period (turnover in days) for 19X6 was closest to: a. 29.1 days. b. 40.3 days. c. 41.6 days. d. 57.6 days.


Oratz Company's times interest earned for 19X6 was closest to: a. 6.3 times. b. 16.3 times. c. 10.0 times. d. 9.0 times.


186

Reference: 18-9 Selected data for the MK Company follow: Current Year Preferred stock, 8%, par value $50 ....... $250,000 Common stock, par value $10 .............. 500,000 Retained earnings at end of year ......... 257,000 Net income ............................... 102,000 Dividends paid on preferred stock ........ 20,000 Dividends paid on common stock ........... 65,000 Quoted market price per common share at year end...................... 25.00

Prior Year $250,000 500,000 240,000 90,000 20,000 60,000 20.00

139. B Hard Refer To: 17-9

The price-earnings ratio for the prior year was: a. 15.8 to 1. b. 14.3 to 1. c. 12.2 to 1. d. 11.1 to 1.


The dividend yield ratio on common stock for the current year was (rounded to the nearest tenth of a percent): a. 5.2% b. 6.8%. c. 6.6%. d. 7.4%.

141. D Hard Refer To: 17-9

MK Company's return on common stockholders' equity for the current year was (rounded to the nearest tenth of a percent): a. 10.2%. b. 8.2%. c. 13.6%. d. 10.9%.


The dividend payout ratio for the prior year was: a. 55.6% b. 140%. c. 114.3%. d. 85.7%.


The book value per share for the current year is (rounded to the nearest cent: a. $22.18. b. $18.31. c. $15.14. d. $20.14.


Reference: 18-10 Lisa Inc.'s balance sheet appears below: Lisa Inc. Statement of Financial Position December 31 (in thousands) 19X7 Cash ................................... $ 30 Marketable securities ................... 20 Accounts receivable (net) ............... 45 Inventories ............................. 60 Prepaid expenses ........................ 15 Total current assets ................... 170 Land .................................... 155 Building (net) .......................... 80 Equipment (net) ......................... 95 Total long-term assets ................. 330 Total Assets ......................... $500

19X6 $ 25 15 30 50 20 140 125 90 100 315 $455

Accounts payable ........................ Accrued interest ........................ Short-term notes payable ................ Total current liabilities .............. Long-term otes payable .................. Bonds payable ........................... Total long-term liabilities ............ Total liabilities ...................... Preferred stock ($100 par value, 5%) .... Common Stock ($10 par value) ............ Additional paid-in capital--common stock Retained earnings ....................... Total shareholders’ equity ............. Total liabilities & equity ...........

$ 28 15 12 55 10 15 25 80 100 150 75 50 375 $455

$ 47 15 23 85 10 15 25 110 100 150 75 65 390 $500

The company's sales for the year were $300,000, its cost of goods sold was $220,000, and its net income was $35,000. All sales were on credit. Preferred dividends for the year were $5,000. 144. B Medium CMA adapted Refer To: 18-10

Lisa Inc.’s acid test (quick) ratio at December 31, 19X7, was closest to: a. 0.6 to 1. b. 1.1 to 1. c. 1.8 to 1. d. 2.0 to 1.


188

145. D Medium CMA adapted Refer To: 18-10

Lisa Inc.’s accounts receivable turnover for 19X7 was closest to: a. 4.9 times. b. 5.9 times. c. 6.7 times. d. 8.0 times.

146. B Medium CMA adapted Refer To: 18-10

Lisa Inc.’s inventory turnover for 19X7 was closest to: a. 3.7 times. b. 4.0 times. c. 4.4 times. d. 5.0 times.

147. C Medium CMA adapted Refer To: 18-10

Lisa Inc.’s book value per share of common stock at December 31, 19X7, was closest to: a. $10.00. b. $11.25. c. $19.33. d. $18.33.

148. B Medium CMA adapted Refer To: 18-10

Lisa Inc.’s return on common stockholders' equity for 19X7 was closest to: a. 7.8%. b. 10.6%. c. 10.9%. d. 12.4%.


Reference: 18-11 NOTE TO THE INSTRUCTOR: Questions 149 to 155, 156 to 162, and 163 to 169 are different versions of the same question. Financial statements for Marcell Company appear below: Marcell Company Statement of Financial Position December 31, 19X6 and 19X5 (dollars in thousands) 19X6 Current assets: Cash and marketable securities ............. $ 160 Accounts receivable, net ................... 110 Inventory .................................. 180 Prepaid expenses ........................... 20 Total current assets ..................... 470 Noncurrent assets: Plant & equipment, net ..................... 1,700 Total assets ................................. $2,170 Current liabilities: Accounts payable ........................... $ 110 Accrued liabilities ........................ 60 Notes payable, short term .................. 280 Total current liabilities ............... 450 Noncurrent liabilities: Bonds payable .............................. 480 Total liabilities ........................ 930 Stockholders' equity: Preferred stock, $10 par, 8% ............... 100 Common stock, $5 par ....................... 140 Additional paid-in capital--common stock ... 280 Retained earnings .......................... 720 Total stockholders' equity ............... 1,240 Total liabilities & stockholders' equity ..... $2,170

19X5 $

150 110 180 20 460

1,680 $2,140

$

150 60 290 500 500 1,000

100 140 280 620 1,140 $2,140

Marcell Company Income Statement For the Year Ended December 31, 19X6 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (30%) ....................... Net income ...............................


$2,550 1,780 770 300 470 50 420 126 $ 294

190


Marcell Company's working capital (in thousands of dollars) at the end of 19X6 was closest to: a. $470. b. $20. c. $520. d. $1,240.


Marcell to: a. 1.04 b. 0.42 c. 0.48 d. 1.22


Marcell Company's acid-test (quick) ratio at the end of 19X6 was closest to: a. 0.33 to 1. b. 1.35 to 1. c. 0.60 to 1. d. 0.74 to 1.


Marcell Company's accounts receivable turnover for 19X6 was closest to: a. 16.2 times. b. 9.9 times. c. 23.2 times. d. 14.2 times.


Marcell Company's average collection period (age of receivables) for 19X6 was closest to: a. 22.6 days. b. 15.7 days. c. 25.8 days. d. 36.9 days.


Marcell Company's inventory turnover for 19X6 was closest to: a. 16.2 times. b. 23.2 times. c. 14.2 times. d. 9.9 times.


Marcell Company's average sale period (turnover in days) for 19X6 was closest to: a. 15.7 days. b. 25.8 days. c. 36.9 days. d. 22.6 days.

Company's current ratio at the end of 19X6 was closest to to to to

1. 1. 1. 1.


Reference: 18-12 NOTE TO THE INSTRUCTOR: Questions 149 to 155, 156 to 162, and 163 to 169 are different versions of the same question. Financial statements for March Company appear below: March Company Statement of Financial Position December 31, 19X6 and 19X5 (dollars in thousands) 19X6 Current assets: Cash and marketable securities ............. $ 220 Accounts receivable, net ................... 160 Inventory .................................. 150 Prepaid expenses ........................... 50 Total current assets ..................... 580 Noncurrent assets: Plant & equipment, net ..................... 1,560 Total assets ................................. $2,140 Current liabilities: Accounts payable ........................... $ 90 Accrued liabilities ........................ 80 Notes payable, short term .................. 230 Total current liabilities ............... 400 Noncurrent liabilities: Bonds payable .............................. 450 Total liabilities ........................ 850 Stockholders' equity: Preferred stock, $10 par, 8% ............... 120 Common stock, $5 par ....................... 180 Additional paid-in capital--common stock ... 220 Retained earnings .......................... 770 Total stockholders' equity ............... 1,290 Total liabilities & stockholders' equity ..... $2,140

19X5 $

190 150 150 40 530

1,560 $2,090

$

100 60 230 390 500 890

120 180 220 680 1,200 $2,090

March Company Income Statement For the Year Ended December 31, 19X6 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (30%) ....................... Net income ...............................


$1,610 1,120 490 190 300 50 250 75 $ 175

192


March Company's working capital (in thousands of dollars) at the end of 19X6 was closest to: a. $520. b. $1,290. c. $180. d. $580.


March Company's current ratio at the end of 19X6 was closest to: a. 1.27 to 1. b. 0.47 to 1. c. 0.49 to 1. d. 1.45 to 1.


March Company's acid-test (quick) ratio at the end of 19X6 was closest to: a. 0.95 to 1. b. 0.39 to 1. c. 1.90 to 1. d. 0.53 to 1.


March Company's accounts receivable turnover for 19X6 was closest to: a. 7.2 times. b. 10.4 times. c. 7.5 times. d. 10.7 times.


March Company's average collection period (age of receivables) for 19X6 was closest to: a. 48.9 days. b. 35.1 days. c. 34.0 days. d. 50.5 days.


March Company's inventory turnover for 19X6 was closest to: a. 7.5 times. b. 10.4 times. c. 10.7 times. d. 7.2 times.


March Company's average sale period (turnover in days) for 19X6 was closest to: a. 48.9 days. b. 34.0 days. c. 35.1 days. d. 50.5 days.


Reference: 18-13 NOTE TO THE INSTRUCTOR: Questions 149 to 155, 156 to 162, and 163 to 169 are different versions of the same question. Financial statements for Marcial Company appear below: Marcial Company Statement of Financial Position December 31, 19X6 and 19X5 (dollars in thousands) 19X6 Current assets: Cash and marketable securities ............. $ 140 Accounts receivable, net ................... 110 Inventory .................................. 140 Prepaid expenses ........................... 50 Total current assets ..................... 440 Noncurrent assets: Plant & equipment, net ..................... 1,550 Total assets ................................. $1,990 Current liabilities: Accounts payable ........................... $ 120 Accrued liabilities ........................ 10 Notes payable, short term .................. 110 Total current liabilities ............... 240 Noncurrent liabilities: Bonds payable .............................. 390 Total liabilities ........................ 630 Stockholders' equity: Preferred stock, $10 par, 8% ............... 120 Common stock, $5 par ....................... 200 Additional paid-in capital--common stock ... 250 Retained earnings .......................... 790 Total stockholders' equity ............... 1,360 Total liabilities & stockholders' equity ..... $1,990

19X5 $

140 110 130 50 430

1,480 $1,910

$

170 40 100 310 400 710

120 200 250 630 1,200 $1,910

Marcial Company Income Statement For the Year Ended December 31, 19X6 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (30%) ....................... Net income ...............................


$1,630 1,140 490 190 300 40 260 78 $ 182

194


Marcial Company's working capital (in thousands of dollars) at the end of 19X6 was closest to: a. $440. b. $570. c. $1,360. d. $200.


Marcial to: a. 1.83 b. 0.38 c. 0.35 d. 1.22


Marcial Company's acid-test (quick) ratio at the end of 19X6 was closest to: a. 0.76 to 1. b. 1.32 to 1. c. 1.04 to 1. d. 0.25 to 1.


Marcial Company's accounts receivable turnover for 19X6 was closest to: a. 8.4 times. b. 14.8 times. c. 12.1 times. d. 10.4 times.


Marcial Company's average collection period (age of receivables) for 19X6 was closest to: a. 24.6 days. b. 35.2 days. c. 43.2 days. d. 30.2 days.


Marcial Company's inventory turnover for 19X6 was closest to: a. 8.4 times. b. 12.1 times. c. 14.8 times. d. 10.4 times.


Marcial Company's average sale period (turnover in days) for 19X6 was closest to: a. 35.2 days. b. 30.2 days. c. 43.2 days. d. 24.6 days.

Company's current ratio at the end of 19X6 was closest to to to to

1. 1. 1. 1.


Reference: 18-14 The following financial data have been taken from the records of CPZ Enterprises. Accounts receivable ...................... Accounts payable ......................... Bonds payable, due in 10 years ........... Cash ..................................... Interest payable, due in three months .... Inventory ................................ Land ..................................... Notes payable, due in six months .........

$200,000 80,000 300,000 100,000 10,000 440,000 250,000 50,000

170. D Medium CMA adapted Refer To: 18-14

The current ratio for CPZ Enterprises is: a. 1.68. b. 2.14. c. 5.00. d. 5.29.

171. C Medium CMA adapted Refer To: 18-14

What is the company’s acid test (quick) ratio? a. 0.68. b. 1.68. c. 2.14. d. 2.31.

172. A Hard CMA adapted Refer To: 18-14

What will happen to the ratios below if CPZ Enterprises uses cash to pay 50% of its accounts payable?

a. b. c. d.

Current Ratio increase decrease increase decrease

Acid-test Ratio increase decrease decrease increase

Reference: 18-15 At December 31, Curry Co. had the following balances in selected asset accounts:

Cash ........................... Accounts receivable, net ....... Inventory ...................... Prepaid expenses ............... Other assets ................... Total assets ...................

19x7 $ 300 1,200 500 100 400 $2,500

19x6 $ 200 800 300 60 250 $1,610

Curry had current liabilities of $1,000 at December 31, 19x7, and credit sales of $7,200 for 19x7. Managerial Accounting, 9/e

196


173. A Medium CPA adapted Refer To: 18-15

Curry Company’s acid-test (quick) ratio at December 31, 19x7 was closest to: a. 1.5 to 1. b. 1.6 to 1. c. 2.0 to 1. d. 2.1 to 1.

174. C Medium CPA adapted Refer To: 18-15

Drew Company's average collection period (age of receivables) for 19x7 was closest to: a. 30.4 days. b. 40.6 days. c. 50.7 days. d. 60.8 days.

Reference: 18-16 NOTE TO THE INSTRUCTOR: Questions 175 to 176, 177 to 178, and 179 to 180 are different versions of the same question. Financial statements for Narita Company appear below: Narita Company Statement of Financial Position December 31, 19X6 and 19X5 (dollars in thousands) 19X6 Current assets: Cash and marketable securities ............. $ 130 Accounts receivable, net ................... 210 Inventory .................................. 120 Prepaid expenses ........................... 60 Total current assets ..................... 520 Noncurrent assets: Plant & equipment, net ..................... 1,660 Total assets ................................. $2,180 Current liabilities: Accounts payable ........................... $ 150 Accrued liabilities ........................ 50 Notes payable, short term .................. 180 Total current liabilities ............... 380 Noncurrent liabilities: Bonds payable .............................. 260 Total liabilities ........................ 640 Stockholders' equity: Preferred stock, $10 par, 6% ............... 120 Common stock, $2 par ....................... 140 Additional paid-in capital--common stock ... 180 Retained earnings .......................... 1,100 Total stockholders' equity ............... 1,540 Total liabilities & stockholders' equity ..... $2,180 Managerial Accounting, 9/e

19X5 $

130 180 120 50 480

1,660 $2,140

$

140 60 200 400 300 700

120 140 180 1,000 1,440 $2,140 198

Narita Company Income Statement For the Year Ended December 31, 19X6 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (30%) ....................... Net income ...............................

$2,570 1,790 780 310 470 30 440 132 $ 308


Narita Company's times interest earned for 19X6 was closest to: a. 14.7 times. b. 26.0 times. c. 10.3 times. d. 15.7 times.


Narita Company's debt-to-equity ratio at the end of 19X6 was closest to: a. 0.17 to 1. b. 0.58 to 1. c. 0.25 to 1. d. 0.42 to 1.

Reference: 18-17 NOTE TO THE INSTRUCTOR: Questions 175 to 176, 177 to 178, and 179 to 180 are different versions of the same question. Financial statements for Narlock Company appear below: Narlock Company Statement of Financial Position December 31, 19X6 and 19X5 (dollars in thousands) 19X6 Current assets: Cash and marketable securities ............. $ 120 Accounts receivable, net ................... 150 Inventory .................................. 130 Prepaid expenses ........................... 90 Total current assets ..................... 490 Noncurrent assets: Plant & equipment, net ..................... 1,670 Total assets ................................. $2,160


19X5 $

120 150 120 80 470

1,600 $2,070

Current liabilities: Accounts payable ........................... $ 100 Accrued liabilities ........................ 60 Notes payable, short term .................. 250 Total current liabilities ............... 410 Noncurrent liabilities: Bonds payable .............................. 480 Total liabilities ........................ 890 Stockholders' equity: Preferred stock, $10 par, 6% ............... 100 Common stock, $2 par ....................... 200 Additional paid-in capital--common stock ... 150 Retained earnings .......................... 820 Total stockholders' equity ............... 1,270 Total liabilities & stockholders' equity ..... $2,160

$

100 70 290 460 500 960

100 200 150 660 1,110 $2,070

Narlock Company Income Statement For the Year Ended December 31, 19X6 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (30%) ....................... Net income ...............................

$2,250 1,570 680 270 410 50 360 108 $ 252


Narlock Company's times interest earned for 19X6 was closest to: a. 7.2 times. b. 8.2 times. c. 13.6 times. d. 5.0 times.


Narlock closest a. 0.70 b. 0.32 c. 0.38 d. 1.09

Company's debt-to-equity ratio at the end of 19X6 was to: to 1. to 1. to 1. to 1.


200

Reference: 18-18 NOTE TO THE INSTRUCTOR: Questions 175 to 176, 177 to 178, and 179 to 180 are different versions of the same question. Financial statements for Narumi Company appear below: Narumi Company Statement of Financial Position December 31, 19X6 and 19X5 (dollars in thousands) 19X6 Current assets: Cash and marketable securities ............. $ 150 Accounts receivable, net ................... 140 Inventory .................................. 130 Prepaid expenses ........................... 40 Total current assets ..................... 460 Noncurrent assets: Plant & equipment, net ..................... 1,340 Total assets ................................. $1,800 Current liabilities: Accounts payable ........................... $ 120 Accrued liabilities ........................ 80 Notes payable, short term .................. 180 Total current liabilities ............... 380 Noncurrent liabilities: Bonds payable .............................. 510 Total liabilities ........................ 890 Stockholders' equity: Preferred stock, $10 par, 6% ............... 120 Common stock, $2 par ....................... 160 Additional paid-in capital--common stock ... 200 Retained earnings .......................... 430 Total stockholders' equity ............... 910 Total liabilities & stockholders' equity ..... $1,800 Narumi Company Income Statement For the Year Ended December 31, 19X6 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (30%) ....................... Net income ...............................


$2,050 1,430 620 240 380 50 330 99 $ 231

19X5 $

150 130 130 30 440

1,310 $1,750

$

110 80 230 420 500 920

120 160 200 350 830 $1,750


Narumi Company's times interest earned for 19X6 was closest to: a. 12.4 times. b. 7.6 times. c. 6.6 times. d. 4.6 times.


Narumi Company's debt-to-equity ratio at the end of 19X6 was closest to: a. 2.07 to 1. b. 0.42 to 1. c. 0.98 to 1. d. 0.56 to 1.

Essay 181. Medium CIMA (UK) adapted

M. K. Berry is the managing director of CE Ltd. a small, family-owned company which manufactures cutlery. His company belongs to a trade association which publishes a monthly magazine. The latest issue of the magazine contains a very brief article based on the analysis of the accounting statements published by the 40 companies which manufacture this type of product. The article contains the following table: Average for all companies in the industry Return on stockholders' equity ...... 33% Return on total assets .............. 29% Gross margin percentage ............. 30% Current ratio ....................... 1.9:1 Average sale period ................. 37 days Average collection period ........... 41 days CE Ltd's latest financial statements are as follows: CE Ltd. Income Statement for the year ended 31 October (in thousands) Sales ...................................... Cost of goods sold ......................... Gross margin ............................... Selling and administrative expenses ........ Interest ................................... Net income .................................

£900 720 180 55 15 £110

The country in which the company operates has no corporate income tax. No dividends were paid during the year. All sales are on account.


202

CE Ltd. Balance Sheets as of 31 October (in thousands) This Year Current assets: Cash ............................... £ 5 Accounts receivable ................ 120 Inventories ........................ 96 Noncurrent assets .................... 500 Total assets ....................... £721 Current liabilities: Accounts payable ................... £147 Noncurrent liabilities: Bonds payable ...................... 150 Common stock ......................... 100 Retained earnings .................... 324 Total liabilities and stockholders’ equity ............ £721

Last Year £ 20 110 80 460 £670

£206 150 100 214 £670

Required: a. Calculate each of the ratios listed in the magazine article for this year for CE, and comment briefly on CE Ltd's performance in comparison to the industrial averages. b. Explain why it could be misleading to compare CE Ltd's ratios with those taken from the article. Answer: a. Return on common stockholders’ equity: Net income = £110 Preferred dividends = £0 Average common stockholders’ equity = [(£100 + £324) + (£100 + £214)] ÷ 2 = £369 Return on common stockholders’ equity = (£110 - £0) ÷ £369 = 29.8% (rounded) Return on total assets: Net income = £110 Tax rate = 0% Interest expense = £15 Average total assets = (£721 + £670) ÷ 2 = £695.5 Return on total assets = [£110 + £15x(1 - 0.00)] ÷ £695.5 = 18.0% (rounded)


Gross margin percentage: Gross margin = £180 Sales = £900 Gross margin percentage = £180/£900 = 20% Current ratio: Current assets = £5 + £120 + £96 = £221 Current liabilities = £147 Current ratio = £221/£147 = 1.5:1 (rounded) Average sale period: Cost of goods sold = £720 Average inventory balance = (£96 + £80)/2 = £88 Inventory turnover = £720/£88 = 8.2 (rounded) Average sale period = 365 days/8.2 = 45 days (rounded)

Average collection period: Sales on account = £900 Average accounts receivable balance = (£120 + £110)/2 = £115 Accounts receivable turnover = £900/£115 = 7.8 (rounded) Average collection period = 365 days/7.8 = 47 days (rounded) CE Ltd's return on stockholders' equity is not as good as the industry’s average. For every pound invested, shareholders are obtaining a return which is smaller than they should expect, based on the article's figures. Similarly, the return on total assets is much less than the average. This indicates that the company is unable to make good use of the funds invested in the company. CE Ltd's gross margin percentage is also lower than average-perhaps because it's selling prices are lower than the average or its cost of sales are higher. The current ratio indicates that CE Ltd's current assets are greater than its current liabilities by a factor of 1.5. The industry average shows an even higher figure, with current assets amounting to almost double current liabilities. Most companies aim to turn over inventory as quickly as possible, in order to improve cash flow. CE Ltd is not managing to do this as quickly as the industry's average of 37 days. Similarly, companies should try to obtain payment from customers as soon as possible. CE Ltd is taking much longer to do this than the average for the industry.


204

b. Care must be taken when comparing CE Ltd's ratios with industry averages because there may be differences in accounting methods. Although accounting standards have reduced the range of acceptable accounting policies, there is still scope for different firms to apply different accounting policies. For example, one firm may use straightline depreciation, while another may use accelerated depreciation. These variations make comparisons difficult. Size differences may also mean that ratios are not comparable. A very large manufacturing business should be able to achieve economies of scale which are not possible for CE Ltd. For example, large companies may be able to negotiate sizable discounts from suppliers. A third problem arises from differences in product range. CE Ltd may produce cutlery which is sold at the top end of the market, for very high prices, and in small volumes. Alternatively, it may be producing high-volume, low quality cutlery for the catering industry. Either situation will reduce the value of comparisons with the industry average.


182. Medium

Comparative financial statements for Springville Company for the last two years appear below. The market price of Springville's common stock was $25 per share on December 31, Year 2. During Year 2, dividends of $2,000,000 were paid to preferred stockholders and $10,000,000 to stockholders. Springville Company Statement of Financial Position December 31, Year 2 and Year 1 (dollars in thousands) Year 2 Current assets: Cash and marketable securities ........... $ 6,000 Accounts receivable, net ................. 20,000 Inventory ................................ 28,000 Total current assets ................... 54,000 Noncurrent assets: Investments............................... 75,000 Plant & equipment, net ................... 12,000 Total assets ............................... $141,000 Current liabilities: Accounts payable ......................... $ 7,000 Accrued liabilities ...................... 1,000 Total current liabilities ............. 8,000 Noncurrent liabilities: Bonds payable ............................ 24,000 Total liabilities ...................... 32,000 Stockholders' equity: Preferred stock, 8%, 1,000,000 shares..... 20,000 Common stock, no par, 5,000,000 shares.... 30,000 Retained earnings ........................ 59,000 Total stockholders' equity ............. 109,000 Total liabilities & stockholders' equity ... $141,000

Year 1 $

4,800 16,800 28,800 50,400

81,600 12,000 $144,000

$

6,000 1,200 7,200 24,000 31,200

20,000 30,000 62,800 112,800 $144,000

Springville Company Income Statement For the Year Ended December 31, Year 2 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (40%) ....................... Net income ...............................


$280,000 200,000 $ 80,000 61,333 18,667 5,000 13,667 5,467 $ 8,200

206

Required: Compute the following for Year 2: a. Dividend payout ratio. b. Dividend yield ratio. c. Price-earnings ratio. d. Accounts receivable turnover. e. Inventory turnover. f. Return on total assets. g. Return on common stockholders' equity. h. Was financial leverage positive or negative for the year? Explain. Answer: a. Dividend payout ratio = Dividends per share ÷ Earnings per share. = ($10,000,000/5,000,000) ÷ (($8,200,000 - $2,000,000) /5,000,000)) = $2.00 ÷ $1.24 = 161.3%. b. Dividend yield ratio = Dividends paid per share ÷ Market price per share = $2.00 ÷ $25 = 8%. c. Price-earnings ratio = Market price per share ÷ Earnings per share = $25 ÷ (($8,200,000 - $2,000,000)/5,000,000)) = 20.16. d. Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance = $280,000 ÷ (($16,800 + $20,000)/2)) = 15.22 times. e. Inventory turnover = Cost of goods sold ÷ Average inventory balance = $200,000 ÷ (($28,800 + $28,000)/2)) = 7.04 times f. Return on total assets = [Net income + ((Interest expense x (1 - Tax rate))] Average total assets = [$8,200,000 + 5,000,000 x (1 - 0.40)] ÷

[($144,000,000 + $141,000,000)/2]

÷

= 7.9%


g. Return on common stockholders' equity = (Net income - preferred dividends) ÷ Average common stockholders' equity = ($8,200,000 - $2,000,000) = 6.8%

[($92,800,000 + $89,000,000)/2]

÷

h. Financial leverage was negative, since the rate of return to the common stockholders (6.8%) was less than the rate of return on total assets (7.8%). 183. Medium

Financial statements for Praeger Company appear below: Praeger Company Statement of Financial Position December 31, 19X6 and 19X5 (dollars in thousands) 19X6 Current assets: Cash and marketable securities ............. $ 100 Accounts receivable, net ................... 170 Inventory .................................. 110 Prepaid expenses ........................... 60 Total current assets ..................... 440 Noncurrent assets: Plant & equipment, net ..................... 2,020 Total assets ................................. $2,460 Current liabilities: Accounts payable ........................... $ 140 Accrued liabilities ........................ 70 Notes payable, short term .................. 100 Total current liabilities ............... 310 Noncurrent liabilities: Bonds payable .............................. 500 Total liabilities ........................ 810 Stockholders' equity: Preferred stock, $5 par, 5% ................ 100 Common stock, $5 par ....................... 200 Additional paid-in capital--common stock ... 200 Retained earnings .......................... 1,150 Total stockholders' equity ............... 1,650 Total liabilities & stockholders' equity ..... $2,460


19X5 $

100 170 110 60 440

1,990 $2,430

$

170 50 120 340 500 840

100 200 200 1,090 1,590 $2,430

208

Praeger Company Income Statement For the Year Ended December 31, 19X6 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (30%) ....................... Net income ...............................

$1,100 770 330 130 200 50 150 45 $ 105

Dividends during 19X6 totalled $45 thousand, of which $5 thousand were preferred dividends. The market price of a share of common stock on December 31, 19X6 was $30. Required: Compute the following for 19X6: 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 (quick) ratio. k. Accounts receivable turnover. l. Average collection period (age of receivables). m. Inventory turnover. n. Average sale period (turnover in days). o. Times interest earned. p. Debt-to-equity ratio. Answer: a. Earnings per share = (Net Income - Preferred Dividends) ÷ Average number of common shares outstanding* = ($105 - $5) ÷ 40 = $2.50 *Number of common shares outstanding = Common stock = $200 ÷ $5 = 40


Par value

÷

b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above) = $30 ÷ $2.50 = 12.0 c. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above) = $1.00 ÷ $2.50 = 40.0% *Dividends per share = Common dividends = $40 ÷ 40 = $1.00 **See above

Common shares**

÷

d. Dividend yield ratio = Dividends per share* ÷ Market price per share = $1.00 ÷ $30.00 = 3.33% *See above e. Return on total assets = Adjusted net income* ÷ Average total assets** = $140 ÷ $2,445 = 5.73% *Adjusted net income = Net income + [Interest expense x (1-Tax rate)] = $105 + [$50 x (1 – 0.30)] = $140 **Average total assets = ($2,460 + $2,430) = $2,445

2

÷

f. Return on common stockholders' equity = (Net income - Preferred dividends) ÷ Average common stockholders' equity* = ($105 - $5) ÷ $1,520 = 6.58% *Average common stockholders' equity = ($1,550 + $1,490) = $1,520

2

÷

g. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding* = $1,550 ÷ 40 = $38.75 *Number of common shares outstanding = Common stock = $200 ÷ $5 = 40


Par value

÷

210

h. Working capital = Current assets - Current liabilities = $440 - $310 = $130 i. Current ratio = Current assets = $440 ÷ $310 = 1.42 to 1 j. Acid-test ratio = Quick assets* = $270 ÷ $310 = 0.87 to 1

Current liabilities

÷

Current liabilities

÷

*Quick assets = Cash + Marketable securities + Current receivables = $100 + $170 = $270 k. Accounts receivable turnover = Sales on account = $1,100 ÷ $170 = 6.47 times

Average accounts receivable*

÷

*Average accounts receivable = ($170 + $170) = $170

2

÷

l. Average collection period = 365 days ÷ Accounts receivable turnover* = 365 ÷ 6.47 = 56.4 days *See above m. Inventory turnover = Cost of goods sold = $770 ÷ $110 = 7.00 times

Average inventory*

÷

*Average inventory = ($110 + $110) ÷2 = $110 n. Average sale period = 365 days ÷ Inventory turnover* = 365 ÷7.00 = 52.1 days *See above o. Times interest earned = Net operating income ÷ Interest expense = $200 ÷ $50 = 4.00 times p. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $810 ÷ $1,650 = 0.49 to 1


184. Medium

Financial statements for AAR Company appear below: AAR Company Statement of Financial Position December 31 Current assets: Cash and marketable securities ............. $ 21,000 Accounts receivable, net ................... 160,000 Inventory .................................. 300,000 Prepaid expenses ........................... 9,000 Total current assets ..................... 490,000 Noncurrent assets: Plant & equipment, net ..................... 810,000 Total assets ................................. $1,300,000 Current liabilities: Accounts payable ........................... $ 75,000 Accrued liabilities ........................ 25,000 Notes payable, short term .................. 100,000 Total current liabilities ............... 200,000 Noncurrent liabilities: Bonds payable .............................. 300,000 Total liabilities ........................ 500,000 Stockholders' equity: Common stock, $5 par ....................... 100,000 Retained earnings .......................... 700,000 Total stockholders' equity ............... 800,000 Total liabilities & stockholders' equity ..... $1,300,000 AAR Company Income Statement For the Year Ended December 31 (dollars in thousands) Sales (all on account) .................. $2,100,000 Cost of goods sold ...................... 1,770,000 Gross margin ............................ 330,000 Operating expenses ...................... 130,000 Net operating income .................... 200,000 Interest expense ........................ 50,000 Net income before taxes ................. 150,000 Income taxes (30%) ...................... 45,000 Net income .............................. $ 105,000 AAR Company paid dividends of $3.15 per share during the year. The market price of the company's stock at December 31 was $63 per share. Assets at the beginning of the year totaled $1,100,000, and stockholders' equity totaled $725,000. The balance of accounts receivable at the beginning of the year was $150,000. The balance in inventory at the beginning of the year was $250,000.


212

Required: Compute the following: a. Current ratio. b. Acid-test (quick) ratio. c. Average collection period (age of receivables). d. Inventory turnover. e. Times interest earned. f. Debt-to-equity ratio. g. Dividend payout ratio. h. Price-earnings ratio. i. Return on total assets. j. Return on common stockholders' equity. k. Was financial leverage positive or negative for the year. Explain. Answer: a. Current ratio = Current assets ÷ Current liabilities = $490,000 ÷ $200,000 = 2.45 to 1 b. Acid-test ratio = Quick assets* ÷ Current liabilities = $181,000 ÷ $200,000 = 0.91 to 1 *Quick assets = Cash + Marketable securities + Current receivables = $21,000 + $160,000 = $181,000 c. Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $2,100,000 ÷ $155,000 = 13.55 times *Average accounts receivable = ($160,000 + $150,000) = $155,000.

2

÷

Average collection period = 365 days ÷ Accounts receivable turnover = 365 ÷ 13.55 = 26.94 days d. Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,770,000 ÷ $275,000 = 6.4 times *Average inventory = ($300,000 + $250,000) = $275,000.


2

÷

e. Times interest earned = Net operating income ÷ Interest expense = $200,000 ÷ $50,000 = 4.00 times f. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $500,000 ÷ $800,000 = 0.625 to 1 g. Dividend payout ratio = Dividends per share ÷ Earnings per share. = $3.15 ÷ ($105,000/20,000 shares) = $3.15 = 60%.

÷

$5.25

h. Dividend yield ratio = Dividends paid per share ÷ Market price per share = $3.15 ÷ $63.00 = 5%. i. Price-earnings ratio = Market price per share ÷ Earnings per share = $63 ÷ $5.25 = 12.0. j. Return on total assets = ((Net income + (Interest expense x (1 - Tax rate)) ÷ Average total assets = (($105,000 + (50,000 x (1 - 0.30)) (($1,100,000 + $1,300,000)/2)) = $140,000 ÷ $1,200,000 = 11.67%. ÷

k. Return on common stockholders' equity = (Net income – Preferred dividends) Average common stockholders' equity = $105,000 ÷ [($725,000 + $800,000)/2] = 13.8% ÷

l. Financial leverage was positive, since the rate of return to the common stockholders (13.8%) was greater than the rate of return on total assets (11.67%).


214

185. Medium

NOTE TO THE INSTRUCTOR: Questions 185, 186, and 187 are different versions of the same question. Financial statements for Qiang Company appear below: Qiang Company Statement of Financial Position December 31, 19X6 and 19X5 (dollars in thousands) 19X6 Current assets: Cash and marketable securities ............. $ 170 Accounts receivable, net ................... 130 Inventory .................................. 130 Prepaid expenses ........................... 60 Total current assets ..................... 490 Noncurrent assets: Plant & equipment, net ..................... 1,900 Total assets ................................. $2,390 Current liabilities: Accounts payable ........................... $ 160 Accrued liabilities ........................ 50 Notes payable, short term .................. 80 Total current liabilities ............... 290 Noncurrent liabilities: Bonds payable .............................. 400 Total liabilities ........................ 690 Stockholders' equity: Preferred stock, $5 par, 10% ............... 120 Common stock, $5 par ....................... 180 Additional paid-in capital--common stock ... 120 Retained earnings .......................... 1,280 Total stockholders' equity ............... 1,700 Total liabilities & stockholders' equity ..... $2,390


19X5 $

160 100 130 70 460

1,880 $2,340

$

160 70 110 340 400 740

120 180 120 1,180 1,600 $2,340

Qiang Company Income Statement For the Year Ended December 31, 19X6 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (30%) ....................... Net income ...............................

$1,500 1,050 450 180 270 40 230 69 $ 161

Dividends during 19X6 totaled $61 thousand, of which $12 thousand were preferred dividends. The market price of a share of common stock on December 31, 19X6 was $50. Required: Compute the following for 19X6: 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. Answer: a. Earnings per share = (Net Income - Preferred Dividends) ÷ Average number of common shares outstanding* = ($161 - $12) ÷ 36 = $4.14 *Number of common shares outstanding = Common stock = $180 ÷ $5 = 36

Par value

÷

b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above) = $50 ÷ $4.14 = 12.1


216

c. Dividend yield ratio = Dividends per share* ÷ Market price per share = $1.36 ÷ $50.00 = 2.72% *Dividends per share = Common dividends = $49 ÷ 36 = $1.36 **See above

Common shares**

÷

d. Return on total assets = Adjusted net income* ÷ Average total assets** = $189 ÷ $2,365 = 7.99% *Adjusted net income = Net income + [Interest expense x (1-Tax rate)] = $161 + [$40 x (1 - 0.30)] = $189 **Average total assets = ($2,390 + $2,340) = $2,365

2

÷

e. Return on common stockholders' equity = (Net income – Preferred dividends) ÷ Average common stockholders' equity* = ($161 - $12) ÷$1,530 = 9.74% *Average common stockholders' equity = ($1,580 + $1,480) = $1,530

2

÷

f. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding* = $1,580 ÷ 36 = $43.89 *Number of common shares outstanding = Common stock = $180 ÷ $5 = 36


Par value

÷

186. Medium

NOTE TO THE INSTRUCTOR: Questions 185, 186, and 187 are different versions of the same question. Financial statements for Qualle Company appear below: Qualle Company Statement of Financial Position December 31, 19X6 and 19X5 (dollars in thousands) 19X6 Current assets: Cash and marketable securities ............. $ 130 Accounts receivable, net ................... 110 Inventory .................................. 170 Prepaid expenses ........................... 30 Total current assets ..................... 440 Noncurrent assets: Plant & equipment, net ..................... 1,890 Total assets ................................. $2,330 Current liabilities: Accounts payable ........................... $ 130 Accrued liabilities ........................ 40 Notes payable, short term .................. 250 Total current liabilities ............... 420 Noncurrent liabilities: Bonds payable .............................. 470 Total liabilities ........................ 890 Stockholders' equity: Preferred stock, $5 par, 10% ............... 100 Common stock, $10 par ...................... 160 Additional paid-in capital--common stock ... 170 Retained earnings .......................... 1,010 Total stockholders' equity ............... 1,440 Total liabilities & stockholders' equity ..... $2,330


19X5 $

120 100 170 30 420

1,880 $2,300

$

130 50 290 470 500 970

100 160 170 900 1,330 $2,300

218

Qualle Company Income Statement For the Year Ended December 31, 19X6 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (30%) ....................... Net income ...............................

$2,300 1,610 690 270 420 50 370 111 $ 259


Par value

÷




Common shares**

÷

d. Return on total assets = Adjusted net income* ÷ Average total assets** = $294 ÷ $2,315 = 12.70% *Adjusted net income = Net income + [Interest expense x (1-Tax rate)] = $259 + [$50 x (1 - 0.30)] = $294 **Average total assets = ($2,330 + $2,300) = $2,315

2

÷


2

÷



Par value

÷

220

187. Medium

NOTE TO THE INSTRUCTOR: Questions 185, 186, and 187 are different versions of the same question. Financial statements for Quade Company appear below: Quade Company Statement of Financial Position December 31, 19X6 and 19X5 (dollars in thousands) 19X6 Current assets: Cash and marketable securities ............. $ 110 Accounts receivable, net ................... 150 Inventory .................................. 120 Prepaid expenses ........................... 80 Total current assets ..................... 460 Noncurrent assets: Plant & equipment, net ..................... 1,550 Total assets ................................. $2,010 Current liabilities: Accounts payable ........................... $ 130 Accrued liabilities ........................ 20 Notes payable, short term .................. 260 Total current liabilities ............... 410 Noncurrent liabilities: Bonds payable .............................. 380 Total liabilities ........................ 790 Stockholders' equity: Preferred stock, $5 par, 15% ............... 120 Common stock, $10 par ...................... 160 Additional paid-in capital--common stock ... 280 Retained earnings .......................... 660 Total stockholders' equity ............... 1,220 Total liabilities & stockholders' equity ..... $2,010


19X5 $

110 140 140 80 470

1,520 $1,990

$

130 40 270 440 400 840

120 160 280 590 1,150 $1,990

Quade Company Income Statement For the Year Ended December 31, 19X6 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (30%) ....................... Net income ...............................

$2,400 1,680 720 280 440 40 400 120 $ 280


Par value

÷



222


Common shares**

÷

d. Return on total assets = Adjusted net income* ÷ Average total assets** = $308 ÷ $2,000 = 15.40% *Adjusted net income = Net income + [Interest expense x (1-Tax rate)] = $280 + [$40 x (1 – 0.30)] = $308 **Average total assets = ($2,010 + $1,990) = $2,000

2

÷


2

÷



Par value

÷

188. Medium

Condensed financial statements of Miller Company at the beginning and at the end of the current year are given below: Miller Company Balance Sheet End of Current Year Cash ........................... $ 10,000 Marketable securities .......... 20,000 Accounts receivable ............ 90,000 Inventories .................... 150,000 Plant and equipment, net ....... 280,000 Total assets ................ $550,000 Accounts payable ............... Accrued short-term liabilities Bonds payable .................. Preferred stock, 10%, $100 par Common stock, $10 par .......... Additional paid-in capital, common stock ................. Retained earnings .............. Total liabilities and equity

Beginning of Current Year $ 8,000 22,000 110,000 100,000 260,000 $500,000

$ 80,000 20,000 75,000 50,000 100,000

$ 60,000 25,000 75,000 50,000 100,000

50,000 175,000 $550,000

50,000 140,000 $500,000

Miller Company Condensed Income Statement For the Current Year Sales (all on account) ............ $650,000 Less cost of goods sold ........... 350,000 Gross margin ...................... 300,000 Less operating expenses ........... 200,000 Net operating income .............. 100,000 Less interest expense ............. 10,000 Net income before income taxes .... 90,000 Less income taxes ................. 40,000 Net income ........................ $ 50,000 The company paid total dividends of $15,000 during the year, of which $5,000 were to preferred stockholders. The market price of a share of common stock at the end of the year was $30.


224

Required: On the basis of the information given above, fill in the blanks with the appropriate figures. Example: The current ratio at the end of the current year would be computed by dividing $270,000 by $100,000 a. The acid-test (quick) ratio at the end of the current year would be computed by dividing _______________ by _________________. b. The inventory turnover for the year would be computed by dividing _______________ by _________________. c. The debt-to-equity ratio at the end of the current year would be computed by dividing _______________ by _________________. d. The earnings per share of common stock would be computed by dividing _______________ by _________________. e. The accounts receivable turnover for the year would be computed by dividing _______________ by _________________. f. The times interest earned for the year would be computed by dividing _______________ by _________________. g. The return on common stockholders' equity for the year would be computed by dividing _______________ by _________________. h. The dividend yield would be computed by dividing _______________ by _________________. Answer: a. $120,000; b. $350,000; c. $175,000; d. $ 45,000; e. $650,000; f. $100,000; g. $ 45,000; h. $1; $30

$100,000 $125,000 $375,000 10,000 shares $100,000 $ 10,000 $307,500


189. Hard CMA adapted

Shelzo Inc., a manufacturer of construction equipment is considering the purchase of one of its suppliers, Raritron Industries. The purchase has been given preliminary approval by Shelzo's Board of Directors, and several discussions have taken place between the management of both companies. Raritron has submitted financial data for the past several years. Shelzo's controller has analyzed Raritron's financial statements and prepared the following ratio analysis comparing Raritron's performance with the industry averages. 1993

1992

1991

Return on common stockholders’ equity ......... 13.03 Average sale period ............ 51.16 Times interest earned .......... 3.87 Price-earnings ratio ........... 10.96 Debt-to-equity ratio ........... 0.50 Accounts receivable turnover ... 6.98 Current ratio .................. 1.65 Dividend yield ratio ........... 2.08

13.02 47.29 3.46 11.23 0.46 7.25 1.95 2.06

12.98 42.15 3.28 11.39 0.48 7.83 1.70 2.12

Industry Average 12.96 38.63 3.56 11.54 0.57 7.78 2.30 2.25

Required: Using the information provided above for Raritron Industries: A. 1. 2. 3. B. 1. 2. 3. C. 1. 2. 3.

Identify the two ratios from the above list that would be of most interest to short-term creditors. Explain what these two ratios measure. What do these two ratios indicate about Shelzo Inc.? Identify the three ratios from the above list that would be of most interest to stockholders. Explain what these three ratios measure. What do these three ratios indicate about Shelzo Inc.? Identify the two ratios from the above list that would be of most interest to long-term creditors. Explain what these two ratios measure. What do these two ratios indicate about Shelzo Inc.?

Answer: A. 1. Two ratios that would be of most interest to short-term creditors would be the average sale period and the current ratio. 2. The average sale period relates the average amount of inventory to the cost of goods sold. This ratio measures the length of time it takes on average to sell inventory and is a gauge of how well the company manages its inventory. The current ratio is calculated by dividing current assets by current liabilities. This ratio measures short-run solvency, i.e., the ability to meet current obligations. Managerial Accounting, 9/e

226

3.

For Shelzo Inc., the average sale period has been increasing and is well above the industry average, while the current ratio has been below the industry average. Both of these ratios indicate that there may be problems with the company’s liquidity position. This could be caused by poor inventory control.

B. 1. The three ratios that would be of most interest to common stockholders are the return on common stockholders’ equity, the price-earnings ratio, and the dividend yield ratio. 2. The return on common stockholders’ equity is a measure of how effectively the company has used the stockholders’ investment in the company to generate profits. The priceearnings ratio provides a measure of how the stock market perceives the company’s future earnings prospects. The higher the ratio, the more favorable the future looks for the company. The dividend yield ratio tells us what proportion of the company’s profits are paid out as cash dividends to common stockholders. 3. These three ratios are close to the industry averages and there are no discernible significant trends. C. 1. The two ratios that would be of most interest to longterm creditors are times interest earned and the debt-toequity ratio. 2. Times interest earned is earnings before interest expense and taxes divided by interest expense. This ratio measures debt paying ability. If stable, the company will be able to refinance or obtain new funds at reasonable rates. The debt-to-equity ratio measures the relative proportions of debt and equity in the company’s capital structure. The lower the level of the debt-to-equity ratio, the more security long-term debtors have. 3. For Shelzo Inc., times interest earned has been improving and is currently above the industry average, indicating that the company should be able to borrow additional funds if needed. The company’s debt-to-equity ratio is below the industry average which also indicates the company has the capacity to perhaps take on additional debt.


190. Medium

Financial statements for Lowe Company appear below: Lowe Company Statement of Financial Position December 31, Year 2 and Year 1 (dollars in thousands)

Cash........................................ Accounts receivable, net ................... Inventory .................................. Long-term investments....................... Land........................................ Building.................................... Total assets..............................

Year 2 $ 45 38 67 162 128 98 $ 538

Accounts payable ........................... $ 36 Notes payable, short term .................. 24 Bonds payable............................... 35 Mortgage payable............................ 100 Preferred stock,12%......................... 100 Common stock................................ 195 Retained earnings .......................... 48 Total liabilities & stockholders' equity.. $ 538

Year 1 $ 30 40 60 150 100 50 $ 430 $

40 30 50 -0100 170 40 $ 430

Lowe Company Income Statement For the Year Ended December 31, Year 2 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses (including interest expense of $5,000)...................... Net income before taxes .................. Income taxes (40%) ....................... Net income ...............................

$145 74 $ 71 16 55 22 $ 33

Dividends totaled $25,000 for the year, of which $12,000 was paid to the preferred stockholder. Required: Compute the following for Year 2: a. Current ratio. b. Acid-test (quick) ratio. c. Average collection period (age of receivables). d. Inventory turnover. e. Return on total assets. f. Debt-to-equity ratio. g. Times-interest-earned ratio.


228

Answer: a. Current ratio = Current assets ÷ Current liabilities = ($45 + $38 + $67) ÷ ($36 + $24) = 2.5 to 1 b. Acid-test ratio = Quick assets* ÷ Current liabilities = $83 ÷ ($36 + $24) = 1.38 to 1 *Quick assets = Cash + Current receivables = $45 + $38 = $83 c. Accounts receivable turnover = Sales on account = $145 ÷ $39 = 3.72 times


÷


2

÷

Average collection period = 365 days ÷ Accounts receivable turnover = 365 ÷ 3.72 = 98.1 days d. Inventory turnover = Cost of goods sold = $74 ÷ $63.5 = 1.17 times *Average inventory = ($67 + $60) = $63.5

Average inventory*

÷

2

÷

e. Return on total assets = ((Net income + (Interest expense x (1 - tax rate)) ÷

Average total assets

= (($33 + ($5 x (1 - 0.40)) = $36 ÷ $484 = 7.4%.

÷

(($538 + $430)/2))

f. Times interest earned = Earnings before interest and taxes ÷ Interest expense = ($55 + $5) ÷ $5 = 12.00 times g. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = ($36 + $24 + $35 + $100) ÷ ($100 + $195 + $48) = $195 ÷ $343 = 0.57 to 1


191. Medium

Several investors are in the process of organizing a new company. The investors feel that $800,000 would be adequate to finance the new company's operations. Three methods are available to finance the new company: a. All $800,000 could be obtained through the issuance of common stock. b. Common stock could be issued to provide $400,000 with the other $400,000 obtained by issuing $100 par value, l0% preferred stock. c. Common stock could be issued to provide $40,000 with the other $400,000 obtained by issuing bonds with an interest rate of 10%. The investors are confident that the company could earn $175,000 each year before interest and taxes. The tax rate is 40%. Required: a. Assuming that the estimates are correct, compute the net income available to common stockholders under each of the three financing methods proposed above. b. Using the income data computed in (a) above, compute the return on common stockholders’ equity under each of the three methods. c. Why do methods B and C provided a greater return on common equity than does method A? Why does method C provide a greater return on common equity than method B? Answer: a. Net income available to common stockholders: Method A Income before interest and taxes... $175,000 Deduct interest expense: 0.10 x $400,000.................. ________ Income before taxes................ $175,000 Deduct income taxes (40%).......... 70,000 Net income......................... $105,000 Deduct preferred dividends: 0.10 x $400,000................... o Net income to common stockholders.. $105,000


Method B $175,000

Method C $175,000

________ $175,000 70,000 $105,000

40,000 $135,000 54,000 $ 81,000

40,000 $ 65,000

o $ 81,000

230

b. Return on common equity: Method A Method B Method C Net income to common stockholders $105,000 $ 65,000 $ 81,000 Common stockholders' investment... $800,000 $400,000 $400,000 Return on common equity........... 13.10% 16.25% 20.25% c. Methods B and C provide a greater return on common equity than Method A due to the effect of positive leverage. Methods B and C each contain sources of funds that require a fixed annual return on the funds provided. This fixed annual return is less than what is being earned on the assets of the company, with the difference going to common stockholders. Method C uses debt and provides more leverage than Method B in which preferred stock is issued. The difference is due to the deductibility for tax purposes of the interest on debt, whereas dividends on preferred stock are not deductible for tax purposes.


192. Medium

NOTE TO THE INSTRUCTOR: Questions 192, 193, and 194 are different versions of the same question. Financial statements for Raridan Company appear below: Raridan Company Statement of Financial Position December 31, 19X6 and 19X5 (dollars in thousands) 19X6 Current assets: Cash and marketable securities ............ $ 140 Accounts receivable, net .................. 190 Inventory ................................. 100 Prepaid expenses .......................... 70 Total current assets .................... 500 Noncurrent assets: Plant & equipment, net .................... 1,540 Total assets ................................ $2,040 Current liabilities: Accounts payable .......................... $ 110 Accrued liabilities ....................... 50 Notes payable, short term ................. 110 Total current liabilities .............. 270 Noncurrent liabilities: Bonds payable ............................. 280 Total liabilities ....................... 550 Stockholders' equity: Preferred stock, $10 par, 5% .............. 120 Common stock, $10 par ..................... 200 Additional paid-in capital--common stock .. 260 Retained earnings ......................... 910 Total stockholders' equity .............. 1,490 Total liabilities & stockholders' equity .... $2,040

19X5 $

140 170 110 70 490

1,520 $2,010

$

110 40 110 260 300 560

120 200 260 870 1,450 $2,010

Raridan Company Income Statement For the Year Ended December 31, 19X6 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (30%) ....................... Net income ...............................


$1,900 1,330 570 220 350 30 320 96 $ 224

232

Required: Compute the following for 19X6: a. Current ratio. b. Acid-test (quick) ratio. c. Average collection period (age of receivables). d. Inventory turnover. e. Times interest earned. f. Debt-to-equity ratio. Answer: a. Current ratio = Current assets = $500 ÷ $270 = 1.85 to 1

Current liabilities

÷

b. Acid-test ratio = Quick assets* = $330 ÷ $270 = 1.22 to 1

Current liabilities

÷

*Quick assets = Cash + Marketable securities + Current receivables = $140 + $190 = $330 c. Accounts receivable turnover = Sales on account = $1,900 ÷ $180 = 10.56 times


÷


2

÷

Average collection period = 365 days ÷ Accounts receivable turnover = 365 ÷ 10.56 = 34.6 days d. Inventory turnover = Cost of goods sold = $1,330 ÷ $105 = 12.67 times *Average inventory = ($100 + $110) = $105

Average inventory*

÷

2

÷

e. Times interest earned = Net operating income ÷ Interest expense = $350 ÷ $30 = 11.67 times f. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $550 ÷ $1,490 = 0.37 to 1


193. Medium

NOTE TO THE INSTRUCTOR: Questions 192, 193, and 194 are different versions of the same question. Financial statements for Rarig Company appear below: Rarig Company Statement of Financial Position December 31, 19X6 and 19X5 (dollars in thousands) 19X6 Current assets: Cash and marketable securities ............ $ 210 Accounts receivable, net .................. 160 Inventory ......................... ................................. ........ 190 Prepaid expenses .......................... 30 Total current assets .................... 590 Noncurrent assets: Plant & equipment, net .................... 1,500 Total assets ........................ ................................ ........ $2,090 Current liabilities: Accounts payable .......................... $ 170 Accrued liabilities ....................... 60 Notes payable, short term ................. 80 Total current liabilities .............. 310 Noncurrent liabilities: Bonds payable .......................... ............................. ... 460 Total liabilities ....................... 770 Stockholders' equity: Preferred stock, $5 par, 15% .............. 100 Common stock, $5 par ...................... 160 Additional paid-in capital—common stock .. 110 Retained earnings ......................... 950 Total stockholders' equity .............. 1,320 Total liabilities & stockholders' equity .... $2,090

19X5 $

190 150 180 30 550

1,470 $2,020

$

190 60 120 370 500 870

100 160 110 780 1,150 $2,020

Rarig Company Income Statement For the Year Ended December 31, 19X6 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin .......................... ............................. ... Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (30%) ....................... Net income ............................ ............................... ...


$1,800 1,260 540 210 330 50 280 84 $ 196

234

Required: Compute the following for 19X6: a. Current ratio. b. Acid-test (quick) ratio. c. Average collection period (age of receivables). d. Inventory turnover. e. Times interest earned. f. Debt-to-equity ratio. Answer: a. Current ratio = Current assets = $590 ÷ $310 = 1.90 to 1 b. Acid-test ratio = Quick assets* = $370 ÷ $310 = 1.19 to 1

Current liabilities

÷

Current liabilities

÷

*Quick assets = Cash + Marketable securities + Current receivables = $210 + $160 = $370 c. Accounts receivable turnover = Sales on account = $1,800 ÷ $155 = 11.61 times


÷


2

÷

Average collection period = 365 days ÷ Accounts receivable turnover = 365 ÷ 11.61 = 31.4 days d. Inventory turnover = Cost of goods sold = $1,260 ÷ $185 = 6.81 times *Average inventory = ($190 + $180) = $185

Average inventory*

÷

2

÷

e. Times interest earned = Net operating income ÷ Interest expense = $330 ÷ $50 = 6.60 times f. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $770 ÷ $1,320 = 0.58 to 1


194. Medium

NOTE TO THE INSTRUCTOR: Questions 192, 193, and 194 are different versions of the same question. Financial statements for Rarity Company appear below: Rarity Company Statement of Financial Position December 31, 19X6 and 19X5 (dollars in thousands) 19X6 Current assets: Cash and marketable securities ............ $ 210 Accounts receivable, net .................. 130 Inventory ......................... ................................. ........ 90 Prepaid expenses .......................... 70 Total current assets .................... 500 Noncurrent assets: Plant & equipment, net .................... 1,440 Total assets ........................ ................................ ........ $1,940 Current liabilities: Accounts payable .......................... $ 180 Accrued liabilities ....................... 60 Notes payable, short term ................. 240 Total current liabilities .............. 480 Noncurrent liabilities: Bonds payable .......................... ............................. ... 480 Total liabilities ....................... 960 Stockholders' equity: Preferred stock, $10 par, 5% .............. 100 Common stock, $5 par ...................... 220 Additional paid-in capital--common stock .. 200 Retained earnings ......................... 460 Total stockholders' equity .............. 980 Total liabilities & stockholders' equity .... $1,940

19X5 $

180 120 110 70 480

1,400 $1,880

$

170 80 240 490 500 990

100 220 200 370 890 $1,880

Rarity Company Income Statement For the Year Ended December 31, 19X6 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ........................... ............................. .. Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (30%) ....................... Net income ........................ ............................... .......


$1,100 770 330 130 200 50 150 45 $ 105

236

Required: Compute the following for 19X6: a. Current ratio. b. Acid-test (quick) ratio. c. Average collection period (age of receivables). d. Inventory turnover. e. Times interest earned. f. Debt-to-equity ratio. Answer: a. Current ratio = Current assets = $500 ÷ $480 = 1.04 to 1 b. Acid-test ratio = Quick assets* = $340 ÷ $480 = 0.71 to 1

Current liabilities

÷

Current liabilities

÷

*Quick assets = Cash + Marketable securities + + Current receivables = $210 + $130 = $340 c. Accounts receivable turnover = Sales on account = $1,100 ÷ $125 = 8.80 times


÷


2

÷

Average collection period = 365 days ÷ Accounts receivable turnover = 365 ÷ 8.80 = 41.5 days d. Inventory turnover = Cost of goods sold = $770 ÷ $100 = 7.70 times *Average inventory = ($90 + $110) = $100

Average inventory*

÷

2

÷

e. Times interest earned = Net operating income ÷ Interest expense = $200 ÷ $50 = 4.00 times f. Debt-to-equity ratio = Liabilities = $960 ÷ $980 = 0.98 to 1


Stockholders' equity

÷

Test Bank - Chapter18 FS Analysis

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