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Exam 13: Financial Statement Analysis

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Question 61

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Describe the factors involved in communicating useful financial information.

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The primary factors in...

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Question 62

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Ratios can be used for different purposes.For example,a variety of ratios have been developed to assess a firm's liquidity.Similarly,ratios have been developed to assess solvency,profitability,and stock market strength.A sample of commonly used ratios for these purposes is provided in the table below. Required: In the middle column of the table,provide the formula to compute the specified ratio.In the final column,indicate the purpose (Liquidity,Solvency,Profitability,and Stock market strength)for which the ratio is most commonly used.The first item is completed as an example. $\begin{array}{|l|l|l|l|}\hline \\\hline & \text {Ratio} & \text {Computation } & \text {Pupose} \\\hline \text { 1. } & \text { Accounts receivable turnover } &\text { Net credit sales/average receivables }&\text { Liquidity }\\\hline \text { 2. } & \text { Asset turnover } \\\hline \text { 3. } & \text { Current ratio } \\\hline \text { 4. } & \text { Debt to equity ratio } \\\hline \text { 5. } & \text { Dividend yield } \\\hline \text { 6. } & \text { Earnings per share } \\\hline \text { 7. } & \text { Inventory turnover } \\\hline \text { 8. } & \text { Net margin } \\\hline \text { 9. } & \text { Pnice-eamings ratio } \\\hline \text { 10. } & \text { Return on equity } \\\hline \text { 11. } & \text { Return on investment } \\\hline\end{array}$

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Question 63

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Profitability ratios attempt to assess the company's ability to generate earnings.

Select the term from the list provided that bests matches each of the following descriptions or definitions: $\begin{array}{|l|l|l|}\hline \text { Your Answer } & \text { Definition or Description } &\text { Term } \\\hline & \text { A. Another term for the current ratio} & \text {1. Acconuts receivable tumover } \\\hline & \text { B. Calculated by dividing dividends per share by the manket price per share } & \text {2. Acid-test ratio } \\\hline & \text {C. Presentation of too mach information may serve confuse nsers of the information } & \text {3. Dividend yield } \\\hline & \text { D. Measure of efficiency in using assets. calcubted as net sales divided by total assets } & \text {4. Eamings per share } \\\hline & \text { E. Measure of inmediate debt paying ability } & \text {5. Information overicat } \\\hline & \text {F. A profitability meastre, net ixcome divided by net sales } & \text {6. Inventory tumover } \\\hline & \text {G. Measures the profitability of a company's asset base, also known as return on assets } & \text {7. Net margin } \\\hline & \text { H. Analysis tecluique that compares an item from the financinl statements with a key amourt from the same year's financial statemens } & \text {8. Average days to collect recervables } \\\hline & \text { I. Measturement of vohume of sales in relation to } & \text {9. Retum on irvestment } \\\hline & \text { J. Net income available for common stock divided by average number of outstandiug shares } & \text {10. Asset turnover } \\\hline & \text { K. Current assets mims current liabilties } & \text {11. Vertical analysis } \\\hline & \text { L. Ratio that measures how quickly a company collects its accounts receivable, calculated by dividing net sales by average net receivables } & \text {12. Working captal } \\\hline & \text { M. Calculated by dividing 365 by the accounts receivable tumover ratio} & \text {13. Working capial ratio } \\\hline\end{array}$

Which of the following statements regarding the quick ratio is incorrect?

In vertical analysis,each item is expressed as a percentage of:

Which of the following statements is generally incorrect from an investor's perspective?

Which of the following statement is correct regarding the quick ratio?

The following information was provided by Joseph Company as of December 31,Year 2: $\begin{array}{|l|r|}\hline \text { Net income } & \$ 528,000 \\\hline \text { Preferred stock, (20,000 shares at } \$ 10 \text { par, } 4 \%) & \$ 200,000 \\\hline \text { Common stock, (220,000 shares at } \$ 1 \text { par) } & \$ 220,000 \\\hline \text { Paid-in capital in excess of par-common } & \$ 2,475,500 \\\hline \text { Retained earnings } & \$ 3,824,500 \\\hline\\\hline\end{array}$ On the most recent trading date,Joseph's common shares sold at $36 and the preferred shares sold at $14. The following information on industry averages is provided: Earnings per share $2.06 Price-earnings ratio 13.2:1 Required: 1)Calculate and compare Joseph Company's ratios with the industry averages shown above.Round your answer to two decimal places. 2)Discuss whether you would invest in this company.

Working capital is current assets minus current liabilities.

As of December 31,Year 1,Gant Corporation had a current ratio of 1.29,quick ratio of 1.05,and working capital of $18,000.The company uses a perpetual inventory system and sells merchandise for more than it cost.On January 1,Year 2,Gant recorded cost of goods sold of $4,100.As a result of this transaction,Gant's quick ratio will:

The quick ratio although similar to the current ratio is more conservative.

Factor(s) involved in communicating useful information is (are) :

The following balance sheet information is provided for Patton Company: $\begin{array}{l}\begin{array}{|l}\hline \text { Assets}\\\hline \text { Cash}\\\hline \text { Accounts receivable}\\\hline \text { Inventory}\\\hline\end{array}\begin{array}{r|}\hline 2014 \\\hline \$ \quad 4,000 \\\hline 15,000 \\\hline \$ \quad 35,000\\\hline \end{array}\begin{array}{r|}\hline 2013 \\\hline \$ \quad2,000 \\\hline 12,000 \\\hline \$ \quad 38,000\\\hline \end{array}\end{array}$ Assuming Year 2 cost of goods sold is $730,000,what is the company's average days to sell inventory? (Use 365 days in a year.Do not round your intermediate calculations. )

Denver Corporation and Cheyenne Company are in different industries.Denver's current ratio is 1.89,while Cheyenne's current ratio is 1.65.Therefore,is it safe to conclude that Denver's liquidity position is better than that of Cheyenne?

Current financial reporting standards assume that users of accounting information:

For Perez Corporation,return on equity is substantially higher than return on investment.What does that tell you about the company?

The following partial balance sheet is provided for Groome Company: $\begin{array}{|l|r|}\hline \text { Liabilities and Stockholders' Equity } & \\\hline \text { Accounts payable } & \$ \quad 9,000 \\\hline \text { Salaries payable } & 12,000 \\\hline \text { Bonds payable (Due in 2020) } & 20,000 \\\hline \text { Common stock, no par } & 30,000 \\\hline \text { Retained earnings } & \underline { 54,000} \\\hline \text { Total liabilities and stockholder' equity } &\underline { \$ \quad 125,000} \\\hline\end{array}$ What is the company's debt to assets ratio (rounded to nearest whole percent) ?

The Fortune Company reported the following income for Year 2: $\begin{array}{l}\begin{array}{|l}\hline \\\hline \text { Sales } & \\\hline \text { Cost of goods sold } & \\\hline \text { Gross margin } \\\hline \text { Selling and administrative expense } \\\hline \text { Operating income } \\\hline \text { Interest expense } \\\hline \text { Income before taxes } \\\hline \text { Income tax expense } \\\hline \text { Net income } \\\hline \\\hline \end{array}\begin{array}{|r|}\hline \\\hline \$ \quad130,000 \\\hline \underline { 80,000} \\\hline \$ \quad50,000 \\\hline \underline { 15,000} \\\hline \$ \quad35,000 \\\hline \underline { 5,000 } \\\hline \$ \quad30,000 \\\hline \underline { 10,000} \\\hline \underline { \$ \quad 20,000} \\\hline \\\hline \end{array}\end{array}$ What is the company's number of times interest is earned ratio?

Which of the following statements regarding horizontal analysis is incorrect?