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 Year 2  Year 1  Merchandise inventory 271,000253,500 Cost of goods sold 486,400433,100\begin{array} { | l | r | r | } \hline & \text { Year 2 } & { \text { Year 1 } } \\\hline \text { Merchandise inventory } & 271,000 & 253,500 \\\hline \text { Cost of goods sold } & 486,400 & 433,100 \\\hline\end{array} -Refer to the following selected financial information from Graceworks Corp.Compute the company's inventory turnover for Year 2.


A) 1.79.
B) 1.71.
C) 1.85.
D) 0.93.
E) 1.75.

F) A) and B)
G) D) and E)

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Net sales divided by average total assets is the:


A) Profit margin.
B) Total asset turnover.
C) Current ratio.
D) Sales return ratio.
E) Return on total assets.

F) None of the above
G) B) and C)

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Analysis of a single financial number is often of limited value.

A) True
B) False

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Match each of the following terms with the appropriate definitions. -A statement where each amount is expressed as a percent of a base amount to reveal the relative importance of each financial statement item.


A) Financial statement analysis
B) Common-size financial statement
C) Horizontal analysis
D) Comparative financial statement
E) Liquidity and efficiency
F) Market prospects
G) Debt to equity ratio
H) Solvency
I) Vertical analysis
J) Profitability

K) H) and I)
L) B) and I)

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The greater the times interest earned ratio,the greater the risk a company is exposed to.

A) True
B) False

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 Year 2  Year 1  Cash $37,50036,850 Short-term investments 90,00090,000 Accounts receivable, net 85,50086,250 Merchandise inventory 121,000117,000 Prepaid expenses 12,10013,500 Plant assets 388,000392,000 Accounts payable 113,400111.750 Net sales 711,000706,000 Cost of goods sold 390,000385,500\begin{array} { | l | r | r | } \hline&{ \text { Year 2 } } & { \text { Year 1 } } \\\hline \text { Cash } & \$ 37,500 & 36,850 \\\hline \text { Short-term investments } & 90,000 & 90,000 \\\hline \text { Accounts receivable, net } & 85,500 & 86,250 \\\hline \text { Merchandise inventory } & 121,000 & 117,000 \\\hline \text { Prepaid expenses } & 12,100 & 13,500 \\\hline \text { Plant assets } & 388,000 & 392,000 \\\hline \text { Accounts payable } & 113,400 & 111.750 \\\hline \text { Net sales } & 711,000 & 706,000 \\\hline \text { Cost of goods sold } & 390,000 & 385,500 \\\hline\end{array} -Refer to the following selected financial information from McCormik,LLC.Compute the company's days' sales in inventory for Year 2.(Use 365 days a year.)


A) 43.9.
B) 42.3.
C) 46.2.
D) 80.0.
E) 113.2.

F) B) and C)
G) A) and B)

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Quick assets divided by current liabilities is the:


A) Acid-test ratio.
B) Current ratio.
C) Working capital ratio.
D) Current liability turnover ratio.
E) Quick asset turnover ratio.

F) B) and E)
G) All of the above

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A company with a high inventory turnover requires a smaller investment in inventory than one producing the same sales with a lower turnover.

A) True
B) False

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Carducci Corporation reported Net sales of $3.6 million and beginning Total assets of $0.9 million and ending Total assets of $1.3 million.The average Total asset amount is:


A) $2.3 million.
B) $2.7 million.
C) $0.25 million.
D) $0.36 million.
E) $1.1 million.

F) B) and D)
G) None of the above

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The evaluation of company performance and financial condition includes evaluation of (1)past and current performance, (2)current financial position,and (3)future performance and risk.

A) True
B) False

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Match each of the following terms with the appropriate formulas. -  Income before interest expense and income taxes Interest expense\frac {\text { Income before interest expense and income taxes}} { \text { Interest expense} }


A) Debt ratio
B) Days' sales in inventory
C) Return on common stockholders' equity
D) Inventory turnover
E) Dividend yield
F) Days' sales uncollected
G) Profit margin ratio
H) Gross margin ratio
I) Times interest earned
J) Total asset turnover

K) A) and E)
L) A) and J)

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Match each of the following terms with the appropriate formulas. -  Net sales - Cost of  goods sold  Net sales \begin{array} { c } \text { Net sales - Cost of } \\\text { goods sold } \\\hline \text { Net sales }\end{array}


A) Debt ratio
B) Days' sales in inventory
C) Return on common stockholders' equity
D) Inventory turnover
E) Dividend yield
F) Days' sales uncollected
G) Profit margin ratio
H) Gross margin ratio
I) Times interest earned
J) Total asset turnover

K) B) and D)
L) C) and H)

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External users of financial information:


A) Are those individuals involved in managing and operating the company.
B) Include internal auditors and consultants.
C) Are not directly involved in operating the company.
D) Make strategic decisions for a company.
E) Make operating decisions for a company.

F) D) and E)
G) A) and B)

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Financial reporting includes not only general purpose financial statements,but also information from SEC filings,press releases,shareholders' meetings,forecasts,management letters,auditor's reports,and Webcasts.

A) True
B) False

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A ratio expresses a mathematical relation between two quantities and can be expressed as a percent,rate,or proportion.

A) True
B) False

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The building blocks of financial statement analysis include (1)liquidity, (2)solvency, (3)profitability,and (4)market prospects.

A) True
B) False

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If a company is comparing its financial condition or performance to a base amount,it is using vertical analysis.

A) True
B) False

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Match the financial analysis building block most appropriately associated with each ratio. Each building block may be used more than once. -Equity Ratio


A) Market Prospects
B) Liquidity and Efficiency
C) Solvency
D) Profitability

E) A) and D)
F) B) and D)

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The following summaries from the income statements and balance sheets of Kouris Company and Brittania,Inc.are presented below. (1)For both companies for 2018,compute the: (a)Current ratio (b)Acid-test ratio (c)Accounts receivable turnover (d)Inventory turnover (e)Days' sales in inventory (f)Days' sales uncollected Which company do you consider to be the better short-term credit risk? Explain. (2)For both companies for 2018,compute the: (a)Profit margin ratio (b)Return on total assets (c)Return on common stockholders' equity Which company do you consider to have better profitability ratios? The following summaries from the income statements and balance sheets of Kouris Company and Brittania,Inc.are presented below. (1)For both companies for 2018,compute the: (a)Current ratio (b)Acid-test ratio (c)Accounts receivable turnover (d)Inventory turnover (e)Days' sales in inventory (f)Days' sales uncollected Which company do you consider to be the better short-term credit risk? Explain. (2)For both companies for 2018,compute the: (a)Profit margin ratio (b)Return on total assets (c)Return on common stockholders' equity Which company do you consider to have better profitability ratios? \begin{array}{c} \text { Kouris Company } \\ \text { Consolidated Statement of Income } \\ \text { May 31,2018 } \\ \text { (in millions) }\\ \begin{array} { | l | r | } \hline \text { Revenues } & \$ 10,697.0 \\ \hline \text { Cost of sales } & 6,313.6 \\ \hline \text { Gross profit } & 3,383.4 \\ \hline \text { Operating expenses } & 1,137.6 \\ \hline \text { Operating income } & 42.9 \\ \hline \text { Interest expense } & \underline { 79.9 } \\ \hline \text { Other revenues and expenses } & 1,123.0 \\ \hline \text { Income before tax } & \underline { 382.9 } \\ \hline \text { Income taxes } & 740.1 \\ \hline \text { Income before effect of accounting change } & \underline { 266.1 } \\ \hline \text { Cumulative effect of accounting change, net of tax } & 474.0 \\ \hline \text { Net income } & \$474.0\\ \hline \end{array}\end{array} \begin{array}{c} \text { Brittania, Inc. } \\ \text { Consolidated Statement of Income } \\ \text { January 3, 2018 } \\ \text { (in millions) }\\ \begin{array} { | l | r | } \hline \text { Revenues } & \$133.5 \\ \hline \text { Cost of sales } &87.3 \\ \hline \text { Gross profit } & 46.2\\ \hline \text { Operating expenses } & 37.3 \\ \hline \text { Operating income } & 8.9 \\ \hline \text { Interest expense } &(0.1 ) \\ \hline \text { Other revenues and expenses } & 0.3 \\ \hline \text { Income before tax } &9.1 \\ \hline \text { Income taxes } & 3.9\\ \hline \text { Net income } &\$ 5.2 \\ \hline \end{array}\end{array} The following summaries from the income statements and balance sheets of Kouris Company and Brittania,Inc.are presented below. (1)For both companies for 2018,compute the: (a)Current ratio (b)Acid-test ratio (c)Accounts receivable turnover (d)Inventory turnover (e)Days' sales in inventory (f)Days' sales uncollected Which company do you consider to be the better short-term credit risk? Explain. (2)For both companies for 2018,compute the: (a)Profit margin ratio (b)Return on total assets (c)Return on common stockholders' equity Which company do you consider to have better profitability ratios? \begin{array}{c} \text { Kouris Company } \\ \text { Consolidated Statement of Income } \\ \text { May 31,2018 } \\ \text { (in millions) }\\ \begin{array} { | l | r | } \hline \text { Revenues } & \$ 10,697.0 \\ \hline \text { Cost of sales } & 6,313.6 \\ \hline \text { Gross profit } & 3,383.4 \\ \hline \text { Operating expenses } & 1,137.6 \\ \hline \text { Operating income } & 42.9 \\ \hline \text { Interest expense } & \underline { 79.9 } \\ \hline \text { Other revenues and expenses } & 1,123.0 \\ \hline \text { Income before tax } & \underline { 382.9 } \\ \hline \text { Income taxes } & 740.1 \\ \hline \text { Income before effect of accounting change } & \underline { 266.1 } \\ \hline \text { Cumulative effect of accounting change, net of tax } & 474.0 \\ \hline \text { Net income } & \$474.0\\ \hline \end{array}\end{array} \begin{array}{c} \text { Brittania, Inc. } \\ \text { Consolidated Statement of Income } \\ \text { January 3, 2018 } \\ \text { (in millions) }\\ \begin{array} { | l | r | } \hline \text { Revenues } & \$133.5 \\ \hline \text { Cost of sales } &87.3 \\ \hline \text { Gross profit } & 46.2\\ \hline \text { Operating expenses } & 37.3 \\ \hline \text { Operating income } & 8.9 \\ \hline \text { Interest expense } &(0.1 ) \\ \hline \text { Other revenues and expenses } & 0.3 \\ \hline \text { Income before tax } &9.1 \\ \hline \text { Income taxes } & 3.9\\ \hline \text { Net income } &\$ 5.2 \\ \hline \end{array}\end{array}  Kouris Company  Consolidated Statement of Income  May 31,2018  (in millions)  Revenues $10,697.0 Cost of sales 6,313.6 Gross profit 3,383.4 Operating expenses 1,137.6 Operating income 42.9 Interest expense 79.9‾ Other revenues and expenses 1,123.0 Income before tax 382.9‾ Income taxes 740.1 Income before effect of accounting change 266.1‾ Cumulative effect of accounting change, net of tax 474.0 Net income $474.0\begin{array}{c}\text { Kouris Company } \\\text { Consolidated Statement of Income } \\\text { May 31,2018 } \\\text { (in millions) }\\\begin{array} { | l | r | } \hline \text { Revenues } & \$ 10,697.0 \\\hline \text { Cost of sales } & 6,313.6 \\\hline \text { Gross profit } & 3,383.4 \\\hline \text { Operating expenses } & 1,137.6 \\\hline \text { Operating income } & 42.9 \\\hline \text { Interest expense } & \underline { 79.9 } \\\hline \text { Other revenues and expenses } & 1,123.0 \\\hline \text { Income before tax } & \underline { 382.9 } \\\hline \text { Income taxes } & 740.1 \\\hline \text { Income before effect of accounting change } & \underline { 266.1 } \\\hline \text { Cumulative effect of accounting change, net of tax } & 474.0 \\\hline \text { Net income } & \$474.0\\\hline\end{array}\end{array} The following summaries from the income statements and balance sheets of Kouris Company and Brittania,Inc.are presented below. (1)For both companies for 2018,compute the: (a)Current ratio (b)Acid-test ratio (c)Accounts receivable turnover (d)Inventory turnover (e)Days' sales in inventory (f)Days' sales uncollected Which company do you consider to be the better short-term credit risk? Explain. (2)For both companies for 2018,compute the: (a)Profit margin ratio (b)Return on total assets (c)Return on common stockholders' equity Which company do you consider to have better profitability ratios? \begin{array}{c} \text { Kouris Company } \\ \text { Consolidated Statement of Income } \\ \text { May 31,2018 } \\ \text { (in millions) }\\ \begin{array} { | l | r | } \hline \text { Revenues } & \$ 10,697.0 \\ \hline \text { Cost of sales } & 6,313.6 \\ \hline \text { Gross profit } & 3,383.4 \\ \hline \text { Operating expenses } & 1,137.6 \\ \hline \text { Operating income } & 42.9 \\ \hline \text { Interest expense } & \underline { 79.9 } \\ \hline \text { Other revenues and expenses } & 1,123.0 \\ \hline \text { Income before tax } & \underline { 382.9 } \\ \hline \text { Income taxes } & 740.1 \\ \hline \text { Income before effect of accounting change } & \underline { 266.1 } \\ \hline \text { Cumulative effect of accounting change, net of tax } & 474.0 \\ \hline \text { Net income } & \$474.0\\ \hline \end{array}\end{array} \begin{array}{c} \text { Brittania, Inc. } \\ \text { Consolidated Statement of Income } \\ \text { January 3, 2018 } \\ \text { (in millions) }\\ \begin{array} { | l | r | } \hline \text { Revenues } & \$133.5 \\ \hline \text { Cost of sales } &87.3 \\ \hline \text { Gross profit } & 46.2\\ \hline \text { Operating expenses } & 37.3 \\ \hline \text { Operating income } & 8.9 \\ \hline \text { Interest expense } &(0.1 ) \\ \hline \text { Other revenues and expenses } & 0.3 \\ \hline \text { Income before tax } &9.1 \\ \hline \text { Income taxes } & 3.9\\ \hline \text { Net income } &\$ 5.2 \\ \hline \end{array}\end{array}  Brittania, Inc.  Consolidated Statement of Income  January 3, 2018  (in millions)  Revenues $133.5 Cost of sales 87.3 Gross profit 46.2 Operating expenses 37.3 Operating income 8.9 Interest expense (0.1) Other revenues and expenses 0.3 Income before tax 9.1 Income taxes 3.9 Net income $5.2\begin{array}{c}\text { Brittania, Inc. } \\\text { Consolidated Statement of Income } \\\text { January 3, 2018 } \\\text { (in millions) }\\\begin{array} { | l | r | } \hline \text { Revenues } & \$133.5 \\\hline \text { Cost of sales } &87.3 \\\hline \text { Gross profit } & 46.2\\\hline \text { Operating expenses } & 37.3 \\\hline \text { Operating income } & 8.9 \\\hline \text { Interest expense } &(0.1 ) \\\hline \text { Other revenues and expenses } & 0.3 \\\hline \text { Income before tax } &9.1 \\\hline \text { Income taxes } & 3.9\\\hline \text { Net income } &\$ 5.2 \\\hline\end{array}\end{array}

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(1)
blured image Brittania has higher current ratio...

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________ ratios include the price-earnings ratio and dividend yield.

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