Accounting

Professor: Dr. Siriyama K. Herath

Due Date: February 6th by 4.00pm

Chapter 12—Financial Statement Analysis (10 points)

MULTIPLE CHOICE

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

a. 2.0 to 1
b. 2.6 to 1
c. 2.5 to 1
d. 0.45 to 1

2. In a common size income statement, the 100% figure is:

a. net cost of goods sold.
b. net income.
c. gross profit.
d. net sales.

3. Based on the following data for the current year, what is the number of days’ sales in accounts receivable?

Net sales on account during year $584,000
Cost of merchandise sold during year 300,000
Accounts receivable, beginning of year 45,000
Accounts receivable, end of year 35,000
Inventory, beginning of year 90,000
Inventory, end of year 110,000
a. 7.3
b. 2.5
c. 14.6
d. 25

4. Based on the following data for the current year, what is the number of days’ sales in inventory?

Net sales on account during year $1,204,500
Cost of merchandise sold during year 657,000
Accounts receivable, beginning of year 75,000
Accounts receivable, end of year 85,000
Inventory, beginning of year 85,600
Inventory, end of year 98,600
a. 51.2
b. 44.4
c. 6.5
d. 7.5

5. The number of times interest expense is earned is computed as

a. net income plus interest expense, divided by interest expense
b. income before income tax plus interest expense, divided by interest expense
c. net income divided by interest expense
d. income before income tax divided by interest expense

6. The current ratio is

a. used to evaluate a company’s liquidity and short-term debt paying ability.
b. is a solvency measure that indicated the margin of safety of a noteholder or bondholder.
c. calculated by dividing current liabilities by current assets.
d. calculated by subtracting current liabilities from current assets.

7 A company with $70,000 in current assets and $50,000 in current liabilities pays a $1,000 current liability. As a result of this transaction, the current ratio and working capital will

a. both decrease.
b. both increase.
c. increase and remain the same, respectively.
d. remain the same and decrease, respectively.

8. Hsu Company reported the following on its income statement:

Income before income taxes $420,000
Income tax expense 120,000
Net income $300,000

An analysis of the income statement revealed that interest expense was $80,000. Hsu Company’s times interest earned was

a. 8 times.
b. 6.25 times.
c. 5.25 times.
d.

e.

5 times.

None of the above

9. The following information pertains to Brock Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments $ 40,000
Accounts receivable (net) 30,000
Inventory 25,000
Property, plant and equipment 215,000
Total Assets $310,000

Liabilities and Stockholders’ Equity

Current liabilities $ 60,000
Long-term liabilities 95,000
Stockholders’ equity-common 155,000
Total Liabilities and stockholders’ equity $310,000

Income Statement

Sales $ 90,000
Cost of goods sold 45,000
Gross margin 45,000
Operating expenses 20,000
Net income $ 25,000
Number of shares of common stock 6,000
Market price of common stock $20

What is the current ratio for this company?

a. 1.42
b. 0.78
c. 1.58
d.

e

0.67

None of the above

11. Based on the above data, what is the amount of quick assets?

a. $168,000
b. $96,000
c. $60,000
d.

e

$61,000

None of the above

12. Based on the above data, what is the amount of working capital?

a. $213,000
b. $113,000
c. $153,000
d.

e

$39,000

None of the above

13. The tendency of the rate earned on stockholders’ equity to vary disproportionately from the rate earned on total assets is sometimes referred to as

a. leverage
b. solvency
c. yield
d. quick assets

The balance sheets at the end of each of the first two years of operations indicate the following:

2012 2011
Total current assets $600,000 $560,000
Total investments 60,000 40,000
Total property, plant, and equipment 900,000 700,000
Total current liabilities 125,000 65,000
Total long-term liabilities 350,000 250,000
Preferred 9% stock, $100 par 100,000 100,000
Common stock, $10 par 600,000 600,000
Paid-in capital in excess of par-common stock 75,000 75,000
Retained earnings 310,000 210,000

14. If net income is $115,000 and interest expense is $30,000 for 2012 what is the rate earned on total assets for 2012 (round percent to one decimal point)?

a. 9.3%
b. 10.1%
c. 8.0%
d.

e.

7.4%

None of the above

15. If net income is $115,000 and interest expense is $30,000 for 2012, what is the rate earned on stockholders’ equity for 2012 (round percent to one decimal point)?

a. 10.6%
b. 11.1%
c. 12.4%
d.

e.

14.0%

None of the above

16. If net income is $115,000 and interest expense is $30,000 for 2012, what are the earnings per share on common stock for 2012, (round to two decimal places)?

a. $2.07
b. $1.92
c. $1.77
d.

e.

$1.64

None of the above

17. The particular analytical measures chosen to analyze a company may be influenced by all of the following except:

a. industry type
b. capital structure
c. diversity of business operations
d. product quality or service effectiveness

18. In 2012 Robert Corporation had net income of $250,000 and paid dividends to common stockholders of $50,000. They had 50,000 shares of common stock outstanding during the entire year. Robert Corporation’s common stock is selling for $50 per share on the New York Stock Exchange.

Robert Corporation’s price-earnings ratio is

a. 10 times.
b. 5 times.
c. 2 times.
d.

e.

8 times.

None of the above

19. Leveraging implies that a company

a. contains debt financing.
b. contains equity financing.
c. has a high current ratio.
d. has a high earnings per share.

20. Percentage analyses, ratios, turnovers, and other measures of financial position and operating results are

a. a substitute for sound judgment.
b. useful analytical measures.
c. enough information for analysis, industry information is not needed.
d. unnecessary for analysis, but reaction is better.

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