Chap 014 Testbank Financial Statement Analysis

Chapter 14 Financial Statement Analysis
Chapter 14
Financial Statement Analysis

True / False Questions

1. Vertical analysis compares the results of financial information with a business in the same
industry for a number of consecutive periods of time.
True False

2. The uic! ratio is especially useful in evaluatin" the liuidity of a company with fast
movin" inventories.
True False

#. $eductin" the cost of "oods sold from net income "ives us operatin" income.
True False

4. The "ross profit rate is "ross profit e%pressed as a percenta"e of net sales.
True False

&. The "ross profit rate usually is lowest on fast movin" merchandise and hi"hest on specialty
and novelty products
True False

'. (hen an income statement does not show "ross profit or operatin" income it is called a
consolidated statement.
True False

). *+, - return on euity - is measured by dividin" net income by avera"e number of shares
outstandin".
True False

14-1
.. The yield rate on stoc! is measured by dividin" dividends per share by mar!et price per
share.
True False

/. The trend in ratios is usually more useful than loo!in" at a sin"le year0s ratio.
True False

11. The acid test ratio includes mar!etable securities but does not include accounts
receivable.
True False

11. Comparative financial statements show side-by-side financial data for two or more
companies.
True False

12. The uality of earnin"s tends to be hi"her for a company that uses strai"ht-line
depreciation and defers costs whenever possible than for a company which uses accelerated
depreciation and defers costs only when necessary.
True False

1#. 2f total current assets are 31414111 at the end of 5ear 14 increase by 3&14111 by the end of
5ear 24 and increase by 3&14111 in 5ear #4 the percenta"e increase over the precedin" year is
less in 5ear # than in 5ear 2.
True False

14. (or!in" capital is the e%cess of current assets over current liabilities.
True False

14-2
1&. A company0s liuidity refers to its ability to remain profitable.
True False

1'. 2nventory is an e%ample of a uic! asset.
True False

1). Current assets are those assets that can be converted into cash within a year and never
lon"er.
True False

1.. The debt ratio is computed by dividin" total liabilities by current assets.
True False

1/. The lower the current ratio4 the more liuid the company appears.
True False

21. The owners of a corporation are not personally responsible for the debts of the business.
True False

21. A sin"le-step and multiple-step income statement are different in form and in the amount
of net income reported.
True False

22. A company whose sales are "rowin" at less than the rate of inflation may actually be
sellin" less merchandise every year.
True False

14-#
2#. A company cannot be increasin" its mar!et share if its net sales are declinin".
True False

24. 6et income stated as a percenta"e of sales is one means of evaluatin" a company0s ability
to control its e%penses.
True False

2&. A company whose future earnin"s are e%pected to rise substantially is li!ely to have a
hi"her price7earnin"s ratio than a company whose future earnin"s are e%pected to decline.
True False

2'. From a creditor0s point of view4 the lower the debt ratio8 the safer the creditors0 position.
True False

2). The price7earnin"s ratio is calculated by dividin" earnin"s per share by the current mar!et
price of a share of the company0s stoc!.
True False

2.. 2f the return on total assets ratio is substantially below the cost of borrowin"4 common
stoc!holders will benefit from a hi"h debt ratio.
True False

2/. The return on euity ratio may be either hi"her or lower than the return on assets ratio.
True False

#1. The current ratio may be less than4 eual to4 or "reater than the uic! ratio.
True False

14-4
#1. The inventory turnover rate indicates how uic!ly inventory sells.
True False

#2. 2n a sin"le-step income statement4 all revenue items are listed then all e%pense items are
combined and deducted from total revenue.
True False

##. 2n a classified balance sheet4 assets are subdivided into current assets4 plant and euipment
and other assets4 while liabilities are all classified as current.
True False

#4. The more pessimistic investors0 e%pectations re"ardin" a company0s future performance
the lower the price7earnin"s ratio is li!ely to be.
True False

#&. A company should carry the amount of wor!in" capital necessary to conduct operations
not necessarily ma%imi9e its wor!in" capital.
True False

Multiple Choice Questions

#'. 2n order for investors and creditors to decide whether to invest in a company or loan a
company funds they may
A. Analy9e financial statements.
:. Focus on corporate "overnance.
C. :oth of the above.
$. 6either of the above.

14-&
#). A comparative financial statement
A. ;laces the balance sheet4 the income statement and the statement of cash flows side by side
in order to compare the results.
:. ;laces two or more years of a financial statement side by side in order to compare results.
C. ;laces the financial statements of two or more companies side by side in order to compare
results.
$. ;laces the dollar amounts ne%t to the percenta"e amounts of a "iven year for the income
statement.

#.. The chan"es in financial statement items from a base year to followin" years are called<
A. =oney chan"es
:. Trend percenta"es
C. Component percenta"es
$. *atios

#/. The measurement of the relative si9e of each item included in a total is called<
A. =oney chan"es
$. *atios

41. +ne number e%pressed as a percenta"e of another is called<
A. =oney chan"es
$. *atios

41. The e%cess of current assets over current liabilities is called<
A. Current ratio
:. (or!in" capital
C. $ebt ratio
$. >uic! ratio

14-'
42. >uic! assets include which of the followin"?
A. Cash4 mar!etable securities and receivables.
:. Cash4 mar!etable securities and inventories.
C. Cash4 inventories and receivables.
$. =ar!et securities4 receivables and inventories.

4#. The ratio which measures total liabilities as a percenta"e of total assets is called<
A. Current ratio
:. (or!in" capital
C. $ebt ratio
$. >uic! ratio

44. The price7earnin"s ratio is measured by dividin"
A. :oo! value by earnin"s per share.
:. ;ar value by earnin"s per share.
C. =ar!et value by earnin"s per share.
$. =ar!et value by total net income.

4&. The principle factors affectin" the uality of wor!in" capital are<
A. The nature of the current assets.
:. The len"th of time to convert current assets into cash.
C. :oth A and :.
$. 6either A nor :.

4'. All of the followin" ratios are considered measures of profitability e%cept<
A. ,arnin"s per share
:. @ross profit rate
C. ;rice earnin"s ratio
$. *eturn on assets

14-)
4). All of the followin" ratios are considered measures of liuidity e%cept<
A. >uic! ratio
:. $ebt ratio
C. Current ratio
$. *eceivables turnover rate

4.. The term classified financial statements refers<
A. To the financial statements of all companies wor!in" on "overnment proAects.
:. +nly to the financial statements of defense contractors wor!in" on secret proAects.
C. To financial statements prepared for use by mana"ement4 but not for distribution outside of
the or"ani9ation.
$. To financial statements in which items with certain characteristics are placed to"ether in a
"roup in an effort to develop useful subtotals.

4/. Comparative financial statements compare the company0s current statements with<
A. Those of prior periods.
:. Those of other companies in the same industry.
C. Those of the company0s principal competitor.
$. The bud"eted level of performance for the period.

&1. (hich of the followin" is not a measure of short-term liuidity?
A. >uic! ratio.
:. (or!in" capital.
C. Current ratio.
$. $ebt ratio.

&1. The current ratio will be BBBBBBBBBBBBBBB the uic! ratio.
A. Cess than.
:. @reater than or eual to.
C. The same as.
$. Always different than.

14-.
&2. (hich of the followin" is not a measure of lon"-term credit ris!?
A. >uic! ratio.
:. $ebt ratio.
C. 2nterest covera"e ratio.
$. Trend in net cash provided by operatin" activities.

&#. A hi"h uality of earnin"s is indicated by<
A. ,arnin"s derived lar"ely from newly introduced products.
:. $eclaration of both cash and stoc! dividends.
C. Dse of the F2F+ method of inventory durin" sustained inflation.
$. A history of increasin" earnin"s and conservative accountin" methods.

&4. 2n evaluatin" the uality of a company0s earnin"s4 which of the followin" factors is least
important?
A. The accountin" methods used by mana"ement.
:. The trend of the company0s earnin"s over a period of years.
C. The dollar amount of earnin"s per share.
$. The stability and sources of the company0s earnin"s.

&&. The measures most often used in evaluatin" solvency--the current ratio4 uic! ratio4 and
amount of wor!in" capital are developed from amounts appearin" in the<
A. :alance sheet.
:. 2ncome statement.
C. Statement of retained earnin"s.
$. Statement of cash flows.

&'. (hich of the followin" is not a measure of profitability?
A. ,;S.
:. *+2.
C. *+,.
$. 6C*.

14-/
&). (hich American industry would tend to have the "reatest debt ratio?
A. Auto.
:. *etail clothin".
C. =anufacturin".
$. :an!in".

&.. The current ratio<
A. 2s computed by dividin" current assets by current liabilities.
:. 2s computed by subtractin" current liabilities from current assets.
C. *emains unchan"ed throu"hout the operatin" cycle.
$. 2s a measure of short-term profitability.

&/. Component percenta"es indicate the relative si9e of each item included in a total. (hich
of the followin" statements is true?
A. 2ncome statement items are e%pressed as a percenta"e of net income and balance sheet
items as a percenta"e of total assets.
:. 2ncome statement items are e%pressed as a percenta"e of sales and balance sheet items as a
percenta"e of total assets.
C. 2ncome statement items are e%pressed as a percenta"e of net income and balance sheet
items as a percenta"e of net worth.
$. :oth income statement and balance sheet items are e%pressed as a percenta"e of net worth.

'1. Eow would a company0s wor!in" capital be affected if a substantial amount of accounts
payable were paid in cash?
A. 2t would be unaffected.
:. 2t would fall.
C. 2t would increase.
$. The chan"e would depend on the relationship between the payables liuidated and current
liabilities.

14-11
'1. Current assets are those assets that can be converted into cash within<
A. +ne year and never lon"er.
:. +ne year or the operatin" cycle4 whichever is lon"er.
C. +ne year or the operatin" cycle4 whichever is shorter.
$. =ana"ement0s discretion.

'2. The current ratio is calculated by<
A. $ividin" current assets by total assets.
:. $ividin" current assets by total liabilities.
C. $ividin" current assets by stoc!holders0 euity.
$. $ividin" current assets by current liabilities.

'#. The uic! ratio<
:. 2s always hi"her than the current ratio.
C. Cannot be hi"her than the current ratio.
$. =ay be hi"her or lower than the current ratio.

'4. Short-term creditors are most li!ely to use the uic! ratio instead of the current ratio in
evaluatin" the solvency of a company with lar"e4 slow-movin"<
A. ;lant and euipment.
:. *eceivables.
C. 2nventories.
$. ,mployees.

'&. (hich of the followin" is considered a uic! asset?
A. Accounts receivable.
:. 2nventory.
C. Automobiles.
$. ;repaid e%penses.

14-11
''. (hich of the followin" transactions would cause a chan"e in the amount of a company0s
wor!in" capital?
A. Collection of an account receivable.
:. ;ayment of an account payable.
C. :orrowin" cash over a '1-day period.
$. Sellin" merchandise at a price above its cost.

'). The debt ratio indicates the percenta"e of<
A. Total assets financed by lon"-term mort"a"es.
:. *evenue consumed by interest e%pense.
C. Total assets financed by creditors.
$. Total liabilities classified as current.

'.. The debt ratio is used primarily as a measure of<
A. Short-term liuidity.
:. Creditors0 lon"-term ris!.
C. ;rofitability.
$. *eturn on 2nvestment.

'/. @enerally spea!in"4 which appears to be a desirable current ratio?
A. 21 to 1.
:. 1 to 21.
C. 2 to 1.
$. 1 to 2.

)1. All of the followin" captions or subtotals are typical of a multiple-step income statement
e%cept for<
A. 6et sales.
:. @ross profit.
C. Total costs and e%penses.
$. +peratin" income.

14-12
)1. (hen comparin" the current ratio to the uic! ratio<
A. The current ratio will always be "reater
:. The uic! ratio will always be "reater
C. The uic! ratio is sometimes "reater and sometimes less than the current ratio
$. They always will be the same

)2. The "ross profit rate represents<
A. Total sales revenue.
:. The percenta"e chan"e in net sales from the prior period.
C. The percenta"e of sales revenue remainin" after providin" for the cost of the merchandise
sold.
$. 6et income stated as a percenta"e of total sales revenue.

)#. A risin" "ross profit rate most stron"ly su""ests<
A. An increase in physical sales volume.
:. Stron" consumer demand for the company0s products.
C. 2ntense competition.
$. 2ncreased short-term solvency.

)4. +peratin" income e%cludes each of the followin"4 e%cept<
A. 2nterest e%pense.
:. 2ncome ta%es.
C. $epreciation.

)&. Assume that net sales are increasin" faster than the rate of inflation4 and that the
company0s "ross profit rate is risin". +f the followin"4 the most lo"ical conclusion is that<
A. The company0s cost of purchasin" merchandise is risin" rapidly.
:. +peratin" e%penses are fallin".
C. $emand for the company0s products is very stron".
$. The company has achieved an increase in sales volume by reducin" its sales prices.

14-1#
)'. 2n calculatin" earnin"s per share4 the denominator of the euation includes<
A. +nly common stoc! outstandin".
:. Common stoc! plus preferred stoc!.
C. Common stoc! less preferred stoc!.
$. The total shares of authori9ed common stoc!.

)). +n common si9e income statements4 each component in the income statement is
represented as a percenta"e of<
A. 6et income.
:. Sales.
C. Total assets.
$. ;rofit.

).. 2n a multiple-step income statement4 interest e%pense usually is not classified as an
operatin" e%pense because interest char"es<
A. $o not contribute to the production of revenue.
:. Stem from the manner in which assets are financed4 not the manner in which they are used
in business operations.
C. *elate directly to the cost of "oods sold.
$. The statement is incorrect. 2nterest usually is classified as an operatin" e%pense.

)/. 2n a multiple-step income statement4 income ta%es are not classified as operatin" e%penses
because<
A. 2ncome ta%es do not contribute to the production of revenue.
:. 2ncome ta%es stem from the manner in which assets are financed4 not the manner in which
they are used in business operations.
C. 6ot all forms of business or"ani9ation are subAect to income ta%es.
$. The statement is incorrect8 income ta%es are classified as operatin" e%penses.

14-14
.1. Traditionally4 stoc! of financially sound companies with stable earnin"s usually have a
price7earnin"s ratio of<
A. /1.
:. 12.
C. 174.
$. #.

.1. *eturn on euity computations are used in evaluatin"<
A. Ciuidity.
:. ;rofitability.
C. @ross profit.
$. (hether a ratio is improvin" or deterioratin" over time.

.2. The financial ratio intended to measure the effectiveness with which mana"ement has
utili9ed the resources of the business4 re"ardless of how these resources are financed4 is<
A. @ross profit rate.
:. Current ratio.
C. *eturn on assets.
$. *eturn on euity.

.#. The return on assets ratio usually is computed as<
A. 6et sales divided by avera"e total assets.
:. @ross profit divided by avera"e total assets.
C. +peratin" income divided by avera"e total assets.
$. 6et income divided by avera"e total assets.

.4. 2f a company has a current ratio of 2 to 14 and purchases inventory on credit4 what will this
do to its current ratio?
A. 2ncrease the current ratio.
:. $ecrease the current ratio.
C. $oes not chan"e the current ratio.
$. Cannot be determined.

14-1&
.&. The return on euity ratio usually is computed as<
A. 6et income divided by avera"e total assets.
:. +peratin" income divided by avera"e total stoc!holders0 euity.
C. @ross profit divided by avera"e total stoc!holders0 euity.
$. 6one of the above answers is correct.

.'. The measurement that best reflects investors0 e%pectations about future earnin"s is<
A. ,arnin"s per share.
:. *eturn on assets.
C. The price7earnin"s ratio.
$. *eturn on euity.

.). The interest covera"e ratio is computed by dividin"<
A. +peratin" income by annual interest e%pense.
:. 6et income by annual interest e%pense.
C. Carryin" value of bonds by cash interest payments.
$. ,arnin"s per share by the prime interest rate.

... Amal"amated Corporation0s net income was 3244114111 in 211/ and 3.114111 in 2111.
(hat percenta"e increase in net income must Amal"amated achieve in 2111 to offset the
decline in profits in 2111?
A. )&F.
:. #11F.
C. ##.##F.
$. .11F.

./. 2f a retail store has a current ratio of 2.& and current assets of 31/&41114 the amount of
wor!in" capital is<
A. 3).4111.
:. 3#.14111.
C. 3##14111.
$. 311)4111.

14-1'
/1. The ;la9a Company has wor!in" capital of 3&414111 and a current ratio of # to 1. The
amount of current assets is<
A. 341&4111.
:. 3&414111.
C. 3.114111.
$. 32)14111.

/1. $urin" the years 211/ throu"h 21114 ;owers4 2nc.4 reported the followin" amounts of net
income Gdollars in thousandsH<

*elative to the prior year4 the percenta"e chan"e in net income<
A. (as the same in 2111 and 2111.
:. (as lar"er in 2111 than in 2111.
C. (as smaller in 2111 than in 2111.
$. Cannot be determined without !nowin" how many shares of stoc! were outstandin".

Shown below are selected data from the balance sheet of Compros4 a small electronics store
Gdollar amounts are in thousandsH<

/2. *efer to the above data. (hat is the uic! ratio?
A. 1.& to 1.
:. .) to 1.
C. .4& to 1.
$. Some other amount.

14-1)
/#. *efer to the above data. (hat is the current ratio?
A. &.1 to 1.
:. 1.& to 1.
C. .) to 1.

/4. *efer to the above data. (hat is wor!in" capital amounts to<
A. 322&4111.
:. 3#114111.
C. 31&14111.

/&. *efer to the above data. (hat is Compro0s debt ratio?
A. )&F.
:. 2&F.
C. '1F.

Shown below are selected data from the balance sheet of :ill0s Auto ;arts4 a retail store

/'. *efer to the above data. (hat is the uic! ratio?
A. &F.
:. 1.& to 1.
C. 21F.

14-1.
/). *efer to the above data. (hat is the current ratio?
A. 1.2 to 1.
:. Cess than 2 to 14 but not 1.2 to 1.
C. 2.' to 1.
$. =ore than 2 to 14 but not 2.' to 1.

/.. *efer to the above data. (or!in" capital amounts to<
A. 3&'14111
:. 3&#14111
C. 32)14111

//. *efer to the above data. :ill0s debt ratio is<
A. 22F.
:. 2)F.
C. &)F.

Shown below are selected data from the financial statements of Supreme Co. $ollar amounts
are in millions Ge%cept for the per share dataH.

;er share data Gthese amounts stated in actual dollars4 not millionsH<
Supreme reported earnin"s per share for the year of 34 and paid cash dividends of 31 per
share. At year end4 the (all Street Iournal listed Supreme0s capital stoc! as tradin" at 3.. per
share.

14-1/
111. *efer to the above data. Supreme0s "ross profit rate was<
A. 42./F.
:. &).)F.
C. 21.1F.

111. *efer to the above data. (hat was Supreme0s operatin" income? Gin millionsH<
A. 3)11.
:. 3#/1.
C. 32)1.

112. *efer to the above data. Supreme0s return on assets was<
A. 11F.
:. '.)&F.
C. 1&F.
$. Some other percenta"e.

11#. *efer to the above data. Supreme0s return on euity was<
A. 11F.
:. 2&F.
C. ).&F.
$. 1'.#F.

114. *efer to the above data. Supreme0s price7earnin"s ratio at year end was<
A. 2&.
:. 22.
C. 111.

14-21
Shown below are selected data from the financial statements of 6oble Computers. G$ollar
amounts are in millions4 e%cept for the per share data.H

6oble reported earnin"s per share for the year of 3' and paid cash dividends of 32.11 per
share. At year end4 the (all Street Iournal listed 6oble0s capital stoc! as tradin" at 3.1 per
share.

11&. *efer to the above data. 6oble0s price7earnin"s ratio at year end was<
A. .).
:. 1#.&.
C. 1).

11'. *efer to the above data. 6oble0s "ross profit rate was<
A. 1.F.
:. 4'F.
C. &1F.

11). *efer to the above data. 6oble0s operatin" income was<
A. 314'11.
:. 3')&
C. 3/#&.

14-21
11.. *efer to the above data. 6oble0s return on assets was<
A. 2.'F
:. 21F.
C. 2'F.

11/. *efer to the above data. 6oble0s return on euity was<
A. 11F.
:. 1#F.
C. 21F.

@iven below are comparative balance sheets and an income statement for Claret Corporation

All sales were made on account. Cash dividends declared durin" the year totaled 31144/2

14-22
111. *efer to the above data. Claret Corporation0s accounts receivable turnover for 211/ is<
A. 4.' times.
:. 2./ times.
C. &.4 times.
$. '. days.

111. *efer to the above data. Claret Corporation0s inventory turnover for 211/ is<
A. '.' times.
:. #./ times.
C. 4.1 times.
$. /4 days.

112. *efer to the above data. Claret Corporation0s "ross profit rate for 211/ is<
A. '1.1F.
:. #/./F.
C. ##F.
$. '.F.

11#. *efer to the above data. Claret Corporation0s return on assets for 211/ rounded to the
nearest tenth of a percent is<
A. /./F.
:. 4.1F.
C. &./F.
$. 1'./F.

114. *efer to the above data. Claret Corporation0s return on common stoc!holders0 euity for
211/4 rounded to the nearest tenth of a percent4 is<
A. &./F.
:. '.1&F.
C. 14.4F.
$. /.4F.

14-2#
11&. 2n an attempt to standardi9e financial practices worldwide4 two areas of particular
interest to the 2nternational Accountin" Standards Committee are<
A. Capitali9in" and e%pensin"
:. Se"ments and consolidations
C. ;ensions and Ceases
$. ;artnerships and corporation

11'. An or"ani9ation that provides ratin"s of corporate "overnance services is<
A. S,C
:. 2SS
C. 2*S
$. 2:=

Essay Questions

14-24
11). Accountin" terminolo"y
Cisted below are ei"ht technical accountin" terms introduced in this chapter<

,ach of the followin" statements may Gor may notH describe one of these technical terms. For
each statement4 indicate the term described4 or answer J6oneJ if the statement does not
correctly describe any of the terms.
GaH The percenta"e of total assets financed by creditors.
GbH A measure of the effectiveness with which mana"ement utili9es a company0s resources4
re"ardless of how those resources are financed.
GcH A company0s percenta"e share of total dollar sales within its industry.
GdH Current assets less current liabilities.
GeH A measure reflectin" investors e%pectations of future profitability.
GfH A measure of short-term solvency often used when a company has lar"e inventories that
cannot be uic!ly converted into cash.
G"H A ratio that helps individual stoc!holders relate the net income of a lar"e corporation to
their euity investment.

14-2&
11.. Current ratio and wor!in" capital
The balance sheet of *ed =issile Company contained the followin" items4 amon" others<

GaH From the above information compute<
G1H Current assets< 3BBBBBBB
G2H Current liabilities< 3BBBBBB
G#H The current ratio< BBBBBB to 1
G4H (or!in" capital< 3BBBBBB
GbH Assume that *ed =issile Company pays the note payable of 31'#41114 thus reducin" cash
to 31)4111. Compute the followin" after the completion of this transaction<
G1H The current ratio< BBBBBB to 1

14-2'
11/. =easures of solvency and credit ris!
Shown below are selected items appearin" in a recent balance sheet of @rant ;roducts. G$ollar
amounts are in thousands.H

GaH Compute the followin"<
G1H Total uic! assets 3BBBBBBBBBBBB
G2H Total current assets 3BBBBBBBBBBBB
G#H Total current liabilities 3BBBBBBBBBBBB
G4H >uic! ratio BBBBBB to 1
G&H Current ratio BBBBBB to 1
GbH *esearch indicates an industry avera"e uic! ratio is 1.# to 14 and a current ratio of 2.# to
1. :ased upon this information4 does @rant ;roducts appear more or less solvent than the
avera"e company in its industry? ,%plain briefly.

14-2)
121. =ultiple-step income statement
Shown below is a recent income statement for ;haeton4 2nc.<

;repare an income statement for the year in a multiple-step format. GDse the "rid provided
below.H

14-2.
121. *eturn on investment
Shown below are selected data from a recent annual report of >uality Service. G$ollar
amounts are in millions.H

Compute for the year<

14-2/
122. Computation of profitability ratios
Shown below are selected data from a recent annual report of Tall +a!s Co. G$ollar amounts
are in thousands.H

Compute for the year the company0s<

14-#1
12#. ;rofitability measures
Shown below is a recent income statement for :-$ ,lectric.

Assume that comparative balance sheets for :-$ ,lectric indicate avera"e total assets for the
year of 324&1141114 and avera"e total euity of 3241&14111. Compute the followin"<

14-#1
124. ;ercenta"e chan"es
Selected information from the financial statements of ;erfectly :a!ed Ca!e Co. appears
below<

GaH Compute the percenta"e chan"e in each of the above items from 2111 to 2111. Dse a K or -
to indicate increase or decrease.

GbH Compute net income as a percenta"e of net sales in each year. G*ound to the nearest one-
tenth of 1FH

14-#2
12&. ;ercenta"e chan"es8 p7e ratios and investors0 e%pectations
Shown below are @amma4 2nc.0s earnin"s per share for a four-year period4 alon" with the per-
share mar!et price of the company0s stoc! at each year-end. The earnin"s in 2111 were the
hi"hest in the company0s history.

GaH Compute the percenta"e chan"e in earnin"s per share in 211/4 21114 and 2111. G;lace your
answers in the spaces provided above.H
GbH Compute the p7e ratio of stoc! at the end of each of the four years. G;lace your answers in
the spaces provided above.H
GcH (hat does the p7e ratio at the end of 2111 indicate about investors0 e%pectations of
earnin"s per share for the comin" year? ,%plain your reasonin".

14-##
12'. ,ffects of events on financial measurements
2ndicate the probable effects of each of the followin" strate"ies or events upon the financial
measurements of Cindsay Corp. listed below. Dse the code letters 2 L 2ncrease4 $ L $ecrease4
and 6, L 6o ,ffect.

14-#4
12). Financial ratios
Shown below are some !ey fi"ures from the balance sheets of =inuteman @as Company for
two successive years<

$ividends of 3/'4111 were declared and paid in 2111. Compute the followin"<

14-#&
12.. Financial ratios
@iven below are comparative balance sheets and an income statement for the ,%cellent
Corporation<

All sales were made on account. Cash dividends declared durin" the year totaled 3&.4&&1.
Compute the followin"<

14-#'

12/. ,ffects of transactions upon analytical measurements
$etermine the immediate effect of each of the transactions described below on the ratio listed
beside each transaction. 2n the blan! space to the left of each statement4 you are to indicate the
effect by writin" the appropriate code letter. The code letters are as follows< 2 L increase the
ratio4 $ L decrease the ratio4 and 6, L no effect on this ratio.

14-#)
1#1. Dse and interpretation of financial measurements
Shown below are various financial measurements for two companies which are similar in si9e
and sell similar products<

2nstructions< 5ou are to enter code letters in the spaces provided in the two ri"ht-hand
columns.
2n the first column4 indicate which of the followin" three "roups probably would be most
interested in the specified financial measurement. 2dentify one "roup4 usin" the followin"
code letters< STC L indicatin" short-term creditors4 CTC L indicatin" lon"-term creditors4 and
S L indicatin" stoc!holders.
2n the second column4 enter an M or a 5 to indicate whether your Jmost interested "roupJ
would prefer the measurement results reported by Co. M or Co. 5.
Consider each financial measurement independently of the others.

1#1. ,valuatin" the adeuacy of net income
Assume that $elta Corp. earns net income of 3141114111 in the current year. 2dentify two
important factors that investors should consider in evaluatin" the reasonableness of this dollar
amount. ,%plain what investors may learn from each of these considerations.

14-#.
1#2. *+2< (hat and why?
2n "eneral terms4 what do all J*+2J ratios measure? (hy are such computations useful?

1##. 2ncome statement classifications
Simon Eardware and @arfun!el Foods are sole proprietorships with similar amounts of total
assets. Also4 both businesses earn similar amounts of revenue4 incur similar amounts of
operatin" e%penses4 and report similar net incomes. Eowever4 Simon has a hi"her cost of
"oods sold4 while @arfun!el Foods has hi"her interest e%pense.
2ndicate which of these companies has the hi"her GaH "ross profit rate4 and GbH return on assets.
2n each case4 e%plain the reasons for each answer.

1#4. 2mprovin" the current ratio
Carter Corporation financed construction of a new addition to its facilities with a lar"e lon"-
term note payable. As a condition of obtainin" the loan4 Carter a"reed to maintain a current
ratio at year-end of at least 1.) to 1. 2f Carter fails to maintain this ratio4 the lender may
demand immediate repayment of the principal amount of the note and all unpaid accrued
interest. As the end of the year approaches4 Carter is concerned about the ma"nitude of its
current ratio. Su""est some actions that the company mi"ht ta!e to increase the ma"nitude of
the current ratio.

14-#/
1#&. :elow is a number of ratios. =atch the computation to one of the ratios. 2f there is no
match fill in JnoneJ

Ga.H 6et income - preferred dividends divided by avera"e number of common shares
outstandin".
Gb.H 6et sales divided by avera"e accounts receivable
Gc.H +peratin" income divided by avera"e total assets
Gd.H Current assets divided by current liabilities
Ge.H Annual dividend divided by current stoc! price
Gf.H Current assets minus current liabilities
G".H Total liabilities divided by total assets
Gh.H 6et income divided by avera"e total euity
Gi.H Common stoc!holder0s euity divided by shares of common stoc! outstandin".
GA.H Current stoc! price divided by earnin"s per share

14-41
1#'. The followin" information is available for the @rant Company for 2111<

*euired<
(hat are earnin"s per share for the current year?
(hat is the ;7, ratio?
(hat is the boo! value per share of common stoc!?
(hat is the dividend yield on common stoc!?
(hat is the net profit ratio?
(hat is the return on euity?

14-41
Chapter 14 Financial Statement Analysis Answer Ney

True / False Questions

1. Vertical analysis compares the results of financial information with a business in the same
industry for a number of consecutive periods of time.
FALSE

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Measurement
earning !"#ective: $

2. The uic! ratio is especially useful in evaluatin" the liuidity of a company with fast
movin" inventories.
FALSE

AICPA BB: Res%urce Management
earning !"#ective: &

#. $eductin" the cost of "oods sold from net income "ives us operatin" income.
FALSE

AICPA BB: Critical Thinking
earning !"#ective: '

14-42
4. The "ross profit rate is "ross profit e%pressed as a percenta"e of net sales.
TRUE


&. The "ross profit rate usually is lowest on fast movin" merchandise and hi"hest on specialty
and novelty products
TRUE

AACSB: Analytic

'. (hen an income statement does not show "ross profit or operatin" income it is called a
consolidated statement.
FALSE


). *+, - return on euity - is measured by dividin" net income by avera"e number of shares
outstandin".
FALSE

earning !"#ective: (

14-4#
.. The yield rate on stoc! is measured by dividin" dividends per share by mar!et price per
share.
TRUE


/. The trend in ratios is usually more useful than loo!in" at a sin"le year0s ratio.
TRUE


11. The acid test ratio includes mar!etable securities but does not include accounts
receivable.
FALSE


11. Comparative financial statements show side-by-side financial data for two or more
companies.
FALSE


14-44
12. The uality of earnin"s tends to be hi"her for a company that uses strai"ht-line
depreciation and defers costs whenever possible than for a company which uses accelerated
depreciation and defers costs only when necessary.
FALSE

AACSB: Analytic
earning !"#ective: )

1#. 2f total current assets are 31414111 at the end of 5ear 14 increase by 3&14111 by the end of
5ear 24 and increase by 3&14111 in 5ear #4 the percenta"e increase over the precedin" year is
less in 5ear # than in 5ear 2.
TRUE

AACSB: Analytic

14. (or!in" capital is the e%cess of current assets over current liabilities.
TRUE


1&. A company0s liuidity refers to its ability to remain profitable.
FALSE


14-4&
1'. 2nventory is an e%ample of a uic! asset.
FALSE


1). Current assets are those assets that can be converted into cash within a year and never
lon"er.
FALSE


1.. The debt ratio is computed by dividin" total liabilities by current assets.
FALSE


1/. The lower the current ratio4 the more liuid the company appears.
FALSE

AACSB: Analytic
AICPA FN: Risk Analysis

14-4'
21. The owners of a corporation are not personally responsible for the debts of the business.
TRUE


21. A sin"le-step and multiple-step income statement are different in form and in the amount
of net income reported.
FALSE


22. A company whose sales are "rowin" at less than the rate of inflation may actually be
sellin" less merchandise every year.
TRUE

AACSB: Analytic
earning !"#ective: *

2#. A company cannot be increasin" its mar!et share if its net sales are declinin".
FALSE

AACSB: Analytic
AICPA BB: Marketing

14-4)
24. 6et income stated as a percenta"e of sales is one means of evaluatin" a company0s ability
to control its e%penses.
TRUE


2&. A company whose future earnin"s are e%pected to rise substantially is li!ely to have a
hi"her price7earnin"s ratio than a company whose future earnin"s are e%pected to decline.
TRUE

AACSB: Analytic

2'. From a creditor0s point of view4 the lower the debt ratio8 the safer the creditors0 position.
TRUE

AACSB: Analytic

2). The price7earnin"s ratio is calculated by dividin" earnin"s per share by the current mar!et
price of a share of the company0s stoc!.
FALSE

AICPA BB: Industry

14-4.
2.. 2f the return on total assets ratio is substantially below the cost of borrowin"4 common
stoc!holders will benefit from a hi"h debt ratio.
FALSE

AACSB: Analytic

2/. The return on euity ratio may be either hi"her or lower than the return on assets ratio.
TRUE

AACSB: Analytic

#1. The current ratio may be less than4 eual to4 or "reater than the uic! ratio.
FALSE

AACSB: Analytic

#1. The inventory turnover rate indicates how uic!ly inventory sells.
TRUE


14-4/
#2. 2n a sin"le-step income statement4 all revenue items are listed then all e%pense items are
combined and deducted from total revenue.
TRUE


##. 2n a classified balance sheet4 assets are subdivided into current assets4 plant and euipment
and other assets4 while liabilities are all classified as current.
FALSE

earning !"#ective: +

#4. The more pessimistic investors0 e%pectations re"ardin" a company0s future performance
the lower the price7earnin"s ratio is li!ely to be.
TRUE

AACSB: Analytic

#&. A company should carry the amount of wor!in" capital necessary to conduct operations
not necessarily ma%imi9e its wor!in" capital.
TRUE

AACSB: Analytic

Multiple Choice Questions

14-&1
#'. 2n order for investors and creditors to decide whether to invest in a company or loan a
company funds they may
A. Analy9e financial statements.
:. Focus on corporate "overnance.
C. :oth of the above.
$. 6either of the above.

earning !"#ective: ,

#). A comparative financial statement
A. ;laces the balance sheet4 the income statement and the statement of cash flows side by side
in order to compare the results.
. ;laces two or more years of a financial statement side by side in order to compare results.
C. ;laces the financial statements of two or more companies side by side in order to compare
results.
$. ;laces the dollar amounts ne%t to the percenta"e amounts of a "iven year for the income
statement.


#.. The chan"es in financial statement items from a base year to followin" years are called<
A. =oney chan"es
. Trend percenta"es
$. *atios


14-&1
#/. The measurement of the relative si9e of each item included in a total is called<
A. =oney chan"es
$. *atios


41. +ne number e%pressed as a percenta"e of another is called<
A. =oney chan"es
!. *atios


41. The e%cess of current assets over current liabilities is called<
A. Current ratio
. (or!in" capital
C. $ebt ratio
$. >uic! ratio


14-&2
42. >uic! assets include which of the followin"?
A. Cash4 mar!etable securities and receivables.
:. Cash4 mar!etable securities and inventories.
C. Cash4 inventories and receivables.
$. =ar!et securities4 receivables and inventories.


4#. The ratio which measures total liabilities as a percenta"e of total assets is called<
A. Current ratio
:. (or!in" capital
C. $ebt ratio
$. >uic! ratio


44. The price7earnin"s ratio is measured by dividin"
A. :oo! value by earnin"s per share.
:. ;ar value by earnin"s per share.
C. =ar!et value by earnin"s per share.
$. =ar!et value by total net income.


14-&#
4&. The principle factors affectin" the uality of wor!in" capital are<
A. The nature of the current assets.
:. The len"th of time to convert current assets into cash.
C. :oth A and :.
$. 6either A nor :.


4'. All of the followin" ratios are considered measures of profitability e%cept<
A. ,arnin"s per share
:. @ross profit rate
C. ;rice earnin"s ratio
$. *eturn on assets


4). All of the followin" ratios are considered measures of liuidity e%cept<
A. >uic! ratio
. $ebt ratio
C. Current ratio
$. *eceivables turnover rate


14-&4
4.. The term classified financial statements refers<
A. To the financial statements of all companies wor!in" on "overnment proAects.
:. +nly to the financial statements of defense contractors wor!in" on secret proAects.
C. To financial statements prepared for use by mana"ement4 but not for distribution outside of
the or"ani9ation.
!. To financial statements in which items with certain characteristics are placed to"ether in a
"roup in an effort to develop useful subtotals.


4/. Comparative financial statements compare the company0s current statements with<
A. Those of prior periods.
:. Those of other companies in the same industry.
C. Those of the company0s principal competitor.
$. The bud"eted level of performance for the period.


&1. (hich of the followin" is not a measure of short-term liuidity?
A. >uic! ratio.
:. (or!in" capital.
C. Current ratio.
!. $ebt ratio.


14-&&
&1. The current ratio will be BBBBBBBBBBBBBBB the uic! ratio.
A. Cess than.
. @reater than or eual to.
C. The same as.
$. Always different than.

AACSB: Analytic

&2. (hich of the followin" is not a measure of lon"-term credit ris!?
A. >uic! ratio.
:. $ebt ratio.
C. 2nterest covera"e ratio.
$. Trend in net cash provided by operatin" activities.


&#. A hi"h uality of earnin"s is indicated by<
A. ,arnin"s derived lar"ely from newly introduced products.
:. $eclaration of both cash and stoc! dividends.
C. Dse of the F2F+ method of inventory durin" sustained inflation.
!. A history of increasin" earnin"s and conservative accountin" methods.


14-&'
&4. 2n evaluatin" the uality of a company0s earnin"s4 which of the followin" factors is least
important?
A. The accountin" methods used by mana"ement.
:. The trend of the company0s earnin"s over a period of years.
C. The dollar amount of earnin"s per share.
$. The stability and sources of the company0s earnin"s.

AACSB: Analytic
AICPA FN: Risk Analysis

&&. The measures most often used in evaluatin" solvency--the current ratio4 uic! ratio4 and
amount of wor!in" capital are developed from amounts appearin" in the<
A. :alance sheet.
:. 2ncome statement.
C. Statement of retained earnin"s.
$. Statement of cash flows.


&'. (hich of the followin" is not a measure of profitability?
A. ,;S.
:. *+2.
C. *+,.
!. 6C*.


14-&)
&). (hich American industry would tend to have the "reatest debt ratio?
A. Auto.
:. *etail clothin".
C. =anufacturin".
!. :an!in".

AACSB: Analytic
AICPA BB: Industry

&.. The current ratio<
:. 2s computed by subtractin" current liabilities from current assets.
C. *emains unchan"ed throu"hout the operatin" cycle.
$. 2s a measure of short-term profitability.


&/. Component percenta"es indicate the relative si9e of each item included in a total. (hich
of the followin" statements is true?
A. 2ncome statement items are e%pressed as a percenta"e of net income and balance sheet
items as a percenta"e of total assets.
. 2ncome statement items are e%pressed as a percenta"e of sales and balance sheet items as a
percenta"e of total assets.
C. 2ncome statement items are e%pressed as a percenta"e of net income and balance sheet
items as a percenta"e of net worth.
$. :oth income statement and balance sheet items are e%pressed as a percenta"e of net worth.


14-&.
'1. Eow would a company0s wor!in" capital be affected if a substantial amount of accounts
payable were paid in cash?
A. 2t would be unaffected.
:. 2t would fall.
C. 2t would increase.
$. The chan"e would depend on the relationship between the payables liuidated and current
liabilities.

AACSB: Analytic

'1. Current assets are those assets that can be converted into cash within<
A. +ne year and never lon"er.
. +ne year or the operatin" cycle4 whichever is lon"er.
C. +ne year or the operatin" cycle4 whichever is shorter.
$. =ana"ement0s discretion.


'2. The current ratio is calculated by<
A. $ividin" current assets by total assets.
:. $ividin" current assets by total liabilities.
C. $ividin" current assets by stoc!holders0 euity.
!. $ividin" current assets by current liabilities.


14-&/
'#. The uic! ratio<
:. 2s always hi"her than the current ratio.
C. Cannot be hi"her than the current ratio.
$. =ay be hi"her or lower than the current ratio.


'4. Short-term creditors are most li!ely to use the uic! ratio instead of the current ratio in
evaluatin" the solvency of a company with lar"e4 slow-movin"<
A. ;lant and euipment.
:. *eceivables.
C. 2nventories.
$. ,mployees.

AACSB: Analytic

'&. (hich of the followin" is considered a uic! asset?
A. Accounts receivable.
:. 2nventory.
C. Automobiles.


14-'1
''. (hich of the followin" transactions would cause a chan"e in the amount of a company0s
wor!in" capital?
A. Collection of an account receivable.
:. ;ayment of an account payable.
C. :orrowin" cash over a '1-day period.
!. Sellin" merchandise at a price above its cost.


'). The debt ratio indicates the percenta"e of<
A. Total assets financed by lon"-term mort"a"es.
:. *evenue consumed by interest e%pense.
C. Total assets financed by creditors.
$. Total liabilities classified as current.


'.. The debt ratio is used primarily as a measure of<
A. Short-term liuidity.
. Creditors0 lon"-term ris!.
C. ;rofitability.
$. *eturn on 2nvestment.


14-'1
'/. @enerally spea!in"4 which appears to be a desirable current ratio?
A. 21 to 1.
:. 1 to 21.
C. 2 to 1.
$. 1 to 2.


)1. All of the followin" captions or subtotals are typical of a multiple-step income statement
e%cept for<
A. 6et sales.
:. @ross profit.
C. Total costs and e%penses.
$. +peratin" income.


)1. (hen comparin" the current ratio to the uic! ratio<
A. The current ratio will always be "reater
:. The uic! ratio will always be "reater
C. The uic! ratio is sometimes "reater and sometimes less than the current ratio
$. They always will be the same

AACSB: Analytic

14-'2
)2. The "ross profit rate represents<
A. Total sales revenue.
:. The percenta"e chan"e in net sales from the prior period.
C. The percenta"e of sales revenue remainin" after providin" for the cost of the merchandise
sold.
$. 6et income stated as a percenta"e of total sales revenue.


)#. A risin" "ross profit rate most stron"ly su""ests<
A. An increase in physical sales volume.
. Stron" consumer demand for the company0s products.
C. 2ntense competition.
$. 2ncreased short-term solvency.

AACSB: Analytic

)4. +peratin" income e%cludes each of the followin"4 e%cept<
A. 2nterest e%pense.
:. 2ncome ta%es.
C. $epreciation.


14-'#
)&. Assume that net sales are increasin" faster than the rate of inflation4 and that the
company0s "ross profit rate is risin". +f the followin"4 the most lo"ical conclusion is that<
A. The company0s cost of purchasin" merchandise is risin" rapidly.
:. +peratin" e%penses are fallin".
C. $emand for the company0s products is very stron".
$. The company has achieved an increase in sales volume by reducin" its sales prices.

AACSB: Analytic

)'. 2n calculatin" earnin"s per share4 the denominator of the euation includes<
A. +nly common stoc! outstandin".
:. Common stoc! plus preferred stoc!.
C. Common stoc! less preferred stoc!.
$. The total shares of authori9ed common stoc!.


)). +n common si9e income statements4 each component in the income statement is
represented as a percenta"e of<
A. 6et income.
. Sales.
C. Total assets.
$. ;rofit.


14-'4
).. 2n a multiple-step income statement4 interest e%pense usually is not classified as an
operatin" e%pense because interest char"es<
A. $o not contribute to the production of revenue.
. Stem from the manner in which assets are financed4 not the manner in which they are used
in business operations.
C. *elate directly to the cost of "oods sold.
$. The statement is incorrect. 2nterest usually is classified as an operatin" e%pense.


)/. 2n a multiple-step income statement4 income ta%es are not classified as operatin" e%penses
because<
A. 2ncome ta%es do not contribute to the production of revenue.
:. 2ncome ta%es stem from the manner in which assets are financed4 not the manner in which
they are used in business operations.
C. 6ot all forms of business or"ani9ation are subAect to income ta%es.
$. The statement is incorrect8 income ta%es are classified as operatin" e%penses.


.1. Traditionally4 stoc! of financially sound companies with stable earnin"s usually have a
price7earnin"s ratio of<
A. /1.
. 12.
C. 174.
$. #.


14-'&
.1. *eturn on euity computations are used in evaluatin"<
A. Ciuidity.
. ;rofitability.
C. @ross profit.
$. (hether a ratio is improvin" or deterioratin" over time.


.2. The financial ratio intended to measure the effectiveness with which mana"ement has
utili9ed the resources of the business4 re"ardless of how these resources are financed4 is<
A. @ross profit rate.
:. Current ratio.
C. *eturn on assets.
$. *eturn on euity.


.#. The return on assets ratio usually is computed as<
A. 6et sales divided by avera"e total assets.
:. @ross profit divided by avera"e total assets.
C. +peratin" income divided by avera"e total assets.
$. 6et income divided by avera"e total assets.


14-''
.4. 2f a company has a current ratio of 2 to 14 and purchases inventory on credit4 what will this
do to its current ratio?
A. 2ncrease the current ratio.
. $ecrease the current ratio.
C. $oes not chan"e the current ratio.
$. Cannot be determined.

AACSB: Analytic

.&. The return on euity ratio usually is computed as<
A. 6et income divided by avera"e total assets.
:. +peratin" income divided by avera"e total stoc!holders0 euity.
C. @ross profit divided by avera"e total stoc!holders0 euity.
!. 6one of the above answers is correct.


.'. The measurement that best reflects investors0 e%pectations about future earnin"s is<
A. ,arnin"s per share.
:. *eturn on assets.
C. The price7earnin"s ratio.
$. *eturn on euity.


14-')
.). The interest covera"e ratio is computed by dividin"<
A. +peratin" income by annual interest e%pense.
:. 6et income by annual interest e%pense.
C. Carryin" value of bonds by cash interest payments.
$. ,arnin"s per share by the prime interest rate.


... Amal"amated Corporation0s net income was 3244114111 in 211/ and 3.114111 in 2111.
(hat percenta"e increase in net income must Amal"amated achieve in 2111 to offset the
decline in profits in 2111?
A. )&F.
. #11F.
C. ##.##F.
$. .11F.
324411411173.114111 L # or #11F

AACSB: Analytic

./. 2f a retail store has a current ratio of 2.& and current assets of 31/&41114 the amount of
wor!in" capital is<
A. 3).4111.
:. 3#.14111.
C. 3##14111.
!. 311)4111.
31/&4111 - G31/&411172.&H L 311)4111

AACSB: Analytic

14-'.
/1. The ;la9a Company has wor!in" capital of 3&414111 and a current ratio of # to 1. The
amount of current assets is<
A. 341&4111.
:. 3&414111.
C. 3.114111.
$. 32)14111.
#CC - CC L 3&414111< CC L 32)141118 CA L 3.114111

AACSB: Analytic

/1. $urin" the years 211/ throu"h 21114 ;owers4 2nc.4 reported the followin" amounts of net
income Gdollars in thousandsH<

*elative to the prior year4 the percenta"e chan"e in net income<
A. (as the same in 2111 and 2111.
:. (as lar"er in 2111 than in 2111.
C. (as smaller in 2111 than in 2111.
$. Cannot be determined without !nowin" how many shares of stoc! were outstandin".
2171&1 L 1#F while #17121 L 2&F

AACSB: Analytic

14-'/
Shown below are selected data from the balance sheet of Compros4 a small electronics store

/2. *efer to the above data. (hat is the uic! ratio?
A. 1.& to 1.
. .) to 1.
C. .4& to 1.
G3)& K 31#&H73#11 L .)

AACSB: Analytic

/#. *efer to the above data. (hat is the current ratio?
A. &.1 to 1.
. 1.& to 1.
C. .) to 1.
G3)& K 31#& K 3241H73#11 L 1.&

AACSB: Analytic

14-)1
/4. *efer to the above data. (hat is wor!in" capital amounts to<
A. 322&4111.
:. 3#114111.
C. 31&14111.
34&1 - 3#11 L 31&1

AACSB: Analytic
AICPA BB: Industry

/&. *efer to the above data. (hat is Compro0s debt ratio?
A. )&F.
:. 2&F.
C. '1F.
3')&73/11 L )&F

AACSB: Analytic

Shown below are selected data from the balance sheet of :ill0s Auto ;arts4 a retail store

14-)1
/'. *efer to the above data. (hat is the uic! ratio?
A. &F.
. 1.& to 1.
C. 21F.
G31#1 K 3#)1H73#41 L 1.4)

AACSB: Analytic

/). *efer to the above data. (hat is the current ratio?
A. 1.2 to 1.
:. Cess than 2 to 14 but not 1.2 to 1.
C. 2.' to 1.
$. =ore than 2 to 14 but not 2.' to 1.
G31#1 K 3#)1 K 3411H 73#41 L 2.'&

AACSB: Analytic
AICPA BB: Industry

/.. *efer to the above data. (or!in" capital amounts to<
A. 3&'14111
:. 3&#14111
C. 32)14111
G31#1 K 3#)1 K 3411H - 3#41 L 3&'1

AACSB: Analytic

14-)2
//. *efer to the above data. :ill0s debt ratio is<
A. 22F.
:. 2)F.
C. &)F.
!. Some other amount.
G3#41 K 32.1H7312'1 L 4/F

AACSB: Analytic

Shown below are selected data from the financial statements of Supreme Co. $ollar amounts
are in millions Ge%cept for the per share dataH.

Supreme reported earnin"s per share for the year of 34 and paid cash dividends of 31 per
share. At year end4 the (all Street Iournal listed Supreme0s capital stoc! as tradin" at 3.. per
share.

14-)#
111. *efer to the above data. Supreme0s "ross profit rate was<
A. 42./F.
. &).)F.
C. 21.1F.
3142#1 - 3&21 L 3)118 3)1173142#1 L &).)F

AACSB: Analytic

111. *efer to the above data. (hat was Supreme0s operatin" income? Gin millionsH<
A. 3)11.
:. 3#/1.
C. 32)1.
3142#1 - 3&21 - 3441 L 32)1

AACSB: Analytic

14-)4
112. *efer to the above data. Supreme0s return on assets was<
A. 11F.
. '.)&F.
C. 1&F.
$. Some other percenta"e.
32#17344111 L .'F

AACSB: Analytic

11#. *efer to the above data. Supreme0s return on euity was<
A. 11F.
:. 2&F.
C. ).&F.
!. 1'.#F.
3#/17324411 L 1'.#F

AACSB: Analytic

14-)&
114. *efer to the above data. Supreme0s price7earnin"s ratio at year end was<
A. 2&.
. 22.
C. 111.
3..734 L 22

AACSB: Analytic

Shown below are selected data from the financial statements of 6oble Computers. G$ollar
amounts are in millions4 e%cept for the per share data.H

6oble reported earnin"s per share for the year of 3' and paid cash dividends of 32.11 per
share. At year end4 the (all Street Iournal listed 6oble0s capital stoc! as tradin" at 3.1 per
share.

14-)'
11&. *efer to the above data. 6oble0s price7earnin"s ratio at year end was<
A. .).
. 1#.&.
C. 1).
3.173' L 1#.&

AACSB: Analytic

11'. *efer to the above data. 6oble0s "ross profit rate was<
A. 1.F.
. 4'F.
C. &1F.
G3#4&11 - 314./1H73#4&11 L 4'F

AACSB: Analytic

14-))
11). *efer to the above data. 6oble0s operatin" income was<
A. 314'11.
:. 3')&
C. 3/#&.
3#4&11 - 314./1 - 3')& L 3/#&

AACSB: Analytic
AICPA BB: Industry

11.. *efer to the above data. 6oble0s return on assets was<
A. 2.'F
. 21F.
C. 2'F.
3/#&7344411 L 21F

AACSB: Analytic
AICPA BB: Industry

14-).
11/. *efer to the above data. 6oble0s return on euity was<
A. 11F.
:. 1#F.
C. 21F.
311&73&41 L 21F

AACSB: Analytic

@iven below are comparative balance sheets and an income statement for Claret Corporation

All sales were made on account. Cash dividends declared durin" the year totaled 31144/2

14-)/
111. *efer to the above data. Claret Corporation0s accounts receivable turnover for 211/ is<
A. 4.' times.
:. 2./ times.
C. &.4 times.
$. '. days.
322.4.117 OG34'4.11 K 3#)4)11H72P L &.4

AACSB: Analytic

111. *efer to the above data. Claret Corporation0s inventory turnover for 211/ is<
A. '.' times.
. #./ times.
C. 4.1 times.
$. /4 days.
1#)4&417OG#24&11 K #'4411H72P L #.//

AACSB: Analytic

112. *efer to the above data. Claret Corporation0s "ross profit rate for 211/ is<
A. '1.1F.
. #/./F.
C. ##F.
$. '.F.
3/142'17322.4.11 L #/./F

AACSB: Analytic
AICPA BB: Industry

14-.1
11#. *efer to the above data. Claret Corporation0s return on assets for 211/ rounded to the
nearest tenth of a percent is<
A. /./F.
:. 4.1F.
C. &./F.
$. 1'./F.
31&4#/27OGG31&24111 K 31&'4111H72HP L /./F

AACSB: Analytic

114. *efer to the above data. Claret Corporation0s return on common stoc!holders0 euity for
211/4 rounded to the nearest tenth of a percent4 is<
A. &./F.
:. '.1&F.
C. 14.4F.
$. /.4F.
3'42/27OG31144111 K 311/4211H72P L &./F

AACSB: Analytic

14-.1
11&. 2n an attempt to standardi9e financial practices worldwide4 two areas of particular
interest to the 2nternational Accountin" Standards Committee are<
A. Capitali9in" and e%pensin"
. Se"ments and consolidations
C. ;ensions and Ceases
$. ;artnerships and corporation


11'. An or"ani9ation that provides ratin"s of corporate "overnance services is<
A. S,C
. 2SS
C. 2*S
$. 2:=

AICPA BB: egal
AICPA FN: Re-%rting

Essay Questions

14-.2
11). Accountin" terminolo"y
Cisted below are ei"ht technical accountin" terms introduced in this chapter<

,ach of the followin" statements may Gor may notH describe one of these technical terms. For
each statement4 indicate the term described4 or answer J6oneJ if the statement does not
correctly describe any of the terms.
GaH The percenta"e of total assets financed by creditors.
GbH A measure of the effectiveness with which mana"ement utili9es a company0s resources4
re"ardless of how those resources are financed.
GcH A company0s percenta"e share of total dollar sales within its industry.
GdH Current assets less current liabilities.
GeH A measure reflectin" investors e%pectations of future profitability.
GfH A measure of short-term solvency often used when a company has lar"e inventories that
cannot be uic!ly converted into cash.
G"H A ratio that helps individual stoc!holders relate the net income of a lar"e corporation to
their euity investment.
GaH $ebt ratio4 GbH *eturn on assets4 GcH =ar!et share4 GdH (or!in" capital4 GeH ;rice7earnin"s
ratio4 GfH >uic! ratio4 G"H ,arnin"s per share

earning !"#ective: $ . ,

14-.#
11.. Current ratio and wor!in" capital
The balance sheet of *ed =issile Company contained the followin" items4 amon" others<

GaH From the above information compute<
G1H Current assets< 3BBBBBBB
G2H Current liabilities< 3BBBBBB
G#H The current ratio< BBBBBB to 1
GbH Assume that *ed =issile Company pays the note payable of 31'#41114 thus reducin" cash
to 31)4111. Compute the followin" after the completion of this transaction<
G1H The current ratio< BBBBBB to 1

AACSB: Analytic

14-.4
11/. =easures of solvency and credit ris!
Shown below are selected items appearin" in a recent balance sheet of @rant ;roducts. G$ollar
amounts are in thousands.H

GaH Compute the followin"<
G1H Total uic! assets 3BBBBBBBBBBBB
G2H Total current assets 3BBBBBBBBBBBB
G#H Total current liabilities 3BBBBBBBBBBBB
G4H >uic! ratio BBBBBB to 1
G&H Current ratio BBBBBB to 1
GbH *esearch indicates an industry avera"e uic! ratio is 1.# to 14 and a current ratio of 2.# to
1. :ased upon this information4 does @rant ;roducts appear more or less solvent than the
avera"e company in its industry? ,%plain briefly.

Gb.H @rant ;roducts0 current ratio and uic! ratio both are below the industry avera"es. This
means that @rant ;roducts has less liuid assets in relation to its current liabilities4 and
therefore appears less solvent4 than the avera"e company in the industry.

14-.&
AACSB: Analytic

121. =ultiple-step income statement
Shown below is a recent income statement for ;haeton4 2nc.<

;repare an income statement for the year in a multiple-step format. GDse the "rid provided
below.H

14-.'

AACSB: Analytic

14-.)
121. *eturn on investment
Shown below are selected data from a recent annual report of >uality Service. G$ollar
amounts are in millions.H

Compute for the year<

AACSB: Analytic

14-..
122. Computation of profitability ratios
Shown below are selected data from a recent annual report of Tall +a!s Co. G$ollar amounts
are in thousands.H

Compute for the year the company0s<

AACSB: Analytic

14-./
12#. ;rofitability measures
Shown below is a recent income statement for :-$ ,lectric.

Assume that comparative balance sheets for :-$ ,lectric indicate avera"e total assets for the
year of 324&1141114 and avera"e total euity of 3241&14111. Compute the followin"<

AACSB: Analytic

14-/1
124. ;ercenta"e chan"es
Selected information from the financial statements of ;erfectly :a!ed Ca!e Co. appears
below<

GaH Compute the percenta"e chan"e in each of the above items from 2111 to 2111. Dse a K or -
to indicate increase or decrease.

GbH Compute net income as a percenta"e of net sales in each year. G*ound to the nearest one-
tenth of 1FH

AACSB: Analytic
AICPA BB: Industry

14-/1
12&. ;ercenta"e chan"es8 p7e ratios and investors0 e%pectations
Shown below are @amma4 2nc.0s earnin"s per share for a four-year period4 alon" with the per-
share mar!et price of the company0s stoc! at each year-end. The earnin"s in 2111 were the
hi"hest in the company0s history.

GaH Compute the percenta"e chan"e in earnin"s per share in 211/4 21114 and 2111. G;lace your
answers in the spaces provided above.H
GbH Compute the p7e ratio of stoc! at the end of each of the four years. G;lace your answers in
the spaces provided above.H
GcH (hat does the p7e ratio at the end of 2111 indicate about investors0 e%pectations of
earnin"s per share for the comin" year? ,%plain your reasonin".

GcH The p7e ratio of ..& is low by historical standards4 indicatin" that investors do not e%pect
the rapid earnin"s "rowth of recent years to continue. The sharp declines in stoc! price and
price7earnin"s ratio occurrin" durin" @amma0s Jrecord yearJ su""est that investors may be
e%pectin" earnin"s to decline from current levels. The current price7earnin"s ratio of ..& is
even less than that at the end of 211. which was preceded by a decline in earnin"s per share.

AACSB: Analytic

14-/2
12'. ,ffects of events on financial measurements
2ndicate the probable effects of each of the followin" strate"ies or events upon the financial
measurements of Cindsay Corp. listed below. Dse the code letters 2 L 2ncrease4 $ L $ecrease4
and 6, L 6o ,ffect.

AACSB: Analytic

14-/#
12). Financial ratios
Shown below are some !ey fi"ures from the balance sheets of =inuteman @as Company for
two successive years<

$ividends of 3/'4111 were declared and paid in 2111. Compute the followin"<

AACSB: Analytic

14-/4
12.. Financial ratios
@iven below are comparative balance sheets and an income statement for the ,%cellent
Corporation<

All sales were made on account. Cash dividends declared durin" the year totaled 3&.4&&1.

14-/&

AACSB: Analytic
AICPA BB: Industry

14-/'
12/. ,ffects of transactions upon analytical measurements
$etermine the immediate effect of each of the transactions described below on the ratio listed
beside each transaction. 2n the blan! space to the left of each statement4 you are to indicate the
effect by writin" the appropriate code letter. The code letters are as follows< 2 L increase the
ratio4 $ L decrease the ratio4 and 6, L no effect on this ratio.

AACSB: Analytic

14-/)
1#1. Dse and interpretation of financial measurements
Shown below are various financial measurements for two companies which are similar in si9e
and sell similar products<

2nstructions< 5ou are to enter code letters in the spaces provided in the two ri"ht-hand
columns.
2n the first column4 indicate which of the followin" three "roups probably would be most
interested in the specified financial measurement. 2dentify one "roup4 usin" the followin"
code letters< STC L indicatin" short-term creditors4 CTC L indicatin" lon"-term creditors4 and
S L indicatin" stoc!holders.
2n the second column4 enter an M or a 5 to indicate whether your Jmost interested "roupJ
would prefer the measurement results reported by Co. M or Co. 5.
Consider each financial measurement independently of the others.

AACSB: Analytic

14-/.
1#1. ,valuatin" the adeuacy of net income
Assume that $elta Corp. earns net income of 3141114111 in the current year. 2dentify two
important factors that investors should consider in evaluatin" the reasonableness of this dollar
amount. ,%plain what investors may learn from each of these considerations.
Students are to identify two important factors to be considered in the evaluation of a
company0s earnin"s4 and to e%plain what investors may learn from these considerations. =ost
students identify two of the followin" factors<
-The resources invested in the effort to "enerate the company0s earnin"s Gi.e.4 si9e of the
companyH. This consideration indicates the efficiency with which economic resources are
employed.
-The earnin"s of the company in prior periods. The trend in earnin"s indicates whether
performance is improvin" or deterioratin".
-The earnin"s of comparable companies Gin si9e4 as well as in the nature of operationsH. This
comparison provides an indication of the company0s ability to compete.

AICPA FN: /ecisi%n Making

1#2. *+2< (hat and why?
2n "eneral terms4 what do all J*+2J ratios measure? (hy are such computations useful?
J*+2J ratios measure an investor0s JreturnJ as a percenta"e of the avera"e amount of the
reuired investment. Such computations provide investors with a basis for comparin" the
profitability of alternative investment opportunities.

AACSB: C%mmunicati%ns

14-//
1##. 2ncome statement classifications
Simon Eardware and @arfun!el Foods are sole proprietorships with similar amounts of total
assets. Also4 both businesses earn similar amounts of revenue4 incur similar amounts of
operatin" e%penses4 and report similar net incomes. Eowever4 Simon has a hi"her cost of
"oods sold4 while @arfun!el Foods has hi"her interest e%pense.
2ndicate which of these companies has the hi"her GaH "ross profit rate4 and GbH return on assets.
2n each case4 e%plain the reasons for each answer.
GaH :oth companies earn similar amounts of revenue4 but Simon Eardware has the hi"her cost
of "oods sold. Therefore4 @arfun!el Foods must have the hi"her total "ross profit and also the
hi"her "ross profit rate.
GbH @arfun!el Foods has the hi"her return on assets. *eturn on assets usually is computed by
e%pressin" operatin" income as a percenta"e of avera"e total assets. As both companies have
similar amounts of total assets4 the company with the hi"her operatin" income will have the
hi"her return on assets.
@arfun!el Foods probably has the hi"her operatin" income. As both companies earn similar
amounts of revenue and net income4 their total costs and e%penses also must be similar. Simon
however4 has a hi"her cost of "oods sold4 which is deducted in arrivin" at operatin" income.
@arfun!el Foods has hi"her interest e%pense4 but interest is deducted after the determination
of operatin" income. Therefore4 @arfun!el Foods probably has the hi"her operatin" income of
the two businesses.
6ote to instructor< 2ncome ta%es is another Jnon-operatin" itemJ which may cause two
businesses with similar net incomes to have different levels of operatin" income. Eowever4
both Simon Eardware and @arfun!el Foods are or"ani9ed as sole proprietorships4 and4
therefore4 do not include income ta%es e%pense in their income statements.

AACSB: C%mmunicati%ns
AICPA FN: Re-%rting

14-111
1#4. 2mprovin" the current ratio
Carter Corporation financed construction of a new addition to its facilities with a lar"e lon"-
term note payable. As a condition of obtainin" the loan4 Carter a"reed to maintain a current
ratio at year-end of at least 1.) to 1. 2f Carter fails to maintain this ratio4 the lender may
demand immediate repayment of the principal amount of the note and all unpaid accrued
interest. As the end of the year approaches4 Carter is concerned about the ma"nitude of its
current ratio. Su""est some actions that the company mi"ht ta!e to increase the ma"nitude of
the current ratio.
;ayin" any current liabilities will increase the current ratio. The company could also consider
postponin" until after year-end any routine transactions that would reduce current assets4 such
as the acuisition of euipment or scheduled maintenance and repair e%penditures. The sale of
e%istin" inventory Gor any other current assetH for a price above cost would also cause the
current ratio to increase.

AACSB: Analytic
AICPA FN: /ecisi%n Making

14-111
1#&. :elow is a number of ratios. =atch the computation to one of the ratios. 2f there is no
match fill in JnoneJ

Ga.H 6et income - preferred dividends divided by avera"e number of common shares
outstandin".
Gb.H 6et sales divided by avera"e accounts receivable
Gc.H +peratin" income divided by avera"e total assets
Gd.H Current assets divided by current liabilities
Ge.H Annual dividend divided by current stoc! price
Gf.H Current assets minus current liabilities
G".H Total liabilities divided by total assets
Gh.H 6et income divided by avera"e total euity
Gi.H Common stoc!holder0s euity divided by shares of common stoc! outstandin".
GA.H Current stoc! price divided by earnin"s per share
Ga.H ,arnin"s per share Gb.H A7* turnover rate Gc.H *eturn on assets Gd.H Current ratio Ge.H none
s7b dividend yield Gf.H (or!in" capital G".H $ebt ratio Gh.H *eturn on euity GiH none s7b boo!
value per share GA.H ;rice7earnin"s ratio


14-112
1#'. The followin" information is available for the @rant Company for 2111<

*euired<
(hat are earnin"s per share for the current year?
(hat is the ;7, ratio?
(hat is the boo! value per share of common stoc!?
(hat is the dividend yield on common stoc!?
(hat is the net profit ratio?
(hat is the return on euity?
,arnin"s per share 3'114111 - 3241117&14111 L 311./'
;rice7,arnin"s ratio 3#27311./' L 32.'.
:oo! value G31'14111 - 3#14111H7 &14111 L 32.'1
$ividend yield 31..173#2 L &.'#F
6et profit rate 3'11411173142114111 L &1F
*eturn on euity 3'114111731'14111 L #)&F

AACSB: Analytic

14-11#
Chapter 14
Financial Statement Analysis
C"A#TER 14 $AME %
1&'M($UTE QU() A SECT(*$
2ndicate the best answer to each uestion in the space provided.
1 The uic! ratio is considered more useful than the current ratio for<
a ,valuatin" the profitability of a business that sells inventory very uic!ly4 such as
a restaurant.
+ ,valuatin" the solvency of a business that turns inventory into cash very slowly4
such as a shipbuilder.
c ,valuatin" lon"-term credit ris!.
, ,valuatin" investorsQ e%pectations concernin" future earnin"s.
- The debt ratio is a measure of<
a 6et cash flows relatin" to financin" activities.
+ Con"-term credit ris!.
c Short-term solvency.
, ;rofitability4 independent of the manner in which assets are financed.
. 2n the lon"-run4 it is most important for a business to "enerate an inflow of cash from
its<
a +peratin" activities.
+ Stoc!holders.
c 2nvestin" activities.
, Creditors.
4 *eturn on assets measures the efficiency with which mana"ement<
a @enerates earnin"s from the assets under its control4 re"ardless of how these
assets are financed.
+ @enerates earnin"s from the assets under its control4 "ivin" consideration to any
costs of financin" these assets.
c @enerates cash from the assets under its control4 re"ardless of accrual-based
measures of profitability.
, Converts its current assets into cash.
/ A transaction that will increase the uic! ratio but cause the current ratio to decline is<
a Short-term borrowin".
+ 2nvestin" cash in plant assets.
c Sale of inventory at a price below cost.
, Collection of an account receivable.
14-114
C"A#TER 14 $AME %
1&'M($UTE QU() SECT(*$
Shown below are data ta!en from a recent annual report of Falcon Co. G$ollar amounts in millions.H
e0innin0 En,
o1 2ear o1 2ear
alance sheet ,ata3
Current assets............................................................. 3141#4 414121
Total assets................................................................. 314&#2 314.22
Current liabilities........................................................ 3#)/ 3#1.
Total liabilities............................................................ 3&4' 34))
Total stoc!holdersQ euity........................................... 314111 41421)
(ncome statement ,ata3
6et sales..................................................................... 324)&/
@ross profit................................................................. 3142'4
+peratin" income....................................................... 3&)4
6et income................................................................. 3421
.
:ased upon the above information4 indicate the best answer in the space provided.
1 The current ratio at year-end Grounded to the nearest tenthH is<
a 2.# to 1. c #.& to 1.
+ .' to 1. , Some other answer.
- The amount of wor!in" capital at the be"innin" of the year Gin millionsH was<
a 3).& c 34)/.
+ 3141/#. , Some other answer.
. The "ross profit rate for the year Grounded to the nearest 1 percentH was<
a 4'F. c '/F.
+ &4F. , Some other answer
4 The return on avera"e total assets durin" the year Grounded to the nearest percentH was<
a 24F. c )/F.
+ #4F. , Some other answer.
/ The return on avera"e total stoc!holdersQ euity durin" the year Grounded to the nearest
1 percentH was<
a &1F. c #.F.
+ 41F. , Some other answer.
14-11&
C"A#TER 14 $AME %
1&'M($UTE QU() C SECT(*$
Shown below are data ta!en from a recent annual report of4 Topa94 2nc. G$ollar amounts in millions.H
e0innin0 En,
o1 2ear o1 2ear
alance sheet ,ata3
Current assets............................................................. 3 '2& 3)11
Total assets................................................................. 3141&1 314211
Current liabilities........................................................ 32)& 31)&
Total liabilities............................................................ 3&11 3'11
Total stoc!holdersQ euity........................................... 3&)& 3)2&
(ncome statement ,ata3
6et sales..................................................................... 314/11
@ross profit................................................................. 3/11
+peratin" income....................................................... 34&1
6et income................................................................. 3#11
.
(nstructions Compute the followin"<
a Current ratio at year-end Ground to nearest tenthH......... BBBBBBBB to 1
+ (or!in" capital at the be"innin" of the year
Gin millionsH 3BBBBBBBBBBBB
c @ross profit rate for the year Ground to the
nearest 1 percentH BBBBBBF
, *eturn on avera"e total assets for the year
Ground to the nearest 1 percentH BBBBBBF
e *eturn on avera"e total euity for the year
Ground to the nearest 1 percentH BBBBBBF
14-11'
C"A#TER 14 $AME %
1&'M($UTE QU() ! SECT(*$
@iven below are comparative balance sheets and an income statement for the Copper Corporation<
Copper Corporation
:alance Sheets R Current 5ear
$ec. #1 Ian. 1
Copper Corporation
2ncome Statement for the
Current 5ear
Cash 3 #14'11 3 2'4/11 Sales 3/#'4111
Accounts receivable 2&24111 21'4111 Cost of "oods sold G&1&4111H
2nventory 1)#4111 1).4111 @ross profit on sales 34214111
,uipment GnetH 12/4111 1&24111 +peratin" e%penses G##24111H
3&.&4'11 3&)24/11 +peratin" income 3 ./4111
Accounts payable 31#&4111 314)4111
2nterest e%pense and
income ta%es G#/4111H
$ividends payable 1.4111 144111 6et income 3 &1.111
Capital stoc!4 3/ par
/14111 /14111
*etained earnin"s #424'11 #214/11
3&.&4'11 3&)24/11
All sales were made on account. Cash dividends declared durin" the year totaled 32/4#11.
a Avera"e accounts receivable turnover times
+ :oo! value per share at the end of the current year 3BBBBBBBBBBBBBB
c ,arnin"s per share of capital stoc! 3BBBBBBBBBBBBBB
, *eturn on assets F
e *eturn on common stoc!holdersQ euity is computed by
dividin" 3 BBBBBBBBBBBB by 3BBBBBBBBBBBBBB

14-11)
C"A#TER 14 SELF'TEST QUEST(*$S FR*M TE4T**5
Choose the best answer for each of the followin" uestions and insert the identifyin" letter in
the space provided.
1 (hich of the followin" usually is least important as a measure of short-term liuidity?
a >uic! ratio.
+ $ebt ratio.
c Current ratio.
, Cash flow from operatin" activities.
- 2n each of the last five years4 the net sales of ;la9a Co. have increased at about half the
rate of inflation4 but net income has increased at appro%imately twice the rate of
inflation. $urin" this period4 the companyQs total assets4 liabilities4 and euity have
remained almost unchan"ed8 dividends are appro%imately eual to net income. These
relationships su""est Gindicate all correct answersH<
a =ana"ement is successfully controllin" costs and e%penses.
+ The company is sellin" more merchandise every year.
c The annual return on assets has been increasin".
, Financin" activities are li!ely to result in a net use of cash.
. From the viewpoint of a stoc!holder4 which of the followin" relationships do you
consider of the least si"nificance?
a The return on assets consistently is hi"her than the industry avera"e.
+ The return on euity has increased in each of the past five years.
c 6et income is "reater than the amount of wor!in" capital.
, The return on assets is "reater than the rate of interest bein" paid to creditors.
4 The followin" data are available from the annual report of Fri%all =otors<
Current assets...................... 3 4.14111 Current liabilities.............. 3#114111
Avera"e total assets............. 241114111 +peratin" income.............. 2414111
Avera"e total euity............. .114111 6et income....................... .14111
(hich of the followin" statements are correct? G=ore than one statement may be
correct.H
a The return on euity e%ceeds the return on assets.
+ The current ratio is .'2& to 1.
c (or!in" capital is 3142114111.
, 6one of the above answers are correct.
14-11.
/ Eart CorporationQs net income was 34114111 in 2114 and 31'14111 in 211&. (hat
percenta"e increase in net income must Eart achieve in 211' to offset the decline in
profits in 211&?
a '1F. + 1&1F. c '11F. , ')F.
6 2f a companyQs current ratio declined in a year durin" which its uic! ratio improved4
which of the followin" is the most li!ely e%planation?
a 2nventory is increasin".
+ 2nventory is declinin".
c *eceivables are bein" collected more rapidly than in the past.
, *eceivables are bein" collected more slowly than in the past.
7 2n financial statement analysis4 the most difficult of the followin" items to predict is
whether<
a The company will be liuid in si% months.
+ The companyQs mar!et share is increasin" or declinin".
c ;rofits will increase in the comin" year.
, The mar!et price of capital stoc! will rise or fall over the ne%t two months.
14-11/
S*LUT(*$S T* C"A#TER 14 1&'M($UTE QU())ES
QU() A QU()
1 : 1 C
- : - $ G3141#4 - #)/ L 3''2H
. A . A
4 A 4 :
/ C / C
QU() C
a Current ratio at year-end 4 to 1
3)11 31)& L 4
+ (or!in" capital at the be"innin" of the year Gin millionsH 3#&1
3'2& - 32)& L 3#&1
c @ross profit rate 4).4F
3/11 314/11 L 4).4F
, *eturn on avera"e total assets 41F
34&1 OG3141&1 K 314211H 2P L 41F
e *eturn on avera"e total stoc!holdersQ euity 4'.2F
3#11 OG3&)& K 3)2&H 2P L 4'.2F
QU() !
a Accounts receivable turnover G3/#'4111 32#44111H L 4 times
+ :oo! value per share at the end of the current year L G34#24'11 114111 sharesH L 34#.2'
c ,arnin"s per share of capital stoc! G3&14111 114111 sharesH L 3&.11
, *eturn on assets G3./4111 O G3&.&4'11 K 3&)24/11H72P L 1&F
e *eturn on common stoc!holdersQ euity is computed by dividin" 3&14111 by 342242&1.
OG34#24'11 K 34114/11H 2P
.
14-111
S*LUT(*$S T* C"A#TER 14 SELF'TEST QUEST(*$S FR*M TE4T**5
1 b 2 a4 c4 d # c 4 d Gsee belowH & b Gsee belowH ' b ) d
(hy answers A4 :4 and C in uestion 4 are incorrect<
A The return on assets4 12F G32414111 3241114111H, exceeds the return on euity4 which is 11F
G3.14111 3.114111H.
: The current ratio is 1.' to 1 G34.14111 3#114111H.
C (or!in" capital amounts to 31.14111 G34.14111 - 3#114111H.
2ncrease in net income reuired in uestion &< G34114111 - 31'14111H 31'14111 L 1&1F
14-111

Chap 014 Testbank Financial Statement Analysis

Caricato da

Informazioni sul documento

Descrizione originale:

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Chap 014 Testbank Financial Statement Analysis

Caricato da

Copyright:

Formati disponibili

Chapter 14 Financial Statement Analysis

Potrebbero piacerti anche