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Financial Statement Analysis

True/False Questions
1. Common-size statements are financial statements of companies of similar size.
2. One limitation of vertical analysis is that it cannot be used to compare two companies
that are significantly different in size.
3. The gross margin percentage is computed by dividing the gross margin by total assets.
4. The sale of used equipment at book value for cash will increase earnings per share.
5. Earnings per share is computed by dividing net income (after deducting preferred
dividends) by the average number of common shares outstanding.
6. The dividend payout ratio divided by the dividend yield ratio equals the price-earnings
ratio.
7. An increase in the number of shares of common stock outstanding will decrease a
company's price-earnings ratio if the market price per share remains unchanged.
8. A company's financial leverage is negative when its return on total assets is less than
its return on common stockholders' equity.
9. When computing return on common stockholders' equity, retained earnings should be
included as part of common stockholders' equity.
10. When a retailing company purchases inventory, the book value per share of the
company increases.
11. If a company's acid-test ratio increases, its current ratio will also increase.
12. Assuming a current ratio greater than 1, acquiring land by issuing more of the
company's common stock will increase the current ratio.
13. If a company successfully implements lean production, its inventory turnover ratio
should decrease.
14. Short-term borrowing is not a source of working capital.
15. Working capital is computed by subtracting long-term liabilities from long-term
assets.

Financial Statement Analysis - Test Bank

Financial Statement Analysis


Multiple Choice Questions
16. Common size financial statements help an analyst to:
A) Evaluate financial statements of companies within a given industry of the
approximate same size.
B) Determine which companies in a similar industry are at approximately the same
stage of development.
C) Compare the mix of assets, liabilities, capital, revenue, and expenses within a
company over a period of time or between companies within a given industry
without respect to size.
D) Ascertain the relative potential of companies of similar size in different
industries.
17. Which of the following ratios would be least useful in determining a company's ability
to pay its expenses and liabilities?
A) current ratio
B) acid-test ratio
C) price-earnings ratio
D) times interest earned ratio
18. Most stockholders would ordinarily be least concerned with which of the following
ratios:
A) earnings per share.
B) dividend yield ratio.
C) price-earnings ratio.
D) acid-test ratio.

Financial Statement Analysis


19. What effect will the issuance of common stock for cash at year-end have on the
following ratios?

A)
B)
C)
D)

Return on Total Assets Debt-to-Equity Ratio


Increase
Increase
Increase
Decrease
Decrease
Increase
Decrease
Decrease

20. The market price of Friden Company's common stock increased from $15 to $18.
Earnings per share of common stock remained unchanged. The company's priceearnings ratio would:
A) increase.
B) decrease.
C) remain unchanged.
D) impossible to determine.
21. If a company is profitable and is effectively using leverage, which
one of the following ratios is likely to be the largest?
A) Return on total assets.
B) Return on total liabilities.
C) Return on common stockholders' equity.
D) Cannot be determined.
22. Clark Company issued bonds with an interest rate of 10%. The company's return on
assets is 12%. The company's return on common stockholders' equity would most
likely:
A) increase.
B) decrease.
C) remain unchanged.
D) cannot be determined.

Financial Statement Analysis - Test Bank

Financial Statement Analysis


23. Which of the following transactions could generate positive financial leverage for a
corporation?
A) acquiring assets through the issuance of long-term debt.
B) acquiring assets through the use of accounts payable.
C) acquiring assets through the issuance of common stock.
D) both A and B above

24. Book value per common share is the amount of stockholders' equity per outstanding
share of common stock. Which one of the following statements about book value per
common share is most correct?
A) Market price per common share usually approximates book value per common
share.
B) Book value per common share is based on past transactions whereas the market
price of a share of stock mainly reflects what investors expect to happen in the
future.
C) A market price per common share that is greater than book value per common
share is an indication of an overvalued stock.
D) Book value per common share is the amount that would be paid to stockholders
if the company were sold to another company.
25. The ratio of total cash, marketable securities, accounts receivable, and short-term
notes to current liabilities is:
A) the debt-to-equity ratio.
B) the current ratio.
C) the acid-test ratio.
D) working capital.

26. A company has just converted a long-term note receivable into a short-term note
receivable. The company's acid-test and current ratios are both greater than 1. This
transaction will:
A) increase the current ratio and decrease the acid-test ratio.
B) increase the current ratio and increase the acid-test ratio.
C) decrease the current ratio and increase the acid-test ratio.
D) decrease the current ratio and decrease the acid-test ratio.
27. Broca Corporation has a current ratio of 2.5. Which of the following transactions will
increase Broca's current ratio?
A) the purchase of inventory for cash.
B) the collection of an account receivable.
C) the payment of an account payable.
D) none of the above.

Financial Statement Analysis

28. Allen Company's average collection period for accounts receivable was 25 days in
year 1, but increased to 40 days in year 2. Which of the following would most likely
be the cause of this change:
A) a decrease in accounts receivable relative to sales in year 2.
B) an increase in credit sales in year 2 as compared to year 1.
C) a relaxation of credit policies in year 2.
D) a decrease in accounts receivable in year 2 as compared to year 1.
29. Wolbers Company wrote off $100,000 in obsolete inventory. The company's inventory
turnover ratio would:
A) increase.
B) decrease.
C) remain unchanged.
D) impossible to determine.

30. Gottlob Corporation's most recent income statement appears below:


Sales (all on account) ................................
Cost of goods sold .....................................
Gross margin .............................................
Selling and administrative expense ...........
Net operating income ................................
Interest expense .........................................
Net income before taxes ............................
Income taxes ..............................................
Net income ................................................

$824,000
477,000
347,000
208,000
139,000
37,000
102,000
30,000
$ 72,000

The gross margin percentage is closest to:


A) 20.7%
B) 72.7%
C) 42.1%
D) 481.9%

31. Crandall Company's net income last year was $60,000. The company paid preferred
dividends of $10,000 and its average common stockholders' equity was $480,000. The
company's return on common stockholders' equity for the year was closest to:
A) 12.5%
B) 10.4%
C) 2.1%
D) 14.6%

Financial Statement Analysis - Test Bank

Financial Statement Analysis


32. Ardor Company's net income last year was $500,000. The company has 150,000
shares of common stock and 30,000 shares of preferred stock outstanding. There was
no change in the number of common or preferred shares outstanding during the year.
The company declared and paid dividends last year of $1.00 per share on the common
stock and $0.70 per share on the preferred stock. The earnings per share of common
stock is closest to:
A) $3.33
B) $3.19
C) $2.33
D) $3.47

33. The following information relates to Konbu Corporation for last year:
Price earnings ratio............
Dividend payout ratio........
Earnings per share .............

15
30%
$5

What is Konbu's dividend yield ratio for last year?


A) 1.5%
B) 2.0%
C) 4.5%
D) 10.0%
34. Richmond Company has 100,000 shares of $10 par value common stock issued and
outstanding. Total stockholders' equity is $2,800,000 and net income for the year is
$800,000. During the year Richmond paid $3.00 per share in dividends on its common
stock. The market value of Richmond's common stock is $24. What is the priceearnings ratio?
A) 3.0
B) 3.5
C) 4.8
D) 8.0
35. Hurst Company has 20,000 shares of common stock outstanding. These shares were
originally issued at a price of $15 per share. The current book value is $25.00 per
share and the current market value is $30.00 per share. The dividends on common
stock for the year totaled $45,000. The dividend yield ratio is:
A) 9%
B) 7.5%
C) 15%
D) 10%

Financial Statement Analysis


36. Bramble Company's net income last year was $65,000 and its interest expense was
$15,000. Total assets at the beginning of the year were $620,000 and total assets at the end of
the year were $650,000. The company's income tax rate was 40%. The company's return on
total assets for the year was closest to:
A) 11.7%
B) 10.2%
C) 12.6%
D) 11.2%

37. Dahl Company can borrow funds at 15% interest. Since the company's tax rate is 40%,
its after-tax cost of interest is only 9%. Thus, the company reasons that if it can earn
$70,000 per year before interest and taxes on a new investment of $500,000, then it
will be better off by $25,000 per year.
A) The company's reasoning is correct.
B) The company's reasoning is not correct, since the after-tax cost of interest would
be 6 percent, rather than 9%.
C) The company's reasoning is not correct, since interest is not tax-deductible.
D) The company's reasoning is not correct, since it would be worse off by $3,000
per year after taxes.
38. Bucatini Corporation is contemplating the expansion of operations. This expansion
will generate a 11% return on the funds invested. To finance this operation, Bucatini
can either issue 12% bonds, issue 12% preferred stock, or issue common stock.
Bucatini currently has a return on common stockholders' equity of 16%. Bucatini's tax
rate is 30%. In which of the financing options above is positive financial leverage
being generated?
A) none of the options generate positive financial leverage
B) the bonds
C) the common stock
D) the preferred stock

39. Consolo Corporation's net income for the most recent year was $809,000. A total of
100,000 shares of common stock and 200,000 shares of preferred stock were
outstanding throughout the year. Dividends on common stock were $2.05 per share
and dividends on preferred stock were $1.80 per share. The earnings per share of
common stock is closest to:
A) $2.44
B) $8.09
C) $4.49
D) $6.04

Financial Statement Analysis - Test Bank

Financial Statement Analysis


40. Bary Corporation's net income last year was $2,604,000. The dividend on common
stock was $2.50 per share and the dividend on preferred stock was $2.40 per share.
The market price of common stock at the end of the year was $73.50 per share.
Throughout the year, 300,000 shares of common stock and 100,000 shares of preferred
stock were outstanding. The price-earnings ratio is closest to:
A) 9.33
B) 11.89
C) 13.66
D) 8.47
41. Arntson Corporation's net income last year was $7,975,000. The dividend on common
stock was $8.20 per share and the dividend on preferred stock was $3.50 per share.
The market price of common stock at the end of the year was $59.10 per share.
Throughout the year, 500,000 shares of common stock and 200,000 shares of preferred
stock were outstanding. The dividend payout ratio is closest to:
A) 1.06
B) 0.51
C) 0.56
D) 1.29
42. Last year, Soley Corporation's dividend on common stock was $11.60 per share and
the dividend on preferred stock was $1.10 per share. The market price of common
stock at the end of the year was $54.80 per share. The dividend yield ratio is closest to:
A) 0.02
B) 0.21
C) 0.23
D) 0.91
43. Inglish Corporation's most recent income statement appears below:
Sales (all on account) ................................
Cost of goods sold .....................................
Gross margin .............................................
Selling and administrative expense ...........
Net operating income ................................
Interest expense .........................................
Net income before taxes ............................
Income taxes (30%) ...................................
Net income ................................................

$610,000
350,000
260,000
110,000
150,000
30,000
120,000
36,000
$ 84,000

The beginning balance of total assets was $560,000 and the ending balance was
$580,000. The return on total assets is closest to:
A) 18.4%

Financial Statement Analysis


B)
C)
D)

14.7%
26.3%
21.1%

44. Excerpts from Bellis Corporation's most recent balance sheet appear below:

Preferred stock .................................................


Common stock .................................................
Additional paid-in capitalcommon stock ......
Retained earnings ............................................
Total stockholders equity ...............................

Year 2
Year 1
$ 100,000 $ 100,000
300,000
300,000
370,000
370,000
480,000
390,000
$1,250,000 $1,160,000

Net income for Year 2 was $160,000. Dividends on common stock were $47,000 in
total and dividends on preferred stock were $23,000 in total. The return on common
stockholders' equity for Year 2 is closest to:
A) 9.4%
B) 13.3%
C) 12.4%
D) 14.5%
45. Data from Baca Corporation's most recent balance sheet appear below:
Preferred stock .................................................
Common stock .................................................
Additional paid-in capitalcommon stock ......
Retained earnings ............................................
Total stockholders equity ...............................

$ 100,000
400,000
360,000
580,000
$1,440,000

A total of 400,000 shares of common stock and 20,000 shares of preferred stock were
outstanding at the end of the year. The book value per share is closest to:
A) $3.35
B) $5.00
C) $1.90
D) $3.60
46. Dravis Company's working capital is $10,000 and its current liabilities are $84,000.
The company's current ratio is closest to:
A) 0.88
B) 0.12
C) 9.40
D) 1.12
47. Erascible Company has $13,000 in cash, $7,000 in marketable securities, $27,000 in

Financial Statement Analysis - Test Bank

Financial Statement Analysis


accounts receivable, $20,000 in inventories, and $30,000 in current liabilities. The
company's current assets consist of cash, marketable securities, accounts receivable,
and inventory. The company's acid-test ratio is closest to:
A) 1.57
B) 0.90
C) 1.33
D) 2.23
48. Frame Company had $160,000 in sales on account last year. The beginning accounts
receivable balance was $10,000 and the ending accounts receivable balance was
$16,000. The company's accounts receivable turnover was closest to:
A) 12.31
B) 6.15
C) 16.00
D) 10.00
49. Graber Company had $130,000 in sales on account last year. The beginning accounts
receivable balance was $18,000 and the ending accounts receivable balance was
$12,000. The company's average collection period was closest to:
A) 33.69 days
B) 42.12 days
C) 84.23 days
D) 50.54 days
50. Harold Company, a retailer, had cost of goods sold of $260,000 last year. The
beginning inventory balance was $20,000 and the ending inventory balance was
$26,000. The company's inventory turnover was closest to:
A) 5.65
B) 10.00
C) 13.00
D) 11.30
51. Ira Company, a retailer, had cost of goods sold of $160,000 last year. The beginning
inventory balance was $26,000 and the ending inventory balance was $24,000. The
company's average sale period was closest to:
A) 114.06 days
B) 54.75 days
C) 59.31 days
D) 57.03 days
52. Raatz Corporation's total current assets are $370,000, its noncurrent assets are
$660,000, its total current liabilities are $220,000, its long-term liabilities are
$410,000, and its stockholders' equity is $400,000. Working capital is:
A) $370,000

Financial Statement Analysis


B)
C)
D)

$150,000
$250,000
$400,000

53. Stubbs Corporation's total current assets are $390,000, its noncurrent assets are
$630,000, its total current liabilities are $230,000, its long-term liabilities are
$290,000, and its stockholders' equity is $500,000. The current ratio is closest to:
A) 0.62
B) 0.59
C) 1.70
D) 0.79
54. Data from Hollingworth Corporation's most recent balance sheet appear below:
Cash ...................................
Marketable securities .........
Accounts receivable ..........
Inventory ...........................
Prepaid expenses ...............
Current liabilities ...............

$12,000
$29,000
$37,000
$51,000
$20,000
$115,000

The company's acid-test ratio is closest to:


A) 0.85
B) 0.10
C) 0.68
D) 0.36
55. Eachus Corporation has provided the following data:

Accounts receivable ..........


Inventory ...........................
Sales on account ................
Cost of goods sold .............

This Year Last Year


$135,000 $119,000
$136,000 $155,000
$698,000
$429,000

The accounts receivable turnover for this year is closest to:


A) 0.88
B) 5.50
C) 5.17
D) 1.13

56. Data from Millier Corporation's most recent balance sheet and income statement

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Financial Statement Analysis


appear below:

Accounts receivable ..........


Inventory ...........................
Sales on account ................
Cost of goods sold .............

This Year Last Year


$101,000 $125,000
$183,000 $190,000
$758,000
$457,000

The average collection period for this year is closest to:


A) 48.7 days
B) 70.6 days
C) 85.6 days
D) 54.4 days
57. Laware Corporation has provided the following data:

Accounts receivable ..........


Inventory ...........................
Sales on account ................
Cost of goods sold .............

This Year Last Year


$118,000 $138,000
$180,000 $170,000
$714,000
$447,000

The inventory turnover for this year is closest to:


A) 2.55
B) 0.94
C) 2.48
D) 1.06

58. Data from Buker Corporation's most recent balance sheet and income statement
appear below:

Accounts receivable ..........


Inventory ...........................
Sales on account ................
Cost of goods sold .............

This Year Last Year


$101,000 $125,000
$155,000 $153,000
$662,000
$399,000

The average sale period for this year is closest to:


A) 142.0 days
B) 3.6 days
C) 140.9 days
D) 3.7 days

Financial Statement Analysis


59. Last year Jar Company had a net income of $290,000, income tax expense of $66,000,
and interest expense of $20,000. The company's times interest earned was closest to:
A) 10.20
B) 14.50
C) 15.50
D) 18.80
60. The times interest earned ratio of Whiting Company is 4.0. The interest expense for
the year is $15,000, and the company's tax rate is 30%. Whiting Company's after-tax
net income must be:
A) $60,000
B) $42,000
C) $31,500
D) $16,500

Financial Statement Analysis - Test Bank

Financial Statement Analysis


61. Karver Company has total assets of $180,000 and total liabilities of $130,000. The
company's debt-to-equity ratio is closest to:
A) 0.28
B) 0.72
C) 0.42
D) 2.60
62. Brewster Company's debt-to-equity ratio is 0.8. Current liabilities total $100,000 and
long term liabilities total $200,000. Brewster Company's total assets must be:
A) $375,000
B) $450,000
C) $550,000
D) $675,000
63. Boyington Corporation has provided the following data from its most recent income
statement:
Net operating income ........
Interest expense .................
Net income before taxes ....
Income taxes ......................
Net income ........................

$87,000
$49,000
$38,000
$11,000
$27,000

The times interest earned ratio is closest to:


A) 0.55
B) 0.78
C) 2.54
D) 1.78
64. Wohlfarth Corporation has provided the following data from its most recent balance
sheet:
Total assets ....................................
Total liabilities ...............................
Total stockholders equity .............
The debt-to-equity ratio is closest to:
A) 4.00
B) 3.00
C) 0.75
D) 0.33

$760,000
$570,000
$190,000