Financial Statement Analysis: Long Quiz 2

Instruction: Use Cost of Sales for Inventory turnover questions. Select your final answer by using the answer sheet
provided. Computations can be made on the vacant spaces on the questionnaire or the answer sheet.

1. The gross margin percentage is equal to:

A) (Net operating income + Operating expenses)/Sales
B) Net operating income/Sales
C) Cost of goods sold/Sales
D) Cost of goods sold/Net income

2. Earnings per share of common stock is computed by:

A) dividing net income by the average number of common and preferred shares outstanding.
B) dividing net income by the average number of common shares outstanding.
C) dividing net income minus preferred dividends by the average number of common and preferred shares
outstanding.
D) dividing net income minus preferred dividends by the average number of common shares outstanding.

3. Which of the following is true regarding the calculation of return on total assets?
A) The numerator of the ratio consists only of net income.
B) The denominator of the ratio consists of the balance of total assets at the end of the period under
consideration.
C) The numerator of the ratio consists of net income plus interest expense times the tax rate.
D) The numerator of the ratio consists of net income plus interest expense times one minus the tax rate.

4. Which of the following is not a source of financial leverage?

A) Bonds payable. C) Interest payable.
B) Accounts payable. D) Prepaid rent.

5. The book value per share of common is usually significantly different from the market value of the common
stock because of:
A) the omission of total assets from the numerator in the calculation of the book value per share.
B) the use of the matching principle in preparing financial statements.
C) the omission of the number of preferred shares outstanding in the calculation of the book value per share.
D) the use of historical costs in preparing financial statements .

6. Sale of a piece of equipment at book value for cash will:

A) increase working capital.
B) decrease the acid-test ratio.
C) decrease the debt-to-equity ratio.
D) increase net income.

7. A company's current ratio is greater than 1. Purchasing raw materials on credit would:
A) increase the current ratio.
B) decrease the current ratio.
C) increase net working capital.
D) decrease net working capital.

8. Zack Company has a current ratio of 2.5. What will be the effect of a purchase of inventory with cash on the
acid-test ratio and on working capital?
Acid-test ratio Working Capital
A) decrease decrease
B) decrease no effect
C) no effect decrease
D) no effect no effect

9. Solomon Company has a current ratio greater than 1 and an acid-test ratio less than 1. How would cash
payments to suppliers to reduce accounts payable affect these ratios?
Current ratio Quick ratio
A) Decreased Decreased
B) Decreased Increased
C) Increased Decreased
D) Increased Increased
10. Norton Inc. could improve its current ratio of 2 by:
A) paying a previously declared stock dividend.
B) writing off an uncollectible receivable.
C) selling merchandise on credit at a profit.
D) purchasing inventory on credit.

11. Bernadette Company has an acid-test (quick) ratio of 2.0. This ratio would decrease if:
A) previously declared common stock dividends were paid.
B) the company collected an account receivable.
C) the company sold merchandise on open account that earned a normal gross margin.
D) the company purchased inventory on open account.

12. Sand Company has an acid-test ratio of 0.8. Which of the following actions would improve the acid-test
ratio?
A) Collect some accounts receivable.
B) Acquire some inventory on account.
C) Sell some equipment for cash.
D) Use cash to pay off some accounts payable.

13. Assuming stable business conditions, a decrease in the accounts receivable turnover ratio could be explained
by:
A) an easing of policies with respect to the granting of credit to customers.
B) stricter policies with respect to the granting of credit to customers.
C) a speedup in collection of accounts from customers.
D) none of these.

14. Accounts receivable turnover will normally decrease as a result of:

A) the write-off of an uncollectible account against the allowance for bad debts.
B) a significant sales volume decrease near the end of the accounting period.
C) an increase in cash sales in proportion to credit sales.
D) a change in credit policy to lengthen the period for cash discounts.

15. Stern Company has 100,000 shares of common stock and 20,000 shares of preferred stock outstanding.
There was no change in the number of common or preferred shares outstanding during the year. Preferred
stockholders received dividends totaling P140,000 during the year. Common stockholders received dividends
totaling P210,000. If the dividend payout ratio was 70%, then the net income was:

16. The market price per share of Farren Co. stock at the beginning of the year was P60.00 and at the end of the
year was P72.00. Net income for the year was P48,000. Dividends to the preferred stockholders for the year
totaled P12,000, and dividends of P2.50 per share were paid on the 6,000 shares of common stock outstanding
during the ear. The price-earnings ratio at year end was:

17. Fackrell Company has provided the following data:

Common stock:
Shares outstanding .................................. 20,000
Market value, December 31 ................... P150,000
Book value, December 31 ...................... P80,000
Dividends paid ........................................ P40,000
Preferred stock, 8%, 100 par ...................P100,000
Net income ...............................................P100,000
Interest on long-term debt ......................... P10,000

The price-earnings ratio is closest to:

18. Tribble Company has provided the following data:

Sales ........................................................... P5,000,000
Interest expense ......................................... P30,000
Total assets, beginning of year .................. P185,000
Total assets, end of year ............................ P215,000
Tax rate ...................................................... 30%
Return on total assets ................................. 15.5%
Tribble Company's net income was:
19. Jense Company's return on common stockholders' equity is 16%. Midtown Bank has offered a P100,000
loan at an annual interest rate of 14%. Jense currently has 50,000 shares of common stock and 10,000 shares of
8% preferred stock outstanding. The financial leverage of the loan would be:
A) positive. C) neither positive nor negative.
B) negative. D) cannot be determined with the data given.

20. Nelson Company's current liabilities are P50,000, its long-term liabilities are P150,000, and its working
capital is P80,000. If Nelson Company's debt-to-equity ratio is 0.32, its total long-term assets must equal:

21. Selected data from Perry Corporation's financial statements follow:

Current ratio .................................................................... 2.0
Acid-test ratio .................................................................. 1.5
Current liabilities ............................................................. P120,000
Inventory turnover ........................................................... 8
Gross profit margin as a percentage of sales ................... 40%
The company has no prepaid expenses and there were no changes in inventories during the year. Perry
Corporation's net sales for the year were:

22. The Seabury Company has a current ratio of 3.5 and an acid-test ratio of 2.8. Inventory equals P49,000 and
there are no prepaid expenses. Seabury Company' current liabilities must be:

23. A company's current ratio is 2. According to the fine print in its bond agreements, the company cannot
allow its current ratio to fall below 1.5 without defaulting on the debt and going into bankruptcy. If current
liabilities are P200,000, what is the maximum amount of additional new short-term debt the company can take
on without defaulting if the new debt is used to finance new current assets?

24. Windham Company has current assets of P400,000 and current liabilities of P500,000. Windham
Company's current ratio would be increased by:
A) the purchase of P100,000 of inventory on account.
B) the payment of P100,000 of accounts payable.
C) the collection of P100,000 of accounts receivable.
D) refinancing a P100,000 long-term loan with short-term debt.

25. The Carney, Inc. has sales of P5 million per year (all credit) and an average collection period of 35 days.
What is its average amount of accounts receivable outstanding?

26. Peavey Company's accounts receivable were P430,000 at the beginning of the year and P480,000 at the end
of the year. Cash sales were P175,000 for the year. The accounts receivable turnover was 5. Peavey Company's
total sales for the year were:

27. The following information is available for Weston Company:

Year 2 Year 1
Sales ............................................... P1,800,000 P1,400,000
Inventory, year-end ....................... P210,000 P190,000
Bad debt expense ........................... P10,000 P12,000
Cost of goods sold ......................... P920,000 P840,000
The inventory turnover for Year 2 is:

28. Neelty Corporation has interest expense of P16,000, sales of P600,000, a tax rate of 30%, and after-tax net
income of P56,000. What is the firm's times interest earned ratio?
Use the following to answer questions 29 to 34:
Financial statements of Sawyer Corporation are reproduced below. The market price of Sawyer's common stock
was P20 per share on November 30, Year 2.
Sawyer Corporation
Statement of Financial Position
As of November 30
(in thousands)

Year 2 Year 1
Cash 3,000 3,000
Short Term Marketable Securities 1,000 1,000
Accounts Receivable, net 14,000 11,000
Merchandise Inventory 24,000 16,000
Total Current Assets 42,000 30,000

Property, Plant, and Equipment 68,000 60,000

Long Term Investments 10,000 10,000
Total Assets 120,000 100,000

Accounts Payable 5,000 4,000

Wages Payable 1,000 1,000
Total Current Liabilities 6,000 5,000

Bonds Payable, 10% 20,000 20,000

Total Liabilities

Common Stock, no par, 10,000,000 shares 25,000 25,000

Retained earnings 69,000 50,000
Total Stockholders’ Equity 120,000 100,000

Sawyer Corporation
Statement of Income
For the Year Ended November 30, Year 2
(in thousands)
Sales (all on credit) ............................................. P200,000
Cost of goods sold .............................................. 120,000
Gross margin ...................................................... 80,000
Operating expenses ............................................ 38,000
Net operating income ......................................... 42,000
Interest expense .................................................. 2,000
Net income before income taxes ........................ 40,000
Income tax expense ............................................ 15,000
Net income ......................................................... P 25,000

29. Sawyer Corporation's current ratio as of November 30, Year 2, is:

30. Sawyer Corporation's acid-test (quick) ratio as of November 30, Year 2, is:

31. Sawyer Corporation's accounts receivable turnover for the year ended November 30, Year 2, is:

32. Sawyer Corporation's merchandise inventory turnover for the year ended November 30, Year 2, is:

33. Sawyer Corporation's times interest earned for the year ended November 30, Year 2, is:

34. Sawyer Corporation's return on stockholders' equity for the year ended November 30, Year 2, is:
Name: ___________________________________________________
Financial Management 1: Financial Statement Analysis
Long Quiz 2

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