Exam 2: A Further Look at Financial Statements

What do these classes of ratios measure? (a) Liquidity ratios. (b) Profitability ratios. (c) Solvency ratios.

The following information is available from the annual reports of Marin Company and Nance Company. Instructions (a) For each company, compute the following ratios: 1. Current ratio 2. Debt to assets ratio 3. Earnings per share (b) Based on your calculations, discuss the relative liquidity, solvency, and profitability of the two companies.

Solvency ratios measure the short-term ability of the company to pay its maturing obligations.

Many bonus plans are based upon the attainment of some specified short-term goal. For example, sales personnel at Metal Crafters are given a bonus of 5% of the amount by which their sales exceed $100,000. Sometimes the attainment of these goals is achieved by methods detrimental to the long-term needs of the company. Sales representative Sara Crown, for example, finds herself tempted to court certain customers that place large orders, even though she knows they may not be able to pay. She complains that the bonus system itself is unethical. Required: Is a bonus system like the one at Metal Crafters unethical? Explain.

Long-term creditors consider a high free cash flow amount an indication of solvency.

The following information is available for Bradshaw Corporation and Newell Corporation: Based on this information, what is the amount of Bradshaw's earnings per share (rounded to two decimals) for 2014?

The following data are taken from the financial statements of Edington Company. The data are in alphabetical order. Accounts payable \ 28,000 Net sales 500,000 Accounts receivable 65,000 Other current liabilities 20,000 Average common shares out. 20,000 Salaries and wages payable 7,000 Cash 56,000 Stockholders' equity 135,000 Gross profit 190,000 Total assets 300,000 Net income 50,000 Instructions Compute the following: (a) Current ratio. (c) Earnings per share. (b) Working capital. (d) Debt to assets ratio.

Which one of the following is not an enhancing quality of useful information?

Both investors and creditors have an interest in a company's ability to generate favorable cash flows.

Ratios that measure the income or operating success of a company for a given period of time are

Relevance and cost are two constraints in accounting.

These items are taken from the financial statements of Drew Corporation for 2014. Retained earnings (beginning of year) \ 33,000 Utilities expense 2,000 Equipment 56,000 Accounts payable 15,300 Cash 15,900 Salaries and wages payable 3,000 Common stock 13,000 Dividends 14,000 Service revenue 78,000 Prepaid insurance 3,500 Maintenance and repairs expense 1,800 Depreciation expense 3,300 Accounts receivable 14,200 Insurance expense 2,200 Salaries and wages expense 47,000 Accumulated depreciation-equipment 17,600 Instructions Prepare an income statement and a retained earnings statement for the year ended December 31, 2014 and a classified balance sheet as of December 31, 2014.

Reporting a net income of $95,000 will

A material item is one that is likely to influence an investor's decision.

At December 31, 2014 Lowery Company had retained earnings of $2,384,000. During 2014 they issued stock for $98,000, and paid dividends of $34,000. Net income for 2014 was $402,000. The retained earnings balance at the beginning of 2014 was

The convention of consistency pertains to the use of the same accounting principles by firms in the same industry.

Trademarks would appear in which balance sheet section?

The monetary unit assumption has led to an increase in the notes to financial statements.

Current assets divided by current liabilities is known as the

The following information is available for Mullen Company for the year ended December 31, 2014: Accounts payable 4,700 Stock investments 8,400 Accumulated depreciation, equipment 4,000 Retained earnings 16,000 Common stock 4,800 Intangible assets 2,500 Notes payable (due in 5 years) 6,000 Accounts receivable 1,500 Cash 2,600 Debt investments 3,000 Land 10,000 Equipment 7,500 Instructions Use the above information to prepare a classified balance sheet for the year ended December 31, 2014.