Exam 14: Financial Statement Analysis

The times interest earned ratio of McHugh Company was 4.5 times.The interest expense for the year was $20,000,and the company's tax rate was 40%.What was the company's net income?

Financial statements for Marcial Company appear below: -Marcial Company's working capital (in thousands of dollars)at the end of Year 2 was closest to which of the following?

If a company has a current ratio greater than 1.0 to 1,repaying a short-term note payable will increase the current ratio.

Financial statements for Lowe Company appear below:

A company's current ratio and acid-test ratios are both greater than 1.0 to 1.If obsolete inventory is written off,what would be the effect?

Financial statements for Sarosa Company appear below: $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Sarosa Company $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Statement of Financial Position $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ December 31, Year 2 and Year 1 $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ (dollars in thousands) Current assets: Cash and marketable securities Accounts receivable, net Inventory Prepaid expenses Total current assets Noncurrent assets: Plant \& equipment, net Total assets Year 2 \ 150 \ 190 \ 150 \ 40 \ 530 \1 ,990 \2 ,520 Year 1 \ 120 \ 160 \ 150 \ 40 \ 470 \ 1.980 \ 2.450 Current liabilities: Accounts payable Accrued liabilities Notes payable, short term Total current liabilities Noncurrent liabilities Bonds payable Total liabilities Shareholders' equity: Preferred shares, \ 20 par, 10\% Common shares, \ 10 par Additional paid-in capital-common shares Retained earnings 'Total shareholders' equity Total liabilities \& shareholders' equity \ 140 \ 170 \ 10 \ 40 \ 190 \ 200 \ 340 \ 410 \ 370 \ 400 \ 710 \ 810 \ 100 \ 100 \ 220 \ 220 \ 250 \ 250 \ 1.240 \ 1.070 \ 1.810 \ 1.640 \ 2.520 \ 2,450 $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Sarosa Company $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Income Statement $\quad$$\quad$ For the Year Ended December 31 , Year 2 $\quad$$\quad$$\quad$$\quad$$\quad$ (dollars in thousands) Sales (all on account) Cost of goods sold Gross margin Operating expenses Net opcrating income Interest expense Net income before taxes Income taxes (30 \%) Net income \ 1,870 \ 1,300 \ 570 \ 220 \ 350 \ 40 \ 310 \ 93 \ 217 Required: a)Calculate Sarosa Company's return on total assets for Year 2. b)Calculate Sarosa Company's return on common shareholders' equity for Year 2. c)Financial leverage was positive for Year 2.Why? d)Assume all current liabilities are interest free and that the interest expense of $40 is for the bonds payable. (i)Calculate the dollar amount of the financial leverage (in $1,000) (ii)Allocate the dollar amount of the financial leverage to the following sources of financing: Preferred Shares,Bonds Payable,and Current Liabilities (rounded to the nearest $1,000)

Financial statements for Laroche Company appear below: Shareholders' Equity: Total dividends during Year 2 were $166,000, of which $10,000 were preferred dividends. The market price of a common share on December 31, Year 2 was $150. -Laroche Company's dividend payout ratio for Year 2 was closest to which of the following?

Financial statements for Praeger Company appear below: $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Praeger Company $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Statement of Financial Position $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ December 31 , Year 2 and Year 1 $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ (dollars in thousands) Year 2 Year1 Current assets: Cash and marketable securities \ 100 \ 100 Accounts receivable, net 170 170 Inventory 110 110 Prepaid expenses Total current assets 440 440 Noncurrent assets: Plant \& equipment, net 2020 1990 Total assets \2 460 \2 430 Current liabilities: Accounts payable \ 140 \ 170 Accrued liabilities 70 50 Notes payable, short term Total current liabilities 310 340 Nonourrent liabilities: Bonds payable 500 500 Total liabilities 810 840 Shareholders' equity: Preferred shares, \5 par, 5\% 100 100 Common shares, \5 par 200 200 Additional paid-in capital-common 200 200 shares Retained earnings Total shareholders' equity \ 1590 Total liabilities \& shareholders' equity \2 460 \2 430 $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Praeger Company $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Income Statement $\quad$$\quad$$\quad$ For the Year Ended December 31 , Year 2 $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ (dollars in thousands) Sales (all on account) \ 1,100 Cost of goods sold Gross margin Operating expenses Net operating income 200 Interest expense Net income before taxes 150 Income taxes (30\%) Net income \ 105 Dividends during Year 2 totalled $45,000,of which $10,000 were preferred dividends.The market price of a common share on December 31,Year 2 was $30. The preferred shares are convertible to common shares on the basis of 2 common shares for each preferred share. Required: Calculate the following for Year 2: a)Basic earnings per common share. b)Fully diluted earnings per common share. c)Price-earnings ratio (use basic earnings per share). d)Dividend payout ratio (use basic earnings per share). e)Dividend yield ratio. f)Return on total assets. g)Return on common shareholders' equity. h)Book value per share. i)Working capital. j)Current ratio. k)Acid-test (quick)ratio. l.)Accounts receivable turnover. m)Average collection period (age of receivables). n)Inventory turnover. o)Average sale period (turnover in days). p)Times interest earned. q)Debt-to-equity ratio.

Financial statements for Narita Company appear below: -Narita Company's debt-to-equity ratio at the end of Year 2 was closest to which of the following?

Selected data from Sheridan Corporation's year-end financial statements are presented below.The difference between average and ending inventory is immaterial. Current Ratio 2.0 Aoid-Test Ratio 1.5 Current Liabilities \ 120,000 Inventory Turnover 8 times Gross Profit Margin 40\% Prepaid Expenses \ 0 What were Sheridan's sales for the year?

Only credit sales (i.e.,sales on account)are included in the computation of the accounts receivable turnover.

Financial statements for Qualle Company appear below:

M.K.Berry is the managing director of CE Ltd.a small,family-owned company that manufactures cutlery.His company belongs to a trade association that publishes a monthly magazine.The latest issue of the magazine contains a very brief article based on the analysis of the accounting statements published by the 40 companies that manufacture this type of product.The article contains the following table: Average for All Companies Return on Shareholders' Equity In the Industry Return on Total Assets 33\% Gross Margin Percentage 29\% Current Ratio 30\% Average Sale Period 1.9:1 Average Collection Period 37 days 41 days CE Ltd's latest financial statements are as follows: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ CE Lid. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ Income Statement $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ for the year ended 31 October $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ (in thousands) Sales £900 Cost of Goods Sold £720 Gross Margin £180 Selling and Administrative Expenses £55 Interest £15 Net Income £110 The country in which the company operates has no corporate income tax.No dividends were paid during the year.All sales are on account. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ CE Lid. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\quad$ Balance Sheets $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\quad$$\quad$$\quad$ as of 31 October $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\quad$ (in thousands) This Year Last Year Current assets: Cash £5 £20 Accounts receivable 120 110 Inventories 96 80 Noncurrent assets: Total assets Current liabilities: Accounts payable £147 £206 Noncurrent liabilitics: Bonds payable 150 150 Common shares 100 100 Retained earnings Total liabilities and £721 shareholders' equity £670 Required: a)Calculate each of the ratios listed in the magazine article for this year for CE,and comment briefly on CE Ltd.'s performance in comparison to the industry averages. b)Explain why it could be misleading to compare CE Ltd.'s ratios with those taken from the article.

Selected financial data for Barnstable Company appear below: -Between Year 1 and Year 2,what happened to the times interest earned?

Dragin Company's working capital is $36,000,and its current liabilities are $61,000.The company's current ratio is closest to which of the following?

Fulton Company's price-earnings ratio is 8.0,and the market price of its common shares is $32.The company has 3,000 shares of preferred shares outstanding,with each share receiving a dividend of $3.What is the earnings per common share?

The market price of XYZ Company's common shares dropped from $25 to $21 per share.The dividend paid per share remained unchanged.How would the company's dividend payout ratio change?

Financial statements for Laroche Company appear below: Shareholders' Equity: Total dividends during Year 2 were $166,000, of which $10,000 were preferred dividends. The market price of a common share on December 31, Year 2 was $150. -Laroche Company's book value per share at the end of Year 2 was closest to which of the following?

Lisa Inc.'s balance sheet appears below: The company's sales for the year were $300,000, its cost of goods sold was $220,000, and its net income was $35,000. All sales were on credit. Dividends paid on preferred shares for the year were $5,000. -Lisa Inc.'s inventory turnover for Year 2 was closest to which of the following?

Selected financial data for Barnstable Company appear below: -For Year 2,what was the gross margin as a percentage of sales?