Exam 14: Financial Statement Analysis

When you are interpreting financial ratios, it is useful to compare a company's ratios to the same ratios from a prior period or to the ratios of another company in the same industry.

In computing the return on total assets, interest expense is subtracted from net income before dividing by average total assets.

Match each ratio that follows to its use (items a-h). Items may be used more than once. -price-earnings (P/E) ratio

The following information pertains to Diane Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Assets Cash and short-term investments \ 30,000 Accounts receivable (net) 20,000 Inventory 15,000 Property, plant, and equipment 185,000 Total assets \ 250,000 Liabilities and Stockholders' Equity Current liabilities \ 45,000 Long-term liabilities 70,000 Common stock 80,000 Retained earnings 55,000 Total liabilities and stockhol ders' equity \ 250,000 Income Statement Sales \ 85,000 Cost of goods sold 45,000 Gross margin \ 40,000 Operating expenses (15,000) Interest expense (5,000) Net income \ 20,000 Number of shares of common stock outstanding 6,000 Market price of common stock \ 20 Total dividends paid \ 9,000 Cash provided by operations \ 30,000 -What is the return on total assets for Diane Company?

An unusual item is often related to current operations and occurs infrequently.

The following information pertains to Newman Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Assets Cash and short-term investments \ 40,000 Accounts receivable (net) 30,000 Inventory 25,000 Property, plant, and equipment 215,000 Total Assets \ 310,000 Liabilities and Stockholders' Equity Current liabilities \ 60,000 Long-term liabilities 95,000 Common stock, no par 80,000 Retained earnings 75,000 Total liabilities and stockhol ders' equity \ 310,000 Income Statement Sales \ 90,000 Cost of goods sold 45,000 Gross margin \ 45,000 Operating expenses 20,000 Net income \ 25,000 Number of shares of common stock 6,000 Market price of common stock \ 40 Dividends per share \ 1.00 Cash provided by operations \ 40,000 What is the return on total assets for this company?

Current position analysis is used by short-term creditors to assess how quickly they will be repaid.

The tendency of the return on stockholders' equity to vary disproportionately from the return on total assets is because of

Match each definition that follows with the term (a-h) it defines. -focuses on a company's ability to generate net income

Accumulated other comprehensive income is presented in the financial statements

The following information pertains to Diane Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Assets Cash and short-term investments \ 30,000 Accounts receivable (net) 20,000 Inventory 15,000 Property, plant, and equipment 185,000 Total assets \ 250,000 Liabilities and Stockholders' Equity Current liabilities \ 45,000 Long-term liabilities 70,000 Common stock 80,000 Retained earnings 55,000 Total liabilities and stockhol ders' equity \ 250,000 Income Statement Sales \ 85,000 Cost of goods sold 45,000 Gross margin \ 40,000 Operating expenses (15,000) Interest expense (5,000) Net income \ 20,000 Number of shares of common stock outstanding 6,000 Market price of common stock \ 20 Total dividends paid \ 9,000 Cash provided by operations \ 30,000 -What is the dividend yield for Diane Company?

The purpose of an audit is to

Gallant Company reported net income of $2,500,000. The income statement included a $200,000 loss on discontinued operations, after applicable income tax. There were 100,000 shares of $10 par common stock and 40,000 shares of 4% preferred stock of $100 par outstanding throughout the current year. ​ Prepare the earnings per share section of Gallant Company's income statement.

A balance sheet that displays only component percentages is a

Why would you or why wouldn't you compare an organization like Ford Motor Company to the local car dealer "Johnson City Ford/Lincoln/Mercury" using vertical and horizontal analysis?

The relationship of $325,000 to $125,000, expressed as a ratio, is

Match each definition that follows with the term (a-h) it defines. -an analysis of a company's ability to pay its current liabilities

A company with working capital of $720,000 and a current ratio of 2.2 pays a $125,000 short-term liability. The amount of working capital immediately after payment is

Comparative financial statements are designed to compare the financial statements of two or more corporations.

Abigail Company reports the following: Net income \ 295,000 Preferred dividends 30,000 Average stockhol ders' equity 1,000,000 Average common stockholders' equity 700,000 ​ Determine the (a) return on stockholders' equity, and (b) return on common stockholders' equity. Round your answer to one decimal place.