Question 1

The return on assets ratio

Accepted Answer

A) considers the investment made by all creditors and stockholders. 
B) is a measure of the liquidity of a company. 
C) is based on average stockholders' equity as compared to net income for the period. 
D) reflects investments made only by the creditors of a company. 
A) considers the investment made by all creditors and stockholders. 
B) is a measure of the liquidity of a company. 
C) is based on average stockholders' equity as compared to net income for the period. 
D) reflects investments made only by the creditors of a company. A

Question 2

Kim Chen Corporation is a wholesaler of scuba gear.During 2018,Chen expanded its retail business by adding over 50 dive shops.The following information is obtained from the comparative financial statements included in the company's 2018 annual report (all amounts are in thousands of dollars):

Accepted Answer

?
 1)  A.
$\begin{array}{l}
\text { Total Liabilities/Total Stockholders' Equity = } \
2018: \$ 26,000 / \$ 34,000=0.76 \text { to } 1 \
2017: \$ 18,000 / \$ 38,000=0.47 \text { to } 1
\end{array}$

B. (Net Income + Interest Expense + Income Tax Expense)/Interest Expense $=$
$2018 : ( \$ 6,000 + \$ 3,400 + \$ 12,600 ) / \$ 3,400 = 6.47$ to 1
$2017 : ( \$ 15,000 + \$ 3,200 + \$ 18,100 ) / \$ 3,200 = 11.34$ to 1
 ?
 2)
Both the debt-to-equity ratio and the times interest earned ratio are indicators of solvency. The debt-to-equity ratio indicates the company's ability to pay liabilities, which is about 76 cents of every doll ar of net worth for 2018 . The times interest eamed ratio indicates the company earns about 6.5 times as much as the amount of interest expense incurred. The times interest earned ratio has declined substantially from 2017 to 2018 .
3)
The debt service coverage ratio is an indicator of the company's ability to pay both principal and interest. For this reason, it is a better indicator of overall solvency. The cash flow from operation to capital expenditures ratio is help ful in that it indicates the company's ability to generate cash instead of accrual basis eamings.

Question 3

The following information is available from the balance sheets at the end of 2018 and 2017 for Riverside Company:
?
 $\begin{array}{lrr}
& \underline{2018}& \underline{2017}\
\text { Accounts payable } & \$ 80,000 & \$ 40,000 \
\text { Accrued liabilities } & 65,000 & 25,000 \
\text { Taxes payable } & 10,000 & 20,000 \
\text { Short-term notes payable } & 0 & 60,000 \
\text { Bonds payable due within next year } & 200,000 & 200,000\
\text { Total current liabilities } & \underline{ \$ 355,000 }&  \underline{\$ 345,000 }\
\text { Bonds payable } & \underline{ \$ 800,000} & \underline{ \$ 300,000} \
\text { Common stock } \$ 5 \text { par } & \$ 1,000,000 & \$ 1,000,000\
 \text { Retained earnings } & \underline{ 695,000}& \underline{55,000} \
 \text { aolders' equity } &  \underline{\$ 1,695,000}& \underline{\$1,055,000}\
 \text { Total liabilities and stockhol ders' equity } & \$ 2,850,000 &\$1,700,000\ 
\end{array}$
 Net income for 2018 and 2017 was $340,000 and $300,000,respectively.Answer the following:
?
 $$\text { A) Calculate the return on common stockholders' equity ratio for } 2018 \text {. }$$ ?
 $$\text { B) What information is provided to users with the cal culation in part } ( A ) \text { ? Explain. }$$ C) What is the difference between the return on stockholders' equity ratio and the return on assets ratio?

Accepted Answer

A) (Net Income - Preferred Dividends)/Average Common Stockholders' Equity = $( \$ 340,000 - \$ 0 ) / [ ( \$ 1,695,000 + \$ 1,055,000 ) / 2 ] = 24.7 \%$
B) This ratio prowides the return (eamings percentage) provided by only the investments from common stockholders. It indicates that the company earned 24.7 cents on every dollar invested by stockholders.
C) The return on assets ratio provides the return provided by the stockholders and creditors. The retum on common stockhol ders' equity ratio indicates the return provided by common stockholders only.

Question 4

The current and quick ratios have two limitations.These ratios

Accepted Answer

A) emphasize the ineffectiveness of analysts' calculations and focus on liquid assets at a point in time instead of a period of time. 
B) focus on cash instead of working capital,and they represent a point in time instead of covering a period of time. 
C) focus on working capital instead of cash,and they represent a point in time instead of covering a period of time. 
D) are ignored by most creditors and focus on working capital instead of cash. 
A) emphasize the ineffectiveness of analysts' calculations and focus on liquid assets at a point in time instead of a period of time. 
B) focus on cash instead of working capital,and they represent a point in time instead of covering a period of time. 
C) focus on working capital instead of cash,and they represent a point in time instead of covering a period of time. 
D) are ignored by most creditors and focus on working capital instead of cash.

Question 5

Presented below are selected data from the financial statements of Parade Corp. $\begin{array}{lrr}&2017&2018\
\text { Net income } & \$ 150,000 & \$ 123,000 \
\text { Weighted average number of common shares outstanding } & 105,000 & 95,000 \
\text { Market price per share of common stock at the end of the year } & \$ 12.00 & \$ 10.00
\end{array}$The price/earnings ratio for 2018 is

Accepted Answer

A) 0.80 to 1. 
B) 1.43 to 1. 
C) 8.39 to 1. 
D) 12.50 to 1. 
A) 0.80 to 1. 
B) 1.43 to 1. 
C) 8.39 to 1. 
D) 12.50 to 1.

Question 6

Knife Corp.
Use the selected data presented below from the financial statements of Knife Corp.for 2018 and 2017 to answer the questions that follow.
​
 $\begin{array}{lrr}&2018&2017\
\text { Net income } & \$ 110,000 & \$ 123,000 \
\text { Cash dividends paid on preferred stock } & \$ 12,000 & \$ 15,000 \
\text { Cash dividends paid on common stock } & \$ 42,000 & \$ 38,000 \
\text { Weighted average number of common shares outstanding } & 105,000 & \$ 5,000 \
\text { Market price per share of common stock at the end of the year } & \$ 16.00 & \$ 13.00
\end{array}$ ​
-Refer to the data for Knife Corp.
​
Required
(A)Calculate earnings per share for 2018 for Knife.Why is this considered one of the most quoted ratios for public companies? Which investors,common or preferred or both,desire this information?
​
(B)Calculate the price/earnings ratio for 2018 for Knife.Why is this ratio important to investors? Explain.

Accepted Answer

(A)(Net Income - Preferred Dividends)/We

Question 7

A nonbusiness entity would be particularly concerned about its

Accepted Answer

A) earnings per share. 
B) price/earnings ratio. 
C) liquidity. 
D) income tax rate. 
A) earnings per share. 
B) price/earnings ratio. 
C) liquidity. 
D) income tax rate.

Question 8

A high P/E ratio always indicates that a stock is overpriced by the market.

Accepted Answer

A) True 
 B)False

Question 9

Vertical analysis is a comparison of financial statement items for a single company over a period of time.

Accepted Answer

A) True 
 B)False

Question 10

Trend analysis is analysis

Accepted Answer

A) of dollar changes and percentage changes over several years. 
B) in which all items are presented as a percentage of one selected item on a financial statement. 
C) in which a statistic is calculated for the relationship between two items on a single financial statement or for two items on different financial statements. 
D) of all ratios that increased or decreased over past accounting periods. 
A) of dollar changes and percentage changes over several years. 
B) in which all items are presented as a percentage of one selected item on a financial statement. 
C) in which a statistic is calculated for the relationship between two items on a single financial statement or for two items on different financial statements. 
D) of all ratios that increased or decreased over past accounting periods.

Question 11

Your supervisor asks you to compare the company's results for the year,as measured by various ratios,with one of the published surveys that arranges information by industry classification.What difficulties might you encounter when making comparisons using industry standards?

Accepted Answer

Published financial statements,as well a

Question 12

What situations could cause a decrease in the current ratio,but an increase in the acid-test ratio? If this happens,is management to be commended or is a problem evident? Explain

Accepted Answer

The current ratio is comprised of curren

Question 13

A company with a capital structure that shifts more toward debt financing will appear to be in a stronger position to pay interest and any principal amount that may be maturing by using its cash flows generated by operating activities.

Accepted Answer

A) True 
 B)False

Question 14

Moonbeam Gift Shop's inventory turned over six times during the year.Similar gift shops have an inventory turnover equal to 12 times per year.What might explain Moonbeam's state of inventory management?

Accepted Answer

A) Moonbeam sold too much inventory during the year. 
B) Moonbeam needs to increase sales and decrease the amount of inventory on hand. 
C) Moonbeam is performing twice as well as its competitors. 
D) Moonbeam should increase the amount of goods on hand to accommodate the additional inventory demand. 
A) Moonbeam sold too much inventory during the year. 
B) Moonbeam needs to increase sales and decrease the amount of inventory on hand. 
C) Moonbeam is performing twice as well as its competitors. 
D) Moonbeam should increase the amount of goods on hand to accommodate the additional inventory demand.

Question 15

The following items appear on the balance sheet of The Piano Company at the end of 2018 and 2017:$\begin{array}{lrr}&2018&2017\
\text { Current assets } & \$ 6,000 & \$ 3,000 \
\text { Long-term assets } & 7,000 & 4,000 \
\text { Current liabilities } & 2,000 & 3,000 \
\text { Long-term liabilities } & 7,000 & 0 \
\text { Stockhol ders' equity } & 4,000 & 4,000
\end{array}$ Between 2017 and 2018,

Accepted Answer

A) The Piano Company's debt-to-equity ratio and current ratio both increased. 
B) The Piano Company's debt-to-equity ratio and current ratio both decreased. 
C) The Piano Company's debt-to-equity ratio increased,and its debt-to-total assets ratio decreased. 
D) The Piano Company's debt-to-equity ratio decreased,and its debt-to-total assets ratio increased. 
A) The Piano Company's debt-to-equity ratio and current ratio both increased. 
B) The Piano Company's debt-to-equity ratio and current ratio both decreased. 
C) The Piano Company's debt-to-equity ratio increased,and its debt-to-total assets ratio decreased. 
D) The Piano Company's debt-to-equity ratio decreased,and its debt-to-total assets ratio increased.

Question 16

What numerators are used in the computation of the following ratios?

$\begin{array}{ll}\text { Inventory turnover ratio }&\text { Accounts receivable turnover ratio }\
a.\text { Cost of Goods Sold } & \text { Cost of Goods Sold } \
b.\text { Net Credit Sales } & \text { Net Credit Sales } \
c.\text { Net Credit Sales } & \text { Cost of Goods Sold } \
d.\text { Cost of Goods Sold } & \text { Net Credit Sales }
\end{array}$

Accepted Answer

The answer of What numerators are used in the computation...

Question 17

Which of the following solvency ratios is the best measure of a company's ability to pay interest and maturing principal amounts on its long-term debt?

Accepted Answer

A) Debt-to-equity ratio 
B) Times interest earned ratio 
C) Debt service coverage ratio 
D) Earnings per share 
A) Debt-to-equity ratio 
B) Times interest earned ratio 
C) Debt service coverage ratio 
D) Earnings per share

Question 18

All line items in common-size comparative income statements are stated as a percentage of net income.

Accepted Answer

A) True 
 B)False

Question 19

Mother Nature Supplies
Following are selected data from the financial statements of Mother Nature Supplies:
​
 $\begin{array}{lrr}&2018&2017\
\text { Accounts receivable } & \$ 60,000 & \$ 38,000 \
\text { Merchandise inventory } & 12,000 & 16,000 \
\text { Total assets } & 450,000 & 380,000 \
\text { Net sales } & 380,000 & 270,000 \
\text { Cost of goods sold } & 160,000 & 210,000
\end{array}$ ​
-Refer to the data for Mother Nature Supplies. 
Which of the following results would be found through a vertical analysis of the balance sheet or the income statement of Mother Nature Supplies?

Accepted Answer

A) Accounts receivable increased $22,000 during 2018. 
B) Total assets increased $70,000 during 2018. 
C) Cost of goods sold increased $50,000,or 23.8%,during 2018. 
D) Gross profit is 57.9% of net sales for 2018. 
A) Accounts receivable increased $22,000 during 2018. 
B) Total assets increased $70,000 during 2018. 
C) Cost of goods sold increased $50,000,or 23.8%,during 2018. 
D) Gross profit is 57.9% of net sales for 2018.

Question 20

Which profitability ratio requires the use of earnings per share in its calculation?

Accepted Answer

A) Price/earnings ratio 
B) Return on common stockholders' equity 
C) Dividend yield ratio 
D) Profit margin 
A) Price/earnings ratio 
B) Return on common stockholders' equity 
C) Dividend yield ratio 
D) Profit margin

The return on assets ratio

Kim Chen Corporation is a wholesaler of scuba gear.During 2018,Chen expanded its retail business by adding over 50 dive shops.The following information is obtained from the comparative financial statements included in the company's 2018 annual report (all amounts are in thousands of dollars):

The current and quick ratios have two limitations.These ratios

A nonbusiness entity would be particularly concerned about its

A high P/E ratio always indicates that a stock is overpriced by the market.

Vertical analysis is a comparison of financial statement items for a single company over a period of time.

Trend analysis is analysis

Your supervisor asks you to compare the company's results for the year,as measured by various ratios,with one of the published surveys that arranges information by industry classification.What difficulties might you encounter when making comparisons using industry standards?

What situations could cause a decrease in the current ratio,but an increase in the acid-test ratio? If this happens,is management to be commended or is a problem evident? Explain

A company with a capital structure that shifts more toward debt financing will appear to be in a stronger position to pay interest and any principal amount that may be maturing by using its cash flows generated by operating activities.

Moonbeam Gift Shop's inventory turned over six times during the year.Similar gift shops have an inventory turnover equal to 12 times per year.What might explain Moonbeam's state of inventory management?

The following items appear on the balance sheet of The Piano Company at the end of 2018 and 2017: 2018 2017 Current assets \ 6,000 \ 3,000 Long-term assets 7,000 4,000 Current liabilities 2,000 3,000 Long-term liabilities 7,000 0 Stockhol ders' equity 4,000 4,000 Between 2017 and 2018,

What numerators are used in the computation of the following ratios? Inventory turnover ratio Accounts receivable turnover ratio a. Cost of Goods Sold Cost of Goods Sold b. Net Credit Sales Net Credit Sales c. Net Credit Sales Cost of Goods Sold d. Cost of Goods Sold Net Credit Sales

Which of the following solvency ratios is the best measure of a company's ability to pay interest and maturing principal amounts on its long-term debt?

All line items in common-size comparative income statements are stated as a percentage of net income.

Which profitability ratio requires the use of earnings per share in its calculation?

Accounting As a Form of Communication

Financial Statements and the Annual Report

Processing Accounting Information

Income Measurement and Accrual Accounting

Inventories and Cost of Goods Sold

Cash and Internal Control

Receivables and Investments

Operating Assets: Property, Plant, and Equipment, and Intangibles

Current Liabilities, Contingencies, and the Time Value of Money

Long-Term Liabilities

Stockholders Equity

The Statement of Cash Flows

International Financial Reporting Standards

Filters

Exam 13: Financial Statement Analysis

The return on assets ratio

Kim Chen Corporation is a wholesaler of scuba gear.During 2018,Chen expanded its retail business by adding over 50 dive shops.The following information is obtained from the comparative financial statements included in the company's 2018 annual report (all amounts are in thousands of dollars):

The current and quick ratios have two limitations.These ratios

A nonbusiness entity would be particularly concerned about its

A high P/E ratio always indicates that a stock is overpriced by the market.

Vertical analysis is a comparison of financial statement items for a single company over a period of time.

Trend analysis is analysis

Your supervisor asks you to compare the company's results for the year,as measured by various ratios,with one of the published surveys that arranges information by industry classification.What difficulties might you encounter when making comparisons using industry standards?

What situations could cause a decrease in the current ratio,but an increase in the acid-test ratio? If this happens,is management to be commended or is a problem evident? Explain

A company with a capital structure that shifts more toward debt financing will appear to be in a stronger position to pay interest and any principal amount that may be maturing by using its cash flows generated by operating activities.

Moonbeam Gift Shop's inventory turned over six times during the year.Similar gift shops have an inventory turnover equal to 12 times per year.What might explain Moonbeam's state of inventory management?

The following items appear on the balance sheet of The Piano Company at the end of 2018 and 2017: 2018 2017 Current assets \ 6,000 \ 3,000 Long-term assets 7,000 4,000 Current liabilities 2,000 3,000 Long-term liabilities 7,000 0 Stockhol ders' equity 4,000 4,000 Between 2017 and 2018,

What numerators are used in the computation of the following ratios? Inventory turnover ratio Accounts receivable turnover ratio a. Cost of Goods Sold Cost of Goods Sold b. Net Credit Sales Net Credit Sales c. Net Credit Sales Cost of Goods Sold d. Cost of Goods Sold Net Credit Sales

Which of the following solvency ratios is the best measure of a company's ability to pay interest and maturing principal amounts on its long-term debt?

All line items in common-size comparative income statements are stated as a percentage of net income.

Which profitability ratio requires the use of earnings per share in its calculation?

Accounting As a Form of Communication

Financial Statements and the Annual Report

Processing Accounting Information

Income Measurement and Accrual Accounting

Inventories and Cost of Goods Sold

Cash and Internal Control

Receivables and Investments

Operating Assets: Property, Plant, and Equipment, and Intangibles

Current Liabilities, Contingencies, and the Time Value of Money

Long-Term Liabilities

Stockholders Equity

The Statement of Cash Flows

International Financial Reporting Standards

Filters