Exam 13: Financial Statement Analysis

Denver Corporation and Cheyenne Company are in different industries.Denver's current ratio is 1.89,while Cheyenne's current ratio is 1.65.Therefore,is it safe to conclude that Denver's liquidity position is better than that of Cheyenne?

Indicate whether each of the following statements about financial statement analysis is true or false. Solvency ratios measure a company's short-term debt-paying ability and its financial structure.______ A company with a high debt to assets ratio probably would be considered to have a high level of financial risk.______ The debt to equity ratio and debt to assets ratio are two ways to measure the same relationship.______ From the point of view of stockholders,a decline in the debt to equity ratio is always good news.______ The lower the debt to equity ratio,the higher a company's financial leverage.______

Long-term creditors are usually most interested in evaluating:

The following information is from the financial records of Newton Company for Year 2: Sales \ 620,000 Interest expense 26,000 Income tax expense 46,000 Net income 104,000 Required: Calculate the number of times interest is earned for Newton in Year 2.(Round your answer to one decimal place.)

Which of the following is (are)objective(s)of ratio analysis?

The study of an individual financial statement item over several accounting periods is called:

Which of the following statements regarding the information disclosed in financial statements is incorrect?

As of December 31,Year 1,Gant Corporation had a current ratio of 1.29,quick ratio of 1.05,and working capital of $18,000.The company uses a perpetual inventory system and sells merchandise for more than it cost.On January 1,Year 2,Gant paid $250 for transportation in cost on merchandise it had received.Which of the following statements is incorrect?

The study of an individual item or account over several periods in the same financial year or over many years is known as:

The only requirement involved in communicating useful information is that the information be accurate.

A banker may perform a financial ratio analysis to assess a firm's ability to repay debt in a timely manner.

Which of the following statements is correct regarding the quick ratio?

Crawford Company's current ratio for Year 2 was 1.42,which was slightly above the current ratio for similar companies in its industry.Crawford's quick ratio for Year 2 was 0.68,which is substantially lower than for similar companies in its industry.What conclusion would you draw based on this information?

The following balance sheet information is provided for Santana Company for Year 2: Cash \ 5,400 Accounts receivable 15,500 Inventory 18,000 Prepaid expenses 1,600 Plant and equipment, net of depreciation 20,200 Land Total assets Liabilities and Stockholders'Equity Accounts payable \ 4,500 Salaries payable 11,500 Bonds payable (due in ten year's) 19,000 Common stock, no par 30,000 Retained earnings Total liabilities and stockholder's' equity What is the company's debt to equity ratio? (Rounded to nearest whole percent.)

Alpha Company provided the following balance sheet for Year 2: Cash \ 5,400 Accounts receivable 15,500 Inventory 18,000 Prepaid expenses 1,600 Plant and equipment, net of depreciation 20,200 Land Total assets Liabilities and Stockholders'Equity Accounts payable \ 4,500 Salaries payable 11,500 Bonds payable (due in ten year's) 10,000 Common stock, no par 30,000 Retained earnings Total liabilities and stockholder's' equity What is the company's plant assets to long-term liabilities ratio?

Many companies have to monitor closely certain ratios,such as the current ratio,due to debt covenants.Selected transactions are provided below for a company that uses a perpetual inventory system,sells its merchandise at a selling price that exceeds cost,and had a current ratio of 1.85 and a quick ratio of 1.19 before the event occurred. Impact on Impact on Current Ratio Ouick Ratio Description of Transaction (+) or (-) or (0) (+) or (-) or (0 ) 1. Collected accounts receivable 2. Issued common stock for cash 3. Purchased one-year insurance policy 4. Paid previously declared cash dividend 5. Paid the balance on an account payable 6. Purchased a building by issuing a long-term note 7. Purchased inventory on account 8. Purchased current marketable securities for cash 9. Sold merchandise for cash 10 Sold merchandise on account Required: In the above table,indicate whether each transaction would increase (+),decrease (-),or not affect (0)the company's current ratio and quick ratio.

Working capital is defined as:

The Fortune Company reported the following income for Year 2: Sales \ 130,000 Cost of goods sold Gross margin 50,000 Selling and administrative expense Operating income \ 35,000 Interest expense Income before taxes \ 30,000 Income tax expense Net income What is the company's number of times interest is earned ratio?

Financial ratio analysis is a form of horizontal analysis in that comparisons are made between different accounts in the same set of financial statements.

Milton Company has total current assets of $46,000,including inventory of $10,000,and current liabilities of $20,000.The company's current ratio is: