Question 1

Net income stated as a percentage of sales is one means of evaluating a company's ability to control its expenses.

Accepted Answer

A) True 
 B)False  True

Question 2

Accounting terminology
Listed below are eight technical accounting terms introduced in this chapter:
$$\begin{array} { | l | l | l | } 
\hline \text { Current ratio } & \text { Return on assets } & \text { Price-earnings ratio } \
\hline \text { Quick ratio } & \text { Market share } & \text { Earnings per share } \
\hline \text { Debt ratio } & \text { Working capital } & \
\hline
\end{array}$$
Each of the following statements may (or may not) describe one of these technical terms. For each statement, indicate the term described, or answer "None" if the statement does not correctly describe any of the terms.
____ (a) The percentage of total assets financed by creditors.
____ (b) A measure of the effectiveness with which management utilizes a company's resources, regardless of how those resources are financed.
____(c) A company's percentage share of total dollar sales within its industry.
____ (d) Current assets less current liabilities.
____ (e) A measure reflecting investors' expectations of future profitability.
____ (f) A measure of short-term solvency often used when a company has large inventories that cannot be quickly converted into cash.
____ (g) A ratio that helps individual stockholders relate the net income of a large corporation to their equity investment.

Accepted Answer

(a) Debt ratio, (b) Return on assets, (c) Market share, (d) Working capital, (e) Price-earnings ratio, (f) Quick ratio, (g) Earnings per share.

Question 3

In calculating earnings per share, the denominator of the equation includes:

Accepted Answer

A)  Only common stock outstanding. 
B)  Common stock plus preferred stock. 
C)  Common stock less preferred stock. 
D)  The total shares of authorized common stock. 
A)  Only common stock outstanding. 
B)  Common stock plus preferred stock. 
C)  Common stock less preferred stock. 
D)  The total shares of authorized common stock. A

Question 4

The following information is available for the Grant Company for 2010:
 
Required:
What are earnings per share for the current year?
What is the P/E ratio?
What is the book value per share of common stock?
What is the dividend yield on common stock?
What is the net profit ratio?
What is the return on equity?

Accepted Answer

Earnings per share $600,000 - $2,100/50,

Question 5

Percentage changes; p/e ratios and investors' expectations
Shown below are Gamma, Inc.'s earnings per share for a four-year period, along with the per-share market price of the company's stock at each year-end. The earnings in 2011 were the highest in the company's history.
$$\begin{array} { | l | c | c | c | c | } 
\hline & 2011 & 2010 & 2009 & 2008 \
\hline \text { Earnings per share } & \$ 9 & \$ 7 & \$ 6 & \$ 7 \
\hline \text { Percentage change } & \% & \% & \% & \% \
\hline \text { Year-end stock price } & \$ 77 & \$ 140 & \$ 84 & \$ 70 \
\hline \text { Price-earnings ratio } & - & - & - & - \
\hline
\end{array}$$
(a) Compute the percentage change in earnings per share in 2009, 2010, and 2011. (Place your answers in the spaces provided above.)
(b) Compute the p/e ratio of stock at the end of each of the four years. (Place your answers in the spaces provided above.)
(c) What does the p/e ratio at the end of 2011 indicate about investors' expectations of earnings per share for the coming year? Explain your reasoning.

Accepted Answer

@#IMG-DLM&
(c) The p/e ratio of 8.5 is low by hist

Question 6

When comparing the current ratio to the quick ratio:

Accepted Answer

A)  The current ratio will always be greater. 
B)  The quick ratio will always be greater. 
C)  The quick ratio is sometimes greater and sometimes less than the current ratio. 
D)  They always will be the same. 
A)  The current ratio will always be greater. 
B)  The quick ratio will always be greater. 
C)  The quick ratio is sometimes greater and sometimes less than the current ratio. 
D)  They always will be the same.

Question 7

Which American industry would tend to have the greatest debt ratio?

Accepted Answer

A)  Auto. 
B)  Retail clothing. 
C)  Manufacturing. 
D)  Banking. 
A)  Auto. 
B)  Retail clothing. 
C)  Manufacturing. 
D)  Banking.

Question 8

In a multiple-step income statement, interest expense usually is not classified as an operating expense because interest charges:

Accepted Answer

A)  Do not contribute to the production of revenue. 
B)  Stem from the manner in which assets are financed, not the manner in which they are used in business operations. 
C)  Relate directly to the cost of goods sold. 
D)  The statement is incorrect. Interest usually is classified as an operating expense. 
A)  Do not contribute to the production of revenue. 
B)  Stem from the manner in which assets are financed, not the manner in which they are used in business operations. 
C)  Relate directly to the cost of goods sold. 
D)  The statement is incorrect. Interest usually is classified as an operating expense.

Question 9

The debt ratio is a measure of:

Accepted Answer

A)  Net cash flows relating to financing activities. 
B)  Long-term credit risk. 
C)  Short-term solvency. 
D)  Profitability, independent of the manner in which assets are financed. 
A)  Net cash flows relating to financing activities. 
B)  Long-term credit risk. 
C)  Short-term solvency. 
D)  Profitability, independent of the manner in which assets are financed.

Question 10

Improving the current ratio
Carter Corporation financed construction of a new addition to its facilities with a large long-term note payable. As a condition of obtaining the loan, Carter agreed to maintain a current ratio at year-end of at least 1.7 to 1. If Carter fails to maintain this ratio, the lender may demand immediate repayment of the principal amount of the note and all unpaid accrued interest. As the end of the year approaches, Carter is concerned about the magnitude of its current ratio. Suggest some actions that the company might take to increase the magnitude of the current ratio.

Accepted Answer

Paying any current liabilities will incr

Question 11

Supreme's gross profit rate was:

Accepted Answer

A)  42.9%. 
B)  57.7%. 
C)  20.0%. 
D)  31.7%. 
A)  42.9%. 
B)  57.7%. 
C)  20.0%. 
D)  31.7%.

Question 12

Working capital equals:

Accepted Answer

A)  $560,000. 
B)  $530,000. 
C)  $270,000. 
D)  $900,000. 
A)  $560,000. 
B)  $530,000. 
C)  $270,000. 
D)  $900,000.

Question 13

If a company's current ratio declined in a year during which its quick ratio improved, which of the following is the most likely explanation?

Accepted Answer

A)  Inventory is increasing. 
B)  Inventory is declining. 
C)  Receivables are being collected more rapidly than in the past. 
D)  Receivables are being collected more slowly than in the past. 
A)  Inventory is increasing. 
B)  Inventory is declining. 
C)  Receivables are being collected more rapidly than in the past. 
D)  Receivables are being collected more slowly than in the past.

Question 14

From the viewpoint of a stockholder, which of the following relationships do you consider of least significance?

Accepted Answer

A)  The return on assets consistently is higher than the industry average. 
B)  The return on equity has increased in each of the past five years. 
C)  Net income is greater than the amount of working capital. 
D)  The return on assets is greater than the rate of interest being paid to creditors. 
A)  The return on assets consistently is higher than the industry average. 
B)  The return on equity has increased in each of the past five years. 
C)  Net income is greater than the amount of working capital. 
D)  The return on assets is greater than the rate of interest being paid to creditors.

Question 15

A rising gross profit rate most strongly suggests:

Accepted Answer

A)  An increase in physical sales volume. 
B)  Strong consumer demand for the company's products. 
C)  Intense competition. 
D)  Increased short-term solvency. 
A)  An increase in physical sales volume. 
B)  Strong consumer demand for the company's products. 
C)  Intense competition. 
D)  Increased short-term solvency.

Question 16

The excess of current assets over current liabilities is called:

Accepted Answer

A)  Current ratio. 
B)  Working capital. 
C)  Debt ratio. 
D)  Quick ratio. 
A)  Current ratio. 
B)  Working capital. 
C)  Debt ratio. 
D)  Quick ratio.

Question 17

What was Supreme's operating income? (in millions):

Accepted Answer

A)  $710. 
B)  $390. 
C)  $270. 
D)  $520. 
A)  $710. 
B)  $390. 
C)  $270. 
D)  $520.

Question 18

Bill's debt ratio is:

Accepted Answer

A)  22%. 
B)  27%. 
C)  57%. 
D)  49%. 
A)  22%. 
B)  27%. 
C)  57%. 
D)  49%.

Question 19

Eleva Corporation's days to sell the average inventory for 2011 is:

Accepted Answer

A)  91.5 days. 
B)  67.3 days. 
C)  94.0 days. 
D)  125.4 days. 
A)  91.5 days. 
B)  67.3 days. 
C)  94.0 days. 
D)  125.4 days.

Question 20

On common size income statements, each component in the income statement is represented as a percentage of:

Accepted Answer

A)  Net income. 
B)  Sales. 
C)  Total assets. 
D)  Profit. 
A)  Net income. 
B)  Sales. 
C)  Total assets. 
D)  Profit.

Exam 14: Financial Statement Analysis

Net income stated as a percentage of sales is one means of evaluating a company's ability to control its expenses.

In calculating earnings per share, the denominator of the equation includes:

When comparing the current ratio to the quick ratio:

Which American industry would tend to have the greatest debt ratio?

In a multiple-step income statement, interest expense usually is not classified as an operating expense because interest charges:

The debt ratio is a measure of:

Supreme's gross profit rate was:

Working capital equals:

If a company's current ratio declined in a year during which its quick ratio improved, which of the following is the most likely explanation?

From the viewpoint of a stockholder, which of the following relationships do you consider of least significance?

A rising gross profit rate most strongly suggests:

The excess of current assets over current liabilities is called:

What was Supreme's operating income? (in millions):

Bill's debt ratio is:

Eleva Corporation's days to sell the average inventory for 2011 is:

On common size income statements, each component in the income statement is represented as a percentage of:

Accounting: Information for Decision Making

Basic Financial Statements

The Accounting Cycle: Capturing Economic Events

The Accounting Cycle: Accruals and Deferrals

The Accounting Cycle: Reporting Financial Results

Merchandising Activities

Financial Assets

Inventories and the Cost of Goods Sold

Plant and Intangible Assets

Liabilities

Stockholders Equity: Paid-In Capital

Income and Changes in Retained Earnings

Statement of Cash Flows

Global Business and Accounting

Management Accounting: a Business Partner

Job Order Cost Systems and Overhead Allocations

Process Costing

Costing and the Value Chain

Cost-Volume-Profit Analysis

Incremental Analysis

Responsibility Accounting and Transfer Pricing

Operational Budgeting

Standard Cost Systems

Rewarding Business Performance

Capital Budgeting

Forms of Business Organization

The Time Value of Money: Future Amounts and Present Values Answer Key

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