Question 1

Discuss any ethical issues raised by the following actions.

Accepted Answer

Big Store’s rate of return on assets (ROA) has fallen below analysts’ expectations in recent years because the firm, a retailer, has added a significant number of new stores (increasing assets in the denominator of ROA) prior to these stores generating earnings (ultimately increasing the numerator of ROA). Big Store decides to curtail the opening of new stores for two years in an effort to allow the earnings of new stores to catch up with the investments it made previously in store assets, thereby increasing its ROA. Management plans to restart the growth in stores after the two years. 
Ethical issues confront Big Store’s management when they make financial reporting decisions. Among the questions that Big Store’s management might raise are: (1) Does the action violate a known law or regulation? and (2) Has the firm provided sufficient disclosure about the action for the users of financial statements to make their own judgments about the ethics of such actions? Big Store’s actions are in accordance with within GAAP, and it should adequately discloses information about the choice There would be a long-term effect of the action because the rate of future growth could be adversely affected and analysts must take the change into account in projecting future earnings. One might argue that an ethical issue arises because management took an action for the primary purpose of increasing return on assets (ROA). Management purposefully managed, some would say distorted, return on assets (ROA) to make it and Big Store look better.

Question 2

Analysts use measures of long-term _____ to evaluate a firm's ability to meet interest and principal payments on long-term debt and similar obligations as they come due.If a firm cannot make the payments on time, it becomes insolvent and may have to reorganize or liquidate.

Accepted Answer

A) insolvency factors 
B) reorganization factors 
C) liquidity risk 
D) insolvency risk 
E) cash flow risk 
A) insolvency factors 
B) reorganization factors 
C) liquidity risk 
D) insolvency risk 
E) cash flow risk C

Question 3

Which of the following is/are limitations of ratio analysis?

Accepted Answer

A) use of acquisition cost for assets rather than current replacement cost or net realizable value 
B) latitude firms have in selecting from among various generally accepted accounting principles 
C) changes in many ratios correlate with each other 
D) must recognize conditions that have changed between the periods being compared when comparing the size of a ratio between periods for the same firm 
E) all of the above 
A) use of acquisition cost for assets rather than current replacement cost or net realizable value 
B) latitude firms have in selecting from among various generally accepted accounting principles 
C) changes in many ratios correlate with each other 
D) must recognize conditions that have changed between the periods being compared when comparing the size of a ratio between periods for the same firm 
E) all of the above E

Question 4

What is financial leverage?

Accepted Answer

FINANCIAL LEVERAGE
The term financial le

Question 5

King Products Corporation
 
King Products Corporation
Statement of Financial Position
(in thousands)
$\begin{array}{lll}&\text { June } 30\
&\text { Year } 6&\text { Year } 5\
\text { Cash } & \$ 60 & \$ 50 \
\text { Marketable securities (at market) } & 40 & 30 \
\text { Accounts receivable (net) } & 90 & 60 \
\text { Inventories (at lower of cost or market) } & 120 & 100 \
\text { Prepaid items } & {30} & 40\\text { Total current assets }&\$340&\$280\
\text { Long-term investments (at cost) } & 50 & 40 \
\text { Land (at cost) } & 150 & 150 \
\text { Building (net) } & 160 & 180 \
\text { Equipment (net) } & 190 & 200 \
\text { Patents (net) } & 70 & 34\
 \text {Gondwill (net) }&40&26\
\text { Total long-term assets }&\$660&\$630\
\text { Total assets }&\$1,000&\$910\\text { Notes payable } & \$ 46 & \$ 24 \
\text { Accounts payable } & 94 & 56 \
\text { Accrued interest } & 30 & 30\
(\text { Total current liabilities }&\$170&\$110\
 \text {Notes payable, $ 10 \% $ due $ 12 / 31 / $ Year 12 }&20 & 20 \
 \text {Bonds payable, $ 12 \% $ due $ 6 / 30 / $ Year 15 }&30 & 30 \
 \text {Total long-term debt }&\$50&\$50\
 \text {Total liabilities }&\$220&\$160\
 \text { \text { Preferred stock- } 5 \% \text { cumulative, } \$ 100 \text { par, non-participating, authorized, issued }}&200&200\ \text {and outstanding, 2,000 shares }\
\text { Common stock- } \$ 10 \text { par, } 40,000 \text { shares authorized, } 30,000 \text { shares issued and }&300&300\
\text { outstanding }\
\text { Additional paid-in capital--common } & 150 & 150 \
\text { Retained earnings } & 130 & 100\
\text { Total shareholders' equity }&\$780&\$750\
\text { Total liabilities and shareholders' equity }&\$1,000&\$910
\end{array}$
King Products Corporation
Income Statement
For the year ended June 30
(in thousands)
$\begin{array}{lc}&\text { Year } 6\
\text { Net sales } & \$ 600 \
\text { Costs and expenses } & \
\text { Cost of goods sold } & 440 \
\text { Selling, general, and administrative } & 60 \
\text { Interest expense } & 10\
\text { Income before taxes } & \$ 90 \
\text { Income taxes } & 45\
\text { Net income }&\$45
\end{array}$ (CMA adapted, Dec 96 #16) Refer to the King Products Corporation example.King Products Corporation's accounts receivable turnover for the fiscal year ended at June 30, Year 6, was

Accepted Answer

A) 4.9 
B) 5.9 
C) 6.7 
D) 8.0 
E) none of the above 
A) 4.9 
B) 5.9 
C) 6.7 
D) 8.0 
E) none of the above

Question 6

The term _____ describes financing with debt and preferred stock to increase the potential return to the residual common shareholders' equity.

Accepted Answer

A) trading on the debt 
B) trading on the equity 
C) financial leverage 
D) equity financing 
E) none of the above 
A) trading on the debt 
B) trading on the equity 
C) financial leverage 
D) equity financing 
E) none of the above

Question 7

The current ratio equals

Accepted Answer

A) current assets plus current liabilities. 
B) current assets minus current liabilities. 
C) current assets multiplied by current liabilities. 
D) current assets divided by current liabilities. 
E) current liabilities minus current assets. 
A) current assets plus current liabilities. 
B) current assets minus current liabilities. 
C) current assets multiplied by current liabilities. 
D) current assets divided by current liabilities. 
E) current liabilities minus current assets.

Question 8

Theoretical and empirical research has shown that the expected return from investing in a firm relates, in part, to the expected profitability of the firm.

Accepted Answer

A) True 
 B)False

Question 9

ROA has particular relevance to the lenders, or creditors, of a firm.

Accepted Answer

A) True 
 B)False

Question 10

Discuss any ethical issues raised by the following actions.

Accepted Answer

Lamb Inc.has a debt-equity ratio of 30 p

Question 11

The accounts payable turnover ratio uses purchases on account in its computation. Although firms do not disclose their purchases, the analyst can calculate the purchase amount as follows:

Accepted Answer

A) Purchases = Cost of Goods Sold + Ending Inventory + Beginning Inventory 
B) Purchases = Cost of Goods Sold + Ending Inventory - Beginning Inventory 
C) Purchases = Cost of Goods Sold - Ending Inventory + Beginning Inventory 
D) Purchases = Cost of Goods Sold - Ending Inventory - Beginning Inventory 
E) Purchases = Cost of Goods Sold x Ending Inventory - Beginning Inventory 
A) Purchases = Cost of Goods Sold + Ending Inventory + Beginning Inventory 
B) Purchases = Cost of Goods Sold + Ending Inventory - Beginning Inventory 
C) Purchases = Cost of Goods Sold - Ending Inventory + Beginning Inventory 
D) Purchases = Cost of Goods Sold - Ending Inventory - Beginning Inventory 
E) Purchases = Cost of Goods Sold x Ending Inventory - Beginning Inventory

Question 12

Some analysts find the reciprocal of the fixed asset turnover ratio helpful in comparing the operating characteristics of different firms, because it measures dollars of fixed assets required to generate one dollar of sales.

Accepted Answer

A) True 
 B)False

Question 13

The rate which indicates how quickly a firm collects cash is the _____ turnover ratio.

Accepted Answer

A) cash 
B) accounts receivable 
C) sales receipts 
D) inventory 
E) asset 
A) cash 
B) accounts receivable 
C) sales receipts 
D) inventory 
E) asset

Question 14

Describe the disaggregation of the rate of return on common shareholders' equity.

Accepted Answer

DISAGGREGATING THE RATE OF RETURN ON COM

Question 15

The financial statements of the Poston Company appear below.Calculate the following ratios:
 a. Rate of return on assets
b. Rate of retum on common shareholders' equity
c. Eamings per share of common stock
d. Current ratio (both dates)
e. Cash flow from operations to current liabilities
f. Long-term debt ratio (both dates)
g. Cash flow from operations to total liabilities
h. Interest coverage

$\begin{array}{lll}
&\text { January } 1&\text { December } 31\
\text { Current assets } & \$ 180,000 & \$ 210,000 \
\text { Noncurrent assets } & 255,000 & 275,000 \
\text { Current liabilities } & 85,000 & 78,000 \
\text { Long-term liabilities } & 30,000 & 75,000 \
\text { Common stock, } 10,000 \text { shares } & 300,000 & 300,000 \
\text { Retained earmings } & 20,000 & 32,000\\\
\text { Operations }\\\text { Net income } & \$ 84,000 \
\text { Interest expense } & 3,000 \
\text { Income taxes (30 percent rate) } & 36,000 \
\text { Cash provided by operations } & 30,970 \
\text { Dividends declared } & 72,000
\end{array}$

Accepted Answer

The answer of The financial statements of the Poston Company...

Question 16

Ramer Company and Matson Company 
Assume the following information for Ramer Company, Matson Company, and for their common industry for a recent year.
$\begin{array}{llll}&\text { Ramer } & \text { Matson } & \text { Industry Average }\
\text { Current ratio } & 3.50 & 2.80 & 3.00 \
\text { Accounts receivable turnover } & 5.00 & 8.10 & 6.00 \
\text { Inventory tumover } & 6.20 & 8.00 & 6.10 \
\text { Interest coverage ratio } & 9.00 & 12.30 & 10.40 \
\text { Debt-equity ratio } & 0.70 & 0.40 & 0.55 \
\text { Retum on investment } & 0.15 & 0.12 & 0.15 \
\text { Dividend payout ratio } & 0.80 & 0.60 & 0.55 \
\text { Earnings per share } & \$ 3.00 & \$ 2.00 & -
\end{array}$ (CMA adapted, Jun 90 #18) Regarding the data for Ramer and Matson Company, if a company is profitable and is effectively using leverage, which one of the following ratios is likely to be the largest?

Accepted Answer

A) return on total assets 
B) return on operating assets 
C) return on common equity 
D) return on investment 
E) none of the above 
A) return on total assets 
B) return on operating assets 
C) return on common equity 
D) return on investment 
E) none of the above

Question 17

The _____ turnover ratio equals sales revenue divided by average accounts receivable during the period.

Accepted Answer

A) cash 
B) accounts receivable 
C) sales receipts 
D) sales revenue 
E) asset 
A) cash 
B) accounts receivable 
C) sales receipts 
D) sales revenue 
E) asset

Question 18

During Year 2, Lamar Corporation purchased $600,000 of merchandise inventory.The cost of sales for year 2 was $660,000 and the ending merchandise inventory at December 31, Year 2 was $60,000.What was the inventory turnover for Year 2?

Accepted Answer

A) 8.0 
B) 7.3 
C) 6.6 
D) 6.0 
E) 6.7 
A) 8.0 
B) 7.3 
C) 6.6 
D) 6.0 
E) 6.7

Question 19

Discuss how investors base their investment decisions on the return anticipated from each investment and the risk associated with that return.

Accepted Answer

Investors base their investment decision

Question 20

To study changes in ROA, the analyst can disaggregate ROA into the product of two other ratios: the profit margin for ROA ratio and the total assets turnover ratio.

Accepted Answer

A) True 
 B)False

Discuss any ethical issues raised by the following actions.

Analysts use measures of long-term _____ to evaluate a firm's ability to meet interest and principal payments on long-term debt and similar obligations as they come due.If a firm cannot make the payments on time, it becomes insolvent and may have to reorganize or liquidate.

Which of the following is/are limitations of ratio analysis?

What is financial leverage?

The term _____ describes financing with debt and preferred stock to increase the potential return to the residual common shareholders' equity.

The current ratio equals

Theoretical and empirical research has shown that the expected return from investing in a firm relates, in part, to the expected profitability of the firm.

ROA has particular relevance to the lenders, or creditors, of a firm.

Discuss any ethical issues raised by the following actions.

The accounts payable turnover ratio uses purchases on account in its computation. Although firms do not disclose their purchases, the analyst can calculate the purchase amount as follows:

Some analysts find the reciprocal of the fixed asset turnover ratio helpful in comparing the operating characteristics of different firms, because it measures dollars of fixed assets required to generate one dollar of sales.

The rate which indicates how quickly a firm collects cash is the _____ turnover ratio.

Describe the disaggregation of the rate of return on common shareholders' equity.

The _____ turnover ratio equals sales revenue divided by average accounts receivable during the period.

During Year 2, Lamar Corporation purchased $600,000 of merchandise inventory.The cost of sales for year 2 was $660,000 and the ending merchandise inventory at December 31, Year 2 was $60,000.What was the inventory turnover for Year 2?

Discuss how investors base their investment decisions on the return anticipated from each investment and the risk associated with that return.

To study changes in ROA, the analyst can disaggregate ROA into the product of two other ratios: the profit margin for ROA ratio and the total assets turnover ratio.

Introduction to Business Activities and Overview of Financial Statements and the Reporting Process

The Basics of Record Keeping and Financial Statement Preparation: Balance Sheet

The Basics of Record Keeping and Financial Statement Preparation: Income Statement

Balance Sheet: Presenting and Analyzing Resources and Financing

Income Statement: Reporting Results of Operating Activities

Statement of Cash Flows

Revenue Recognition, Receivables, and Advances From Customers

Working Capital

Long-Lived Tangible and Intangible Assets

Notes, Bonds, and Leases

Liabilities: Off-Balance Sheet Financing, Retirement Benefits, and Income Taxes

Marketable Securities and Derivatives

Intercorporate Investments in Common Stock

Shareholders Equity: Capital Contributions and Distributions

Statement of Cash Flows: Another Look

Synthesis and Extensions

Filters

Exam 7: Introduction to Financial Statement Analysis

Discuss any ethical issues raised by the following actions.

Analysts use measures of long-term _____ to evaluate a firm's ability to meet interest and principal payments on long-term debt and similar obligations as they come due.If a firm cannot make the payments on time, it becomes insolvent and may have to reorganize or liquidate.

Which of the following is/are limitations of ratio analysis?

What is financial leverage?

The term _____ describes financing with debt and preferred stock to increase the potential return to the residual common shareholders' equity.

The current ratio equals

Theoretical and empirical research has shown that the expected return from investing in a firm relates, in part, to the expected profitability of the firm.

ROA has particular relevance to the lenders, or creditors, of a firm.

Discuss any ethical issues raised by the following actions.

The accounts payable turnover ratio uses purchases on account in its computation. Although firms do not disclose their purchases, the analyst can calculate the purchase amount as follows:

Some analysts find the reciprocal of the fixed asset turnover ratio helpful in comparing the operating characteristics of different firms, because it measures dollars of fixed assets required to generate one dollar of sales.

The rate which indicates how quickly a firm collects cash is the _____ turnover ratio.

Describe the disaggregation of the rate of return on common shareholders' equity.

The _____ turnover ratio equals sales revenue divided by average accounts receivable during the period.

During Year 2, Lamar Corporation purchased $600,000 of merchandise inventory.The cost of sales for year 2 was $660,000 and the ending merchandise inventory at December 31, Year 2 was $60,000.What was the inventory turnover for Year 2?

Discuss how investors base their investment decisions on the return anticipated from each investment and the risk associated with that return.

To study changes in ROA, the analyst can disaggregate ROA into the product of two other ratios: the profit margin for ROA ratio and the total assets turnover ratio.

Introduction to Business Activities and Overview of Financial Statements and the Reporting Process

The Basics of Record Keeping and Financial Statement Preparation: Balance Sheet

The Basics of Record Keeping and Financial Statement Preparation: Income Statement

Balance Sheet: Presenting and Analyzing Resources and Financing

Income Statement: Reporting Results of Operating Activities

Statement of Cash Flows

Revenue Recognition, Receivables, and Advances From Customers

Working Capital

Long-Lived Tangible and Intangible Assets

Notes, Bonds, and Leases

Liabilities: Off-Balance Sheet Financing, Retirement Benefits, and Income Taxes

Marketable Securities and Derivatives

Intercorporate Investments in Common Stock

Shareholders Equity: Capital Contributions and Distributions

Statement of Cash Flows: Another Look

Synthesis and Extensions

Filters