Test Bank - Chapter18 FS Analysis

Chapter 18
“How Well Am I Doing?” Financial Statement Analysis
True/False
1. In determining whether a company's financial condition is improving or deteriorating over

F time, vertical analysis of financial statement data would be more useful than horizontal
Medium analysis.
2. Trend percentages state several years' financial data in terms of a base year. For example, sales
T for every year would be stated as a percentage of the sales in the base year.
Easy
3. The gross margin percentage is computed taking the difference between sales and cost of
T goods and then dividing the result by sales.
Easy
4. The gross margin percentage is computed by dividing net income before interest and taxes by
F sales.
Medium
5. The price-earnings ratio is determined by dividing the price of a product by its profit margin.
F
Easy
6. The price-earnings ratio is computed by dividing the market price per share by the current
T earnings per share.
Easy
7. When computing the return on total assets, the after-tax effect of interest expense must be
F subtracted from net income.
Medium
8. If the assets in which funds are invested have a rate of return lower than the fixed rate of return
F paid to the supplier of the funds, then financial leverage is positive.
Medium
9. If the market value of a share of stock is greater than its book value, the stock is probably
F overpriced.
Easy
10. Working capital equals current assets, plus noncurrent liabilities and stockholders' equity, less
T total assets.
Hard
664 Managerial Accounting, 9/e

11. Assuming that a company has a current ratio greater than 1.0 to 1, repaying a short-term note
T payable will increase the current ratio.
Medium
12. The acid-test ratio is a test of the quality of accounts receivable--in other words, whether they
F are likely to be collected.
Medium
13. When computing the acid-test ratio, prepaid expenses are ignored.
T
Medium
14. Only credit sales (i.e., sales on account) are included in the computation of the accounts
T receivable turnover.
Easy
15. The inventory turnover ratio is equal to the average inventory balance divided by the cost of
F goods sold.
Easy
Multiple Choice
16. Horizontal analysis of financial statements is accomplished through:

D a. placing statement items on an after-tax basis.
Easy b. common-size statements.
c. computing both earnings per share and the price-earnings ratio.
d. trend percentages.
17. The gross margin percentage is most likely to be used to assess:

D a. how quickly accounts receivables can be collected.
Easy b. how quickly inventories are sold.
c. the efficiency of administrative departments.
d. the overall profitability of the company's products.
18. Earnings per share of common stock will immediately increase as a result of:
C a. the sale of additional shares of common stock by the company.
Medium b. an increase in the dividends paid to common stockholders by the company.
c. an increase in the company's net income.
d. the issuance of bonds by the company to finance construction of new buildings.
Managerial Accounting, 9/e 665

19. The market price of XYZ Company's common stock dropped from $25 to $21 per share. The
C dividend paid per share remained unchanged. The company’s dividend payout ratio would:
Easy a. increase.
b. decrease.
c. be unchanged.
d. impossible to determine without more information.
20. An increase in the market price of a company’s common stock will immediately affect its:
A a. dividend yield ratio.
Medium b. debt-to-equity ratio.
CMA adapted c. earnings per share of common stock.
d. dividend payout ratio.
21. Which of the following is true regarding the calculation of return on total assets?
D a. The numerator of the ratio consists only of net income.
Medium b. The denominator of the ratio consists of the balance of total assets at the end of the
period under consideration.
c. The numerator of the ratio consists of net income plus interest expense times the tax
rate.
d. The numerator of the ratio consists of net income plus interest expense times one
minus the tax rate.
22. Financial leverage is negative when:

D a. the return on total assets is less than the rate of return on common stockholders'
Medium equity.
b. total liabilities are less than stockholders' equity.
c. total liabilities are less than total assets.
d. the return on total assets is less than the rate of return demanded by creditors.
23. Which of the following is not a source of financial leverage?

D a. Bonds payable.
Medium b. Accounts payable.
c. Preferred stock.
d. Retained earnings.
24. If a company's bonds bear an interest rate of 8%, the tax rate is 30%, and the company's assets
A are generating an after-tax return of 7%, then the leverage would be:
Medium a. positive.
b. negative.
c. neither positive or negative.
d. impossible to determine without knowing the return on common stockholders' equity.

25. A company’s current ratio and acid-test ratios are both greater than 1.0 to 1. If obsolete
D inventory is written off, this would:
Medium a. decrease the acid-test ratio.
CMA adapted b. increase the acid-test ratio.
c. increase net working capital.
d. decrease the current ratio.
26. If a company converts a short-term note payable into a long-term note payable, this transaction
D would:
Medium a. decrease working capital and increase the current ratio.
b. decrease working capital and decrease the current ratio.
c. decrease the current ratio and decrease the acid-test ratio.
d. increase working capital and increase the current ratio.
27. Which one of the following would increase the working capital of a company?
B a. Cash payment of payroll taxes payable.
Hard b. Refinancing a short-term note payable with a two year note payable.
CMA adapted c. Cash collection of accounts receivable.
d. Payment of a 20-year mortgage payable with cash.
28. Sale of a piece of equipment at book value for cash will:

A a. increase working capital.
Medium b. decrease working capital.
c. decrease the debt-to-equity ratio.
d. increase net income.
29. If a firm has a high current ratio but a low acid-test ratio, one can conclude that:
B a. the firm has a large outstanding accounts receivable balance.
Medium b. the firm has a large investment in inventory.
CMA adapted c. the firm has a large amount of current liabilities.
d. the firm's financial leverage is very high.
30 Desktop Co. presently has a current ratio of 1.2 to 1 and an acid-test ratio of 0.8 to 1.
B Prepaying next year's office rent of $50,000 will:
Hard a. have no effect on either the company's current ratio or its acid-test ratio.
b. have no effect on the company's current ratio but will decrease its acid-test ratio.
c. decrease the company's current ratio and decrease its acid- test ratio.
d. increase the company's current ratio and increase its acid- test ratio.

31. The Miller Company paid off some of its accounts payable using cash. The company's current
A ratio is greater than 1.0 to 1. The company’s current ratio would:
Medium a. increase.
b. decrease.
c. remain unchanged.
d. impossible to determine from the information given.
32. Rahner Company has a current ratio of 1.75 to 1. This ratio will decrease if Rahner Company:
A a. borrows cash using a six-month note.
Hard b. pays the taxes payable which have been a current liability.
c. pays the following month's rent on the last day of the year.
d. sells inventory for more than their cost.
33. Which of the following accounts would be included in the calculation of the acid-test ratio:
D
Easy Accounts Receivable Prepaid Expense Inventory
a. yes yes no
b. no yes yes
c. no no yes
d. yes no no
34. Allen Company's average collection period for accounts receivable was 40 days last year, but
C increased to 60 days this year. Which of the following would most likely account for this
Medium change?
a. a decrease in accounts receivable relative to sales.
b. a decrease in sales.
c. a relaxation of credit policies.
d. an increase in sales.
35. The net accounts receivable for Andante Company were $150,000 at the beginning of the most
B recent year and $190,000 at the end of the year. If the accounts receivable turnover for the year
Hard was 8.5, and 15% of total sales were cash sales, then the total sales for the year were:
a. $1,445,000.
b. $1,700,000.
c. $1,900,000.
d. $1,500,000.

36. Selected data from Sheridan Corporation’s year-end financial statements are presented below.
A The difference between average and ending inventory is immaterial.
Hard
CMA adapted Current ratio ............ 2.0
Acid-test ratio .......... 1.5
Current liabilities ...... $120,000
Inventory turnover ....... 8 times
Gross profit margin ...... 40%
Sheridan's sales for the year was:

a. $800,000.
b. $480,000.
c. $1,200,000.
d. $240,000.
37. Fulton Company's price-earnings ratio is 8.0 and the market price of a share of common stock
C is $32. The company has 3,000 shares of preferred stock outstanding with each share receiving
Hard a dividend of $3 per share. The earnings per share of common stock is:
a. $10.
b. $7.
c. $4.
d. $3.
38. Perlman Company had 100,000 shares of common stock and 20,000 shares of preferred stock
C at the end of the year just completed. Preferred stockholders received dividends totaling
Hard $140,000. Common stockholders received dividends totaling $210,000. If the dividend payout
ratio for the year was 70%, then the net income for the year was:
a. $300,000.
b. $287,000.
c. $440,000.
d. $147,000.
39. NOTE TO THE INSTRUCTOR: Questions 39, 40, and 41 are different versions of the same
C question.
Medium
Arlberg Company's net income last year was $250,000. The company has 150,000 shares of
common stock and 80,000 shares of preferred stock outstanding. There was no change in the
number of common or preferred shares outstanding during the year. The company declared and
paid dividends last year of $1.30 per share on the common stock and $1.40 per share on the
preferred stock. The earnings per share of common stock is closest to:
a. $1.67.
b. $2.41.
c. $0.92.
d. $0.37.

C question.
Medium
Arget Company's net income last year was $600,000. The company has 150,000 shares of
a. $4.24.
b. $4.00.
c. $3.76.
d. $2.90.
D question.
Medium
Arquandt Company's net income last year was $550,000. The company has 150,000 shares of
a. $3.67.
b. $2.47.
c. $4.23.
d. $3.10.
42. NOTE TO THE INSTRUCTOR: Questions 42 and 43 are different versions of the same
C question.
Easy
The following data have been taken from your company's financial records for the current
year:
Earnings per share ...... $10

Dividend per share ...... $6
Market price per share .. $90
Book value per share .... $70
The price-earnings ratio is:

a. 1.67 to 1.
b. 15.0 to 1.
c. 9.0 to 1.
d. 7.0 to 1.

43. NOTE TO THE INSTRUCTOR: Questions 42 and 43 are different versions of the same
C question.
Easy
The following data have been taken from your company's financial records for the current
year:
Earnings per share ...... $15

Dividend per share ...... $9
Market price per share .. $120
Book value per share .... $90
The price-earnings ratio is:

a. 12.5 to 1.
b. 6.0 to 1.
c. 8.0 to 1.
d. 7.5 to 1.
44. Information concerning the common stock of Morris Company as of the end of the company's
D fiscal year is presented below.
Medium
Number of shares outstanding ...... 460,000
Par value per share ............... $5.00
Dividends paid per share .......... $6.00
Market price per share ............ $54.00
Earnings per share ................ $18.00
The dividend yield ratio is closest to:

a. 50.0%.
b. 33.3%.
c. 120.0%.
d. 11.1%.
45. Cameron Company had 50,000 shares of common stock issued and outstanding during the year
D just ended. The following information pertains to these shares:
Hard
Price originally issued ................... $40
Book value at end of current year ......... $70
Market value, beginning of current year ... $85
Market value, end of current year ......... $90
The total dividend on common stock for the year was $400,000. Cameron Company's dividend
yield ratio for the year was:
a. 20.00%
b. 11.43%.
c. 9.41%.
d. 8.89%.

C question.
Medium
Braverman Company's net income last year was $75,000 and its interest expense was $10,000.
Total assets at the beginning of the year were $650,000 and total assets at the end of the year
were $610,000. The company's income tax rate was 30%. The company's return on total assets
for the year was closest to:
a. 13.5%.
b. 12.4%.
c. 13.0%.
d. 11.9%.
D question.
Medium
Brachlan Company's net income last year was $80,000 and its interest expense was $20,000.
a. 12.5%.
b. 13.4%.
c. 15.6%.
d. 14.7%.
A question.
Medium
Brawer Company's net income last year was $55,000 and its interest expense was $20,000.
a. 10.8%.
b. 8.6%.
c. 11.7%.
d. 9.5%.
49. The total assets of the Philbin Company on January 1, 19x9 were $2.3 million and on
C December 31, 19x9 were $2.5 million. Net income for 19x9 was $188,000. Dividends for 19x9
Medium totaled $75,000, interest expenses totaled $70,000, and the tax rate was 30%. The return on
total assets for 19x9 was closest to:
a. 9.5%.
b. 6.8%.
c. 9.9%.
d. 10.8%.

50. Selected financial data for Irvington Company appear below:
C
Medium Account Balances o
CPA adapted Beginning End of
of year year
Preferred stock ......... $125,000 $125,000
Common stock ............. 300,000 400,000
Retained earnings......... 75,000 185,000
During the year, the company paid dividends of $10,000 on its preferred stock. The company's
net income for the year was $120,000. The company's return on common stockholders' equity
for the year is closest to:
a. 17%.
b. 19%.
c. 23%.
d. 25%.
A question.
Easy
Crasler Company's net income last year was $100,000. The company paid preferred dividends
of $20,000 and its average common stockholders' equity was $580,000. The company's return
on common stockholders' equity for the year was closest to:
a. 13.8%.
b. 3.4%.
c. 20.7%.
d. 17.2%.
D question.
Easy
Crawler Company's net income last year was $80,000. The company paid preferred dividends
a. 20.0%.
b. 22.5%.
c. 2.5%.
d. 17.5%.

C question.
Easy
Crabtree Company's net income last year was $50,000. The company paid preferred dividends
a. 15.9%.
b. 11.4%.
c. 6.8%.
d. 4.5%.
54. The following account balances have been provided for the end of the most recent year:
A
Medium Total assets $150,000
Total stockholders' equity $120,000
Total common stock $50,000 (5,000 shares)
Total preferred stock $10,000 (1,000 shares)
The book value per share of common stock is:

a. $22.
b. $25.
c. $20.
d. $28.
A question.
Medium
Dratif Company's working capital is $33,000 and its current liabilities are $80,000. The
company's current ratio is closest to:
a. 1.41 to 1.
b. 0.59 to 1.
c. 3.42 to 1.
d. 0.41 to 1.
D question.
Medium
Dragin Company's working capital is $36,000 and its current liabilities are $61,000. The
a. 2.69 to 1.
b. 0.41 to 1.
c. 0.59 to 1.
d. 1.59 to 1.

B question.
Medium
Draban Company's working capital is $38,000 and its current liabilities are $59,000. The
a. 0.36 to 1.
b. 1.64 to 1.
c. 0.64 to 1.
d. 2.55 to 1.
58. At the end of the year just completed, Orem Company's current liabilities totaled $75,000, and
C its long-term liabilities totaled $225,000. Working capital at year-end was $100,000. If the
Hard company's debt-to-equity ratio is 0.30 to 1, total long-term assets must equal:
a. $1,000,000.
b. $1,300,000.
c. $1,125,000.
d. $1,225,000.
59. Starrs Company has current assets of $300,000 and current liabilities of $200,000. Which of
B the following transactions would increase its working capital?
Hard a. Prepayment of $50,000 of next year’s rent.
CMA adapted b. Refinancing $50,000 of short-term debt with long-term debt.
c. Acquisition of land valued at $50,000 by issuing new common stock.
d. Purchase of $50,000 of marketable securities for cash.
60. Selected year-end data for the Brayer Company are presented below:
C
Hard Current liabilities ........ $600,000
CMA adapted Acid-test ratio ............ 2.5 to 1
Current ratio .............. 3.0 to 1
Cost of goods sold ......... $500,000
The company has no prepaid expenses and inventories remained unchanged during the year.
Based on these data, the company's inventory turnover ratio for the year was closest to:
a. 1.20 times.
b. 2.40 times.
c. 1.67 times.
d. 2.33 times.

61. Harwichport Company has a current ratio of 3.5 to 1 and an acid-test ratio of 2.8 to 1. Current
A assets equal $175,000 of which $5,000 consists of prepaid expenses. Harwichport Company's
Hard inventory must be:
a. $30,000.
b. $40,000.
c. $50,000.
d. $35,000.
62. Ben Company has the following data for the year just ended:
A
Hard Cash .................... ?
Accounts Receivable ..... $28,000
Inventory ............... $35,000
Current ratio ........... 2.4 to 1
Acid test ratio ......... 1.6 to 1
Ben Company's current liabilities were:

a. $43,750.
b. $50,400.
c. $35,000.
d. $63,000.
63. Marcy Corporation's current ratio is currently 1.75 to 1. The firm’s current ratio cannot fall
C below 1.5 to 1 without violating agreements with its bondholders. If current liabilities are
Hard presently $250 million, the maximum new short-term debt that can be issued to finance an
CMA adapted equivalent amount of inventory expansion is:
a. $ 41.67 million.
b. $375.00 million.
c. $125.00 million.
d. $ 62.50 million.
B question.
Easy
Eral Company has $17,000 in cash, $3,000 in marketable securities, $36,000 in current
receivables, $24,000 in inventories, and $45,000 in current liabilities. The company's acid-test
(quick) ratio is closest to:
a. 1.78 to 1.
b. 1.24 to 1.
c. 0.80 to 1.
d. 0.44 to 1.

C question.
Easy
Erambo Company has $11,000 in cash, $6,000 in marketable securities, $27,000 in current
a. 0.75 to 1.
b. 1.02 to 1.
c. 0.86 to 1.
d. 0.53 to 1.
A question.
Easy
Erack Company has $15,000 in cash, $4,000 in marketable securities, $38,000 in current
a. 1.43 to 1.
b. 0.95 to 1.
c. 1.33 to 1.
d. 1.88 to 1.
67. Eastham Company's accounts receivable were $600,000 at the beginning of the year and
D $800,000 at the end of the year. Cash sales for the year were $300,000. The accounts
Hard receivable turnover for the year was 5 times. Eastham Company's total sales for the year were:
CPA adapted a. $ 800,000.
b. $1,300,000.
c. $3,300,000.
d. $3,800,000.
C question.
Easy
Frantic Company had $130,000 in sales on account last year. The beginning accounts
receivable balance was $10,000 and the ending accounts receivable balance was $16,000. The
company's accounts receivable turnover was closest to:
a. 5.00 times.
b. 13.00 times.
c. 10.00 times.
d. 8.13 times.

D question.
Easy
Fracus Company had $100,000 in sales on account last year. The beginning accounts
a. 6.25 times.
b. 7.14 times.
c. 3.33 times.
d. 6.67 times.
B question.
Easy
Frabine Company had $150,000 in sales on account last year. The beginning accounts
a. 4.69 times.
b. 9.38 times.
c. 8.33 times.
d. 10.71 times.
B question.
Easy
Granger Company had $180,000 in sales on account last year. The beginning accounts
company's average collection period (age of receivables) was closest to:
a. 20.28 days.
b. 28.39 days.
c. 36.50 days.
d. 56.78 days.
A question.
Easy
Grapp Company had $130,000 in sales on account last year. The beginning accounts
company's average collection period (age of receivables) was closest to:
a. 47.73 days.
b. 50.54 days.
c. 44.92 days.
d. 95.46 days.

D question.
Easy
Grave Company had $150,000 in sales on account last year. The beginning accounts receivable
balance was $14,000 and the ending accounts receivable balance was $10,000. The company's
average collection period (age of receivables) was closest to:
a. 24.33 days.
b. 58.40 days.
c. 34.07 days.
d. 29.20 days.
B question.
Easy
Harris Company, a retailer, had cost of goods sold of $290,000 last year. The beginning
inventory balance was $26,000 and the ending inventory balance was $24,000. The company's
inventory turnover was closest to:
a. 12.08 times.
b. 11.60 times.
c. 5.80 times.
d. 11.15 times.
D question.
Easy
Harton Company, a retailer, had cost of goods sold of $250,000 last year. The beginning
a. 5.95 times.
b. 11.36 times.
c. 12.50 times.
d. 11.90 times.
C question.
Easy
Harker Company, a retailer, had cost of goods sold of $160,000 last year. The beginning
a. 6.15 times.
b. 8.00 times.
c. 6.96 times.
d. 3.48 times.

A question.
Easy
Irawaddy Company, a retailer, had cost of goods sold of $230,000 last year. The beginning
average sale period (turnover in days) was closest to:
a. 36.50 days.
b. 73.00 days.
c. 38.09 days.
d. 34.91 days.
D question.
Easy
Irappa Company, a retailer, had cost of goods sold of $170,000 last year. The beginning
a. 55.82 days.
b. 60.12 days.
c. 115.94 days.
d. 57.97 days.
A question.
Easy
Irally Company, a retailer, had cost of goods sold of $150,000 last year. The beginning
a. 60.83 days.
b. 63.27 days.
c. 58.40 days.
d. 121.67 days.
80. Last year Dunn Company purchased $1,920,000 of inventory. The cost of good sold was
C $1,800,000 and the ending inventory was $360,000. What was the inventory turnover?
Hard a. 5.0 times.
CPA adapted b. 5.3 times.
c. 6.0 times.
d. 6.4 times.
81. During the year just ended, James Company purchased $425,000 of inventory. The inventory
A balance at the beginning of the year was $175,000. If the cost of goods sold for the year was
Hard $450,000, then the inventory turnover for the year was:
a. 2.77 times.
b. 2.57 times.
c. 3.00 times.
d. 2.62 times.

D question.
Easy
Last year Javer Company had a net income of $200,000, income tax expense of $74,000, and
interest expense of $20,000. The company's times interest earned was closest to:
a. 10.00 times.
b. 11.00 times.
c. 5.30 times.
d. 14.70 times.
C question.
Easy
Last year Jabber Company had a net income of $180,000, income tax expense of $62,000, and
interest expense of $20,000. The company's times interest earned was closest to:
a. 9.00 times.
b. 4.90 times.
c. 13.10 times.
d. 10.00 times.
B question.
Easy
Last year Jackson Company had a net income of $160,000, income tax expense of $66,000,
and interest expense of $20,000. The company's times interest earned was closest to:
a. 9.00 times.
b. 12.30 times.
c. 8.00 times.
d. 3.70 times.
85. The times interest earned ratio of McHugh Company is 4.5 times. The interest expense for the
B year was $20,000, and the company's tax rate is 40%. The company's net income is:
Hard a. $22,000.
b. $42,000.
c. $54,000.
d. $66,000.
86. Mariah Company has a times interest earned ratio of 3.0 for the year just ended. The
D company's tax rate is 40% and the interest expense for the year was $25,000. Mariah
Hard Company's after-tax net income was:
a. $50,000.
b. $75,000.
c. $25,000.
d. $30,000.

87. PFM Company has sales of $210,000, interest expense of $8,000, a tax rate of 30%, and a net
A profit after tax of $35,000. PFM Company's times interest earned ratio is:
Hard a. 7.25 times.
b. 4.375 times.
c. 5.375 times.
d. 15.5 times.
B question.
Easy
Karma Company has total assets of $190,000 and total liabilities of $90,000. The company's
debt-to-equity ratio is closest to:
a. 0.47 to 1.
b. 0.90 to 1.
c. 0.53 to 1.
d. 0.32 to 1.
D question.
Easy
Karl Company has total assets of $170,000 and total liabilities of $110,000. The company's
a. 0.39 to 1.
b. 0.65 to 1.
c. 0.35 to 1.
d. 1.83 to 1.
A question.
Easy
Krakov Company has total assets of $170,000 and total liabilities of $80,000. The company's
a. 0.89 to 1.
b. 0.32 to 1.
c. 0.47 to 1.
d. 0.53 to 1.

Reference: 18-1
Selected financial data for Barnstable Company appear below:
19x9 19x8
(in thousands)
Sales ......................... $1,500 $1,200
Operating Expenses ............ 450 400
Interest Expense .............. 75 30
Cost of Goods Sold ............ 900 720
Dividends Declared and Paid ... 30 0
91. For 19x9, the gross margin as a percentage of sales was:

D a. 5%.
Easy b. 60%.
Refer To: 18- c. 10%.
1 d. 40%.
92. For 19x9, the net income before taxes as a percentage of sales was:
D a. 10%.
Easy b. 3%.
Refer To: 18- c. 8%.
1 d. 5%.
93. For 19x9, the net operating income as a percentage of sales was:
C a. 70%.
Easy b. 8%.
Refer To: 18- c. 10%.
1 d. 40%.
94. Between 19x8 and 19x9, the times interest earned ratio:
B a. increased.
Medium b. decreased.
Refer To: 18- c. remained the same.
1 d. cannot be determined from the data provided.

Reference: 18-2
NOTE TO THE INSTRUCTOR: Questions 95 to 101, 102 to 108, and 109 to 115 are different versions of the
same question.
Financial statements for Larned Company appear below:
Larned Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)
19X6 19X5
Current assets:
Cash and marketable securities ............. $ 130 $ 100
Accounts receivable, net ................... 150 130
Inventory .................................. 100 100
Prepaid expenses ........................... 20 20
Total current assets ..................... 400 350
Noncurrent assets:
Plant & equipment, net ..................... 1,640 1,600
Total assets ................................. $2,040 $1,950
Current liabilities:
Accounts payable ........................... $ 120 $ 120
Accrued liabilities ........................ 110 80
Notes payable, short term .................. 170 160
Total current liabilities ............... 400 360
Noncurrent liabilities:
Bonds payable .............................. 370 400
Total liabilities ........................ 770 760
Stockholders' equity:
Preferred stock, $20 par, 10% .............. 120 120
Common stock, $10 par ...................... 180 180
Additional paid-in capital--common stock ... 110 110
Retained earnings .......................... 860 780
Total stockholders' equity ............... 1,270 1,190
Total liabilities & stockholders' equity ..... $2,040 $1,950

Larned Company
Income Statement
For the Year Ended December 31, 19X6
Sales (all on account) ................... $2,930

Cost of goods sold ....................... 2,050
Gross margin ............................. 880
Operating expenses ....................... 350
Net operating income ..................... 530
Interest expense ......................... 40
Net income before taxes .................. 490
Income taxes (30%) ....................... 147
Net income ............................... $ 343
Dividends during 19X6 totalled $263 thousand, of which $12 thousand were preferred dividends.
The market price of a share of common stock on December 31, 19X6 was $160.
95. Larned Company's earnings per share of common stock for 19X6 was closest to:
A a. $18.39.
Medium b. $27.22.
Refer To: 18- c. $19.06.
2 d. $11.03.
96. Larned Company's price-earnings ratio on December 31, 19X6 was closest to:
C a. 5.88.
Medium b. 14.50.
Refer To: 18- c. 8.70.
2 d. 8.40.
97. Larned Company's dividend payout ratio for 19X6 was closest to:
A a. 75.8%.
Medium b. 28.5%.
Refer To: 18- c. 76.7%.
2 d. 47.4%.
98. Larned Company's dividend yield ratio on December 31, 19X6 was closest to:
A a. 8.7%.
Medium b. 9.1%.
Refer To: 18- c. 8.3%.
2 d. 5.5%.
99. Larned Company's return on total assets for 19X6 was closest to:
C a. 15.8%.
Medium b. 17.2%.
Refer To: 18- c. 18.6%.
2 d. 17.8%.

100. Larned Company's return on common stockholders' equity for 19X6 was closest to:
A a. 29.8%.
Medium b. 26.9%.
Refer To: 18- c. 30.9%.
2 d. 27.9%.
101. Larned Company's book value per share at the end of 19X6 was closest to:
B a. $16.11.
Medium b. $63.89.
Refer To: 18- c. $70.56.
2 d. $10.00.
Reference: 18-3
same question.
Financial statements for Laroche Company appear below:
Laroche Company
19X6 19X5
Current assets:
Inventory .................................. 160 180
Noncurrent assets:
Total assets ................................. $1,900 $1,880
Bonds payable .............................. 280 300
Common stock, $10 par ...................... 240 240

Laroche Company
Income Statement

Gross margin ............................. 680
Income taxes (30%) ....................... 114
Net income ............................... $ 266
Dividends during 19X6 totaled $166 thousand, of which $10 thousand were preferred dividends.
102. Laroche Company's earnings per share of common stock for 19X6 was closest to:
A a. $10.67.
Medium b. $15.83.
Refer To: 18- c. $3.71.
3 d. $11.08.
103. Laroche Company's price-earnings ratio on December 31, 19X6 was closest to:
C a. 13.53.
Medium b. 40.43.
Refer To: 18- c. 14.06.
3 d. 9.47.
104. Laroche Company's dividend payout ratio for 19X6 was closest to:
C a. 22.9%.
Medium b. 62.4%.
Refer To: 18- c. 60.9%.
3 d. 38.0%.
105. Laroche Company's dividend yield ratio on December 31, 19X6 was closest to:
C a. 4.6%.
Medium b. 4.1%.
Refer To: 18- c. 4.3%.
3 d. 1.6%.
106. Laroche Company's return on total assets for 19X6 was closest to:
B a. 14.1%.
Medium b. 15.2%.
Refer To: 18- c. 14.6%.
3 d. 13.0%.

107. Laroche Company's return on common stockholders' equity for 19X6 was closest to:
D a. 24.0%.
Medium b. 21.2%.
Refer To: 18- c. 22.0%.
3 d. 23.1%.
108. Laroche Company's book value per share at the end of 19X6 was closest to:
C a. $52.50.
Medium b. $10.00.
Refer To: 18- c. $48.33.
3 d. $17.50.
Reference: 18-4
same question.
Financial statements for Larosa Company appear below:
Larosa Company
19X6 19X5
Current assets:
Inventory .................................. 150 150
Noncurrent assets:
Total assets ................................. $2,520 $2,450
Bonds payable .............................. 370 400
Common stock, $10 par ...................... 220 220
Retained earnings .......................... 1,240 1,070
Larosa Company
Income Statement


Gross margin ............................. 570
Income taxes (30%) ....................... 93
Net income ............................... $ 217
109. Larosa Company's earnings per share of common stock for 19X6 was closest to:
B a. $3.09.
Medium b. $9.41.
Refer To: 18- c. $14.09.
4 d. $9.86.
110. Larosa Company's price-earnings ratio on December 31, 19X6 was closest to:
C a. 7.10.
Medium b. 22.66.
Refer To: 18- c. 7.44.
4 d. 4.97.
111. Larosa Company's dividend payout ratio for 19X6 was closest to:
B a. 21.7%.
Medium b. 17.9%.
Refer To: 18- c. 6.5%.
4 d. 10.6%.
112. Larosa Company's dividend yield ratio on December 31, 19X6 was closest to:
C a. 1.8%.
Medium b. 3.1%.
Refer To: 18- c. 2.4%.
4 d. 1.0%.
113. Larosa Company's return on total assets for 19X6 was closest to:
B a. 8.7%.
Medium b. 9.9%.
Refer To: 18- c. 7.6%.
4 d. 9.2%.

114. Larosa Company's return on common stockholders' equity for 19X6 was closest to:
B a. 12.0%.
Medium b. 12.7%.
Refer To: 18- c. 13.4%.
4 d. 12.6%.
115. Larosa Company's book value per share at the end of 19X6 was closest to:
A a. $77.73.
Medium b. $82.27.
Refer To: 18- c. $10.00.
4 d. $21.36.
Reference: 18-5
The Dawson Corporation projects the following for the upcoming year:
Earnings before interest and taxes ............. $35 million

Interest expense ............................... $ 5 million
Preferred stock dividends ...................... $ 4 million
Common stock dividend payout ratio ............. 30%
Average number of common shares outstanding .... 2 million
Effective corporate income tax rate ............ 40%
116. The expected dividend per share of common stock is

A a. $2.10.
Hard b. $2.70.
CMA adapted c. $1.80.
Refer To: 18- d. $3.90.
5
117. If Dawson corporation’s common stock has a price-earnings ratio of eight, the market price per
B share (to the nearest dollar) would be
Hard a. $125.
CMA adapted b. $56.
Refer To: 18- c. $72.
5 d. $68.
Reference: 18-6
same question.
Financial statements for Orange Company appear below:

Orange Company
19X6 19X5
Current assets:
Inventory .................................. 160 160
Noncurrent assets:
Total assets ................................. $2,210 $2,130
Bonds payable .............................. 250 300
Preferred stock, $10 par, 15% ............... 120 120
Common stock, $5 par ....................... 220 220
Retained earnings .......................... 1,100 920
Orange Company
Income Statement

Gross margin ............................. 850
Income taxes (30%) ....................... 144
Net income ............................... $ 336

118. Orange Company's earnings per share of common stock for 19X6 was closest to:
A a. $7.23.
Medium b. $2.27.
Refer To: 18- c. $10.91.
6 d. $7.64.
119. Orange Company's dividend yield ratio on December 31, 19X6 was closest to:
A a. 3.1%.
Medium b. 1.1%.
Refer To: 18- c. 3.5%.
6 d. 2.7%.
120. Orange Company's return on total assets for 19X6 was closest to:
C a. 15.5%.
Medium b. 15.9%.
Refer To: 18- c. 16.5%.
6 d. 14.5%.
121. Orange Company's current ratio at the end of 19X6 was closest to:
D a. 1.24 to 1.
Medium b. 0.55 to 1.
Refer To: 18- c. 0.44 to 1.
6 d. 1.71 to 1.
122. Orange Company's accounts receivable turnover for 19X6 was closest to:
A a. 15.7 times.
Medium b. 11.0 times.
Refer To: 18- c. 17.7 times.
6 d. 12.4 times.
123. Orange Company's average sale period (turnover in days) for 19X6 was closest to:
B a. 23.2 days.
Medium b. 29.5 days.
Refer To: 18- c. 33.2 days.
6 d. 20.6 days.
124. Orange Company's times interest earned for 19X6 was closest to:
C a. 16.0 times.
6 d. 11.2 times.

Reference: 18-7
same question.
Financial statements for Orantes Company appear below:
Orantes Company
19X6 19X5
Current assets:
Inventory .................................. 130 130
Noncurrent assets:
Total assets ................................. $2,490 $2,410
Bonds payable .............................. 270 300
Common stock, $10 par ....................... 200 200
Orantes Company
Income Statement

Gross margin ............................. 760
Income taxes (30%) ....................... 129
Net income ............................... $ 301

125. Orantes Company's earnings per share of common stock for 19X6 was closest to:
B a. $3.61.
Medium b. $14.45.
Refer To: 18- c. $15.05.
7 d. $21.50.
126. Orantes Company's dividend yield ratio on December 31, 19X6 was closest to:
A a. 3.0%.
Medium b. 0.8%.
Refer To: 18- c. 2.8%.
7 d. 3.2%.
127. Orantes Company's return on total assets for 19X6 was closest to:
C a. 12.3%.
Medium b. 11.4%.
Refer To: 18- c. 13.1%.
7 d. 12.7%.
128. Orantes Company's current ratio at the end of 19X6 was closest to:
D a. 0.54 to 1.
Refer To: 18- c. 0.35 to 1.
7 d. 1.50 to 1.
129. Orantes Company's accounts receivable turnover for 19X6 was closest to:
C a. 19.3 times.
7 d. 10.3 times.
130. Orantes Company's average sale period (turnover in days) for 19X6 was closest to:
B a. 24.7 days.
7 d. 35.5 days.
131. Orantes Company's times interest earned for 19X6 was closest to:
B a. 10.0 times.
7 d. 25.3 times.

Reference: 18-8
same question.
Financial statements for Oratz Company appear below:
Oratz Company
19X6 19X5
Current assets:
Inventory .................................. 180 180
Noncurrent assets:
Total assets ................................. $1,920 $1,860
Bonds payable .............................. 300 300
Common stock, $15 par ....................... 140 140
Oratz Company
Income Statement

Gross margin ............................. 490
Income taxes (30%) ....................... 81
Net income ............................... $ 189

132. Oratz Company's earnings per share of common stock for 19X6 was closest to:
D a. $1.74.
Medium b. $28.93.
Refer To: 18- c. $20.25.
8 d. $19.61.
133. Oratz Company's dividend yield ratio on December 31, 19X6 was closest to:
C a. 5.7%.
Medium b. 5.2%.
Refer To: 18- c. 5.5%.
8 d. 0.5%.
134. Oratz Company's return on total assets for 19X6 was closest to:
B a. 8.9%.
Medium b. 11.1%.
Refer To: 18- c. 10.5%.
8 d. 10.0%.
135. Oratz Company's current ratio at the end of 19X6 was closest to:
B a. 0.57 to 1.
Refer To: 18- c. 0.51 to 1.
8 d. 1.26 to 1.
136. Oratz Company's accounts receivable turnover for 19X6 was closest to:
B a. 9.1 times.
8 d. 6.3 times.
137. Oratz Company's average sale period (turnover in days) for 19X6 was closest to:
D a. 29.1 days.
8 d. 57.6 days.
138. Oratz Company's times interest earned for 19X6 was closest to:
C a. 6.3 times.
8 d. 9.0 times.

Reference: 18-9
Selected data for the MK Company follow:
Current Year Prior Year

Preferred stock, 8%, par value $50 ....... $250,000 $250,000
Common stock, par value $10 .............. 500,000 500,000
Retained earnings at end of year ......... 257,000 240,000
Net income ............................... 102,000 90,000
Dividends paid on preferred stock ........ 20,000 20,000
Dividends paid on common stock ........... 65,000 60,000
Quoted market price per common
share at year end...................... 25.00 20.00
139. The price-earnings ratio for the prior year was:

B a. 15.8 to 1.
Hard b. 14.3 to 1.
Refer To: 17- c. 12.2 to 1.
9 d. 11.1 to 1.
140. The dividend yield ratio on common stock for the current year was
A (rounded to the nearest tenth of a percent):
Medium a. 5.2%
Refer To: 17- b. 6.8%.
9 c. 6.6%.
d. 7.4%.
141. MK Company's return on common stockholders' equity for the current year was (rounded to
D the nearest tenth of a percent):
Hard a. 10.2%.
Refer To: 17- b. 8.2%.
9 c. 13.6%.
d. 10.9%.
142. The dividend payout ratio for the prior year was:
D a. 55.6%
Medium b. 140%.
Refer To: 17- c. 114.3%.
9 d. 85.7%.
143. The book value per share for the current year is (rounded to the nearest cent:
C a. $22.18.
Medium b. $18.31.
Refer To: 17- c. $15.14.
9 d. $20.14.

Reference: 18-10
Lisa Inc.'s balance sheet appears below:
Lisa Inc.
December 31
(in thousands)
19X7 19X6
Cash ................................... $ 30 $ 25
Marketable securities ................... 20 15
Accounts receivable (net) ............... 45 30
Inventories ............................. 60 50
Prepaid expenses ........................ 15 20
Total current assets ................... 170 140
Land .................................... 155 125
Building (net) .......................... 80 90
Equipment (net) ......................... 95 100
Total long-term assets ................. 330 315
Total Assets ......................... $500 $455
Accounts payable ........................ $ 47 $ 28

Accrued interest ........................ 15 15
Short-term notes payable ................ 23 12
Total current liabilities .............. 85 55
Long-term otes payable .................. 10 10
Bonds payable ........................... 15 15
Total long-term liabilities ............ 25 25
Total liabilities ...................... 110 80
Preferred stock ($100 par value, 5%) .... 100 100
Common Stock ($10 par value) ............ 150 150
Additional paid-in capital--common stock 75 75
Retained earnings ....................... 65 50
Total shareholders’ equity ............. 390 375
Total liabilities & equity ........... $500 $455
The company's sales for the year were $300,000, its cost of goods sold was $220,000, and its net income was
$35,000. All sales were on credit. Preferred dividends for the year were $5,000.
144. Lisa Inc.’s acid test (quick) ratio at December 31, 19X7, was closest to:
B a. 0.6 to 1.
Medium b. 1.1 to 1.
CMA adapted c. 1.8 to 1.
Refer To: 18- d. 2.0 to 1.
10

145. Lisa Inc.’s accounts receivable turnover for 19X7 was closest to:
D a. 4.9 times.
CMA adapted c. 6.7 times.
Refer To: 18- d. 8.0 times.
10
146. Lisa Inc.’s inventory turnover for 19X7 was closest to:
B a. 3.7 times.
CMA adapted c. 4.4 times.
Refer To: 18- d. 5.0 times.
10
147. Lisa Inc.’s book value per share of common stock at December 31, 19X7, was closest to:
C a. $10.00.
Medium b. $11.25.
CMA adapted c. $19.33.
Refer To: 18- d. $18.33.
10
148. Lisa Inc.’s return on common stockholders' equity for 19X7 was closest to:
B a. 7.8%.
Medium b. 10.6%.
CMA adapted c. 10.9%.
Refer To: 18- d. 12.4%.
10

Reference: 18-11
same question.
Financial statements for Marcell Company appear below:
Marcell Company
19X6 19X5
Current assets:
Inventory .................................. 180 180
Noncurrent assets:
Total assets ................................. $2,170 $2,140
Bonds payable .............................. 480 500
Total liabilities ........................ 930 1,000
Common stock, $5 par ....................... 140 140
Marcell Company
Income Statement

Gross margin ............................. 770
Income taxes (30%) ....................... 126
Net income ............................... $ 294

149. Marcell Company's working capital (in thousands of dollars) at the end of 19X6 was closest to:
B a. $470.
Medium b. $20.
Refer To: 18- c. $520.
11 d. $1,240.
150. Marcell Company's current ratio at the end of 19X6 was closest to:
A a. 1.04 to 1.
Refer To: 18- c. 0.48 to 1.
11 d. 1.22 to 1.
151. Marcell Company's acid-test (quick) ratio at the end of 19X6 was closest to:
C a. 0.33 to 1.
Refer To: 18- c. 0.60 to 1.
11 d. 0.74 to 1.
152. Marcell Company's accounts receivable turnover for 19X6 was closest to:
C a. 16.2 times.
11 d. 14.2 times.
153. Marcell Company's average collection period (age of receivables) for 19X6 was closest to:
B a. 22.6 days.
11 d. 36.9 days.
154. Marcell Company's inventory turnover for 19X6 was closest to:
D a. 16.2 times.
11 d. 9.9 times.
155. Marcell Company's average sale period (turnover in days) for 19X6 was closest to:
C a. 15.7 days.
11 d. 22.6 days.

Reference: 18-12
same question.
Financial statements for March Company appear below:
March Company
19X6 19X5
Current assets:
Inventory .................................. 150 150
Noncurrent assets:
Total assets ................................. $2,140 $2,090
Bonds payable .............................. 450 500
Common stock, $5 par ....................... 180 180
March Company
Income Statement

Gross margin ............................. 490
Income taxes (30%) ....................... 75
Net income ............................... $ 175

156. March Company's working capital (in thousands of dollars) at the end of 19X6 was closest to:
C a. $520.
Medium b. $1,290.
Refer To: 18- c. $180.
12 d. $580.
157. March Company's current ratio at the end of 19X6 was closest to:
D a. 1.27 to 1.
Refer To: 18- c. 0.49 to 1.
12 d. 1.45 to 1.
158. March Company's acid-test (quick) ratio at the end of 19X6 was closest to:
A a. 0.95 to 1.
Refer To: 18- c. 1.90 to 1.
12 d. 0.53 to 1.
159. March Company's accounts receivable turnover for 19X6 was closest to:
B a. 7.2 times.
12 d. 10.7 times.
160. March Company's average collection period (age of receivables) for 19X6 was closest to:
B a. 48.9 days.
12 d. 50.5 days.
161. March Company's inventory turnover for 19X6 was closest to:
A a. 7.5 times.
12 d. 7.2 times.
162. March Company's average sale period (turnover in days) for 19X6 was closest to:
A a. 48.9 days.
12 d. 50.5 days.

Reference: 18-13
same question.
Financial statements for Marcial Company appear below:
Marcial Company
19X6 19X5
Current assets:
Inventory .................................. 140 130
Noncurrent assets:
Total assets ................................. $1,990 $1,910
Bonds payable .............................. 390 400
Common stock, $5 par ....................... 200 200
Marcial Company
Income Statement

Gross margin ............................. 490
Income taxes (30%) ....................... 78
Net income ............................... $ 182

163. Marcial Company's working capital (in thousands of dollars) at the end of 19X6 was closest to:
D a. $440.
Medium b. $570.
Refer To: 18- c. $1,360.
13 d. $200.
164. Marcial Company's current ratio at the end of 19X6 was closest to:
A a. 1.83 to 1.
Refer To: 18- c. 0.35 to 1.
13 d. 1.22 to 1.
165. Marcial Company's acid-test (quick) ratio at the end of 19X6 was closest to:
C a. 0.76 to 1.
Refer To: 18- c. 1.04 to 1.
13 d. 0.25 to 1.
166. Marcial Company's accounts receivable turnover for 19X6 was closest to:
B a. 8.4 times.
13 d. 10.4 times.
167. Marcial Company's average collection period (age of receivables) for 19X6 was closest to:
A a. 24.6 days.
13 d. 30.2 days.
168. Marcial Company's inventory turnover for 19X6 was closest to:
A a. 8.4 times.
13 d. 10.4 times.
169. Marcial Company's average sale period (turnover in days) for 19X6 was closest to:
C a. 35.2 days.
13 d. 24.6 days.

Reference: 18-14
The following financial data have been taken from the records of CPZ Enterprises.
Accounts receivable ...................... $200,000

Accounts payable ......................... 80,000
Bonds payable, due in 10 years ........... 300,000
Cash ..................................... 100,000
Interest payable, due in three months .... 10,000
Inventory ................................ 440,000
Land ..................................... 250,000
Notes payable, due in six months ......... 50,000
170. The current ratio for CPZ Enterprises is:

D a. 1.68.
Medium b. 2.14.
CMA adapted c. 5.00.
Refer To: 18- d. 5.29.
14
171. What is the company’s acid test (quick) ratio?

C a. 0.68.
Medium b. 1.68.
CMA adapted c. 2.14.
Refer To: 18- d. 2.31.
14
172. What will happen to the ratios below if CPZ Enterprises uses cash to pay 50% of its accounts
A payable?
Hard
CMA adapted Current Ratio Acid-test Ratio
Refer To: 18- a. increase increase
14 b. decrease decrease
c. increase decrease
d. decrease increase
Reference: 18-15
At December 31, Curry Co. had the following balances in selected asset accounts:
19x7 19x6
Cash ........................... $ 300 $ 200
Accounts receivable, net ....... 1,200 800
Inventory ...................... 500 300
Prepaid expenses ............... 100 60
Other assets ................... 400 250
Total assets ................... $2,500 $1,610
Curry had current liabilities of $1,000 at December 31, 19x7, and credit sales of $7,200 for 19x7.

173. Curry Company’s acid-test (quick) ratio at December 31, 19x7 was closest to:
A a. 1.5 to 1.
Medium b. 1.6 to 1.
CPA adapted c. 2.0 to 1.
Refer To: 18- d. 2.1 to 1.
15
174. Drew Company's average collection period (age of receivables) for 19x7 was closest to:
C a. 30.4 days.
CPA adapted c. 50.7 days.
Refer To: 18- d. 60.8 days.
15
Reference: 18-16
same question.
Financial statements for Narita Company appear below:
Narita Company
19X6 19X5
Current assets:
Inventory .................................. 120 120
Noncurrent assets:
Total assets ................................. $2,180 $2,140
Bonds payable .............................. 260 300
Common stock, $2 par ....................... 140 140
Narita Company

Income Statement

Gross margin ............................. 780
Income taxes (30%) ....................... 132
Net income ............................... $ 308
175. Narita Company's times interest earned for 19X6 was closest to:
D a. 14.7 times.
16 d. 15.7 times.
176. Narita Company's debt-to-equity ratio at the end of 19X6 was closest to:
D a. 0.17 to 1.
Refer To: 18- c. 0.25 to 1.
16 d. 0.42 to 1.
Reference: 18-17
same question.
Financial statements for Narlock Company appear below:
Narlock Company
19X6 19X5
Current assets:
Inventory .................................. 130 120
Noncurrent assets:
Total assets ................................. $2,160 $2,070

Bonds payable .............................. 480 500
Common stock, $2 par ....................... 200 200
Narlock Company
Income Statement

Gross margin ............................. 680
Income taxes (30%) ....................... 108
Net income ............................... $ 252
177. Narlock Company's times interest earned for 19X6 was closest to:
B a. 7.2 times.
17 d. 5.0 times.
178. Narlock Company's debt-to-equity ratio at the end of 19X6 was closest to:
A a. 0.70 to 1.
Refer To: 18- c. 0.38 to 1.
17 d. 1.09 to 1.

Reference: 18-18
same question.
Financial statements for Narumi Company appear below:
Narumi Company
19X6 19X5
Current assets:
Inventory .................................. 130 130
Noncurrent assets:
Total assets ................................. $1,800 $1,750
Bonds payable .............................. 510 500
Common stock, $2 par ....................... 160 160
Total stockholders' equity ............... 910 830
Narumi Company
Income Statement

Gross margin ............................. 620
Income taxes (30%) ....................... 99
Net income ............................... $ 231

179. Narumi Company's times interest earned for 19X6 was closest to:
B a. 12.4 times.
18 d. 4.6 times.
180. Narumi Company's debt-to-equity ratio at the end of 19X6 was closest to:
C a. 2.07 to 1.
Refer To: 18- c. 0.98 to 1.
18 d. 0.56 to 1.
Essay
181. M. K. Berry is the managing director of CE Ltd. a small, family-owned company which
Medium manufactures cutlery. His company belongs to a trade association which publishes a monthly
CIMA (UK) magazine. The latest issue of the magazine contains a very brief article based on the analysis of
adapted the accounting statements published by the 40 companies which manufacture this type of
product. The article contains the following table:
Average for all companies

in the industry
Return on stockholders' equity ...... 33%
Return on total assets .............. 29%
Gross margin percentage ............. 30%
Current ratio ....................... 1.9:1
Average sale period ................. 37 days
Average collection period ........... 41 days
CE Ltd's latest financial statements are as follows:
CE Ltd.
Income Statement
for the year ended 31 October
(in thousands)
Sales ...................................... £900

Cost of goods sold ......................... 720
Gross margin ............................... 180
Selling and administrative expenses ........ 55
Interest ................................... 15
Net income ................................. £110
The country in which the company operates has no corporate income tax. No dividends were
paid during the year. All sales are on account.
CE Ltd.
Balance Sheets
as of 31 October
(in thousands)

This Year Last Year
Current assets:
Cash ............................... £ 5 £ 20
Accounts receivable ................ 120 110
Inventories ........................ 96 80
Noncurrent assets .................... 500 460
Total assets ....................... £721 £670
Accounts payable ................... £147 £206
Bonds payable ...................... 150 150
Common stock ......................... 100 100
Retained earnings .................... 324 214
Total liabilities and
stockholders’ equity ............ £721 £670
Required:
a. Calculate each of the ratios listed in the magazine article for this year for CE, and
comment briefly on CE Ltd's performance in comparison to the industrial averages.
b. Explain why it could be misleading to compare CE Ltd's ratios with those taken from the
article.
Answer:
a.
Return on common stockholders’ equity:
Net income = £110
Preferred dividends = £0
Average common stockholders’
equity = [(£100 + £324) + (£100 + £214)] ÷ 2
= £369
Return on common stockholders’ equity = (£110 - £0) ÷ £369
= 29.8% (rounded)
Return on total assets:

Net income = £110
Tax rate = 0%
Interest expense = £15
Average total assets = (£721 + £670) ÷ 2 = £695.5
Return on total assets = [£110 + £15x(1 - 0.00)] ÷ £695.5
= 18.0% (rounded)

Gross margin percentage:
Gross margin = £180
Sales = £900
Gross margin percentage = £180/£900 = 20%
Current ratio:
Current assets = £5 + £120 + £96 = £221
Current liabilities = £147
Current ratio = £221/£147 = 1.5:1 (rounded)
Average sale period:

Cost of goods sold = £720
Average inventory balance = (£96 + £80)/2 = £88
Inventory turnover = £720/£88 = 8.2 (rounded)
Average sale period = 365 days/8.2 = 45 days (rounded)
Average collection period:

Sales on account = £900
Average accounts receivable balance = (£120 + £110)/2 =
£115
Accounts receivable turnover = £900/£115 = 7.8 (rounded)
Average collection period = 365 days/7.8 = 47 days
(rounded)
CE Ltd's return on stockholders' equity is not as good as the industry’s average. For every
pound invested, shareholders are obtaining a return which is smaller than they should expect,
based on the article's figures. Similarly, the return on total assets is much less than the
average. This indicates that the company is unable to make good use of the funds invested in
the company.
CE Ltd's gross margin percentage is also lower than average--perhaps because it's selling
prices are lower than the average or its cost of sales are higher.
The current ratio indicates that CE Ltd's current assets are greater than its current liabilities
by a factor of 1.5. The industry average shows an even higher figure, with current assets
amounting to almost double current liabilities.
Most companies aim to turn over inventory as quickly as possible, in order to improve
cash flow. CE Ltd is not managing to do this as quickly as the industry's average of 37
days. Similarly, companies should try to obtain payment from customers as soon as
possible. CE Ltd is taking much longer to do this than the average for the industry.

b.
Care must be taken when comparing CE Ltd's ratios with industry averages because there
may be differences in accounting methods. Although accounting standards have reduced
the range of acceptable accounting policies, there is still scope for different firms to apply
different accounting policies. For example, one firm may use straight-line depreciation,
while another may use accelerated depreciation. These variations make comparisons
difficult.
Size differences may also mean that ratios are not comparable. A very large manufacturing
business should be able to achieve economies of scale which are not possible for CE Ltd.
For example, large companies may be able to negotiate sizable discounts from suppliers.
A third problem arises from differences in product range. CE Ltd may produce cutlery
which is sold at the top end of the market, for very high prices, and in small volumes.
Alternatively, it may be producing high-volume, low quality cutlery for the catering
industry. Either situation will reduce the value of comparisons with the industry average.

182. Comparative financial statements for Springville Company for the last two years appear below.
Medium The market price of Springville's common stock was $25 per share on December 31, Year 2.
During Year 2, dividends of $2,000,000 were paid to preferred stockholders and $10,000,000
to stockholders.
Springville Company
December 31, Year 2 and Year 1
Year 2 Year 1
Current assets:
Cash and marketable securities ........... $ 6,000 $ 4,800
Accounts receivable, net ................. 20,000 16,800
Inventory ................................ 28,000 28,800
Total current assets ................... 54,000 50,400
Noncurrent assets:
Investments............................... 75,000 81,600
Plant & equipment, net ................... 12,000 12,000
Total assets ............................... $141,000 $144,000
Accounts payable ......................... $ 7,000 $ 6,000
Accrued liabilities ...................... 1,000 1,200
Total current liabilities ............. 8,000 7,200
Bonds payable ............................ 24,000 24,000
Total liabilities ...................... 32,000 31,200
Preferred stock, 8%, 1,000,000 shares..... 20,000 20,000
Common stock, no par, 5,000,000 shares.... 30,000 30,000
Retained earnings ........................ 59,000 62,800
Total stockholders' equity ............. 109,000 112,800
Total liabilities & stockholders' equity ... $141,000 $144,000
Springville Company
Income Statement
For the Year Ended December 31, Year 2

Gross margin ............................. $ 80,000
Operating expenses ....................... 61,333
Net operating income ..................... 18,667
Interest expense ......................... 5,000
Net income before taxes .................. 13,667
Income taxes (40%) ....................... 5,467
Net income ............................... $ 8,200

Required:
Compute the following for Year 2:

a. Dividend payout ratio.
b. Dividend yield ratio.
c. Price-earnings ratio.
d. Accounts receivable turnover.
e. Inventory turnover.
f. Return on total assets.
g. Return on common stockholders' equity.
h. Was financial leverage positive or negative for the year?
Explain.
Answer:
a. Dividend payout ratio = Dividends per share
÷ Earnings per share.
= ($10,000,000/5,000,000) ÷ (($8,200,000 - $2,000,000)
/5,000,000))
= $2.00  $1.24
= 161.3%.
b. Dividend yield ratio = Dividends paid per share

 Market price per share
= $2.00 ÷ $25
= 8%.
c. Price-earnings ratio = Market price per share

÷ Earnings per share
= $25 ÷ (($8,200,000 - $2,000,000)/5,000,000))
= 20.16.
d. Accounts receivable turnover = Sales on account

 Average accounts receivable balance
= $280,000  (($16,800 + $20,000)/2))
= 15.22 times.
e. Inventory turnover = Cost of goods sold

÷ Average inventory balance
= $200,000 ÷ (($28,800 + $28,000)/2))
= 7.04 times
f. Return on total assets

= [Net income + ((Interest expense x (1 - Tax rate))]
 Average total assets
= [$8,200,000 + 5,000,000 x (1 - 0.40)]
 [($144,000,000 + $141,000,000)/2]
= 7.9%

g. Return on common stockholders' equity
= (Net income - preferred dividends)
 Average common stockholders' equity
= ($8,200,000 - $2,000,000)  [($92,800,000 + $89,000,000)/2]
= 6.8%
h. Financial leverage was negative, since the rate of return to the common stockholders (6.8%)
was less than the rate of return on total assets (7.8%).
183. Financial statements for Praeger Company appear below:

Medium
Praeger Company
19X6 19X5
Current assets:
Inventory .................................. 110 110
Noncurrent assets:
Total assets ................................. $2,460 $2,430
Bonds payable .............................. 500 500
Preferred stock, $5 par, 5% ................ 100 100
Common stock, $5 par ....................... 200 200

Praeger Company
Income Statement

Cost of goods sold ....................... 770
Gross margin ............................. 330
Income taxes (30%) ....................... 45
Net income ............................... $ 105
Dividends during 19X6 totalled $45 thousand, of which $5 thousand were preferred dividends.
Required:
Compute the following for 19X6:

a. Earnings per share of common stock.
b. Price-earnings ratio.
c. Dividend payout ratio.
d. Dividend yield ratio.
e. Return on total assets.
f. Return on common stockholders' equity.
g. Book value per share.
h. Working capital.
i. Current ratio.
j. Acid-test (quick) ratio.
k. Accounts receivable turnover.
l. Average collection period (age of receivables).
m. Inventory turnover.
n. Average sale period (turnover in days).
o. Times interest earned.
p. Debt-to-equity ratio.
Answer:
a. Earnings per share = (Net Income - Preferred Dividends)
÷ Average number of common shares
outstanding*
= ($105 - $5) ÷ 40
= $2.50
*Number of common
shares outstanding = Common stock ÷ Par value
= $200 ÷ $5
= 40

b. Price-earnings ratio = Market price per share
÷ Earnings per share (see above)
= $30 ÷ $2.50
= 12.0
c. Dividend payout ratio = Dividends per share*

= $1.00 ÷ $2.50
= 40.0%
*Dividends per share = Common dividends ÷ Common shares**

= $40 ÷ 40
= $1.00
**See above
d. Dividend yield ratio = Dividends per share*

÷ Market price per share
= $1.00 ÷ $30.00
= 3.33%
*See above
e. Return on total assets = Adjusted net income*

÷ Average total assets**
= $140 ÷ $2,445
= 5.73%
*Adjusted net income = Net income

+ [Interest expense x (1-Tax rate)]
= $105 + [$50 x (1 – 0.30)]
= $140
**Average total assets = ($2,460 + $2,430) ÷ 2

= $2,445
f. Return on common
stockholders' equity = (Net income - Preferred dividends)
÷ Average common stockholders' equity*
= ($105 - $5) ÷ $1,520
= 6.58%
*Average common stockholders' equity = ($1,550 + $1,490) ÷ 2

= $1,520
g. Book value per share = Common stockholders' equity

÷ Number of common shares outstanding*
= $1,550 ÷ 40
= $38.75
*Number of common
= $200 ÷ $5
= 40

h. Working capital = Current assets - Current liabilities
= $440 - $310
= $130
i. Current ratio = Current assets ÷ Current liabilities

= $440 ÷ $310
= 1.42 to 1
j. Acid-test ratio = Quick assets* ÷ Current liabilities

= $270 ÷ $310
= 0.87 to 1
*Quick assets = Cash + Marketable securities

+ Current receivables
= $100 + $170
= $270
k. Accounts receivable
turnover = Sales on account ÷ Average accounts
receivable*
= $1,100 ÷ $170
= 6.47 times
*Average accounts receivable = ($170 + $170) ÷ 2

= $170
l. Average collection
period = 365 days ÷ Accounts receivable turnover*
= 365 ÷ 6.47
= 56.4 days
*See above
m. Inventory turnover = Cost of goods sold ÷ Average inventory*

= $770 ÷ $110
= 7.00 times
*Average inventory = ($110 + $110)÷2

= $110
n. Average sale period = 365 days ÷ Inventory turnover*

= 365 ÷7.00
= 52.1 days
*See above
o. Times interest earned = Net operating income

÷ Interest expense
= $200 ÷ $50
= 4.00 times
p. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity

= $810 ÷ $1,650
= 0.49 to 1

184. Financial statements for AAR Company appear below:
Medium
AAR Company
December 31
Current assets:
Cash and marketable securities ............. $ 21,000
Accounts receivable, net ................... 160,000
Inventory .................................. 300,000
Prepaid expenses ........................... 9,000
Total current assets ..................... 490,000
Noncurrent assets:
Plant & equipment, net ..................... 810,000
Total assets ................................. $1,300,000
Accounts payable ........................... $ 75,000
Accrued liabilities ........................ 25,000
Notes payable, short term .................. 100,000
Total current liabilities ............... 200,000
Bonds payable .............................. 300,000
Total liabilities ........................ 500,000
Common stock, $5 par ....................... 100,000
Retained earnings .......................... 700,000
Total stockholders' equity ............... 800,000
Total liabilities & stockholders' equity ..... $1,300,000
AAR Company
Income Statement
For the Year Ended December 31
Sales (all on account) .................. $2,100,000

Cost of goods sold ...................... 1,770,000
Gross margin ............................ 330,000
Operating expenses ...................... 130,000
Net operating income .................... 200,000
Interest expense ........................ 50,000
Net income before taxes ................. 150,000
Income taxes (30%) ...................... 45,000
Net income .............................. $ 105,000
AAR Company paid dividends of $3.15 per share during the year. The market price of the
company's stock at December 31 was $63 per share. Assets at the beginning of the year totaled
$1,100,000, and stockholders' equity totaled $725,000. The balance of accounts receivable at
the beginning of the year was $150,000. The balance in inventory at the beginning of the year
was $250,000.

Required:
Compute the following:

a. Current ratio.
b. Acid-test (quick) ratio.
c. Average collection period (age of receivables).
d. Inventory turnover.
e. Times interest earned.
f. Debt-to-equity ratio.
g. Dividend payout ratio.
h. Price-earnings ratio.
i. Return on total assets.
j. Return on common stockholders' equity.
k. Was financial leverage positive or negative for the year.
Explain.
Answer:
a. Current ratio = Current assets ÷ Current liabilities

= $490,000 ÷ $200,000
= 2.45 to 1
b. Acid-test ratio = Quick assets* ÷ Current liabilities

= $181,000 ÷ $200,000
= 0.91 to 1

= $21,000 + $160,000
= $181,000
c. Accounts receivable
turnover = Sales on account ÷ Average accounts receivable*
= $2,100,000 ÷ $155,000
= 13.55 times
*Average accounts receivable = ($160,000 + $150,000) ÷ 2

= $155,000.
Average collection
period = 365 days ÷ Accounts receivable turnover
= 365 ÷ 13.55
= 26.94 days
d. Inventory turnover = Cost of goods sold ÷ Average inventory*

= $1,770,000 ÷ $275,000
= 6.4 times
*Average inventory = ($300,000 + $250,000) ÷ 2

= $275,000.

e. Times interest earned = Net operating income
÷ Interest expense
= $200,000 ÷ $50,000
= 4.00 times
f. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity

= $500,000 ÷ $800,000
= 0.625 to 1
g. Dividend payout ratio = Dividends per share

÷ Earnings per share.
= $3.15 ÷ ($105,000/20,000 shares)
= $3.15  $5.25
= 60%.
h. Dividend yield ratio = Dividends paid per share

 Market price per share
= $3.15 ÷ $63.00
= 5%.
i. Price-earnings ratio = Market price per share

÷ Earnings per share
= $63 ÷ $5.25
= 12.0.
j. Return on total assets

= ((Net income + (Interest expense x (1 - Tax rate))
= (($105,000 + (50,000 x (1 - 0.30))
 (($1,100,000 + $1,300,000)/2))
= $140,000  $1,200,000
= 11.67%.
k. Return on common stockholders' equity

= (Net income – Preferred dividends)
 Average common stockholders' equity
= $105,000  [($725,000 + $800,000)/2]
= 13.8%
l. Financial leverage was positive, since the rate of return to the common stockholders
(13.8%) was greater than the rate of return on total assets (11.67%).

Medium question.
Financial statements for Qiang Company appear below:
Qiang Company
19X6 19X5
Current assets:
Inventory .................................. 130 130
Noncurrent assets:
Total assets ................................. $2,390 $2,340
Bonds payable .............................. 400 400
Common stock, $5 par ....................... 180 180

Qiang Company
Income Statement

Gross margin ............................. 450
Income taxes (30%) ....................... 69
Net income ............................... $ 161
Dividends during 19X6 totaled $61 thousand, of which $12 thousand were preferred
dividends.
Required:

c. Dividend yield ratio.
d. Return on total assets.
e. Return on common stockholders' equity.
f. Book value per share.
Answer:
÷ Average number of common
shares outstanding*
= ($161 - $12) ÷ 36
= $4.14
*Number of common
= $180 ÷ $5
= 36

= $50 ÷ $4.14
= 12.1
c. Dividend yield ratio = Dividends per share*

= $1.36 ÷ $50.00
= 2.72%

= $49 ÷ 36
= $1.36
**See above
d. Return on total assets = Adjusted net income*

= $189 ÷ $2,365
= 7.99%
*Adjusted net income = Net income

+ [Interest expense x (1-Tax rate)]
= $161 + [$40 x (1 - 0.30)]
= $189

= $2,365
e. Return on common
stockholders' equity = (Net income – Preferred dividends)
= ($161 - $12)÷$1,530
= 9.74%

= $1,530
f. Book value per share = Common stockholders' equity

= $1,580 ÷ 36
= $43.89
*Number of common
= $180 ÷ $5
= 36

186. NOTE TO THE INSTRUCTOR: Questions 185, 186, and 187 are different versions of the
Medium same question.
Financial statements for Qualle Company appear below:
Qualle Company
19X6 19X5
Current assets:
Inventory .................................. 170 170
Noncurrent assets:
Total assets ................................. $2,330 $2,300
Bonds payable .............................. 470 500
Common stock, $10 par ...................... 160 160
Retained earnings .......................... 1,010 900

Qualle Company
Income Statement

Gross margin ............................. 690
Income taxes (30%) ....................... 111
Net income ............................... $ 259
dividends.
Required:

Answer:
÷ Average number of common shares
outstanding*
= ($259 - $10) ÷ 16
= $15.56
*Number of common
= $160 ÷ $10
= 16

= $280 ÷ $15.56
= 18.0

= $8.69 ÷ $280.00
= 3.10%

= $139 ÷ 16
= $8.69
**See above

= $294 ÷ $2,315
= 12.70%
*Adjusted net income = Net income + [Interest expense

x (1-Tax rate)]
= $259 + [$50 x (1 - 0.30)]
= $294

= $2,315
e. Return on common
÷ Average common
stockholders' equity*
= ($259 - $10)÷$1,285
= 19.38%

= $1,285

÷ Number of common
shares outstanding*
= $1,340 ÷ 16
= $83.75
*Number of common
= $160 ÷ $10
= 16

187. NOTE TO THE INSTRUCTOR: Questions 185, 186, and 187 are different versions of the
Medium same question.
Financial statements for Quade Company appear below:
Quade Company
19X6 19X5
Current assets:
Inventory .................................. 120 140
Noncurrent assets:
Total assets ................................. $2,010 $1,990
Bonds payable .............................. 380 400
Common stock, $10 par ...................... 160 160

Quade Company
Income Statement

Gross margin ............................. 720
Income taxes (30%) ....................... 120
Net income ............................... $ 280
dividends.
Required:

Answer:
÷ Average number of common
shares outstanding*
= ($280 - $18) ÷ 16
= $16.38
*Number of common
= $160 ÷ $10
= 16

= $230 ÷ $16.38
= 14.0

= $12.00 ÷ $230.00
= 5.22%

= $192 ÷ 16
= $12.00
**See above

= $308 ÷ $2,000
= 15.40%
*Adjusted net income = Net income + [Interest expense

x (1-Tax rate)]
= $280 + [$40 x (1 – 0.30)]
= $308

= $2,000
e. Return on common
= ($280 - $18)÷$1,065
= 24.60%

= $1,065

= $1,100 ÷ 16
= $68.75
*Number of common
= $160 ÷ $10
= 16

188. Condensed financial statements of Miller Company at the beginning and at the end of the
Medium current year are given below:
Miller Company
Balance Sheet
End of Beginning of
Current Year Current Year
Cash ........................... $ 10,000 $ 8,000
Marketable securities .......... 20,000 22,000
Accounts receivable ............ 90,000 110,000
Inventories .................... 150,000 100,000
Plant and equipment, net ....... 280,000 260,000
Total assets ................ $550,000 $500,000
Accounts payable ............... $ 80,000 $ 60,000

Accrued short-term liabilities 20,000 25,000
Bonds payable .................. 75,000 75,000
Preferred stock, 10%, $100 par 50,000 50,000
Common stock, $10 par .......... 100,000 100,000
Additional paid-in capital,
common stock ................. 50,000 50,000
Retained earnings .............. 175,000 140,000
Total liabilities and equity $550,000 $500,000
Miller Company
Condensed Income Statement
For the Current Year
Sales (all on account) ............ $650,000

Less cost of goods sold ........... 350,000
Gross margin ...................... 300,000
Less operating expenses ........... 200,000
Net operating income .............. 100,000
Less interest expense ............. 10,000
Net income before income taxes .... 90,000
Less income taxes ................. 40,000
Net income ........................ $ 50,000
The company paid total dividends of $15,000 during the year, of which $5,000 were to
preferred stockholders. The market price of a share of common stock at the end of the year was
$30.

Required:
On the basis of the information given above, fill in the blanks with the appropriate figures.
Example: The current ratio at the end of the current year would be computed by dividing
$270,000 by $100,000
a. The acid-test (quick) ratio at the end of the current year would be computed by dividing
_______________ by _________________.
b. The inventory turnover for the year would be computed by dividing _______________ by
_________________.
c. The debt-to-equity ratio at the end of the current year would be computed by dividing
_______________ by _________________.
d. The earnings per share of common stock would be computed by dividing

_______________ by _________________.
e. The accounts receivable turnover for the year would be computed by dividing
_______________ by _________________.
f. The times interest earned for the year would be computed by dividing
_______________ by _________________.
g. The return on common stockholders' equity for the year would be computed by
dividing _______________ by _________________.
h. The dividend yield would be computed by dividing _______________ by

_________________.
Answer:
a. $120,000; $100,000
b. $350,000; $125,000
c. $175,000; $375,000
d. $ 45,000; 10,000 shares
e. $650,000; $100,000
f. $100,000; $ 10,000
g. $ 45,000; $307,500
h. $1; $30

189. Shelzo Inc., a manufacturer of construction equipment is considering the purchase of one of its
Hard suppliers, Raritron Industries. The purchase has been given preliminary approval by Shelzo's
CMA adapted Board of Directors, and several discussions have taken place between the management of both
companies. Raritron has submitted financial data for the past several years. Shelzo's controller has
analyzed Raritron's financial statements and prepared the following ratio analysis comparing
Raritron's performance with the industry averages.
Industry
1993 1992 1991 Average
Return on common
stockholders’ equity ......... 13.03 13.02 12.98 12.96
Average sale period ............ 51.16 47.29 42.15 38.63
Times interest earned .......... 3.87 3.46 3.28 3.56
Price-earnings ratio ........... 10.96 11.23 11.39 11.54
Debt-to-equity ratio ........... 0.50 0.46 0.48 0.57
Accounts receivable turnover ... 6.98 7.25 7.83 7.78
Current ratio .................. 1.65 1.95 1.70 2.30
Dividend yield ratio ........... 2.08 2.06 2.12 2.25
Required:
Using the information provided above for Raritron Industries:
A. 1. Identify the two ratios from the above list that would be of most interest to
short-term creditors.
2. Explain what these two ratios measure.
3. What do these two ratios indicate about Shelzo Inc.?
B. 1. Identify the three ratios from the above list that would be of most interest to
stockholders.
2. Explain what these three ratios measure.
3. What do these three ratios indicate about Shelzo Inc.?
C. 1. Identify the two ratios from the above list that would be of most interest to
long-term creditors.
2. Explain what these two ratios measure.
3. What do these two ratios indicate about Shelzo Inc.?
Answer:
A. 1. Two ratios that would be of most interest to short-term creditors would be the
average sale period and the current ratio.
2. The average sale period relates the average amount of inventory to the cost of
goods sold. This ratio measures the length of time it takes on average to sell inventory
and is a gauge of how well the company manages its inventory. The current
ratio is calculated by dividing current assets by current liabilities. This ratio
measures short-run solvency, i.e., the ability to meet current obligations.
3. For Shelzo Inc., the average sale period has been increasing and is well above the
industry average, while the current ratio has been below the industry average. Both
of these ratios indicate that there may be problems with the company’s liquidity position.
This could be caused by poor inventory control.

B. 1. The three ratios that would be of most interest to common stockholders are the
return on common stockholders’ equity, the price-earnings ratio, and the dividend yield
ratio.
2. The return on common stockholders’ equity is a measure of how effectively the
company has used the stockholders’ investment in the company to generate profits.
The price- earnings ratio provides a measure of how the stock market perceives the
company’s future earnings prospects. The higher the ratio, the more favorable the future
looks for the company. The dividend yield ratio tells us what proportion of the
company’s profits are paid out as cash dividends to common stockholders.
3. These three ratios are close to the industry averages and there are no discernible
significant trends.
C. 1. The two ratios that would be of most interest to long- term creditors are times interest
earned and the debt-to- equity ratio.
2. Times interest earned is earnings before interest expense and taxes divided by
interest expense. This ratio measures debt paying ability. If stable, the company will
be able to refinance or obtain new funds at reasonable rates. The debt-to-
equity ratio measures the relative proportions of debt and equity in the company’s capital
structure. The lower the level of the debt-to-equity ratio, the more security long-
term debtors have.
3. For Shelzo Inc., times interest earned has been improving and is currently above
the industry average, indicating that the company should be able to borrow additional
funds if needed. The company’s debt-to-equity ratio is below the industry
average which also indicates the company has the capacity to perhaps take on additional
debt.

190. Financial statements for Lowe Company appear below:
Medium
Lowe Company
December 31, Year 2 and Year 1
Year 2 Year 1
Cash........................................ $ 45 $ 30
Inventory .................................. 67 60
Long-term investments....................... 162 150
Land........................................ 128 100
Building.................................... 98 50
Total assets.............................. $ 538 $ 430

Bonds payable............................... 35 50
Mortgage payable............................ 100 -0-
Preferred stock,12%......................... 100 100
Common stock................................ 195 170
Total liabilities & stockholders' equity.. $ 538 $ 430
Lowe Company
Income Statement
For the Year Ended December 31, Year 2
Sales (all on account) ................... $145

Gross margin ............................. $ 71
Operating expenses (including interest
expense of $5,000)...................... 16
Income taxes (40%) ....................... 22
Net income ............................... $ 33
Dividends totaled $25,000 for the year, of which $12,000 was paid to the preferred stockholder.
Required:
Compute the following for Year 2:

a. Current ratio.
e. Return on total assets.
g. Times-interest-earned ratio.

Answer:

= ($45 + $38 + $67) ÷ ($36 + $24)
= 2.5 to 1

= $83 ÷ ($36 + $24)
= 1.38 to 1
*Quick assets = Cash + Current receivables

= $45 + $38
= $83
= $145 ÷ $39
= 3.72 times

= $39
Average collection
= 365 ÷ 3.72
= 98.1 days

= $74 ÷ $63.5
= 1.17 times
*Average inventory = ($67 + $60) ÷ 2

= $63.5
e. Return on total assets

= ((Net income + (Interest expense x (1 - tax rate))
= (($33 + ($5 x (1 - 0.40))  (($538 + $430)/2))
= $36  $484
= 7.4%.
f. Times interest earned = Earnings before interest and taxes

÷ Interest expense
= ($55 + $5) ÷ $5
= 12.00 times
g. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity

= ($36 + $24 + $35 + $100) ÷ ($100 + $195 + $48)
= $195 ÷ $343
= 0.57 to 1

191. Several investors are in the process of organizing a new company. The investors feel that
Medium $800,000 would be adequate to finance the new company's operations. Three methods are
available to finance the new company:
a. All $800,000 could be obtained through the issuance of common stock.
b. Common stock could be issued to provide $400,000 with the other $400,000
obtained by issuing $100 par value, l0% preferred stock.
c. Common stock could be issued to provide $40,000 with the other $400,000 obtained by
issuing bonds with an interest rate of 10%.
The investors are confident that the company could earn $175,000 each year before interest
and taxes. The tax rate is 40%.
Required:
a. Assuming that the estimates are correct, compute the net income available to common
stockholders under each of the three financing methods proposed above.
b. Using the income data computed in (a) above, compute the return on common
stockholders’ equity under each of the three methods.
c. Why do methods B and C provided a greater return on common equity than does
method A? Why does method C provide a greater return on common equity than method B?
Answer:
a. Net income available to common stockholders:
Method A Method B Method C

Income before interest and taxes... $175,000 $175,000 $175,000
Deduct interest expense:
0.10 x $400,000.................. ________ ________ 40,000
Income before taxes................ $175,000 $175,000 $135,000
Deduct income taxes (40%).......... 70,000 70,000 54,000
Net income......................... $105,000 $105,000 $ 81,000
Deduct preferred dividends:
0.10 x $400,000................... - o 40,000 - o
Net income to common stockholders.. $105,000 $ 65,000 $ 81,000

b. Return on common equity:
Method A Method B Method C
Net income to common stockholders $105,000 $ 65,000 $ 81,000
Common stockholders' investment... $800,000 $400,000 $400,000
Return on common equity........... 13.10% 16.25% 20.25%
c. Methods B and C provide a greater return on common equity than Method A due to the
effect of positive leverage. Methods B and C each contain sources of funds that require a
fixed annual return on the funds provided. This fixed annual return is less than what is
being earned on the assets of the company, with the difference going to common
stockholders.
Method C uses debt and provides more leverage than Method B in which preferred stock
is issued. The difference is due to the deductibility for tax purposes of the interest on debt,
whereas dividends on preferred stock are not deductible for tax purposes.

Medium question.
Financial statements for Raridan Company appear below:
Raridan Company
19X6 19X5
Current assets:
Cash and marketable securities ............ $ 140 $ 140
Accounts receivable, net .................. 190 170
Inventory ................................. 100 110
Prepaid expenses .......................... 70 70
Total current assets .................... 500 490
Noncurrent assets:
Plant & equipment, net .................... 1,540 1,520
Total assets ................................ $2,040 $2,010
Accounts payable .......................... $ 110 $ 110
Accrued liabilities ....................... 50 40
Notes payable, short term ................. 110 110
Bonds payable ............................. 280 300
Total liabilities ....................... 550 560
Common stock, $10 par ..................... 200 200
Additional paid-in capital--common stock .. 260 260
Retained earnings ......................... 910 870
Total stockholders' equity .............. 1,490 1,450
Total liabilities & stockholders' equity .... $2,040 $2,010
Raridan Company
Income Statement

Gross margin ............................. 570
Income taxes (30%) ....................... 96
Net income ............................... $ 224

Required:

a. Current ratio.
Answer:
= $500 ÷ $270
= 1.85 to 1

= $330 ÷ $270
= 1.22 to 1

= $140 + $190
= $330
= $1,900 ÷ $180
= 10.56 times

= $180
Average collection
= 365 ÷ 10.56
= 34.6 days

= $1,330 ÷ $105
= 12.67 times

= $105

÷ Interest expense
= $350 ÷ $30
= 11.67 times

= $550 ÷ $1,490
= 0.37 to 1

Medium question.
Financial statements for Rarig Company appear below:
Rarig Company
19X6 19X5
Current assets:
Inventory ................................. 190 180
Noncurrent assets:
Total assets ................................ $2,090 $2,020
Bonds payable ............................. 460 500
Common stock, $5 par ...................... 160 160
Additional paid-in capital—common stock .. 110 110
Total stockholders' equity .............. 1,320 1,150
Rarig Company
Income Statement

Gross margin ............................. 540
Income taxes (30%) ....................... 84
Net income ............................... $ 196

Required:

a. Current ratio.
Answer:
= $590 ÷ $310
= 1.90 to 1

= $370 ÷ $310
= 1.19 to 1

= $210 + $160
= $370
= $1,800 ÷ $155
= 11.61 times

= $155
Average collection
= 365 ÷ 11.61
= 31.4 days

= $1,260 ÷ $185
= 6.81 times

= $185

÷ Interest expense
= $330 ÷ $50
= 6.60 times

= $770 ÷ $1,320
= 0.58 to 1

Medium question.
Financial statements for Rarity Company appear below:
Rarity Company
19X6 19X5
Current assets:
Inventory ................................. 90 110
Noncurrent assets:
Total assets ................................ $1,940 $1,880
Bonds payable ............................. 480 500
Common stock, $5 par ...................... 220 220
Additional paid-in capital--common stock .. 200 200
Total stockholders' equity .............. 980 890
Rarity Company
Income Statement

Gross margin ............................. 330
Income taxes (30%) ....................... 45
Net income ............................... $ 105

Required:

a. Current ratio.
Answer:
= $500 ÷ $480
= 1.04 to 1

= $340 ÷ $480
= 0.71 to 1
*Quick assets = Cash + Marketable securities +

= $210 + $130
= $340
= $1,100 ÷ $125
= 8.80 times

= $125
Average collection
= 365 ÷ 8.80
= 41.5 days

= $770 ÷ $100
= 7.70 times

= $100

÷ Interest expense
= $200 ÷ $50
= 4.00 times

= $960 ÷ $980
= 0.98 to 1

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Chapter 18

“How Well Am I Doing?” Financial Statement Analysis

1. In determining whether a company's financial condition is improving or deteriorating over

664 Managerial Accounting, 9/e

16. Horizontal analysis of financial statements is accomplished through:

17. The gross margin percentage is most likely to be used to assess:

Managerial Accounting, 9/e 665

22. Financial leverage is negative when:

23. Which of the following is not a source of financial leverage?

666 Managerial Accounting, 9/e

28. Sale of a piece of equipment at book value for cash will:

Managerial Accounting, 9/e 667

668 Managerial Accounting, 9/e

Sheridan's sales for the year was:

Managerial Accounting, 9/e 669

Earnings per share ...... $10

The price-earnings ratio is:

670 Managerial Accounting, 9/e

Earnings per share ...... $15

The price-earnings ratio is:

The dividend yield ratio is closest to:

Managerial Accounting, 9/e 671

672 Managerial Accounting, 9/e

Managerial Accounting, 9/e 673

The book value per share of common stock is:

674 Managerial Accounting, 9/e

Managerial Accounting, 9/e 675

Ben Company's current liabilities were:

676 Managerial Accounting, 9/e

Managerial Accounting, 9/e 677

678 Managerial Accounting, 9/e

Managerial Accounting, 9/e 679

680 Managerial Accounting, 9/e

Managerial Accounting, 9/e 681

682 Managerial Accounting, 9/e

91. For 19x9, the gross margin as a percentage of sales was:

Managerial Accounting, 9/e 683

Financial statements for Larned Company appear below:

684 Managerial Accounting, 9/e

Sales (all on account) ................... $2,930

Managerial Accounting, 9/e 685

Financial statements for Laroche Company appear below:

686 Managerial Accounting, 9/e

Sales (all on account) ................... $2,250

Managerial Accounting, 9/e 687

Financial statements for Larosa Company appear below:

688 Managerial Accounting, 9/e

Sales (all on account) ................... $1,870

Managerial Accounting, 9/e 689

Earnings before interest and taxes ............. $35 million

116. The expected dividend per share of common stock is

Financial statements for Orange Company appear below:

690 Managerial Accounting, 9/e

Sales (all on account) ................... $2,830

Managerial Accounting, 9/e 691

692 Managerial Accounting, 9/e

Financial statements for Orantes Company appear below:

Sales (all on account) ................... $2,510

Managerial Accounting, 9/e 693