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Exam 13: Financial Statement Analysis

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Question 51

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Net income divided by sales is the formula for which of these analytical measures?

A) Return on assets
B) Return on equity
C) Earnings per share
D) Net margin

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Question 52

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Which ratio compares the earnings per share of a company to the market price for a share of the company's stock?

A) Price-earnings ratio
B) Dividend yield
C) Book value per share
D) Return on equity

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Question 53

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Alpha Company provided the following balance sheet for Year 2: $\begin{array}{|l|r|}\hline \text { Assets }\\\hline \text { Cash } & \$ \quad 5,400 \\\hline \text { Accounts receivable } & 15,500 \\\hline \text { Inventory } & 18,000 \\\hline \text { Prepaid expenses } & 1,600 \\\hline \text { Plant and equipment, net of depreciation } & 25,000 \\\hline \text { Land } & \underline { 19,950} \\\hline \text { Total assets } & \underline { \$ \quad 85,450} \\\hline\\\hline \text { Liabilities and Stockholders' Equity }\\\hline \text { Accounts payable } & \$ \quad4,500 \\\hline \text { Salaries payable } & 11,500 \\\hline \text { Bonds payable (Due in 2020) } & 10,000 \\\hline \text { Common stock, no par } & 30,000 \\\hline \text { Retained earnings } & \underline {29,450} \\\hline \text { Total liabilities and stockholder' equity } & \underline {\$ \quad 85,450} \\\hline\end{array}$ What is the company's plant assets to long-term liabilities ratio?

An analysis procedure that uses percentages to compare each of the parts of an individual statement to a key dollar amount from the financial statements is:

You are considering an investment in Frontier Airlines stock and wish to assess the firm's earnings performance.All of the following ratios can be used to assess profitability except:

Sable Company is seeking a short-term loan from its local bank.The banker needs assurance that the company will be able to repay the loan.Describe three financial ratios the banker should consider including in the loan approval process.What information does each of your selected ratios provide?

You are considering an investment in Apple stock and wish to assess the firm's short-term debt-paying ability.All of the following ratios are used to assess liquidity except:

Grove Corporation had sales of $3,000,000,cost of sales of $2,250,000,and average inventory of $500,000.What was Grove's inventory turnover ratio for the period?

Indicate whether each of the following statements about financial statement analysis is

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

Describe the differences between the liquidity ratios,solvency ratios and profitability ratios.Identify examples of each type of ratio as well.

Indicate whether each of the following statements about financial statement analysis is

On December 31,Year 1,Allen Company's total current assets were $600,000 and its total current liabilities were $380,000.On January 1,Year 2,Allen paid $20,000 on accounts payable. Required: (a)Compute Allen's working capital before and after paying the account payable. (b)Compute Allen's current ratio before and after paying the account payable.Round your answer to two decimal places.

Lilly's Corporation has working capital of $620,000,and Harmon Corporation has working capital of $840,000.Which of the following statements is incorrect?

Financial analysis typically involves some form of comparison such as changes in the same item over a number of years.

The current ratio is one of the most common measures of solvency.

Comparative income statements for Chicago Company are provided below: $\begin{array}{l}\hline \quad\quad\quad\quad\quad\quad\quad \text { Chicago Company }\\\hline \quad\quad\quad\quad \text {Comparative Income Statement}\\\hline \quad\quad\quad\quad\quad\text {Years Ended December 31,}\\\begin{array}{|l|}\hline\\\hline \text { Sales }\\\hline \text {Less cost of goods sold}\\\hline \text {Gross margin }\\\hline \text {Less operating expenses }\\\hline \text {Income before taxes}\\\hline \text {Income taxes}\\\hline \text {Net income}\\\hline\end{array}\begin{array}{l|}\hline 2014 \\\hline 288,000 \\\hline \underline {101,350} \\\hline 186,650 \\\hline \underline {89,970} \\\hline 96,680 \\\hline \underline {38,672} \\\hline \underline {58,008} \\\hline \end{array}\begin{array}{l|}\hline 2013 \\\hline 302,190 \\\hline \underline {115,400} \\\hline 186,790 \\\hline \underline {99,770} \\\hline 87,020 \\\hline \underline {34,808} \\\hline \underline {52,212} \\\hline \end{array}\end{array}$ Required: Perform a horizontal analysis of Chicago Company's income statement by computing horizontal percentages for each item.Round your answer to one decimal place (i.e.22.5%).

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

Benson Company declared and paid a cash dividend totaling $500,000 on its common stock.As a result of this transaction,the company's debt to assets ratio will:

The following balance sheet information is provided for Duke Company for Year 2: $\begin{array}{|l|r|}\hline \text { Cash } & \$\quad 5,400 \\\hline \text { Accounts receivable } & 15,500 \\\hline \text { Inventory } & 18,000 \\\hline \text { Prepaid expenses } & 1,600 \\\hline \text { Pant and equipment, net of depreciation } & 20,200 \\\hline \text { Land } & \underline { 19950 }\\\hline \text { Total assets } & \underline { \$ \quad 80,650 }\\\hline\\\hline \text { Liabilities and Stockholders' Equity }\\\hline\text { Accounts payable } & \$ \quad 4,500 \\\hline\text { Salaries payable } & 11,500 \\\hline \text { Bonds payable (Due in 2020) } & 19,000 \\\hline \text { Common stock, no par } & 30,000 \\\hline \text { Retained earnings } & \underline { 15,650}\\\hline \text { Total liabilities and stockholder' equity } & \underline { \$ \quad 80,650}\\\hline\end{array}$ What is the company's current ratio (rounded to two decimal points) ?