Chapter 16 “How Well Am I Doing?”—Financial Statement Analysis
True/False Questions
1. Common-size statements are financial statements of companies of similar size.
Ans: False
2. One limitation of vertical analysis is that it cannot be used to compare two companies that are significantly different in size.
Ans: False
3. The gross margin percentage is computed by dividing the gross margin by total assets.
Ans: False
4. The sale of used equipment at book value for cash will increase earnings per share.
Ans: False
5. Earnings per share is computed by dividing net income (after deducting preferred dividends) by the average number of common shares outstanding.
Ans: True
6. The dividend payout ratio divided by the dividend yield ratio equals the price-earnings ratio.
Ans: True
7. An increase in the number of shares of common stock outstanding will decrease a company's price-earnings ratio if the market price per share remains unchanged.
Ans: False
8. A company's financial leverage is negative when its return on total assets is less than its return on common stockholders' equity.
Ans: False
9. When computing return on common stockholders' equity, retained earnings should be included as part of common stockholders' equity.
Ans: True
10. When a retailing company purchases inventory, the book value per share of the company increases.
Ans: False
11. If a company's acid-test ratio increases, its current ratio will also increase.
Ans: True
12. Assuming a current ratio greater than 1, acquiring land by issuing more of the company's common stock will increase the current ratio.
Ans: False
13. If a company successfully implements lean production, its inventory turnover ratio should decrease.
Ans: False
14. Short-term borrowing is not a source of working capital.
Ans: True
15. Working capital is computed by subtracting long-term liabilities from long-term assets.
Ans: False
Multiple Choice Questions
16. Common size financial statements help an analyst to:A) Evaluate financial statements of companies within a given industry of the
approximate same size.B) Determine which companies in a similar industry are at approximately the same
stage of development.C) Compare the mix of assets, liabilities, capital, revenue, and expenses within a
company over a period of time or between companies within a given industry without respect to size.
D) Ascertain the relative potential of companies of similar size in different industries.
Ans: C Source: CMA, adapted
17. Which of the following ratios would be least useful in determining a company's ability to pay its expenses and liabilities?A) current ratioB) acid-test ratioC) price-earnings ratioD) times interest earned ratio
Ans: C LO: 2,3,4
18. Most stockholders would ordinarily be least concerned with which of the following ratios:A) earnings per share.B) dividend yield ratio.C) price-earnings ratio.D) acid-test ratio.
Ans: D LO: 2,3
19. What effect will the issuance of common stock for cash at year-end have on the following ratios?
Return on Total Assets Debt-to-Equity RatioA) Increase IncreaseB) Increase DecreaseC) Decrease IncreaseD) Decrease Decrease
Ans: D LO: 2,4
20. The market price of Friden Company's common stock increased from $15 to $18. Earnings per share of common stock remained unchanged. The company's price-earnings ratio would:A) increase.B) decrease.C) remain unchanged.D) impossible to determine.
Ans: A
21. If a company is profitable and is effectively using leverage, whichone of the following ratios is likely to be the largest?A) Return on total assets.B) Return on total liabilities.C) Return on common stockholders' equity.D) Cannot be determined.
Ans: C
22. Clark Company issued bonds with an interest rate of 10%. The company's return on assets is 12%. The company's return on common stockholders' equity would most likely:A) increase.B) decrease.C) remain unchanged.D) cannot be determined.
Ans: A
23. Which of the following transactions could generate positive financial leverage for a corporation?A) acquiring assets through the issuance of long-term debt.B) acquiring assets through the use of accounts payable.C) acquiring assets through the issuance of common stock.D) both A and B above
Ans: D
24. Book value per common share is the amount of stockholders' equity per outstanding share of common stock. Which one of the following statements about book value per common share is most correct?A) Market price per common share usually approximates book value per common
share.B) Book value per common share is based on past transactions whereas the market
price of a share of stock mainly reflects what investors expect to happen in the future.
C) A market price per common share that is greater than book value per common share is an indication of an overvalued stock.
D) Book value per common share is the amount that would be paid to stockholders if the company were sold to another company.
Ans: B Source: CMA, adapted
25. The ratio of total cash, marketable securities, accounts receivable, and short-term notes to current liabilities is:A) the debt-to-equity ratio.B) the current ratio.C) the acid-test ratio.D) working capital.
Ans: C LO: 3,4
26. A company has just converted a long-term note receivable into a short-term note receivable. The company's acid-test and current ratios are both greater than 1. This transaction will:A) increase the current ratio and decrease the acid-test ratio.B) increase the current ratio and increase the acid-test ratio.C) decrease the current ratio and increase the acid-test ratio.D) decrease the current ratio and decrease the acid-test ratio.
Ans: B
27. Broca Corporation has a current ratio of 2.5. Which of the following transactions will increase Broca's current ratio?A) the purchase of inventory for cash.B) the collection of an account receivable.C) the payment of an account payable.D) none of the above.
Ans: C
28. Allen Company's average collection period for accounts receivable was 25 days in year 1, but increased to 40 days in year 2. Which of the following would most likely be the cause of this change:A) a decrease in accounts receivable relative to sales in year 2.B) an increase in credit sales in year 2 as compared to year 1.C) a relaxation of credit policies in year 2.D) a decrease in accounts receivable in year 2 as compared to year 1.
Ans: C
29. Wolbers Company wrote off $100,000 in obsolete inventory. The company's inventory turnover ratio would:A) increase.B) decrease.C) remain unchanged.D) impossible to determine.
Ans: A
30. Gottlob Corporation's most recent income statement appears below:
Sales (all on account) $824,000Cost of goods sold 477,000 Gross margin 347,000Selling and administrative expense 208,000 Net operating income 139,000Interest expense 37,000 Net income before taxes 102,000Income taxes 30,000 Net income $ 72,000
The gross margin percentage is closest to:A) 20.7%B) 72.7%C) 42.1%D) 481.9%
Ans: C
Solution:
Gross margin percentage = Gross margin ÷ Sales = $347,000 ÷ $824,000 = 42.1%
31. Crandall Company's net income last year was $60,000. The company paid preferred dividends of $10,000 and its average common stockholders' equity was $480,000. The company's return on common stockholders' equity for the year was closest to:A) 12.5%B) 10.4%C) 2.1%D) 14.6%
Ans: B
Solution:
Return on common stockholders' equity = (Net income − Preferred dividends)÷ Average common stockholders' equity= ($60,000 − $10,000) ÷ $480,000 = 10.4%
32. Ardor Company's net income last year was $500,000. The company has 150,000 shares of common stock and 30,000 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 $1.00 per share on the common stock and $0.70 per share on the preferred stock. The earnings per share of common stock is closest to:A) $3.33B) $3.19C) $2.33D) $3.47
Ans: B
Solution:
Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding= ($500,000 − $21,000) ÷ [(150,000 shares + 150,000 shares) ÷ 2] = $3.19 per share
33. The following information relates to Konbu Corporation for last year:
Price earnings ratio 15Dividend payout ratio 30%Earnings per share $5
What is Konbu's dividend yield ratio for last year?A) 1.5%B) 2.0%C) 4.5%D) 10.0%
Ans: B
Solution:
Dividend yield ratio = Dividends per share* ÷ Market price per share **= $0.06 ÷ $3 = 2.0%* Dividends per share = Dividend payout ratio ÷ Earnings per share= 30% ÷ $5 = $0.06 per share** Market price per share = Price earnings ratio ÷ Earnings per share= 15 ÷ $5 = $3 per share
34. Richmond Company has 100,000 shares of $10 par value common stock issued and outstanding. Total stockholders' equity is $2,800,000 and net income for the year is $800,000. During the year Richmond paid $3.00 per share in dividends on its common stock. The market value of Richmond's common stock is $24. What is the price-earnings ratio?A) 3.0B) 3.5C) 4.8D) 8.0
Ans: A Source: CPA, adapted
Solution:
Price-earnings ratio = Market price per share ÷ Earnings per share*= $24 ÷ $8 = 3.0* Earnings per share = (Net income - Preferred dividends) ÷ Average # of common shares outstanding= ($800,000 - $0) ÷ [(100,000 shares + 100,000 shares) ÷ 2] = $8 per share
35. Hurst Company has 20,000 shares of common stock outstanding. These shares were originally issued at a price of $15 per share. The current book value is $25.00 per share and the current market value is $30.00 per share. The dividends on common stock for the year totaled $45,000. The dividend yield ratio is:A) 9%B) 7.5%C) 15%D) 10%
Ans: B
Solution:
Dividend yield ratio = Dividends per share ÷ Market price per share= ($45,000 ÷ 20,000) ÷ $30.00 = 7.5%
36. Bramble Company's net income last year was $65,000 and its interest expense was $15,000. Total assets at the beginning of the year were $620,000 and total assets at the end of the year were $650,000. The company's income tax rate was 40%. The company's return on total assets for the year was closest to:A) 11.7%B) 10.2%C) 12.6%D) 11.2%
Ans: A
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**= $74,000 ÷ $635,000 = 11.7%*Adjusted net income = Net income + [Interest expense × (1-Tax rate)]= $65,000 + 15,000 × (1 − 0.40) = $74,000**Average total assets = ($620,000 + $650,000) ÷ 2 = $635,000
37. Dahl Company can borrow funds at 15% interest. Since the company's tax rate is 40%, its after-tax cost of interest is only 9%. Thus, the company reasons that if it can earn $70,000 per year before interest and taxes on a new investment of $500,000, then it will be better off by $25,000 per year.A) The company's reasoning is correct.B) The company's reasoning is not correct, since the after-tax cost of interest would
be 6 percent, rather than 9%.C) The company's reasoning is not correct, since interest is not tax-deductible.D) The company's reasoning is not correct, since it would be worse off by $3,000
per year after taxes.
Ans: D
38. Bucatini Corporation is contemplating the expansion of operations. This expansion will generate a 11% return on the funds invested. To finance this operation, Bucatini can either issue 12% bonds, issue 12% preferred stock, or issue common stock. Bucatini currently has a return on common stockholders' equity of 16%. Bucatini's tax rate is 30%. In which of the financing options above is positive financial leverage being generated?A) none of the options generate positive financial leverageB) the bondsC) the common stockD) the preferred stock
Ans: B
39. Consolo Corporation's net income for the most recent year was $809,000. A total of 100,000 shares of common stock and 200,000 shares of preferred stock were outstanding throughout the year. Dividends on common stock were $2.05 per share and dividends on preferred stock were $1.80 per share. The earnings per share of common stock is closest to:A) $2.44B) $8.09C) $4.49D) $6.04
Ans: C
Solution:
Earnings per share = (Net Income - Preferred Dividends)÷ Average number of common shares outstanding= [$809,000 − (200,000 × $1.80)] ÷ [(100,000 shares + 100,000 shares) ÷ 2] = $4.49
40. Bary Corporation's net income last year was $2,604,000. The dividend on common stock was $2.50 per share and the dividend on preferred stock was $2.40 per share. The market price of common stock at the end of the year was $73.50 per share. Throughout the year, 300,000 shares of common stock and 100,000 shares of preferred stock were outstanding. The price-earnings ratio is closest to:A) 9.33B) 11.89C) 13.66D) 8.47
Ans: A
Solution:
Price-earnings ratio = Market price per share ÷ Earnings per share*= $73.50 ÷ $7.88 = 9.33* Earnings per share = (Net income − Preferred dividends) ÷ Average number of common shares outstanding= [$2,604,000 − (100,000 × $2.40)] ÷ [(300,000 shares + 300,000 shares) ÷ 2] = $7.88
41. Arntson Corporation's net income last year was $7,975,000. The dividend on common stock was $8.20 per share and the dividend on preferred stock was $3.50 per share. The market price of common stock at the end of the year was $59.10 per share. Throughout the year, 500,000 shares of common stock and 200,000 shares of preferred stock were outstanding. The dividend payout ratio is closest to:A) 1.06B) 0.51C) 0.56D) 1.29
Ans: C
Solution:
Dividend payout ratio = Dividends per share ÷ Earnings per share*= $8.20 ÷ $14.55 = 0.56* Earnings per share = (Net income − Preferred dividends) ÷ Average number of common shares outstanding= [$7,975,000 − (200,000 × $3.50)] ÷ [(500,000 shares + 500,000 shares) ÷ 2] = $14.55
42. Last year, Soley Corporation's dividend on common stock was $11.60 per share and the dividend on preferred stock was $1.10 per share. The market price of common stock at the end of the year was $54.80 per share. The dividend yield ratio is closest to:A) 0.02B) 0.21C) 0.23D) 0.91
Ans: B
Solution:
Dividend yield ratio = Dividends per share (see above) ÷ Market price per share= $11.60 ÷ $54.80 = 0.21
43. Inglish Corporation's most recent income statement appears below:
Sales (all on account) $610,000Cost of goods sold 350,000 Gross margin 260,000Selling and administrative expense 110,000 Net operating income 150,000Interest expense 30,000 Net income before taxes 120,000Income taxes (30%) 36,000 Net income $ 84,000
The beginning balance of total assets was $560,000 and the ending balance was $580,000. The return on total assets is closest to:A) 18.4%B) 14.7%C) 26.3%D) 21.1%
Ans: A
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**= $105,000 ÷ $570,000 = 18.4%*Adjusted net income= Net income + [Interest expense × (1 − Tax rate)]= $84,000 + [$30,000 × (1 − 0.30)] = $105,000**Average total assets = ($560,000 + $580,000) ÷ 2 = $570,000
44. Excerpts from Bellis Corporation's most recent balance sheet appear below:
Year 2 Year 1Preferred stock $ 100,000 $ 100,000Common stock 300,000 300,000Additional paid-in capital–common stock 370,000 370,000Retained earnings 480,000 390,000 Total stockholders’ equity $1,250,000 $1,160,000
Net income for Year 2 was $160,000. Dividends on common stock were $47,000 in total and dividends on preferred stock were $23,000 in total. The return on common stockholders' equity for Year 2 is closest to:A) 9.4%B) 13.3%C) 12.4%D) 14.5%
Ans: C
Solution:
Return on common stockholders' equity = (Net income − Preferred dividends)÷ Average common stockholders' equity*= ($160,000 − $23,000) ÷ $1,105,000 = 12.4%*Average common stockholders' equity = ($1,060,000 + $1,150,000) ÷ 2 = $1,105,000
45. Data from Baca Corporation's most recent balance sheet appear below:
Preferred stock $ 100,000Common stock 400,000Additional paid-in capital–common stock 360,000Retained earnings 580,000 Total stockholders’ equity $1,440,000
A total of 400,000 shares of common stock and 20,000 shares of preferred stock were outstanding at the end of the year. The book value per share is closest to:A) $3.35B) $5.00C) $1.90D) $3.60
Ans: A
Solution:
Book value per share= Common stockholders' equity ÷ Number of common shares outstanding* = $1,340,000 ÷ 400,000 shares = $3.35 per share
46. Dravis Company's working capital is $10,000 and its current liabilities are $84,000. The company's current ratio is closest to:A) 0.88B) 0.12C) 9.40D) 1.12
Ans: D
Solution:
Current ratio = Current assets ÷ Current liabilities = ($84,000 + $10,000) ÷ $84,000 = 1.12
47. Erascible Company has $13,000 in cash, $7,000 in marketable securities, $27,000 in accounts receivable, $20,000 in inventories, and $30,000 in current liabilities. The company's current assets consist of cash, marketable securities, accounts receivable, and inventory. The company's acid-test ratio is closest to:A) 1.57B) 0.90C) 1.33D) 2.23
Ans: A
Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities = $47,000 ÷ $30,000 = 1.57*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $13,000 + $7,000 + $27,000 = $47,000
48. Frame Company had $160,000 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) 12.31B) 6.15C) 16.00D) 10.00
Ans: A
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $160,000 ÷ $13,000 = 12.31*Average accounts receivable = ($10,000 + $16,000) ÷ 2 = $13,000
49. Graber Company had $130,000 in sales on account last year. The beginning accounts receivable balance was $18,000 and the ending accounts receivable balance was $12,000. The company's average collection period was closest to:A) 33.69 daysB) 42.12 daysC) 84.23 daysD) 50.54 days
Ans: B
Solution:
Average collection period = 365 days ÷ Accounts receivable turnover* = 365 days ÷ 8.6667 = 42.12 days* Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance= $130,000 ÷ [($18,000 + $12,000) ÷ 2] = 8.6667
50. Harold Company, a retailer, had cost of goods sold of $260,000 last year. The beginning inventory balance was $20,000 and the ending inventory balance was $26,000. The company's inventory turnover was closest to:A) 5.65B) 10.00C) 13.00D) 11.30
Ans: D
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory*= $260,000 ÷ $23,000 = 11.30*Average inventory = ($20,000 + $26,000) ÷ 2 = $23,000
51. Ira Company, a retailer, had cost of goods sold of $160,000 last year. The beginning inventory balance was $26,000 and the ending inventory balance was $24,000. The company's average sale period was closest to:A) 114.06 daysB) 54.75 daysC) 59.31 daysD) 57.03 days
Ans: D
Solution:
Average sale period = 365 days ÷ Inventory turnover*= 365 days ÷ 6.4 = 57.03 days* Inventory turnover = Cost of goods sold ÷ Average inventory = $160,000 ÷ [($26,000 + $24,000) ÷ 2] = 6.4
52. Raatz Corporation's total current assets are $370,000, its noncurrent assets are $660,000, its total current liabilities are $220,000, its long-term liabilities are $410,000, and its stockholders' equity is $400,000. Working capital is:A) $370,000B) $150,000C) $250,000D) $400,000
Ans: B
Solution:
Working capital = Current assets − Current liabilities = $370,000 − $220,000 = $150,000
53. Stubbs Corporation's total current assets are $390,000, its noncurrent assets are $630,000, its total current liabilities are $230,000, its long-term liabilities are $290,000, and its stockholders' equity is $500,000. The current ratio is closest to:A) 0.62A) 0.59B) 1.70C) 0.79
Ans: C
Solution:
Current ratio = Current assets ÷ Current liabilities = $390,000 ÷ $230,000 = 1.70
54. Data from Hollingworth Corporation's most recent balance sheet appear below:
Cash $12,000Marketable securities $29,000Accounts receivable $37,000Inventory $51,000Prepaid expenses $20,000Current liabilities $115,000
The company's acid-test ratio is closest to:A) 0.85B) 0.10C) 0.68D) 0.36
Ans: C
Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities = $78,000 ÷ $115,000 = 0.68* Quick assets = Cash + Marketable securities + Accounts receivable= $12,000 + $29,000 + $37,000 = $78,000
55. Eachus Corporation has provided the following data:
This Year Last YearAccounts receivable $135,000 $119,000Inventory $136,000 $155,000Sales on account $698,000Cost of goods sold $429,000
The accounts receivable turnover for this year is closest to:A) 0.88B) 5.50C) 5.17D) 1.13
Ans: B
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $698,000 ÷ $127,000 = 5.50
*Average accounts receivable = ($135,000 + $119,000) ÷ 2 = $127,000
56. Data from Millier Corporation's most recent balance sheet and income statement appear below:
This Year Last YearAccounts receivable $101,000 $125,000Inventory $183,000 $190,000Sales on account $758,000Cost of goods sold $457,000
The average collection period for this year is closest to:A) 48.7 daysB) 70.6 daysC) 85.6 daysD) 54.4 days
Ans: D
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $758,000 ÷ $113,000 = 6.71
*Average accounts receivable = ($101,000 + $125,000) ÷ 2 = $113,000
Average collection period = 365 days ÷ Accounts receivable turnover*= 365 ÷ 6.71 = 54.4 days *See above
57. Laware Corporation has provided the following data:
This Year Last YearAccounts receivable $118,000 $138,000Inventory $180,000 $170,000Sales on account $714,000Cost of goods sold $447,000
The inventory turnover for this year is closest to:A) 2.55B) 0.94C) 2.48D) 1.06
Ans: A
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $447,000 ÷ $175,000 = 2.55
*Average inventory = ($170,000 + $180,000) ÷ 2 = $175,000
58. Data from Buker Corporation's most recent balance sheet and income statement appear below:
This Year Last Year
Accounts receivable $101,000 $125,000Inventory $155,000 $153,000Sales on account $662,000Cost of goods sold $399,000
The average sale period for this year is closest to:A) 142.0 daysB) 3.6 daysC) 140.9 daysD) 3.7 days
Ans: C
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $399,000 ÷ $154,000 = 2.59
*Average inventory = ($153,000 + $155,000) ÷ 2 = $154,000
Average sale period = 365 days ÷ Inventory turnover* = 365 ÷ 2.59= 140.9 days *See above
59. Last year Jar Company had a net income of $290,000, income tax expense of $66,000, and interest expense of $20,000. The company's times interest earned was closest to:A) 10.20B) 14.50C) 15.50D) 18.80
Ans: D
Solution:
Times interest earned = Net operating income ÷ Interest expense= ($290,000 + $66,000 + $20,000) ÷ $20,000 = 18.80
60. The times interest earned ratio of Whiting Company is 4.0. The interest expense for the year is $15,000, and the company's tax rate is 30%. Whiting Company's after-tax net income must be:A) $60,000B) $42,000C) $31,500D) $16,500
Ans: C
Solution:
Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense4.0 = (Before-tax income + $15,000) ÷ $15,000$60,000 = Earnings before income taxes + $15,000Earnings before income taxes = $45,000After-tax net income = Earnings before income taxes × (1 − Tax rate)= $45,000 × (1 − 0.30) = $31,500
61. Karver Company has total assets of $180,000 and total liabilities of $130,000. The company's debt-to-equity ratio is closest to:A) 0.28B) 0.72C) 0.42D) 2.60
Ans: D
Solution:
Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $130,000 ÷ ($180,000 - $130,000) = 2.60
62. Brewster Company's debt-to-equity ratio is 0.8. Current liabilities total $100,000 and long term liabilities total $200,000. Brewster Company's total assets must be:A) $375,000B) $450,000C) $550,000D) $675,000
Ans: D
Solution:
Debt-to-equity ratio = Liabilities ÷ Stockholders' equity= ($100,000 + $200,000) ÷ Stockholders' equity = 0.8Stockholders' equity = $300,000 ÷ 0.8 = $375,000Total assets = Liabilities + Stockholders' equity = $300,000 + $375,000= $675,000
63. Boyington Corporation has provided the following data from its most recent income statement:
Net operating income $87,000Interest expense $49,000Net income before taxes $38,000Income taxes $11,000Net income $27,000
The times interest earned ratio is closest to:A) 0.55B) 0.78C) 2.54D) 1.78
Ans: D
Solution:
Times interest earned = Net operating income ÷ Interest expense= $87,000 ÷ $49,000 = 1.78
64. Wohlfarth Corporation has provided the following data from its most recent balance sheet:
Total assets $760,000Total liabilities $570,000Total stockholders’ equity $190,000
The debt-to-equity ratio is closest to:A) 4.00B) 3.00C) 0.75D) 0.33
Ans: B
Solution:
Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $570,000 ÷ $190,000 = 3.00
Use the following to answer questions 65-81:
Gschwend Corporation's most recent balance sheet and income statement appear below:
Statement of Financial PositionDecember 31, Year 2 and Year 1
(in thousands of dollars)Assets Year 2 Year 1Current assets:
Cash $ 140 $ 130Accounts receivable 160 140Inventory 170 150Prepaid expenses 90 90
Total current assets 560 510Plant and equipment, net 840 900 Total assets $1,400 $1,410
Liabilities and Stockholders’ EquityCurrent liabilities:
Accounts payable $ 150 $ 150Accrued liabilities 60 60Notes payable, short term 60 60
Total current liabilities 270 270Bonds payable 230 270 Total liabilities 500 540 Stockholders’ equity:
Preferred stock, $100 par value, 5% 200 200Common stock, $1 par value 100 100Additional paid-in capital–common stock 100 100Retained earnings 500 470
Total stockholders’ equity 900 870 Total liabilities & stockholders’ equity $1,400 $1,410
Income StatementFor the Year Ended December 31, Year 2
(in thousands of dollars)Sales (all on account) $1,370Cost of goods sold 800 Gross margin 570Selling and administrative expense 439 Net operating income 131Interest expense 31 Net income before taxes 100Income taxes (30%) 30 Net income $ 70
Dividends on common stock during Year 2 totaled $30 thousand. Dividends on preferred stock totaled $10 thousand. The market price of common stock at the end of Year 2 was $4.86 per share.
65. The gross margin percentage for Year 2 is closest to:A) 814.3%B) 71.3%C) 41.6%D) 12.3%
Ans: C
Solution:
Gross margin percentage = Gross margin ÷ Sales = $570 ÷ $1,370 = 41.6%
66. The earnings per share of common stock for Year 2 is closest to:A) $0.60B) $0.70C) $1.00D) $1.31
Ans: A
Solution:
Earnings per share = (Net Income - Preferred Dividends) ÷Average number of common shares outstanding* = ($70 − $10) ÷ 100 = $0.60
*Number of common shares outstanding = Common stock ÷ Par value= $100 ÷ $1 = 100
67. The price-earnings ratio for Year 2 is closest to:A) 8.10B) 3.71C) 6.94D) 4.86
Ans: A
Solution:
Earnings per share = (Net Income - Preferred Dividends) ÷Average number of common shares outstanding* = ($70 − $10) ÷ 100 = $0.60
*Number of common shares outstanding = Common stock ÷ Par value= $100 ÷ $1 = 100
Price-earnings ratio = Market price per share ÷ Earnings per share= $4.86 ÷ $0.60 = 8.10
68. The dividend payout ratio for Year 2 is closest to:A) 66.7%B) 50.0%C) 833.3%D) 42.9%
Ans: B
Solution:
Earnings per share = (Net Income - Preferred Dividends) ÷Average number of common shares outstanding* = ($70 − $10) ÷ 100 = $0.60
*Number of common shares outstanding = Common stock ÷ Par value= $100 ÷ $1 = 100
Dividend payout ratio = Dividends per share* ÷ Earnings per share= $0.30 ÷ $0.60 = 50.0%*Dividends per share = Common dividends ÷ Common shares= $30 ÷ 100 shares = $0.30 per share
69. The dividend yield ratio for Year 2 is closest to:A) 75.00%B) 8.23%C) 2.06%D) 6.17%
Ans: D
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷Average number of common shares outstanding* = ($70 − $10) ÷ 100 = $0.60
*Number of common shares outstanding = Common stock ÷ Par value= $100 ÷ $1 = 100
Dividend payout ratio = Dividends per share* ÷ Earnings per share= $0.30 ÷ $0.60 = 50.0%*Dividends per share = Common dividends ÷ Common shares= $30 ÷ 100 shares = $0.30 per share
Dividend yield ratio = Dividends per share ÷ Market price per share = $0.30 ÷ $4.86 = 6.17%
70. The return on total assets for Year 2 is closest to:A) 5.00%B) 6.55%C) 6.53%D) 4.98%
Ans: C
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**= $91.70 ÷ $1,405 = 6.53%*Adjusted net income= Net income + [Interest expense × (1 − Tax rate)]= $70 + [$31 × (1 − 0.30)] = $91.70**Average total assets = ($1,410 + $1,400) ÷ 2 = $1,405
71. The return on common stockholders' equity for Year 2 is closest to:A) 6.78%B) 7.91%C) 8.76%D) 10.22%
Ans: C
Solution:
Return on common stockholders' equity= (Net income - Preferred dividends) ÷ Average common stockholders' equity*= ($70 − $10) ÷ $685 = 8.76%*Average common stockholders' equity= [($870 - $200) + ($900 − $200)] ÷ 2 = $685
72. The book value per share at the end of Year 2 is closest to:A) $0.60B) $7.00C) $9.00D) $14.00
Ans: B
Solution:
Book value per share = Common stockholders' equity÷ Number of common shares outstanding* = $700 ÷ 100 shares = $7.00 per share*Number of common shares outstanding = Common stock ÷ Par value= $100 ÷ $1 per share = 100 shares
73. The working capital at the end of Year 2 is:A) $840 thousandB) $560 thousandC) $290 thousandD) $900 thousand
Ans: C
Solution:
Working capital = Current assets - Current liabilities = $560 thousand − $270 thousand = $290 thousand
74. The current ratio at the end of Year 2 is closest to:A) 0.36B) 0.40C) 0.89D) 2.07
Ans: D
Solution:
Current ratio = Current assets ÷ Current liabilities = $560 ÷ $270 = 2.07
75. The acid-test ratio at the end of Year 2 is closest to:A) 1.11B) 1.12C) 2.07D) 1.44
Ans: A
Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities = $300 ÷ $270 = 1.11*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $140 + $0 + $160 = $300
76. The accounts receivable turnover for Year 2 is closest to:A) 1.14B) 8.56C) 0.88D) 9.13
Ans: D
Solution:Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,370 ÷ $150 = 9.13*Average accounts receivable = ($140 + $160) ÷ 2 = $150
77. The average collection period for Year 2 is closest to:A) 1.1 daysB) 42.6 daysC) 0.9 daysD) 40.0 days
Ans: D
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,370 ÷ $150 = 9.13*Average accounts receivable = ($140 + $160) ÷ 2 = $150
Average collection period = 365 days ÷ Accounts receivable turnover= 365 days ÷ 9.13 = 40.0 days
78. The inventory turnover for Year 2 is closest to:A) 4.71B) 0.88C) 5.00D) 1.13
Ans: C
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $800 ÷ $160 = 5.00*Average inventory = ($150 + $170) ÷ 2 = $160
79. The average sale period for Year 2 is closest to:A) 45.3 daysB) 77.5 daysC) 213.1 daysD) 73.0 days
Ans: D
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $800 ÷ $160 = 5.00*Average inventory = ($150 + $170) ÷ 2 = $160
Average sale period = 365 days ÷ Inventory turnover (see above)= 365 days ÷ 5.00 = 73.0 days
80. The times interest earned for Year 2 is closest to:A) 4.23B) 6.04C) 2.26D) 3.23
Ans: A
Solution:
Times interest earned = Net operating income ÷ Interest expense= $131 ÷ $31 = 4.23
81. The debt-to-equity ratio at the end of Year 2 is closest to:A) 0.71B) 0.26C) 0.56D) 0.32
Ans: C
Solution:
Debt-to-equity ratio = Liabilities ÷ Stockholders' equity= $500 ÷ $900 = 0.56
Use the following to answer questions 82-89:
Orgeron Corporation's most recent balance sheet and income statement appear below:
Statement of Financial PositionDecember 31, Year 2 and Year 1
(in thousands of dollars)Assets Year 2 Year 1Current assets:
Cash$ 26
0 $ 120Accounts receivable 160 190Inventory 180 160
Prepaid expenses 6
0 70 Total current assets 660 540
Plant and equipment, net 68
0 750
Total assets$1,34
0 $1,290
Liabilities and Stockholders’ EquityCurrent liabilities:
Accounts payable$ 17
0 $ 150Accrued liabilities 40 40Notes payable, short term 80 90
Total current liabilities 290 280Bonds payable 290 300 Total liabilities 580 580 Stockholders’ equity:Preferred stock, $100 par value, 5% 100 100
Common stock, $2 par value 200 200Additional paid-in capital–common stock 100 100Retained earnings 360 310
Total stockholders’ equity 760 710
Total liabilities & stockholders’ equity$1,34
0 $1,290
Income StatementFor the Year Ended December 31, Year 2
(in thousands of dollars)Sales (all on account) $1,260Cost of goods sold 800 Gross margin 460Selling and administrative expense 272 Net operating income 188Interest expense 38 Net income before taxes 150Income taxes (30%) 45 Net income $ 105
Dividends on common stock during Year 2 totaled $50 thousand. Dividends on preferred stock totaled $5 thousand. The market price of common stock at the end of Year 2 was $11.30 per share.
82. The gross margin percentage for Year 2 is closest to:A) 57.5%B) 22.8%C) 438.1%D) 36.5%
Ans: D
Solution:
Gross margin percentage = Gross margin ÷ Sales = $460 ÷ $1,260 = 36.5%
83. The earnings per share of common stock for Year 2 is closest to:A) $1.05B) $1.88C) $1.50D) $1.00
Ans: D
Solution:
Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($105 − $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $2 per share = 100 shares
84. The price-earnings ratio for Year 2 is closest to:A) 11.30B) 10.76C) 7.53D) 6.01
Ans: A
Solution:
Earnings per share = (Net Income - Preferred Dividends)÷ Average number of common shares outstanding*= ($105 - $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $2 per share = 100 sharesPrice-earnings ratio = Market price per share ÷ Earnings per share= $11.30 ÷ $1.00 = 11.30
85. The dividend payout ratio for Year 2 is closest to:A) 47.6%B) 55.0%C) 50.0%D) 500.0%
Ans: C
Solution:
Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($105 − $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $2 per share = 100 sharesDividend payout ratio = Dividends per share* ÷ Earnings per share= $0.50 ÷ $1.00 = 50.0%*Dividends per share = Common dividends ÷ Common shares= $50 ÷ 100 shares = $0.50 per share
86. The dividend yield ratio for Year 2 is closest to:A) 4.42%B) 0.45%C) 90.91%D) 4.87%
Ans: A
Solution:
Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($105 − $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $2 per share = 100 sharesDividend payout ratio = Dividends per share* ÷ Earnings per share= $0.50 ÷ $1.00 = 50.0%*Dividends per share = Common dividends ÷ Common shares= $50 ÷ 100 shares = $0.50 per shareDividend yield ratio = Dividends per share ÷ Market price per share = $0.50 ÷ $11.30 = 4.42%
87. The return on total assets for Year 2 is closest to:A) 10.01%B) 7.98%C) 7.84%D) 9.82%
Ans: A
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**= $131.60 ÷ $1,315 = 10.01%*Adjusted net income= Net income + [Interest expense × (1 − Tax rate)]= $105 + [$38 × (1 − 0.30)] = $131.60**Average total assets = ($1,290 + $1,340) ÷ 2 = $1,315
88. The return on common stockholders' equity for Year 2 is closest to:A) 15.75%B) 16.54%C) 13.61%D) 14.29%
Ans: A
Solution:
Return on common stockholders' equity= (Net income − Preferred dividends) ÷ Average common stockholders' equity*= ($105 − $5) ÷ $635 = 15.75%*Average common stockholders' equity = ($610 + $660) ÷ 2 = $635
89. The book value per share at the end of Year 2 is closest to:A) $1.00B) $7.60C) $13.40D) $6.60
Ans: D
Solution:
Book value per share = Common stockholders' equity÷ Number of common shares outstanding* = $660 ÷ 100 shares = $6.60 per share*Number of common shares outstanding = Common stock ÷ Par value= $200 ÷ $2 per share = 100 shares
Use the following to answer questions 90-92:
Payne Company's sales and current assets have been reported as follows over the last four years:
Year 4 Year 3 Year 2 Year 1
Sales$810,00
0 $720,000 $630,000 $600,000
Cash $ 36,000 $ 30,000 $ 25,000 $ 20,000Accounts receivable 74,000 60,000 59,200 50,000Inventory 77,800 72,000 90,000 80,000Prepaid expenses 46,200 38,000 10,800 30,000
Total current assets$234,00
0 $200,000 $185,000 $180,000
90. Suppose that Payne Company employs trend percentages to analyze performance with Year 1 as the base year. Sales for Year 4 expressed as a trend percentage would be closest to:A) 128.6%B) 74.1%C) 112.5%D) 135.0%
Ans: D
Solution:
Sales as trend percentage = Year 4 sales ÷ Year 1 sales = ($810,000 ÷ $600,000) = 135.0%
91. Suppose that Payne Company employs trend percentages to analyze performance with Year 2 as the base year. Inventory for Year 3 expressed as a trend percentage would be closest to:A) 125%B) 80%C) 90%D) 36%
Ans: B
Solution:
Inventory as trend percentage = Year 3 inventory ÷ Year 2 inventory = $72,000 ÷ $90,000 = 80%
92. Suppose that Payne Company employs common size statements to analyze changes in the current assets. The increase in the Accounts Receivable account when comparing Year 3 to Year 2 would be closest to:A) 1.3% increaseB) 0.4% increaseC) 5.3% increaseD) 4.2% increase
Ans: A
Solution:
Increase in Accounts Receivable account = ($60,000 − $59,200) ÷ $59,200 = 1.3%
Use the following to answer questions 93-99:
Financial statements for Orahood Company appear below:
Orahood CompanyStatement of Financial Position
December 31, Year 2 and Year 1(dollars in thousands)
Year 2 Year 1Current assets:
Cash and marketable securities$ 20
0 $ 170Accounts receivable, net 170 140Inventory 120 120Prepaid expenses 20 30
Total current assets 510 460Noncurrent assets:
Plant & equipment, net 1,53
0 1,540
Total assets$2,04
0 $2,000
Current liabilities:
Accounts payable$ 17
0 $ 160Accrued liabilities 60 50
Notes payable, short term 27
0 290 Total current liabilities 500 500Noncurrent liabilities:
Bonds payable 290 300Total liabilities 790 800
Stockholders’ equity:Preferred stock, $10 par, 10% 100 100Common stock, $5 par 200 200Additional paid-in capital–common stock 280 280
Retained earnings 67
0 620 Total stockholders’ equity 1,250 1,200
Total liabilities & stockholders’ equity$2,04
0 $2,000
Orahood CompanyIncome Statement
For the Year Ended December 31, Year 2(dollars in thousands)
Sales (all on account) $1,740Cost of goods sold 1,210 Gross margin 530Selling and administrative expense 210 Net operating income 320Interest expense 30 Net income before taxes 290Income taxes (30%) 87 Net income $ 203
Dividends during Year 2 totaled $153 thousand, of which $10 thousand were preferred dividends. The market price of a share of common stock on December 31, Year 2 was $80.
93. Orahood Company's earnings per share of common stock for Year 2 was closest to:A) $7.25B) $2.14C) $4.83D) $5.08
Ans: C
Solution:
Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($203 − $10) ÷ (40 shares + 40 shares)/2 = $4.83 per share*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $5 per share = 40 shares
94. Orahood Company's dividend yield ratio on December 31, Year 2 was closest to:A) 4.2%B) 4.5%C) 2.1%D) 4.8%
Ans: B
Solution:
Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($203 − $10) ÷ (40 shares + 40 shares)/2 = $4.83 per share*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $5 per share = 40 sharesDividends per share = Common dividends ÷ Common shares = $143 ÷ 40 shares = $3.58 per shareDividend yield ratio = Dividends per share ÷ Market price per share = $3.58 ÷ $80 = 4.5%
95. Orahood Company's return on total assets for Year 2 was closest to:A) 11.1%B) 10.0%C) 9.0%D) 10.5%
Ans: A
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**= $224 ÷ $2,020 = 11.1%*Adjusted net income= Net income + [Interest expense × (1 − Tax rate)]= $203 + [$30 × (1 − 0.30)] = $224**Average total assets = ($2,000 + $2,040) ÷ 2 = $2,020
96. Orahood Company's current ratio at the end of Year 2 was closest to:A) 0.63B) 1.02C) 0.55D) 1.25
Ans: B
Solution:
Current ratio = Current assets ÷ Current liabilities = $510 ÷ $500 = 1.02
97. Orahood Company's accounts receivable turnover for Year 2 was closest to:A) 14.5B) 10.1C) 11.2D) 7.8
Ans: C
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,740 ÷ $155 = 11.2
*Average accounts receivable = ($140 + $170) ÷ 2 = $155
98. Orahood Company's average sale period for Year 2 was closest to:A) 25.2 daysB) 46.8 daysC) 32.5 daysD) 36.2 days
Ans: D
Solution:
Average sale period = 365 days ÷ Inventory turnover*= 365 days ÷ 10.08 = 36.2 days*Inventory turnover = Cost of goods sold ÷ Average inventory = $1,210 ÷ ($120 + $120)/2 = 10.08
99. Orahood Company's times interest earned for Year 2 was closest to:A) 9.7B) 17.7C) 6.8D) 10.7
Ans: D
Solution:
Times interest earned = Net operating income ÷ Interest expense= $320 ÷ $30 = 10.07
Use the following to answer questions 100-103:
Financial statements for Matti Company appear below:
Matti CompanyBalance Sheet
As of December 31Year 2 Year 1
Current assets $ 90,000 $ 70,000Long term investments 110,000 110,000Plant, property, and equipment (net) 500,000 420,000 Total assets $700,000 $600,000
Current liabilities $110,000 $80,000Bonds payable 140,000 100,000Preferred stock (par value $100, 8%) 75,000 75,000Common stock (par value $5) 125,000 125,000Additional paid-in capital–common stock 220,000 220,000Retained earnings 30,000 0 Total liabilities and equities $700,000 $600,000
Matti CompanyIncome Statement
For the Year Ended December 31, Year 2
Sales $800,000Cost of goods sold 450,000 Gross margin 350,000Selling and administrative expense 250,000 Net operating income 100,000Interest expense 10,000 Net income before taxes 90,000Income taxes (30%) 27,000 Net Income $ 63,000
Dividends were $33,000 for the year, of which $6,000 were for preferred stock.
100. The return on common stockholders' equity for Matti Company for Year 2 is closest to:A) 15.8%B) 17.5%C) 14.0%D) 15.2%
Ans: A
Solution:
Return on common stockholders' equity = (Net income − Preferred dividends) ÷Average common stockholders' equity* = ($63,000 - $6,000) ÷ $360,000 = 15.8%
*Average common stockholders' equity = ($375,000 + $345,000) ÷ 2 = $360,000
101. The return on total assets for Matti Company for Year 2 is closest to:A) 10.8%B) 10.0%C) 9.0%D) 10.2%
Ans: A
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**= $70,000 ÷ $650,000 = 10.8%*Adjusted net income = Net income + [Interest expense × (1 − Tax rate)]= $63,000 + [$10,000 × (1 − 0.30)] = $70,000**Average total assets = ($600,000 + $700,000) ÷ 2 = $650,000
102. The times interest earned for Matti Company for Year 2 is closest to:A) 6.3B) 7.3C) 9.0D) 10.0
Ans: D Solution:
Times interest earned = Net operating income ÷ Interest expense= $100,000 ÷ $10,000 = 10.00
103. The book value per share for Matti Company as of December 31, Year 2 is closest to:A) $18.00B) $13.80C) $28.00D) $15.00
Ans: D
Solution:
Book value per share = Common stockholders' equity ÷Number of common shares outstanding* = $375,000 ÷ 25,000 = $15.00
*Number of common shares outstanding = Common stock ÷ Par value= $125,000 ÷ $5 = 25,000
Use the following to answer questions 104-110:
Financial statements for Lardy Company appear below:
Lardy CompanyStatement of Financial Position
December 31, Year 2 and Year 1(dollars in thousands)
Year 2 Year 1Current assets:
Cash and marketable securities $ 180 $ 180Accounts receivable, net 220 190Inventory 170 180Prepaid expenses 30 20
Total current assets 600 570Noncurrent assets:
Plant & equipment, net 1,830 1,820 Total assets $2,430 $2,390
Current liabilities:Accounts payable $ 120 $ 130Accrued liabilities 90 60Notes payable, short term 140 160
Total current liabilities 350 350Noncurrent liabilities:
Bonds payable 360 400Total liabilities 710 750
Stockholders’ equity:Preferred stock, $20 par, 10% 120 120Common stock, $10 par 140 140Additional paid-in capital–common stock 160 160Retained earnings 1,300 1,220
Total stockholders’ equity 1,720 1,640 Total liabilities & stockholders’ equity $2,430 $2,390
Lardy CompanyIncome Statement
For the Year Ended December 31, Year 2(dollars in thousands)
Sales (all on account) $2,060Cost of goods sold 1,440 Gross margin 620Selling and administrative expense 240 Net operating income 380Interest expense 40 Net income before taxes 340Income taxes (30%) 102 Net income $ 238
Dividends during Year 2 totaled $158 thousand, of which $12 thousand were preferred dividends. The market price of a share of common stock on December 31, Year 2 was $210.
104. Lardy Company's earnings per share of common stock for Year 2 was closest to:A) $16.14B) $24.29C) $17.00D) $3.65
Ans: A
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷Average number of common shares outstanding*= ($238 − $12) ÷ 14 = $16.14
*Number of common shares outstanding = Common stock ÷ Par value= $140 ÷ $10 =14
105. Lardy Company's price-earnings ratio on December 31, Year 2 was closest to:A) 8.65B) 13.01C) 57.61D) 12.35
Ans: B
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷Average number of common shares outstanding*= ($238 − $12) ÷ 14 = $16.14
*Number of common shares outstanding = Common stock ÷ Par value= $140 ÷ $10 =14
Price-earnings ratio = Market price per share ÷ Earnings per share= $210 ÷ $16.14 = 13.01
106. Lardy Company's dividend payout ratio for Year 2 was closest to:A) 38.4%B) 23.5%C) 66.4%D) 64.6%
Ans: D
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷Average number of common shares outstanding*= ($238 − $12) ÷ 14 = $16.14
*Number of common shares outstanding = Common stock ÷ Par value= $140 ÷ $10 =14
Dividend payout ratio = Dividends per share* ÷ Earnings per share= $10.43 ÷ $16.14 = 64.6%
*Dividends per share = Common dividends ÷ Common shares= $146 ÷ 14 = $10.43
107. Lardy Company's dividend yield ratio on December 31, Year 2 was closest to:A) 5.4%B) 1.2%C) 5.0%D) 4.6%
Ans: C
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷Average number of common shares outstanding*= ($238 − $12) ÷ 14 = $16.14
*Number of common shares outstanding = Common stock ÷ Par value= $140 ÷ $10 =14
Dividend payout ratio = Dividends per share* ÷ Earnings per share= $10.43 ÷ $16.14 = 64.6%
*Dividends per share = Common dividends ÷ Common shares= $146 ÷ 14 = $10.43
Dividend yield ratio = Dividends per share ÷ Market price per share= $10.43 ÷ $210 = 5.0%
108. Lardy Company's return on total assets for Year 2 was closest to:A) 11.0%B) 8.7%C) 9.9%D) 10.4%
Ans: A
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**= $266 ÷ $2,410 = 11.0%
*Adjusted net income = Net income + [Interest expense × (1 − Tax rate)]= $238 + 40 x (1 − .30) = $266
**Average total assets = ($2,390 + $2,430) ÷ 2 = $2,410
109. Lardy Company's return on common stockholders' equity for Year 2 was closest to:A) 14.5%B) 15.3%C) 13.5%D) 14.2%
Ans: A
Solution:
Return on common stockholders' equity = (Net income − Preferred dividends) ÷Average common stockholders' equity* = ($238 − $12) ÷ $1,560 = 14.5%
*Average common stockholders' equity = ($1,520 + $1,600) ÷ 2 = $1,560
110. Lardy Company's book value per share at the end of Year 2 was closest to:A) $21.43B) $114.29C) $10.00D) $122.86
Ans: B
Solution:
Book value per share = Common stockholders' equity ÷Number of common shares outstanding* = $1,600 ÷ 14 = $114.29
*Number of common shares outstanding = Common stock ÷ Par value= $140 ÷ $10 = 14
Use the following to answer questions 111-113:
Information concerning the common stock of Hopkins Company follows:
Market price per share on December 31 $36.00Book value per share on December 31 $27.00Earnings per share for the year $4.50Par value per share $10.00Dividend per share for the year $1.80
111. Hopkins Company's dividend payout ratio is:A) 60%B) 40%C) 5%D) 18%
Ans: B
Solution:
Dividend payout ratio = Dividends per share* ÷ Earnings per share= $1.80 ÷ $4.50 = 40%
112. Hopkins Company's price-earnings ratio is:A) 8.0B) 6.67C) 6.0D) 20.0
Ans: A
Solution:
Price-earnings ratio = Market price per share ÷ Earnings per share= $36.00 ÷ $4.50 = 8.0
113. Hopkins Company's dividend yield ratio is:A) 18%B) 12.5%C) 6%D) 5%
Ans: D
Solution:
Dividend yield ratio = Dividends per share ÷ Market price per share= $1.80 ÷ $36.00 = 5%
Use the following to answer questions 114-120:
Erichsen Corporation's most recent balance sheet and income statement appear below:
Statement of Financial PositionDecember 31, Year 2 and Year 1
(in thousands of dollars)Year 2 Year 1
AssetsCurrent assets:
Cash $ 120 $ 150Accounts receivable 200 180Inventory 220 200Prepaid expenses 10 10
Total current assets 550 540Plant and equipment, net 830 830 Total assets $1,380 $1,370
Liabilities and Stockholders’ EquityCurrent liabilities:
Accounts payable $ 110 $ 100Accrued liabilities 30 30Notes payable, short term 50 50
Total current liabilities 190 180Bonds payable 250 300 Total liabilities 440 480 Stockholders’ equity:
Preferred stock, $100 par value, 5% 100 100Common stock, $1 par value 200 200Additional paid-in capital–common stock 160 160Retained earnings 480 430
Total stockholders’ equity 940 890 Total liabilities & stockholders’ equity $1,380 $1,370
Income StatementFor the Year Ended December 31, Year 2
(in thousands of dollars)Sales (all on account) $1,290Cost of goods sold 770 Gross margin 520Selling and administrative expense 294 Net operating income 226Interest expense 33 Net income before taxes 193Income taxes (30%) 58 Net income $ 135
Dividends on common stock during Year 2 totaled $80 thousand. Dividends on preferred stock totaled $5 thousand. The market price of common stock at the end of Year 2 was $11.05 per share.
114. The earnings per share of common stock for Year 2 is closest to:A) $0.68B) $0.65C) $1.13D) $0.97
Ans: B
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷Average number of common shares outstanding*= ($135 − $5) ÷ 200 = $0.65
*Number of common shares outstanding = Common stock ÷ Par value= $200 ÷ $1 = 200
115. The price-earnings ratio for Year 2 is closest to:A) 11.39B) 16.25C) 17.00D) 9.78
Ans: C
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷Average number of common shares outstanding*= ($135 − $5) ÷ 200 = $0.65
*Number of common shares outstanding = Common stock ÷ Par value= $200 ÷ $1 = 200
Price-earnings ratio = Market price per share ÷ Earnings per share= $11.05 ÷ $0.65 = 17.00
116. The dividend payout ratio for Year 2 is closest to:A) 61.5%B) 769.2%C) 59.3%D) 65.4%
Ans: A
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷Average number of common shares outstanding*= ($135 − $5) ÷ 200 = $0.65
*Number of common shares outstanding = Common stock ÷ Par value= $200 ÷ $1 = 200
Dividend payout ratio = Dividends per share** ÷ Earnings per share= $0.40 ÷ $0.65 = 61.5%
**Dividends per share = Common dividends ÷ Common shares= $80 ÷ 200 = $0.40
117. The dividend yield ratio for Year 2 is closest to:A) 94.12%B) 3.85%C) 3.62%D) 0.23%
Ans: C
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷Average number of common shares outstanding*= ($135 − $5) ÷ 200 = $0.65
*Number of common shares outstanding = Common stock ÷ Par value= $200 ÷ $1 = 200
Dividend payout ratio = Dividends per share** ÷ Earnings per share= $0.40 ÷ $0.65 = 61.5%
**Dividends per share = Common dividends ÷ Common shares= $80 ÷ 200 = $0.40
Dividend yield ratio = Dividends per share ÷ Market price per share= $0.40 ÷ $11.05 = 3.62%
118. The return on total assets for Year 2 is closest to:A) 11.50%B) 9.78%C) 11.46%D) 9.82%
Ans: A
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**= $158.10 ÷ $1,375 = 11.50%
*Adjusted net income = Net income + [Interest expense × (1 − Tax rate)]= $135 + 33 x (1 − 0.30) = $158.10
**Average total assets = ($1,370 + $1,380) ÷ 2 = $1,375
119. The return on common stockholders' equity for Year 2 is closest to:A) 14.75%B) 14.21%C) 16.56%D) 15.95%
Ans: D
Solution:
Return on common stockholders' equity = (Net income − Preferred dividends) ÷Average common stockholders' equity* = ($135 − $5) ÷ $815 = 15.95%
*Average common stockholders' equity = ($790 + $840) ÷ 2 = $815
120. The book value per share at the end of Year 2 is closest to:A) $4.70B) $4.20C) $0.65D) $6.90
Ans: B
Solution:
Book value per share = Common stockholders' equity ÷Number of common shares outstanding* = $840 ÷ 200 = $4.20
*Number of common shares outstanding = Common stock ÷ Par value= $200 ÷ $1 = 200
Use the following to answer questions 121-127:
Excerpts from Jameel Corporation's most recent balance sheet and income statement appear below:
Year 2 Year 1Total assets $1,540 $1,530
Total liabilities $470 $490
Stockholders’ equity:Preferred stock, $100 par value, 5% $ 100 $ 100Common stock, $1 par value 200 200Additional paid-in capital–common stock 150 150Retained earnings 620 590
Total stockholders’ equity $1,070 $1,040
Sales (all on account) $1,290Cost of goods sold 790 Gross margin 500Selling and administrative expense 334 Net operating income 166Interest expense 30 Net income before taxes 136Income taxes (30%) 41 Net income $ 95
Dividends on common stock during Year 2 totaled $60 thousand. Dividends on preferred stock totaled $5 thousand. The market price of common stock at the end of Year 2 was $3.87 per share.
121. The earnings per share of common stock for Year 2 is closest to:A) $0.48B) $0.68C) $0.45D) $0.83
Ans: C
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷Average number of common shares outstanding*= ($95 − $5) ÷ 200 = $0.45
*Number of common shares outstanding = Common stock ÷ Par value= $200 ÷ $1 = 200
122. The price-earnings ratio for Year 2 is closest to:A) 5.69B) 8.60C) 4.66D) 8.06
Ans: B
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷Average number of common shares outstanding*= ($95 − $5) ÷ 200 = $0.45
*Number of common shares outstanding = Common stock ÷ Par value= $200 ÷ $1 = 200
Price-earnings ratio = Market price per share ÷ Earnings per share (see above)= $3.87 ÷ $0.45 = 8.60
123. The dividend payout ratio for Year 2 is closest to:A) 1111.1%B) 63.2%C) 66.7%D) 72.2%
Ans: C
Solution:
Number of common shares outstanding = Common stock ÷ Par value= $200 ÷ $1 = 200
Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)= $0.30 ÷ $0.45 = 66.7%
*Dividends per share = Common dividends ÷ Common shares= $60 ÷ 200 = $0.30
124. The dividend yield ratio for Year 2 is closest to:A) 92.31%B) 7.75%C) 0.65%D) 8.40%
Ans: B
Solution:
Number of common shares outstanding = Common stock ÷ Par value= $200 ÷ $1 = 200
*Dividends per share = Common dividends ÷ Common shares= $60 ÷ 200 = $0.30
Dividend yield ratio = Dividends per share* ÷ Market price per share= $0.30 ÷ $3.87 = 7.75%
125. The return on total assets for Year 2 is closest to:A) 6.17%B) 7.53%C) 6.19%D) 7.56%
Ans: D
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**= $116 ÷ $1,535 = 7.56%
*Adjusted net income = Net income + [Interest expense × (1 − Tax rate)]= $95 + [$30 × (1 − 0.30)] = $116
**Average total assets = ($1,530 + $1,540) ÷ 2 = $1,535
126. The return on common stockholders' equity for Year 2 is closest to:A) 9.42%B) 8.53%C) 9.00%D) 9.95%
Ans: A
Solution:
Return on common stockholders' equity = (Net income − Preferred dividends) ÷Average common stockholders' equity* = ($95 − $5) ÷ $955 = 9.42%
*Average common stockholders' equity = ($940 + $970) ÷ 2 = $955
127. The book value per share at the end of Year 2 is closest to:A) $5.35B) $4.85C) $0.45D) $7.70
Ans: B
Solution:
Book value per share = Common stockholders' equity ÷Number of common shares outstanding* = $970 ÷ 200 = $4.85
*Number of common shares outstanding = Common stock ÷ Par value= $200 ÷ $1 = 200
Use the following to answer questions 128-132:
Financial statements for Spencer Company appear below:
Spencer CompanyBalance SheetDecember 31
Cash $ 200,000Accounts receivable 240,000Inventories 340,000Prepaid expenses 20,000Plant and equipment (net) 400,000 Total assets $1,200,000
Accounts payable $ 300,000Taxes payable 90,000Interest payable 10,000Long-term bonds payable 200,000Common stock $(14 par) 280,000Retained earnings 320,000 Total liabilities & stockholders’ equities $1,200,000
Spencer CompanyIncome Statement
For the Year Ended December 31
Sales (all on account) $1,800,000Cost of goods sold 1,120,000 Gross margin 680,000Selling and administrative expenses 520,000 Net operating income 160,000Interest expense 20,000 Net income before taxes 140,000Income taxes (30%) 42,000 Net income $ 98,000
128. At December 31, Spencer Company's current ratio was closest to:A) 1.10B) 1.33C) 2.00D) 2.67
Ans: C
Solution:
Current ratio = Current assets ÷ Current liabilities = ($1,200,000 − $400,000) ÷ ($300,000 + $90,000 + $10,000) = 2.00
129. At December 31, Spencer Company's acid-test ratio was closest to:A) 1.10B) 0.50C) 0.90D) 1.15
Ans: A
Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities = $440,000 ÷ $400,000 = 1.10
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $200,000 + $240,000 = $440,000
130. Suppose that the Inventory account had a balance of $300,000 at the beginning of the year. Spencer Company's inventory turnover for the year was closest to:A) 3.50B) 6.00C) 5.63D) 3.23
Ans: A
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,120,000 ÷ $320,000 = 3.50
*Average inventory = ($300,000 + $340,000) ÷ 2 = $320,000
131. Suppose that the balance of Accounts Receivable remained unchanged between the beginning and end of the year. Spencer Company's average collection period for the year was closest to:A) 27 daysB) 28 daysC) 49 daysD) 75 days
Ans: C
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,800,000 ÷ $240,000 = 7.5
*Average accounts receivable = ($240,000 + $240,000) ÷ 2 = $240,000
Average collection period = 365 days ÷ Accounts receivable turnover= 365 ÷ 7.5 = 49
132. Spencer Company's debt-to-equity ratio on December 31 was closest to:A) 0.333B) 0.500C) 1.000D) 0.375
Ans: C
Solution:
Debt-to-equity ratio = Liabilities ÷ Stockholders' equity= ($300,000 + $90,000 + $10,000 + $200,000) ÷ ($280,000 + $320,000) = 1.000
Use the following to answer questions 133-139:
Financial statements for Marbet Company appear below:
Marbet CompanyStatement of Financial Position
December 31, Year 2 and Year 1(dollars in thousands)
Year 2 Year 1Current assets:
Cash and marketable securities $ 160 $ 160Accounts receivable, net 180 160Inventory 110 130Prepaid expenses 40 40
Total current assets 490 490Noncurrent assets:
Plant & equipment, net 1,910 1,870 Total assets $2,400 $2,360
Current liabilities:Accounts payable $ 120 $ 150Accrued liabilities 80 50Notes payable, short term 200 200
Total current liabilities 400 400Noncurrent liabilities:
Bonds payable 500 500Total liabilities 900 900
Stockholders’ equity:Preferred stock, $10 par, 8% 120 120Common stock, $5 par 200 200Additional paid-in capital–common stock 280 280Retained earnings 900 860
Total stockholders’ equity 1,500 1,460 Total liabilities & stockholders’ equity $2,400 $2,360
Marbet CompanyIncome Statement
For the Year Ended December 31, Year 2(dollars in thousands)
Sales (all on account) $1,600Cost of goods sold 1,120 Gross margin 480Selling and administrative expense 190 Net operating income 290Interest expense 50 Net income before taxes 240Income taxes (30%) 72 Net income $ 168
133. Marbet Company's working capital (in thousands of dollars) at the end of Year 2 was closest to:A) $90B) $1,500C) $490D) $600
Ans: A
Solution:
Working capital = Current assets − Current liabilities = $490 − $400 = $90
134. Marbet Company's current ratio at the end of Year 2 was closest to:A) 0.37B) 1.20C) 1.23D) 0.44
Ans: C
Solution:
Current ratio = Current assets ÷ Current liabilities = $490 ÷ $400 = 1.23
135. Marbet Company's acid-test ratio at the end of Year 2 was closest to:A) 0.85B) 2.27C) 0.31D) 0.44
Ans: A
Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities = $340 ÷ $400 = 0.85
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $160 + $180 = $340
136. Marbet Company's accounts receivable turnover for Year 2 was closest to:A) 9.3B) 13.3C) 6.6D) 9.4
Ans: D
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,600 ÷ $170 = 9.4
*Average accounts receivable = ($160 + $180) ÷ 2 = $170
137. Marbet Company's average collection period for Year 2 was closest to:A) 27.4 daysB) 39.1 daysC) 55.4 daysD) 38.8 days
Ans: D
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,600 ÷ $170 = 9.4
*Average accounts receivable = ($160 + $180) ÷ 2 = $170
Average collection period = 365 days ÷ Accounts receivable turnover= 365 ÷ 9.4 = 38.8 days
138. Marbet Company's inventory turnover for Year 2 was closest to:A) 13.3B) 6.6C) 9.4D) 9.3
Ans: D
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,120 ÷ $120 = 9.3
*Average inventory = ($130 + $110) ÷ 2 = $120
139. Marbet Company's average sale period for Year 2 was closest to:A) 38.8 daysB) 55.4 daysC) 39.1 daysD) 27.4 days
Ans: C
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,120 ÷ $120 = 9.3
*Average inventory = ($130 + $110) ÷ 2 = $120
Average sale period = 365 days ÷ Inventory turnover = 365 ÷ 9.3= 39.1 days
Use the following to answer questions 140-142:
Selected financial data for Drew Company appear below:
Drew CompanySelected Financial Data
As of December 31Year 2 Year 1
Cash $75,000 $35,000Accounts receivable (net) $225,000 $200,000Inventory $270,000 $210,000Short-term marketable securities $40,000 $20,000Land and building (net) $500,000 $500,000Mortgage payable-current portion $30,000 $25,000Accounts payable and accrued liabilities $120,000 $110,000Short-term notes payable $50,000 $70,000
Year Ended December 31Year 2 Year 1
Sales (all on credit) $1,500,000 $1,300,000Cost of goods sold $900,000 $800,000
140. Drew Company's acid-test ratio as of December 31, Year 2, was closest to:A) 3.6B) 3.1C) 2.0D) 1.7
Ans: D Source: CPA, adapted
Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities = $340,000 ÷ ($30,000 + $120,000 + $50,000) = 1.7
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $75,000 + $225,000 + $40,000 = $340,000
141. Drew Company's average sale period for Year 2 was closest to:A) 97 daysB) 34 daysC) 58 daysD) 219 days
Ans: A Source: CPA, adapted
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $900,000 ÷ $240,000 = 3.75*Average inventory = ($210,000 + $270,000) ÷ 2 = $240,000
Average sale period = 365 days ÷ Inventory turnover= 365 days ÷ 3.75 = 97 days
142. Drew Company's average collection period for Year 2 was closest to:A) 86 daysB) 52 daysC) 55 daysD) 304 days
Ans: B Source: CPA, adapted
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,500,000 ÷ $212,500 = 7.06*Average accounts receivable = ($200,000 + $225,000) ÷ 2 = $212,500
Average collection period = 365 days ÷ Accounts receivable turnover = 365 days ÷ 7.06 = 52 days
Use the following to answer questions 143-149:
Rosenfield Corporation's most recent balance sheet and income statement appear below:
Statement of Financial PositionDecember 31, Year 2 and Year 1
(in thousands of dollars)Assets Year 2 Year 1Current assets:
Cash $ 10 $ 130Accounts receivable 150 130Inventory 140 120Prepaid expenses 20 20
Total current assets 320 400Plant and equipment, net 890 830 Total assets $1,210 $1,230
Liabilities and Stockholders’ EquityCurrent liabilities:
Accounts payable $ 160 $ 180Accrued liabilities 60 70Notes payable, short term 60 70
Total current liabilities 280 320Bonds payable 70 110Total liabilities 350 430Stockholders’ equity:
Preferred stock, $100 par value, 5% 100 100Common stock, $1 par value 200 200Additional paid-in capital–common stock 180 180Retained earnings 380 320
Total stockholders’ equity 860 800 Total liabilities & stockholders’ equity $1,210 $1,230
Income StatementFor the Year Ended December 31, Year 2
(in thousands of dollars)Sales (all on account) $1,280Cost of goods sold 870 Gross margin 410Selling and administrative expense 215 Net operating income 195Interest expense 16 Net income before taxes 179Income taxes (30%) 54 Net income $ 125
143. The working capital at the end of Year 2 is:A) $320 thousandB) $860 thousandC) $890 thousandD) $40 thousand
Ans: D
Solution:
Working capital = Current assets − Current liabilities = $320 thousand − $280 thousand = $40 thousand
144. The current ratio at the end of Year 2 is closest to:A) 1.09B) 1.14C) 0.26D) 0.29
Ans: B
Solution:
Current ratio = Current assets ÷ Current liabilities = $320 ÷ $280 = 1.14
145. The acid-test ratio at the end of Year 2 is closest to:A) 0.91B) 1.14C) 0.57D) 0.64
Ans: C
Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities = $160 ÷ $280 = 0.57*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $10 + $0 + $150 = $160
146. The accounts receivable turnover for Year 2 is closest to:A) 1.15B) 8.53C) 0.87D) 9.14
Ans: D
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,280 ÷ $140 = 9.14*Average accounts receivable = ($130 + $150) ÷ 2 = $140
147. The average collection period for Year 2 is closest to:A) 1.2 daysB) 39.9 daysC) 0.9 daysD) 42.8 days
Ans: B
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,280 ÷ $140 = 9.14*Average accounts receivable = ($130 + $150) ÷ 2 = $140
Average collection period = 365 days ÷ Accounts receivable turnover = 365 days ÷ 9.14 = 39.9 days
148. The inventory turnover for Year 2 is closest to:A) 0.86B) 6.21C) 6.69D) 1.17
Ans: C
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $870 ÷ $130 = 6.69*Average inventory = ($140 + $120) ÷ 2 = $130
149. The average sale period for Year 2 is closest to:A) 248.1 daysB) 54.6 daysC) 58.8 daysD) 39.9 days
Ans: B
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $870 ÷ $130 = 6.69*Average inventory = ($140 + $120) ÷ 2 = $130
Average sale period = 365 days ÷ Inventory turnover= 365 days ÷ 6.69 = 54.6 days
Use the following to answer questions 150-156:
Excerpts from Debnam Corporation's most recent balance sheet appear below:
Year 2 Year 1Current assets:
Cash $150 $150Accounts receivable 130 110Inventory 160 150Prepaid expenses 90 90
Total current assets $530 $500Total current liabilities $200 $210
Sales on account in Year 2 amounted to $1,170 and the cost of goods sold was $700.
150. The working capital at the end of Year 2 is:A) $330 thousandB) $530 thousandC) $1,030 thousandD) $860 thousand
Ans: A
Solution:
Working capital = Current assets − Current liabilities = $530 thousand − $200 thousand = $330 thousand
151. The current ratio at the end of Year 2 is closest to:A) 0.38B) 0.26C) 2.65D) 0.68
Ans: C
Solution:
Current ratio = Current assets ÷ Current liabilities = $530 ÷ $200 = 2.65
152. The acid-test ratio at the end of Year 2 is closest to:A) 1.40B) 1.85C) 1.47D) 2.65
Ans: A
Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities = $280 ÷ $200 = 1.40*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $150 + $0 + $130 = $280
153. The accounts receivable turnover for Year 2 is closest to:A) 9.00B) 0.85C) 1.18D) 9.75
Ans: D
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,170 ÷ $120 = 9.75*Average accounts receivable = ($110 + $130) ÷ 2 = $120
154. The average collection period for Year 2 is closest to:A) 0.8 daysB) 37.4 daysC) 1.2 daysD) 40.6 days
Ans: B
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,170 ÷ $120 = 9.75*Average accounts receivable = ($110 + $130) ÷ 2 = $120Average collection period = 365 days ÷ Accounts receivable turnover = 365 days ÷ 9.75 = 37.4 days
155. The inventory turnover for Year 2 is closest to:A) 1.07B) 0.94C) 4.38D) 4.52
Ans: D
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $700 ÷ $155 = 4.52*Average inventory = ($150 + $160) ÷ 2 = $155
156. The average sale period for Year 2 is closest to:A) 80.8 daysB) 49.9 daysC) 83.3 daysD) 218.4 days
Ans: A
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $700 ÷ $155 = 4.52*Average inventory = ($150 + $160) ÷ 2 = $155Average sale period = 365 days ÷ Inventory turnover= 365 days ÷ 4.52 = 80.8 days
Use the following to answer questions 157-161:
Excerpts from Jordison Corporation's most recent balance sheet appear below:
Year 2 Year 1Current assets:
Cash $200 $160Accounts receivable 160 150Inventory 170 150Prepaid expenses 80 80
Total current assets $610 $540Total current liabilities $290 $270
Sales on account in Year 2 amounted to $1,240 and the cost of goods sold was $730.
157. The working capital at the end of Year 2 is:A) $320 thousandB) $840 thousandC) $1,000 thousandD) $610 thousand
Ans: A
Solution:
Working capital = Current assets − Current liabilities = $610 thousand − $290 thousand = $320 thousand
158. The current ratio at the end of Year 2 is closest to:A) 2.10B) 0.42C) 0.31D) 0.74
Ans: A
Solution:
Current ratio = Current assets ÷ Current liabilities = $610 ÷ $290 = 2.10
159. The acid-test ratio at the end of Year 2 is closest to:A) 1.36B) 2.10C) 1.24D) 1.52
Ans: C
Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities = $360 ÷ $290 = 1.24*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $200 + $0 + $160 = $360
160. The accounts receivable turnover for Year 2 is closest to:A) 1.07B) 0.94C) 8.00D) 7.75
Ans: C
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,240 ÷ $155 = 8.00*Average accounts receivable = ($150 + $160) ÷ 2 = $155
161. The inventory turnover for Year 2 is closest to:A) 1.13B) 4.56C) 4.29D) 0.88
Ans: B
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $730 ÷ $160 = 4.56*Average inventory = ($150 + $170) ÷ 2 = $160
Use the following to answer questions 162-166:
Data from Carrel Corporation's most recent balance sheet appear below:
Year 2 Year 1Current assets:
Cash $100 $160Accounts receivable 250 300Inventory 120 110Prepaid expenses 90 80
Total current assets $560 $650Total current liabilities $250 $270
Sales on account in Year 2 amounted to $1,440 and the cost of goods sold was $890.
162. The working capital at the end of Year 2 is:A) $930 thousandB) $310 thousandC) $950 thousandD) $560 thousand
Ans: B
Solution:
Working capital = Current assets − Current liabilities = $560 thousand − $250 thousand = $310 thousand
163. The current ratio at the end of Year 2 is closest to:A) 0.38B) 0.96C) 2.24D) 0.36
Ans: C
Solution:
Current ratio = Current assets ÷ Current liabilities = $560 ÷ $250 = 2.24
164. The acid-test ratio at the end of Year 2 is closest to:A) 1.40B) 2.24C) 1.76D) 1.04
Ans: A
Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities = $350 ÷ $250 = 1.40*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $100 + $0 + $250 = $350
165. The average collection period for Year 2 is closest to:A) 69.7 daysB) 0.8 daysC) 1.2 daysD) 63.4 days
Ans: A
Solution:
Average collection period = 365 days ÷ Accounts receivable turnover*= 365 days ÷ 5.24 = 69.7 days*Accounts receivable turnover = Net credit sales ÷ Average accounts receivable= $1,440 ÷ [($300 + $250) ÷ 2] = 5.24
166. The average sale period for Year 2 is closest to:A) 30.4 daysB) 47.2 daysC) 49.2 daysD) 225.6 days
Ans: B
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $890 ÷ $115 = 7.73*Average inventory = ($110 + $120) ÷ 2 = $115
Average sale period = 365 days ÷ Inventory turnover= 365 days ÷ 7.73 = 47.2 days
Use the following to answer questions 167-168:
Financial statements for Narasaki Company appear below:
Narasaki CompanyStatement of Financial Position
December 31, Year 2 and Year 1(dollars in thousands)
Year 2 Year 1Current assets:
Cash and marketable securities $ 130 $ 120Accounts receivable, net 200 170Inventory 130 130Prepaid expenses 90 80
Total current assets 550 500Noncurrent assets:
Plant & equipment, net 1,380 1,360 Total assets $1,930 $1,860
Current liabilities:Accounts payable $ 160 $ 160Accrued liabilities 90 80Notes payable, short term 110 110
Total current liabilities 360 350Noncurrent liabilities:
Bonds payable 510 500 Total liabilities 870 850 Stockholders’ equity:
Preferred stock, $10 par, 6% 100 100Common stock, $2 par 160 160Additional paid-in capital–common stock 240 240Retained earnings 560 510
Total stockholders’ equity 1,060 1,010 Total liabilities & stockholders’ equity $1,930 $1,860
Narasaki CompanyIncome Statement
For the Year Ended December 31, Year 2(dollars in thousands)
Sales (all on account) $2,960Cost of goods sold 2,070 Gross margin 890Selling and administrative expense 350 Net operating income 540Interest expense 50 Net income before taxes 490Income taxes (30%) 147 Net income $ 343
167. Narasaki Company's times interest earned for Year 2 was closest to:A) 17.8B) 10.8C) 9.8D) 6.9
Ans: B
Solution:
Times interest earned = Net operating income ÷ Interest expense= $540 ÷ $50 = 10.8
168. Narasaki Company's debt-to-equity ratio at the end of Year 2 was closest to:A) 0.48B) 0.34C) 1.55D) 0.82
Ans: D
Solution:
Debt-to-equity ratio = Liabilities ÷ Stockholders' equity= $870 ÷ $1,060 = 0.82
Use the following to answer questions 169-170:
Parmeter Corporation's most recent balance sheet and income statement appear below:
Statement of Financial PositionDecember 31, Year 2 and Year 1
(in thousands of dollars)Year 2 Year 1
AssetsCurrent assets:
Cash $ 80 $ 140Accounts receivable 120 110Inventory 130 110Prepaid expenses 100 90
Total current assets 430 450Plant and equipment, net 670 730
Total assets$1,10
0 $1,180
Liabilities and Stockholders’ EquityCurrent liabilities:
Accounts payable$ 17
0 $ 190Accrued liabilities 40 50Notes payable, short term 80 90
Total current liabilities 290 330Bonds payable 70 120 Total liabilities 360 450 Stockholders’ equity:
Preferred stock, $100 par value, 5% 100 100Common stock, $2 par value 200 200Additional paid-in capital–common stock 120 120Retained earnings 320 310
Total stockholders’ equity 740 730
Total liabilities & stockholders’ equity$1,10
0 $1,180
Income StatementFor the Year Ended December 31, Year 2
(in thousands of dollars)Sales (all on account) $1,270Cost of goods sold 790 Gross margin 480Selling and administrative expense 369 Net operating income 111Interest expense 18 Net income before taxes 93Income taxes (30%) 28 Net income $ 65
169. The times interest earned for Year 2 is closest to:A) 5.17B) 8.81C) 6.17D) 3.61
Ans: C
Solution:
Times interest earned = Net operating income ÷ Interest expense= $111 ÷ $18 = 6.17
170. The debt-to-equity ratio at the end of Year 2 is closest to:A) 0.20B) 0.56C) 0.09D) 0.49
Ans: D
Solution:
Debt-to-equity ratio = Liabilities ÷ Stockholders' equity= $360 ÷ $740 = 0.49
Use the following to answer questions 171-172:
Data from Pruette Corporation's most recent balance sheet and the company's income statement appear below:
Year 2 Year 1Total assets $1,260 $1,230Total liabilities $580 $560Total stockholders’ equity $680 $670
Income StatementFor the Year Ended December 31, Year 2
(in thousands of dollars)Sales (all on account) $1,270Cost of goods sold 860 Gross margin 410Selling and administrative expense 280 Net operating income 130Interest expense 30 Net income before taxes 100Income taxes (30%) 30 Net income $ 70
171. The times interest earned for Year 2 is closest to:A) 6.19B) 3.33C) 4.33D) 2.33
Ans: C
Solution:
Times interest earned = Net operating income ÷ Interest expense= $130 ÷ $30 = 4.33
172. The debt-to-equity ratio at the end of Year 2 is closest to:A) 0.34B) 0.85C) 1.21D) 0.43
Ans: B
Solution:
Debt-to-equity ratio = Liabilities ÷ Stockholders' equity= $580 ÷ $680 = 0.85
Essay Questions
173. Espinola Corporation's most recent balance sheet and income statement appear below:
Statement of Financial PositionDecember 31, Year 2 and Year 1
(in thousands of dollars)Year 2 Year 1
AssetsCurrent assets:
Cash $ 320 $ 180Accounts receivable 220 240Inventory 140 130Prepaid expenses 20 20
Total current assets 700 570Plant and equipment, net 860 920 Total assets $1,560 $1,490
Liabilities and Stockholders’ EquityCurrent liabilities:
Accounts payable $ 200 $ 170Accrued liabilities 80 80Notes payable, short term 40 40
Total current liabilities 320 290Bonds payable 210 220 Total liabilities 530 510 Stockholders’ equity:
Preferred stock, $100 par value, 5% 100 100Common stock, $1 par value 100 100Additional paid-in capital–common stock 150 150Retained earnings 680 630
Total stockholders’ equity 1,030 980 Total liabilities & stockholders’ equity $1,560 $1,490
Income StatementFor the Year Ended December 31, Year 2
(in thousands of dollars)Sales (all on account) $1,220Cost of goods sold 790 Gross margin 430Selling and administrative expense 268 Net operating income 162Interest expense 26 Net income before taxes 136Income taxes (30%) 41 Net income $ 95
Dividends on common stock during Year 2 totaled $40 thousand. Dividends on preferred stock totaled $5 thousand. The market price of common stock at the end of Year 2 was $12.87 per share.
Required:
Compute the following for Year 2:a. Gross margin percentage.b. Earnings per share (of common stock).c. Price-earnings ratio.d. Dividend payout ratio.e. Dividend yield ratio.f. Return on total assets.g. Return on common stockholders' equity.h. Book value per share.i. Working capital.j. Current ratio.k. Acid-test ratio.l. Accounts receivable turnover.m. Average collection period.n. Inventory turnover.o. Average sale period.p. Times interest earned.q. Debt-to-equity ratio.
Ans:
a. Gross margin percentage = Gross margin ÷ Sales = $430 ÷ $1,220 = 35.2%
b. Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($95 − $5) ÷ (100 shares + 100 shares)/2 = $0.90 per share*Number of common shares outstanding= Common stock ÷ Par value = $100 ÷ $1 per share = 100 shares
c. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)= $12.87 ÷ $0.90 = 14.3
d. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)= $0.40 ÷ $0.90 = 44.4%*Dividends per share = Common dividends ÷ Common shares (see above)= $40 ÷ 100 shares = $0.40 per share
e. Dividend yield ratio = Dividends per share (see above) ÷ Market price per share= $0.40 ÷ $12.87 = 3.11%
f. Return on total assets = Adjusted net income* ÷ Average total assets**= $113.2 ÷ $1,525 = 7.42%*Adjusted net income= Net income + [Interest expense × (1−Tax rate)]= $95 + 26 × (1-0.30) = $113.2**Average total assets = ($1,560 + $1,490) ÷ 2 = $1,525
g. Return on common stockholders' equity = (Net income − Preferred dividends)÷ Average common stockholders' equity*= ($95 − $5) ÷ $905 = 9.94%*Average common stockholders' equity = ($930 + $880) ÷ 2 = $905
h. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding* = $930 ÷ 100 shares = $9.30 per share*Number of common shares outstanding = Common stock ÷ Par value= $100 ÷ $1 per share = 100 shares
i. Working capital = Current assets − Current liabilities = $700 - $320 = $380
j. Current ratio = Current assets ÷ Current liabilities = $700 ÷ $320 = 2.19
k. Acid-test ratio = Quick assets* ÷ Current liabilities = $540 ÷ $320 = 1.69*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $320 + $0 + $220 = $540
l. Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,220 ÷ $230 = 5.30*Average accounts receivable = ($220 + $240) ÷ 2 = $230
m. Average collection period = 365 days ÷ Accounts receivable turnover (see above) = 365 days ÷ 5.30 = 68.9 days
n. Inventory turnover = Cost of goods sold ÷ Average inventory*= $790 ÷ $135 = 5.85*Average inventory = ($140 + $130) ÷ 2 = $135
o. Average sale period = 365 days ÷ Inventory turnover (see above)= 365 days ÷ 5.85 = 62.4 days
p. Times interest earned = Net operating income ÷ Interest expense= $162 ÷ $26 = 6.23
q. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity= $530 ÷ $1,030 = 0.51
LO: 1,2,3,4
174. Slaubaugh Corporation's most recent balance sheet and income statement appear below:
Statement of Financial PositionDecember 31, Year 2 and Year 1
(in thousands of dollars)Year 2 Year 1
AssetsCurrent assets:
Cash $ 100 $ 140Accounts receivable 160 180Inventory 210 190Prepaid expenses 40 50
Total current assets 510 560Plant and equipment, net 860 820 Total assets $1,370 $1,380
Liabilities and Stockholders’ EquityCurrent liabilities:
Accounts payable $ 160 $ 180Accrued liabilities 80 80Notes payable, short term 80 80
Total current liabilities 320 340Bonds payable 70 100 Total liabilities 390 440 Stockholders’ equity:
Preferred stock, $100 par value, 10% 200 200Common stock, $1 par value 200 200Additional paid-in capital–common stock 130 130Retained earnings 450 410
Total stockholders’ equity 980 940 Total liabilities & stockholders’ equity $1,370 $1,380
Income StatementFor the Year Ended December 31, Year 2
(in thousands of dollars)Sales (all on account) $1,350Cost of goods sold 820 Gross margin 530Selling and administrative expense 399 Net operating income 131Interest expense 17 Net income before taxes 114Income taxes (30%) 34 Net income $ 80
Dividends on common stock during Year 2 totaled $20 thousand. Dividends on preferred stock totaled $20 thousand. The market price of common stock at the end of Year 2 was $2.88 per share.
Required:
Compute the following for Year 2:a. Gross margin percentage.b. Earnings per share (of common stock).c. Price-earnings ratio.d. Dividend payout ratio.e. Dividend yield ratio.f. Return on total assets.g. Return on common stockholders' equity.h. Book value per share.
Ans:a. Gross margin percentage = Gross margin ÷ Sales = $530 ÷ $1,350 = 39.3%
b. Earnings per share = (Net Income - Preferred Dividends)÷ Average number of common shares outstanding*= ($80 - $20) ÷ (200 shares + 200 shares)/2 = $0.30 per share*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $1 per share = 200 shares
c. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)= $2.88 ÷ $0.30 = 9.6
d. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)= $0.10 ÷ $0.30 = 33.3%*Dividends per share = Common dividends ÷ Common shares (see above)= $20 ÷ 200 shares = $0.10 per share
e. Dividend yield ratio = Dividends per share (see above) ÷ Market price per share= $0.10 ÷ $2.88 = 3.47%
f. Return on total assets = Adjusted net income* ÷ Average total assets**= $91.9 ÷ $1,375 = 6.68%*Adjusted net income = Net income + [Interest expense × (1−Tax rate)]= $80 + 17 × (1−0.30) = $91.9**Average total assets = ($1,370 + $1,380) ÷ 2 = $1,375
g. Return on common stockholders' equity = (Net income − Preferred dividends)÷ Average common stockholders' equity*= ($80 − $20) ÷ $760 = 7.89%*Average common stockholders' equity = ($780 + $740) ÷ 2 = $760
h. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding*= $780 ÷ 200 shares = $3.90 per share*Number of common shares outstanding = Common stock ÷ Par value= $200 ÷ $1 per share = 200 shares
LO: 1,2
175. Philo Corporation's most recent income statement appears below:
Sales (all on account) $561,000Cost of goods sold 325,000 Gross margin 236,000Selling and administrative expense 106,000 Net operating income 130,000Interest expense 35,000 Net income before taxes 95,000Income taxes 30,000 Net income $ 65,000
Required:
Compute the gross margin percentage.
Ans:
Gross margin percentage = Gross margin ÷ Sales = $236,000 ÷ $561,000 = 42.1%
176. Financial statements for Pratt Company appear below:
Pratt CompanyStatement of Financial Position
December 31, Year 2 and Year 1(dollars in thousands)
Year 2 Year 1Current assets:
Cash and marketable securities $ 140 $ 140Accounts receivable, net 190 180Inventory 150 150Prepaid expenses 70 70
Total current assets 550 540Noncurrent assets:
Plant & equipment, net 1,490 1,420 Total assets $2,040 $1,960
Current liabilities:Accounts payable $ 160 $ 160Accrued liabilities 50 60Notes payable, short term 230 250
Total current liabilities 440 470Noncurrent liabilities:
Bonds payable 300 300 Total liabilities 740 770 Stockholders’ equity:
Preferred stock, $5 par, 10% 120 120Common stock, $5 par 180 180Additional paid-in capital–common stock 210 210Retained earnings 790 680
Total stockholders’ equity 1,300 1,190 Total liabilities & stockholders’ equity $2,040 $1,960
Pratt CompanyIncome Statement
For the Year Ended December 31, Year 2(dollars in thousands)
Sales (all on account) $2,000Cost of goods sold 1,400 Gross margin 600Selling and administrative expense 240 Net operating income 360Interest expense 30 Net income before taxes 330Income taxes (30%) 99 Net income $ 231
Dividends during Year 2 totaled $121 thousand, of which $12 thousand were preferred dividends. The market price of a share of common stock on December 31, Year 2 was $80.
Required:
Compute the following for Year 2: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 ratio.k. Accounts receivable turnover.l. Average collection period.m. Inventory turnover.n. Average sale period.o. Times interest earned.p. Debt-to-equity ratio.
Ans:
a. Earnings per share = (Net Income − Preferred Dividends) ÷Average number of common shares outstanding*= ($231 − $12) ÷ 36 = $6.08
*Number of common shares outstanding = Common stock ÷ Par value= $180 ÷ $5 = 36
b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)= $80 ÷ $6.08 = 13.2
c. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)= $3.03 ÷ $6.08 = 49.8%
*Dividends per share = Common dividends ÷ Common shares**= $109 ÷ 36 = $3.03**See above
d. Dividend yield ratio = Dividends per share* ÷ Market price per share= $3.03 ÷ $80.00 = 3.78% *See above
e. Return on total assets = Adjusted net income* ÷ Average total assets**= $252 ÷ $2,000 = 12.60%
*Adjusted net income = Net income + [Interest expense × (1−Tax rate)]= $231 + 30 × (1 − 0.30) = $252
**Average total assets = ($2,040 + $1,960) ÷ 2 = $2,000
f. Return on common stockholders' equity = (Net income − Preferred dividends) ÷Average common stockholders' equity* = ($231 − $12) ÷ $1,125 = 19.47%
*Average common stockholders' equity = ($1,180 + $1,070) ÷ 2 = $1,125
g. Book value per share = Common stockholders' equity ÷Number of common shares outstanding* = $1,180 ÷ 36 = $32.78
*Number of common shares outstanding = Common stock ÷ Par value= $180 ÷ $5 = 36
h. Working capital = Current assets − Current liabilities = $550 − $440 = $110
i. Current ratio = Current assets ÷ Current liabilities = $550 ÷ $440 = 1.25
j. Acid-test ratio = Quick assets* ÷ Current liabilities = $330 ÷ $440 = 0.75
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $140 + $190 = $330
k. Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $2,000 ÷ $185 = 10.81
*Average accounts receivable = ($190 + $180) ÷ 2 = $185
l. Average collection period = 365 days ÷ Accounts receivable turnover*= 365 ÷ 10.81 = 33.8 days *See above
m. Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,400 ÷ $150 = 9.33
*Average inventory = ($150 + $150) ÷ 2 = $150
n. Average sale period = 365 days ÷ Inventory turnover* = 365 ÷9.33= 39.1 days *See above
o. Times interest earned = Net operating income ÷ Interest expense= $360 ÷ $30 = 12.00
p. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $740 ÷ $1,300 = 0.57
LO: 2,3,4
177. Financial statements for Qadri Company appear below:
Qadri CompanyStatement of Financial Position
December 31, Year 2 and Year 1(dollars in thousands)
Year 2 Year 1Current assets:
Cash and marketable securities $ 120 $ 100Accounts receivable, net 130 120Inventory 160 180Prepaid expenses 50 50
Total current assets 460 450Noncurrent assets:
Plant & equipment, net 1,730 1,730 Total assets $2,190 $2,180
Current liabilities:Accounts payable $ 50 $ 100Accrued liabilities 60 50Notes payable, short term 160 200
Total current liabilities 270 350Noncurrent liabilities:
Bonds payable 280 300 Total liabilities 550 650 Stockholders’ equity:
Preferred stock, $10 par, 5% 120 120Common stock, $10 par 220 220Additional paid-in capital–common stock 110 110Retained earnings 1,190 1,080
Total stockholders’ equity 1,640 1,530 Total liabilities & stockholders’ equity $2,190 $2,180
Qadri CompanyIncome Statement
For the Year Ended December 31, Year 2(dollars in thousands)
Sales (all on account) $2,300Cost of goods sold 1,610 Gross margin 690Selling and administrative expense 270 Net operating income 420Interest expense 30 Net income before taxes 390Income taxes (30%) 117 Net income $ 273
Dividends during Year 2 totaled $163 thousand, of which $6 thousand were preferred dividends. The market price of a share of common stock on December 31, Year 2 was $150.
Required:
Compute the following for Year 2:a. Earnings per share of common stock.b. Price-earnings ratio.c. Dividend yield ratio.d. Return on total assets.e. Return on common stockholders' equity.f. Book value per share.
Ans:
a. Earnings per share = (Net Income − Preferred Dividends) ÷Average number of common shares outstanding* = ($273 − $6) ÷ 22 = $12.14
*Number of common shares outstanding = Common stock ÷ Par value= $220 ÷ $10 = 22
b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)= $150 ÷ $12.14 = 12.4
c. Dividend yield ratio = Dividends per share* ÷ Market price per share= $7.14 ÷ $150.00 = 4.76%
*Dividends per share = Common dividends ÷ Common shares**= $157 ÷ 22 = $7.14**See above
d. Return on total assets = Adjusted net income* ÷ Average total assets**= $294 ÷ $2,185 = 13.46%
*Adjusted net income = Net income + [Interest expense × (1−Tax rate)]= $273 + 30 × (1 − 0.30) = $294
**Average total assets = ($2,190 + $2,180) ÷ 2 = $2,185
e. Return on common stockholders' equity = (Net income − Preferred dividends) ÷Average common stockholders' equity* = ($273 − $6) ÷ $1,465 = 18.23%
*Average common stockholders' equity = ($1,520 + $1,410) ÷ 2 = $1,465
f. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding* = $1,520 ÷ 22 = $69.09
*Number of common shares outstanding = Common stock ÷ Par value= $220 ÷ $10 = 22
178. Maranville Corporation's most recent balance sheet and income statement appear below:
Statement of Financial PositionDecember 31, Year 2 and Year 1
(in thousands of dollars)Year 2 Year 1
AssetsCurrent assets:
Cash $ 170 $ 180Accounts receivable 160 180Inventory 170 160Prepaid expenses 70 60
Total current assets 570 580Plant and equipment, net 840 830 Total assets $1,410 $1,410
Liabilities and Stockholders’ EquityCurrent liabilities:
Accounts payable $ 150 $ 160Accrued liabilities 40 40Notes payable, short term 50 50
Total current liabilities 240 250Bonds payable 90 100Total liabilities 330 350Stockholders’ equity:
Preferred stock, $100 par value, 10% 200 200Common stock, $2 par value 400 400Additional paid-in capital–common stock 140 140Retained earnings 340 320
Total stockholders’ equity 1,080 1,060 Total liabilities & stockholders’ equity $1,410 $1,410
Income StatementFor the Year Ended December 31, Year 2
(in thousands of dollars)Sales (all on account) $1,410Cost of goods sold 860 Gross margin 550Selling and administrative expense 449 Net operating income 101Interest expense 15 Net income before taxes 86Income taxes (30%) 26 Net income $ 60
Dividends on common stock during Year 2 totaled $20 thousand. Dividends on preferred stock totaled $20 thousand. The market price of common stock at the end of Year 2 was $2.36 per share.
Required:
Compute the following for Year 2: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.
Ans:
a. Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($60 - $20) ÷ (200 shares + 200 shares)/2 = $0.20 per share*Number of common shares outstanding = Common stock ÷ Par value = $400 ÷ $2 per share = 200 shares
b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)= $2.36 ÷ $0.20 = 11.8
c. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)= $0.10 ÷ $0.20 = 50.0%*Dividends per share = Common dividends ÷ Common shares (see above)= $20 ÷ 200 shares = $0.10 per share
d. Dividend yield ratio = Dividends per share (see above) ÷ Market price per share = $0.10 ÷ $2.36 = 4.24%
e. Return on total assets = Adjusted net income* ÷ Average total assets**= $70.5 ÷ $1,410 = 5.00%*Adjusted net income= Net income + [Interest expense × (1−Tax rate)]= $60 + 15 × (1 − 0.30) = $70.5**Average total assets = ($1,410 + $1,410) ÷ 2 = $1,410
f. Return on common stockholders' equity= (Net income − Preferred dividends) ÷ Average common stockholders' equity*= ($60 − $20) ÷ $870 = 4.60%*Average common stockholders' equity = ($880 + $860) ÷ 2 = $870
g. Book value per share = Common stockholders' equity÷ Number of common shares outstanding* = $880 ÷ 200 shares = $4.40 per share*Number of common shares outstanding = Common stock ÷ Par value= $400 ÷ $2 per share = 200 shares
179. Isidro Corporation has provided the following financial data (in thousands of dollars):
Year 2 Year 1Total assets $1,520 $1,490Stockholders’ equity:
Preferred stock, $100 par value, 5% $200 $200Common stock, $2 par value $400 $400Additional paid-in capital–common stock $160 $160Retained earnings $380 $320
Net income for Year 2 was $110 thousand. Interest expense was $21 thousand. The tax rate was 30%. Dividends on common stock during Year 2 totaled $40 thousand. Dividends on preferred stock totaled $10 thousand. The market price of common stock at the end of Year 2 was $9.15 per share.
Required:
Compute the following for Year 2: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.
Ans:
a. Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($110 − $10) ÷ (200 shares + 200 shares)/2 = $0.50 per share*Number of common shares outstanding = Common stock ÷ Par value= $400 ÷ $2 per share = 200 shares
b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)= $9.15 ÷ $0.50 = 18.3
c. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)= $0.20 ÷ $0.50 = 40.0%*Dividends per share = Common dividends ÷ Common shares (see above)= $40 ÷ 200 shares = $0.20 per share
d. Dividend yield ratio = Dividends per share (see above) ÷ Market price per share = $0.20 ÷ $9.15 = 2.19%
e. Return on total assets = Adjusted net income* ÷ Average total assets**= $124.7 ÷ $1,505 = 8.29%*Adjusted net income = Net income + [Interest expense × (1−Tax rate)]= $110 + 21 × (1 − 0.30) = $124.7**Average total assets = ($1,520 + $1,490) ÷ 2 = $1,505
f. Return on common stockholders' equity = (Net income − Preferred dividends)÷ Average common stockholders' equity* = ($110 − $10) ÷ $910 = 10.99%*Average common stockholders' equity = ($940 + $880) ÷ 2 = $910
g. Book value per share = Common stockholders' equity÷ Number of common shares outstanding*= $940 ÷ 200 shares = $4.70 per share*Number of common shares outstanding = Common stock ÷ Par value= $400 ÷ $2 per share = 200 shares
180. Mikolajczyk Corporation's net income for the most recent year was $1,379,000. A total of 100,000 shares of common stock and 200,000 shares of preferred stock were outstanding throughout the year. Dividends on common stock were $1.15 per share and dividends on preferred stock were $1.30 per share.
Required:
Compute the earnings per share of common stock. Show your work!
Ans:
Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding= ($1,379,000 − $260,000) ÷ 100,000 shares = $11.19 per share
181. Hoa Corporation's net income last year was $7,460,000. The dividend on common stock was $8.40 per share and the dividend on preferred stock was $4.30 per share. The market price of common stock at the end of the year was $78.90 per share. Throughout the year, 500,000 shares of common stock and 100,000 shares of preferred stock were outstanding.
Required:
Compute the price-earnings ratio. Show your work!
Ans:
Price-earnings ratio = Market price per share ÷ Earnings per share*= $78.90 ÷ $14.06 = 5.61*Earnings per share= (Net Income - Preferred Dividends) ÷ Average number of common shares outstanding = ($7,460,000 - $430,000) ÷ 500,000 shares = $14.06 per share
182. Dupas Corporation's net income last year was $7,330,000. The dividend on common stock was $12.70 per share and the dividend on preferred stock was $1.70 per share. The market price of common stock at the end of the year was $47.20 per share. Throughout the year, 500,000 shares of common stock and 200,000 shares of preferred stock were outstanding.
Required:
Compute the dividend payout ratio. Show your work!
Ans:
Dividend payout ratio = Dividends per share ÷ Earnings per share*= $12.70 ÷ $13.98 = 0.91*Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding= ($7,330,000 − $340,000) ÷ 500,000 shares = $13.98 per share
183. Last year, Sheline Corporation's dividend on common stock was $13.00 per share and the dividend on preferred stock was $2.10 per share. The market price of common stock at the end of the year was $68.60 per share.
Required:
Compute the dividend yield ratio. Show your work!
Ans:
Dividend yield ratio = Dividends per share ÷ Market price per share= $13.00 ÷ $68.60 = 0.19
184. Allaman Corporation's most recent income statement appears below:
Sales (all on account) $760,000Cost of goods sold 450,000 Gross margin 310,000Selling and administrative expense 100,000 Net operating income 210,000Interest expense 40,000 Net income before taxes 170,000Income taxes (30%) 51,000 Net income $119,000
The beginning balance of total assets was $930,000 and the ending balance was $970,000.
Required:
Compute the return on total assets. Show your work!
Ans:
Return on total assets = Adjusted net income* ÷ Average total assets**= $147,000 ÷ $950,000 = 15.5%*Adjusted net income = Net income + [Interest expense × (1−Tax rate)]= $119,000 + 40,000 × (1 − 0.30) = $147,000**Average total assets = ($930,000 + $970,000) ÷ 2 = $950,000
185. Excerpts from Orr Corporation's most recent balance sheet appear below:
Year 2 Year 1Preferred stock $ 200,000 $ 200,000Common stock 400,000 400,000Additional paid-in capital–common stock 390,000 390,000Retained earnings 420,000 350,000 Total stockholders’ equity $1,410,000 $1,340,000
Net income for Year 2 was $147,000. Dividends on common stock were $50,000 in total and dividends on preferred stock were $27,000 in total.
Required:
Compute the return on common stockholders' equity. Show your work!
Ans:
Return on common stockholders' equity = (Net income − Preferred dividends)÷ Average common stockholders' equity* = ($147,000 − $27,000) ÷ $1,175,000 = 10.2%*Average common stockholders' equity = ($1,210,000 + $1,140,000) ÷ 2 = $1,175,000
186. Data from Speir Corporation's most recent balance sheet appear below:
Preferred stock $ 200,000Common stock 300,000Additional paid-in capital–common stock 380,000Retained earnings 490,000 Total stockholders’ equity $1,370,000
A total of 150,000 shares of common stock and 20,000 shares of preferred stock were outstanding at the end of the year.
Required:
Compute the book value per share. Show your work!
Ans:
Book value per share = Common stockholders' equity ÷ Number of common shares outstanding = $1,170,000 ÷ 150,000 shares = $7.80 per share
187. Financial statements for Rarick Company appear below:
Rarick CompanyStatement of Financial Position
December 31, Year 2 and Year 1(dollars in thousands)
Year 2 Year 1Current assets:
Cash and marketable securities $ 120 $ 120Accounts receivable, net 180 150Inventory 100 100Prepaid expenses 10 20
Total current assets 410 390Noncurrent assets:
Plant & equipment, net 1,830 1,780 Total assets $2,240 $2,170
Current liabilities:Accounts payable $ 130 $ 150Accrued liabilities 30 50Notes payable, short term 270 270
Total current liabilities 430 470Noncurrent liabilities:
Bonds payable 310 300 Total liabilities 740 770 Stockholders’ equity:
Preferred stock, $10 par, 10% 100 100Common stock, $5 par 240 240Additional paid-in capital–common stock 250 250Retained earnings 910 810
Total stockholders’ equity 1,500 1,400 Total liabilities & stockholders’ equity $2,240 $2,170
Rarick CompanyIncome Statement
For the Year Ended December 31, Year 2(dollars in thousands)
Sales (all on account) $2,400Cost of goods sold 1,680 Gross margin 720Selling and administrative expense 280 Net operating income 440Interest expense 30 Net income before taxes 410Income taxes (30%) 123 Net income $ 287
Required:
Compute the following for Year 2:a. Current ratio.b. Acid-test ratio.c. Average collection period.d. Inventory turnover.e. Times interest earned.f. Debt-to-equity ratio.
Ans:
a. Current ratio = Current assets ÷ Current liabilities = $410 ÷ $430 = 0.95
b. Acid-test ratio = Quick assets* ÷ Current liabilities = $300 ÷ $430 = 0.70
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $120 + $180 = $300
c. Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $2,400 ÷ $165 = 14.55
*Average accounts receivable = ($180 + $150) ÷ 2 = $165
Average collection period = 365 days ÷ Accounts receivable turnover= 365 ÷ 14.55 = 25.1 days
d. Inventory turnover = Cost of goods sold ÷ Average inventory*= $1,680 ÷ $100 = 16.80
*Average inventory = ($100 + $100) ÷ 2 = $100
e. Times interest earned = Net operating income ÷ Interest expense= $440 ÷ $30 = 14.67
f. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity= $740 ÷ $1,500 = 0.49
LO: 3,4
188. Carleton Corporation's most recent balance sheet and income statement appear below:
Statement of Financial PositionDecember 31, Year 2 and Year 1
(in thousands of dollars)Year 2 Year 1
AssetsCurrent assets:
Cash $ 30 $ 110Accounts receivable 210 260Inventory 190 170Prepaid expenses 70 70
Total current assets 500 610Plant and equipment, net 810 740 Total assets $1,310 $1,350
Liabilities and Stockholders’ EquityCurrent liabilities:
Accounts payable $ 140 $ 150Accrued liabilities 30 30Notes payable, short term 40 40
Total current liabilities 210 220Bonds payable 190 240 Total liabilities 400 460 Stockholders’ equity:
Preferred stock, $100 par value, 5% 100 100Common stock, $2 par value 400 400Additional paid-in capital–common stock 130 130Retained earnings 280 260
Total stockholders’ equity 910 890 Total liabilities & stockholders’ equity $1,310 $1,350
Income StatementFor the Year Ended December 31, Year 2
(in thousands of dollars)Sales (all on account) $1,260Cost of goods sold 770 Gross margin 490Selling and administrative expense 400 Net operating income 90Interest expense 26 Net income before taxes 64Income taxes (30%) 19 Net income $ 45
Required:
Compute the following for Year 2:a. Working capital.b. Current ratio.c. Acid-test ratio.d. Accounts receivable turnover.e. Average collection period.f. Inventory turnover.g. Average sale period.
Ans:
a. Working capital = Current assets − Current liabilities = $500 thousand − $210 thousand = $290 thousand
b. Current ratio = Current assets ÷ Current liabilities = $500 ÷ $210 = 2.38
c. Acid-test ratio = Quick assets* ÷ Current liabilities = $240 ÷ $210 = 1.14*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $30 + $0 + $210 = $240
d. Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,260 ÷ $235 = 5.36*Average accounts receivable = ($210 + $260) ÷ 2 = $235
e. Average collection period = 365 days ÷ Accounts receivable turnover (see above) = 365 days ÷ 5.36 = 68.1 days
f. Inventory turnover = Cost of goods sold ÷ Average inventory* = $770 ÷ $180 = 4.28*Average inventory = ($190 + $170) ÷ 2 = $180
g. Average sale period = 365 days ÷ Inventory turnover (see above)= 365 days ÷ 4.28 = 85.3 days
189. Excerpts from Beaty Corporation's most recent balance sheet (in thousands of dollars) appear below:
Year 2 Year 1Current assets:
Cash $ 70 $140Accounts receivable 250 280Inventory 150 140Prepaid expenses 20 20
Total current assets $490 $580Current liabilities:
Accounts payable $150 $170Accrued liabilities 90 90Notes payable, short term 80 80
Total current liabilities $320 $340
Sales on account during the year totaled $1,320 thousand. Cost of goods sold was $730 thousand.
Required:
Compute the following for Year 2:a. Working capital.b. Current ratio.c. Acid-test ratio.d. Accounts receivable turnover.e. Average collection period.f. Inventory turnover.g. Average sale period.
Ans:
a. Working capital = Current assets − Current liabilities = $490 thousand − $320 thousand = $170 thousand
b. Current ratio = Current assets ÷ Current liabilities = $490 ÷ $320 = 1.53
c. Acid-test ratio = Quick assets* ÷ Current liabilities = $320 ÷ $320 = 1.00*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $70 + $0 + $250 = $320
d. Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,320 ÷ $265 = 4.98*Average accounts receivable = ($250 + $280) ÷ 2 = $265
e. Average collection period = 365 days ÷ Accounts receivable turnover (see above) = 365 days ÷ 4.98 = 73.3 days
f. Inventory turnover = Cost of goods sold ÷ Average inventory* = $730 ÷ $145 = 5.03*Average inventory = ($150 + $140) ÷ 2 = $145
g. Average sale period = 365 days ÷ Inventory turnover (see above)= 365 days ÷ 5.03 = 72.6 days
190. Romaine Corporation's total current assets are $300,000, its noncurrent assets are $570,000, its total current liabilities are $270,000, its long-term liabilities are $360,000, and its stockholders' equity is $240,000.
Required:
Compute the company's working capital. Show your work!
Ans:
Working capital = Current assets − Current liabilities = $300,000 − $270,000 = $30,000
191. Wayment Corporation's total current assets are $310,000, its noncurrent assets are $680,000, its total current liabilities are $270,000, its long-term liabilities are $460,000, and its stockholders' equity is $260,000.
Required:
Compute the company's current ratio. Show your work!
Ans:
Current ratio = Current assets ÷ Current liabilities = $310,000 ÷ $270,000 = 1.15
192. Data from Furnia Corporation's most recent balance sheet appear below:
Cash $13,000Marketable securities $21,000Accounts receivables $32,000Inventory $52,000Prepaid expenses $16,000Current liabilities $118,000
Required:
Compute the company's acid-test ratio. Show your work!
Ans:Acid-test ratio = Quick assets* ÷ Current liabilities = $66,000 ÷ $118,000 = 0.56*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $13,000 + $21,000 + $32,000 = $66,000
193. Cozzolino Corporation has provided the following data:
This Year Last YearAccounts receivable $118,000 $123,000Inventory $141,000 $165,000Sales on account $687,000Cost of goods sold $455,000
Required:
Compute the accounts receivable turnover for this year. Show your work!
Ans:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable*= $687,000 ÷ $120,500 = 5.70*Average accounts receivable = ($118,000 + $123,000) ÷ 2 = $120,500
194. Data from Ringwald Corporation's most recent balance sheet and income statement appear below:
This Year Last YearAccounts receivable $118,000 $103,000Inventory $164,000 $173,000Sales on account $727,000Cost of goods sold $481,000
Required:
Compute the average collection period for this year:
Ans:
Average collection period = 365 days ÷ Accounts receivable turnover*= 365 days ÷ 6.58 = 55.5 days*Accounts receivable turnover = Sales on account ÷ Average accounts receivable** = $727,000 ÷ $110,500 = 6.58**Average accounts receivable = ($118,000 + $103,000) ÷ 2 = $110,500
195. Hsieh Corporation has provided the following data:
This Year Last YearAccounts receivable $104,000 $115,000Inventory $150,000 $157,000Sales on account $879,000Cost of goods sold $575,000
Required:
Compute the inventory turnover for this year:
Ans:
Inventory turnover = Cost of goods sold ÷ Average inventory*= $575,000 ÷ $153,500 = 3.75*Average inventory = ($150,000 + $157,000) ÷ 2 = $153,500
196. Data from Buttler Corporation's most recent balance sheet and income statement appear below:
This Year Last YearAccounts receivable $134,000 $138,000Inventory $151,000 $171,000Sales on account $864,000Cost of goods sold $675,000
Required:
Compute the average sale period for this year:
Ans:
Average sale period = 365 days ÷ Inventory turnover*= 365 days ÷ 4.19 = 87.1 days*Inventory turnover = Cost of goods sold ÷ Average inventory*= $675,000 ÷ $161,000 = 4.19**Average inventory = ($151,000 + $171,000) ÷ 2 = $161,000
197. Erke Corporation's most recent balance sheet and income statement appear below:
Statement of Financial PositionDecember 31, Year 2 and Year 1
(in thousands of dollars)Year 2 Year 1
AssetsCurrent assets:
Cash $ 130 $ 160Accounts receivable 120 110Inventory 90 100Prepaid expenses 20 20
Total current assets 360 390Plant and equipment, net 890 840 Total assets $1,250 $1,230
Liabilities and Stockholders’ EquityCurrent liabilities:
Accounts payable $ 190 $ 180Accrued liabilities 70 60Notes payable, short term 40 40
Total current liabilities 300 280Bonds payable 130 150 Total liabilities 430 430 Stockholders’ equity:
Preferred stock, $100 par value, 5% 100 100Common stock, $2 par value 200 200Additional paid-in capital–common stock 130 130Retained earnings 390 370
Total stockholders’ equity 820 800 Total liabilities & stockholders’ equity $1,250 $1,230
Income StatementFor the Year Ended December 31, Year 2
(in thousands of dollars)Sales (all on account) $1,150Cost of goods sold 710 Gross margin 440Selling and administrative expense 358 Net operating income 82Interest expense 18 Net income before taxes 64Income taxes (30%) 19 Net income $ 45
Required:
Compute the following for Year 2:a. Times interest earned.b. Debt-to-equity ratio.
Ans:
a. Times interest earned = Net operating income ÷ Interest expense= $82 ÷ $18 = 4.56
b. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity= $430 ÷ $820 = 0.52
198. Froemming Corporation's net operating income last year was $193,000; its interest expense was $22,000; its total stockholders' equity was $950,000; and its total liabilities were $400,000.
Required:
Compute the following for Year 2:a. Times interest earned.b. Debt-to-equity ratio.
Ans:
a. Times interest earned = Net operating income ÷ Interest expense= $193,000 ÷ $22,000 = 8.77b. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity= $400,000 ÷ $950,000 = 0.42
199. Brandy Corporation has provided the following data from its most recent income statement:
Net operating income $51,000Interest expense $37,000Net income before taxes $14,000Income taxes $4,000Net income $10,000
Required:
Compute the times interest earned ratio. Show your work!
Ans:
Times interest earned = Net operating income ÷ Interest expense= $51,000 ÷ $37,000 = 1.38
200. Molony Corporation has provided the following data from its most recent balance sheet:
Total assets $740,000Total liabilities $610,000Total stockholders’ equity $130,000
Required:
Compute the debt-to-equity ratio. Show your work!
Ans:
Debt-to-equity ratio = Liabilities ÷ Stockholders' equity= $610,000 ÷ $130,000 = 4.69
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