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Exam 9: Financial Statement Analysis

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Question 81

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Montana Company reported the following operating results for Year 1 and Year 2: Required: Express each income statement component for each year as a percentage of sales. Round your answer to one decimal place (i.e., 22.5%).

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Question 82

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Select the term from the list provided that best matches each of the following descriptions or definitions:

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Question 83

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Indicate whether each of the following statements about financial statement analysis is true or false. Working capital measures a company's immediate debt-paying ability. ______ Accounts receivable turnover is a direct measure of a company's uncollectible accounts expense. ______ Accounts receivable turnover is calculated by using the following formula: net credit sales ÷ average accounts receivable. ______ Net credit sales is sales on account plus sales returns and discounts. ______ The amount of average receivables can be calculated using the amount of receivables shown on balance sheets for the current year and previous year. ______

You are considering an investment in IBM stock and wish to assess the firm's long-term debt-paying ability and its use of debt financing. All of the following ratios can be used to assess solvency except:

The Martin Company reported net income of $15,000 on gross sales of $80,000. The company has average total assets of $135,000, of which $102,000 is property, plant, and equipment. What is the company's return on investment? (Round your final answer to 1 decimal place.)

The Abel Company provided the following information from its financial records: $\begin{array}{lrlc}\text { Net income } & \$ 250,000 & \text { Common shares } &200,000\\&&\text { outstanding 1/1 }\\\text { Common stock dividends } & \$ 20,000 &\text { Common shares } &300,000\\&&\text { outstanding 12/31 }\\\text { Preferred stock } & \$ 25,000 & \text { Preferred shares } &10,000\\\text { dividends } & & \begin{array}{l}\text { outstanding } 1 / 1\end{array} \\\text { Sales } & \$ 1,000,000 & \text { Preferred shares }& 6,000 \\& & \begin{array}{l}\text { outstanding } 12 / 31\end{array} \\\end{array}$ What is the amount of the company's earnings per share?

Horizontal analysis is also known as:

Which of the following statements regarding the analysis of absolute amounts of various accounts reported on the financial statements is incorrect?

For Year 2, Weston Corporation reported after-tax net income of $1,200,000. During the year, the number of outstanding shares of 6% $100 par preferred stock remained constant at 5,000, and 500,000 shares of common stock were outstanding all year. The company's total stockholders' equity at December 31, Year 2, was $12,500,000. Weston's common stock was selling at $38 per share at the end of the year. All dividends for the year were paid, including a dividend of $2.50 per share to common stockholders. Required: Compute the following:Earnings per share (Round your answer to the nearest cent.)Book value per share of common stockPrice-earnings ratio (Round your answer to one decimal place.)Dividend yield (Round your answer to one decimal place.)

The Poole Company reported the following income for Year 2: $\begin{array}{lr}\text {Sales}&\$30,000\\\text {Cost of goods sold}&\underline{8,000}\\\text {Gross margin}&\$22,000\\\text {Selling and administrative expense}&\underline{10,000}\\\text { Operating income } & \$ 12,000 \\\text { Interest expense } & \underline{4,000} \\ \text {Income before taxes } & \$8,000 \\\text { Income tax expense } & \underline{ 2,500} \\\text { Net income } & \underline{\$ 5,500}\end{array}$ What is the company's net margin? (Round your answers to the nearest whole percent.)

Financial statement analysis involves forms of comparison including:

Solvency ratios are used to analyze the long-term debt-paying ability and the composition of the financing structure of the firm.

The following balance sheet information is provided for Gaynor Company: $\begin{array}{lrr}\text { Assets } & \text { Year 2 } & \text { Year 1 } \\\text { Cash } & \$ 4,250 & \$ 3,500 \\\text { Accounts receivable } & 17,000 & 15,000 \\\text { Inventory } & \$ 44,500 & \$ 52,000\end{array}$ Assuming Year 2 cost of goods sold is $130,000, what is the company's inventory turnover?

Working capital is defined as:

The Dennis Company reported net income of $50,000 on sales of $300,000. The company has average total assets of $500,000 and average total liabilities of $100,000. What is the company's return on equity ratio?

Darden Company has cash of $37,000, accounts receivable of $47,000, inventory of $24,500, and equipment of $67,000. Assuming current liabilities of $32,500, this company's working capital is:

In vertical analysis, each item is expressed as a percentage of:

Factors involved in communicating useful information is are:

The following balance sheet information is provided for Santana Company for Year 2: $\begin{array}{lr}\text { Assets }\\\text { Cash } & \$ 5,400 \\\text { Accounts receivable } & 15,500 \\\text { Inventory } & 18,000 \\\text { Prepaid expenses } & 1,600 \\\text { Plant and equipment, net of depreciation } & 20,200 \\\text { Land } & \underline{ 19,950 }\\\text { Total assets } &\underline{ \$ 80,650}\\\text { Liabilities and Stockholders' Equity }\\\text { Accounts payable } & \$ 4,500 \\\text { Salaries payable } & 11,500 \\\text { Bonds payable (Due in ten years) } & 19,000 \\\text { Common stock, no par } & 30,000 \\\text { Retained earnings } &\underline{ 15,650} \\\text { Total liabilities and stockholders' equity }& \$ 80,650\end{array}$ What is the company's debt to equity ratio? (Round your answers to the nearest whole percent.)

Indicate whether each of the following statements about financial statement analysis is true or false. The asset turnover ratio is calculated by dividing net income by average total assets. ______ The asset turnover ratio is likely to be high in an industry in which operations require only a minimal investment in assets. ______ Return on equity measures the wealth generated by the amount of assets invested in a business. ______ A higher value for the return on investment ratio would generally indicate more effective company management. ______ The use of financial leverage often causes a business's return on equity to be lower than its return on investment. ______