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Exam 13: Financial Statement Analysis

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Question 1

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The following balance sheet information is provided for Gaynor Company: $\begin{array} { l r r } \text { Assets } & \text { Year 2 } & \text { Year } 1 \\\text { Cash } & \$ 4,000 & \$ 2,000 \\\text { Accounts receivable } &15,000 & 12,000\\\text { Inventory } & \$ 35,000 & \$ 38,000 \end{array}$ Assuming Year 2 cost of goods sold is $153,300,what is the company's inventory turnover?

A) 4.0 times
B) 4.4 times
C) 4.2 times
D) None of these answers are correct.

E) C) and D)
F) B) and C)

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Question 2

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Vertical analysis always involves comparing financial statement elements over a span of time.

A) True
B) False

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Question 3

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

Indicate whether each of the following statements about financial statement analysis is true or false. The ratio of plant assets to long-term liabilities is a measure of a company's ability to obtain additional long-term financing.______ Generally,a company's current assets should be purchased using long-term financing such as bonds payable.______ Ratios that measure a company's profitability provide some measure of the effectiveness of the company's management.______ Net margin indicates the amount remaining from each sales dollar after cost of goods sold has been subtracted out.______ Net margin is also sometimes called the return on assets ratio.______

As of December 31,Year 1,Gant Corporation had a current ratio of 1.29,quick ratio of 1.05,and working capital of $18,000.The company uses a perpetual inventory system and sells merchandise for more than it cost.On January 1,Year 2,Gant sold inventory on account for $6,000.Which of the following statements is incorrect?

The Crestar Company reported net income of $112,000 on 20,000 average outstanding common shares.Preferred dividends total $12,000.On the most recent trading day,the preferred shares sold at $50 and the common shares sold at $95.What is this company's current price-earnings ratio?

Horizontal analysis is also known as:

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

Indicate whether each of the following statements about financial statement analysis is true or false. Both dividends and earnings performance are indicators of the value of a company's stock.______ The most widely quoted measure of a company's earnings performance is return on equity.______ Earnings per share is calculated for a company's common stock.______ Investors need to understand that the value of a company's earnings per share is affected by its choices of accounting principles and assumptions.______ The book value per share measures the market value of a corporation's stock.______

As of December 31,Year 1,Gant Corporation had a current ratio of 1.29,quick ratio of 1.05,and working capital of $18,000.The company uses a perpetual inventory system and sells merchandise for more than it cost.On January 1,Year 2,Gant issued common stock at par value for $10,000 cash.Which of the following statements is correct?

The following income statement was prepared by Case Company for Year 2: $\begin{array}{lr}\text { Sales } & \$ 100,000 \\\text { Cost of goods sold } & \underline{56,500 }\\\text { Gross margin } & 43,500 \\\text { Selling and administrative expense } & 26,000 \\\text { Interest expense } & \underline{ 5,000 }\\\text { Total expenses } & \underline{ 31,000} \\\text { Income before taxes } & \underline{12,500} \\\text { Income tax expense } & \underline{4,000} \\\text { Net income } & \underline{\$ 8,500}\end{array}$ Required: Perform vertical analysis for Case Company's Year 2 income statement.

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

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

The Phibbs Company paid total cash dividends of $200,000 on 25,000 outstanding common shares.On the most recent trading day,the common shares sold at $80.What is this company's dividend yield?

Factors involved in communicating useful information are:

Osgood Company provided the following income statement for Year 1 and Year 2: $\begin{array}{lrr}&\text { Year } 2 & \text { Year } 1\\\text { Sales } & \$ 220,000 & \$ 160,000\\\text { Cost of goods sold } & \underline{156,000}& \underline{ 105,000}\\\text { Gross margin } & 64,000 & 55,000\\\text { Less operating expenses: }\\\text { Selling and administrative expenses } & 26,000 & 15,000 \\\text { Interest expense } & \underline{ 2,000 }& \underline{ 3,000} \\\text { Income before tax } & 36,000 & 37,000 \\\text { Income tax expense } & \underline{10,800} & \underline{11,100 }\\\text { Net income } & \underline{ \$ 25,200} & \underline{\$ 25,900}\end{array}$ Required: (a)Perform vertical analysis on Osgood's income statements for Year 1 and Year 2.Round your answer to one decimal place (i.e.,22.4%). (b)Comment on the results,comparing Year 1 to Year 2.

Jenkins Company's current ratio is higher than the average for its industry,while its quick ratio is below the industry average.One possible interpretation for these results is that Jenkins carries less inventory than most companies in its industry.

As of December 31,Year 1,Gant Corporation had a current ratio of 1.29,quick ratio of 1.05,and working capital of $18,000.The company uses a perpetual inventory system and sells merchandise for more than it cost.On January 1,Year 2,Gant recorded cost of goods sold of $4,100.As a result of this transaction,Gant's quick ratio will:

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

The Bernard Company provided the following information from its financial records: $\begin{array} { l l l l r } \text { Net income } & \$ 250,000 & \text { Total stockholders' equity } & \$ 1,000,000 \\\text { Common } & \$ 15,000 & \text { Comrnon shares outstarding, } & 150,000 \\\text { dividends } && 12 / 31 & \\\text { Preferred rights } & \$ 175,000 & &\end{array}$ What is the company's book value per share?