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Exam 13: Financial Statement Analysis

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Question 21

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Gamma Company and Chi Company are similar and similar-sized companies operating in the same industry.At the end of the most recent year,Gamma's price-earnings ratio was 22.0,and Chi's price-earnings ratio was 14.2.What conclusion would you draw based on the difference in price-earnings ratios for the two companies?

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The price-earnings ratio is a measure of...

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Question 22

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The following balance sheet information is provided for Patton 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 $730,000,what is the company's average days to sell inventory? (Use 365 days in a year.Do not round your intermediate calculations.)

A) 17.5 days
B) 18.25 days
C) 19 days
D) 20.86 days

E) None of the above
F) C) and D)

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Question 23

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Financial ratios can be used to assess which of the following aspects of a firm's performance?

Earnings before interest and taxes divided by interest expense is the formula for which of these analytical measures?

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

Which of the following statements is generally incorrect from an investor's perspective?

Benson Company received cash of $1,000,000 from issuing common stock at par value.As a result of this transaction,the company's debt to equity ratio will:

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:

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

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 collected $5,200 of accounts receivable.As a result of this transaction,Gant's working capital will:

The following information was provided by Joseph Company as of December 31,Year 2: $\begin{array}{llr}\text { Net income } & \$ 528,000 \\\text { Preferred stock, }(20,000 \text { shares at } \$ 10 \text { par, 4\%) } & \$ 200,000 \\\text { Common stock, (220,000 shares at } \$ 1 \text { par) } & \$ 220,000 \\\text { Paid-in capital in excess of par-common } & \$ 2,475,500 \\\text { Retained earnings } & \$ 3,824,500\end{array}$ On the most recent trading date,Joseph's common shares sold at $36 and the preferred shares sold at $14. The following information on industry averages is provided: Earnings per share $2.06 Price-earnings ratio 13.2:1 Required: 1)Calculate and compare Joseph Company's ratios with the industry averages shown above.(Round your answer to two decimal places.) 2)Discuss whether you would invest in this company.

Solvency ratios are used to assess a company's:

A careless accountant splattered spaghetti sauce on Kitchen Company's balance sheet.The balance sheet with its missing amounts is provided below: Kitchen Company's working capital is $138,000. Required: Compute the missing amounts.Record your answers in the following table: $\begin{array} { | c | c | } \hline \text { A } & \text { F } \\\hline \text { B. } & \text { G. } \\\hline \text { C. } & \text { H. } \\\hline \text { D. } & \text { I } \\\hline \text { E } & \\\hline\end{array}$

Describe the factors involved in communicating useful financial information.

The accounts receivable turnover ratio can be used to asses a firm's solvency.

Rialto Company collected $5,000 on account.What impact will this transaction have on the firm's current ratio?

All of the following are considered to be measures of a company's short-term debt-paying ability except:

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?

Discuss the limitations that affect financial statement analysis.

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