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Exam 13: Financial Statement Analysis

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Question 31

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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 32

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The following balance sheet information is provided for Greene 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 quick (acid-test) ratio?

A) 0.7
B) 1.4
C) 1.3
D) 3.8

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

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Question 33

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The most frequently quoted measure of earnings performance is the stockholders' equity ratio.

Accrual accounting requires the use of many estimates,including:

Indicate whether each of the following statements about financial statement analysis is true or false. Having too little inventory can hurt a company's profitability because of lost sales.______ Having too much inventory can hurt a company's profitability because of excess costs.______ Generally,a lower inventory turnover indicates that merchandise is being handled more efficiently.______ Average days to sell inventory is the number of times,on average,that inventory is replaced during the year.______ Values for the inventory turnover ratio vary widely among different industries.______

Which of the following is not included in the computation of the quick ratio?

What is a primary drawback of examining and comparing absolute amounts from two businesses' financial statements?

Explain the difference between horizontal analysis and vertical analysis of a company's financial statements.

The following partial balance sheet is provided for Groome Company: $\begin{array}{l}\text { Liabilities and Stockholders' Equity }\\\begin{array} { l r } \text { Accounts payable } & \$ 9,000 \\\text { Salaries payable } & 12,000 \\\text { Bonds payable (due in ten years) } & 20,000 \\\text { Common stock, no par } & 30,000 \\\text { Retained earnings } & 54,000 \\\text { Total liabilities and stockholders' equity } & \$ 125,000\end{array}\end{array}$ What is the company's debt to assets ratio? (Rounded to nearest whole percent.)

Select the correct statement regarding vertical analysis.

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

Which of the following is a potential limitation of financial statement analysis?

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

Ratios can be used for different purposes.For example,a variety of ratios have been developed to assess a firm's liquidity.Similarly,ratios have been developed to assess solvency,profitability,and stock market strength.A sample of commonly used ratios for these purposes is provided in the table below. Required: In the middle column of the table,provide the formula to compute the specified ratio.In the final column,indicate the purpose (Liquidity,Solvency,Profitability,and Stock market strength)for which the ratio is most commonly used.The first item is completed as an example. $\begin{array} { | l | l | l | l | } \hline &{ \text { Ratin } } & { \text { Computation } } & \text { Purpose } \\\hline \text { 1. } & \text { Accounts receivable turnover } & \text { Net credit sales/Average receivables } & \text { Liquidity } \\\hline \text { 2. } & \text { Asset tumover } & & \\\hline \text { 3. } & \text { Current ratio } & & \\\hline \text { 4. } & \text { Debt to equity ratio } & & \\\hline \text { 5. } & \text { Dividend yield } & & \\\hline \text { 6. } & \text { Earnings per share } & & \\\hline \text { 7. } & \text { Inventory turnover } & & \\\hline \text { 8. } & \text { Net margin } & & \\\hline \text { 9. } & \text { Price-earnings ratio } & & \\\hline \text { 10. } & \text { Retum on equity } & & \\\hline \text { 11. } & \text { Retum on investment } & & \\\hline\end{array}$

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.______

Which of the following statements regarding ratio analysis is incorrect?

Longwood Company had a current ratio of 3:1 at the end of Year 1.The asset section of the company's balance sheet is provided below: $\begin{array} { | l | r | r | } \hline \text { Cash } & & \$ 100,000 \\\hline \text { Accounts receivable } & \$ 400,000 & \\\hline \text { Less allowance for uncollectible } & 50,000 & 350,000 \\ \text { Accounts } & & \\\hline \text { Inventory } & & 550,000 \\\hline \text { Prepaid expenses } & & 74,000 \\\hline \text { Property, plant, \& equipment, net } & & 926,000 \\\hline \quad \text { Total assets } & & \$ 2,000,000 \\\hline & & \\\hline\end{array}$ Required: 1)Compute Longwood Company's end-of-year working capital. 2)Compute the company's quick (acid-test)ratio. 3)The company has a debt agreement with its bank that authorizes the bank to call in its loan to the company if the company's current ratio falls below 3:1 as of the last day of any month during the term of the loan.During January Year 2,the company engaged in the three following transactions: (a)Collected $100,000 on account (b)Purchased inventory on account,$50,000 (c)Paid accounts payable,$60,000 Will the company be in default after completing these transactions? Justify your answer. (Round your answers to two decimal places.)

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

The following balance sheet information was provided by Western 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 net credit sales totaled $270,000,what was the company's average days to collect receivables? (Use 365 days in a year.Do not round your intermediate calculations.)

Which of the following statements is correct?