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Exam 13: Financial Statement Analysis

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Question 51

Multiple Choice

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Financial statement analysis involves forms of comparison including:

A) Comparing changes in the same item over a number of periods.
B) Comparing key relationships within the same year.
C) Comparing key items to industry averages.
D) All of these answers are correct.

E) A) and D)
F) A) and C)

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Question 52

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When debt is used to finance the purchase of assets,the term or time span of the debt should always be shorter than the life span of the assets.

A) True
B) False

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Question 53

Multiple Choice

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Net income divided by sales is the formula for which of these analytical measures?

While horizontal analysis examines one item over many time periods,vertical analysis examines many items in the same interval of time.

Benson Company received cash of $5,000,000 by issuing 20-year bonds payable.As a result of this transaction,the company's current ratio will:

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: (a)Earnings per share (Round your answer to the nearest cent.) (b)Book value per share of common stock (c)Price-earnings ratio (Round your answer to one decimal place.) (d)Dividend yield (Round your answer to one decimal place.)

Indicate whether each of the following statements about financial statement analysis is true or false. The value of a corporation's price-earnings ratio indicates how optimistic investors are about a company's growth potential.______ The dividend yield ratio indicates the percentage of a company's net income that it paid out in dividends.______ Conservatism produces a positive bias in a company's financial statements and thus in the ratios calculated from the financial statements.______ Changes in general economic conditions (such as rate of inflation)can cause the values for a company's financial statement ratios to change from one year to the next.______ Comparing financial statement ratios of companies in different industries can give misleading results.______

The return on investment measure is also referred to as:

The Abel Company provided the following information from its financial records: What is the amount of the company's earnings per share?

Working capital is current assets minus current liabilities.

Which of the following statements regarding the return on equity (ROE) measure is incorrect?

Financial analysis typically involves some form of comparison,such as changes in the same item over a number of years.

Profitability ratios attempt to assess the company's ability to generate earnings.

Which of the following statements about financial statements is incorrect?

Indicate whether each of the following statements about financial statement analysis is true or false. Working capital is a measure of the amount of current assets a company would have left after paying its current liabilities.______ If a transaction caused a company's working capital to increase,the transaction caused the company to become less liquid.______ Interpretation of a company's current ratio can be difficult because it is an absolute amount.______ The quick ratio is a more conservative variation of the current ratio.______ The quick ratio is usually calculated by using the following equation: cash + receivables + current marketable securities ÷ current liabilities.______

Describe the differences among liquidity ratios,solvency ratios,and profitability ratios.Identify examples of each type of ratio as well.

Which of the following statements regarding the quick ratio is incorrect?

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? (Rounded to the nearest whole percent.)

Which ratio measures how effectively a company is using assets to generate revenue?

Grove Corporation had sales of $3,000,000,cost of goods sold of $2,250,000,and average inventory of $500,000.What was Grove's inventory turnover ratio for the period?