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Exam 13: Financial Statement Analysis

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Question 51

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Which of the following statements regarding the information disclosed in financial statements is incorrect?

A) The costs of providing all possible information about a firm would be prohibitively high for the business.
B) Some information disclosed in financial statements may be irrelevant to some users.
C) Financial statements should be detailed enough to answer any financial-related question an investor might have.
D) When too much information is presented users may suffer from information overload.

E) None of the above
F) All of the above

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Question 52

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

A) Total expenses on the income statement.
B) Net income on the income statement.
C) Sales on the income statement.
D) None of these answers is correct.

E) None of the above
F) A) and B)

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Question 53

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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 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:

Which of the following statements regarding horizontal analysis is incorrect?

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:

Many companies have to monitor closely certain ratios, such as the current ratio, due to debt covenants. Selected transactions are provided below for a company that uses a perpetual inventory system; sells its merchandise at a selling price that exceeds cost; and had a current ratio of 1.85 and a quick ratio of 1.19 before the event occurred.Required: In the above table, indicate whether each transaction would increase (+), decrease (-), or not affect (0) the company's current ratio and quick ratio. $\begin{array} { | l | c | c | } \hline & \text { Impact on } & \text { Impact on } \\\hline & \text { Current Ratio } & \text { Quick Ratio } \\\hline \text { Description of Transaction } & (+) \text { or }(-) \text { or }(0) & (+) \text { or }(-) \text { or (0) } \\\hline \text { 1. Collected accounts receivable } & & \\\hline \text { 2. Issued common stock for cash } & & \\\hline \text { 3. Purchased one-year insurance policy } & & \\\hline \text { 4. Paid previously declared cash dividend } & & \\\hline \text { 5. Paid the balance on an account payable } & & \\\hline \text { 6. Purchased a bualding by issuing a long- } & & \\ \text { term note } & & \\\hline \text { 7. Purchased inventory on account } & & \\\hline \text { 8. Purchased current marketable securities for } & & \\ \text { cash } & & \\\hline \text { 9. Sold merchandise for cash } & & \\\hline \text { 10. Sold merchandise on account } & & \\\hline\end{array}$

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

Horizontal analysis is also known as:

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

Starwood Corporation has current assets of $200,000, total current liabilities of $750,000 net credit sales of $1,300,000, beginning accounts receivable of $65,000 and ending accounts receivable of $69,000. What is Starwood's accounts receivable turnover?

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

Discuss the limitations that affect financial statement analysis.

A banker may perform a financial ratio analysis to assess a firm's ability to repay debt in a timely manner.

Solvency ratios are used to assess a company's:

The following balance sheet information is provided for Gaynor Company: Assuming Year 2 cost of goods sold is $153,300, what is the company's inventory turnover? $\begin{array} { | l | r r | r r | } \hline \text { Assets } & & 2014 & 2013 \\\hline \text { Cash } & \$ & 4,000 & \$ & 2,000 \\\hline \text { Accounts receivable } & & 15,000 & & 12,000 \\\hline \text { Inventory } & \$ & 35,000 & \$ & 38,000 \\\hline\end{array}$

The study of an individual financial statement item over several accounting periods is called:

The study of an individual item or account over several periods in the same financial year or over many years is known as:

Many companies have to monitor some of their financial statement ratios, such as the current ratio, due to debt covenants. Selected transactions are provided below for a company that uses a perpetual inventory system; sells its merchandise at a selling price that exceeds cost; and had a current ratio of 1.85 before the event occurred.Required: In the above table, indicate whether each transaction would increase (+), decrease (-), or not affect (0) the company's working capital and the current ratio. $\begin{array}{|l|c|c|}\hline & \text { Impact on } & \text { Impact on } \\\hline & \text { Working Capital } & \text { Current Ratio } \\\hline \text { Description of Transaction } & (+) \text { or }(-) \text { or }(0) & (+) \text { or }(-) \text { or }(0) \\\hline \text { 1. Collected accounts receivable } & \\\hline \text { 2. Declared a stock dividend } & \\\hline \text { 3. Issued common stock for cash } & \\\hline \text { 4. Paid advertising cost } & \\\hline \text { 5. Paid cash for a patent } & \\\hline \text { 6. Paid previously declared cash dividend } & \\\hline \text { 7. Paid sales commissions } \\\hline \text { 8. Paid the balance on an account payable } \\\hline \text { 9. Purchased a building by issuing a long. } \\\hline \text { term note } \\\hline \text { 10. Purchased inventory on account } \\\hline \text { 11. Purchased current marketable securities for }\\\text { cash } & \\\hline 12 . \text { Recorded depreciation expense } & \\\hline 13 . \text { Sold land for cash } & \\\hline 14 . \text { Sold merchandise for cash } & \\\hline 15 . \text { Sold merchandise on account } & \\\hline\end{array}$

Selected financial information for Martin Company for Year 2 follows: Required: How many times did Martin's merchandise inventory turnover during Year 2? Round your answer to one decimal place. $\begin{array}{|l|ll|}\hline \text { Sales } & \$ & 498,000 \\\hline \text { Cost of goods sold } & 320,000 \\\hline \text { Merchandise inventory } & \\\hline \text { Beginning of year } & 72,000 \\\hline \text { End of year } & 80,000 \\\hline\end{array}$