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Exam 9: Financial Statement Analysis

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Question 31

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As of December 31, 2013, 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, 2014, Gant sold inventory on account for $6,000. Which of the following statements is incorrect?

A) Gant's current ratio will increase.
B) Gant's quick ratio will decrease.
C) Gant's working capital will increase.
D) None of these answers is correct.

E) B) and D)
F) A) and B)

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Question 32

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Indicate whether each of the following statements about financial statement analysis is true or false. 1. The value of a corporation's price-earnings ratio indicates how optimistic investors are about a company's growth potential. 2. The dividend yield ratio indicates the percentage of a company's net income that it paid out in dividends. 3. Conservatism produces a positive bias in a company's financial statements and thus in the ratios calculated from the financial statements. 4. 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. 5. Comparing financial statement ratios of companies in different industries can give misleading results.

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1. True
2....

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Question 33

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A limitation of financial statement analysis stems from the discretion of management to choose accounting procedures that cast the best light on the firm's performance.

Which type of approach should be used when evaluating corporate results using horizontal analysis?

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:

Indicate whether each of the following statements about financial statement analysis is true or false. 1. Solvency ratios measure a company's short-term debt paying ability and its financial structure. 2. A company with a high debt to assets ratio probably would be considered to have a high level of financial risk. 3. The debt to equity ratio and debt to assets ratio are two ways to measure the same relationship. 4. From the point of view of stockholders, a decline in the debt to equity ratio is always good news. 5. The lower the debt to equity ratio, the higher a company's financial leverage.

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

Describe the factors involved in communicating useful financial information.

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

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.

Darden Company has cash of $40,000, accounts receivable of $60,000, inventory of $32,000, and equipment of $100,000. Assuming current liabilities of $48,000, this company's working capital is:

Which of the following statements about financial statements is incorrect?

The following balance sheet information was provided by Western Company: $\begin{array}{|l|r|r|}\hline \text { Assets } & 2014 & 2013 \\\hline \text { Cash } & \$ 4,000 & \$ 2,000 \\\hline \text { Accounts receivable } & 15,000 & 12,000 \\\hline \text { Inventory } & \$ 35,000 & \$ 38,000 \\\hline\end{array}$ Assuming 2014 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.)

Select the incorrect statement regarding the return on equity (ROE) measure.

Which ratio measures the percentage of company's assets that are financed by debt?

Assume that you are considering purchasing some of a company's long-term bonds as an investment. Which of the company's financial statement ratios would you probably be most interested in?

You are considering an investment in Apple stock and wish to assess the firm's short-term debt-paying ability. All of the following ratios are used to assess liquidity except:

The Crestar Company reported net income of $112,000 on 20,000 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?

As of December 31, 2013, 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, 2014, Gant purchased merchandise on account for $4,000. Which of the following statements is true?

Montana Company reported the following operating results for 2013 and 2014: $\begin{array}{|l|r|c|}\hline 2014 &{\text { Amount }} & \% \text { of Sales } \\\hline \text { Sales } & \$ 960,000 & \\\hline \text { Cost of goods sold } & 635,000 & \\\hline \text { Gross margin } & 325,000 \\\hline \text { Operating expenses } & 275,000 \\\hline \text { Income before taxes } & 50,000 \\\hline \text { Income taxes } & 15,000 \\\hline \text { Net income } & \$ \quad 35,000 \\\hline\end{array}$ Required: Express each income statement component for each year as a percentage of sales. Round your answer to one decimal place (i.e. 22.5%)