Financial Statement Analysis Test Bank Part 1

Financial Statement Analysis True/False Questions 1. Common-size statements are financial statements of companies of similar size. 2. One limitation of vertical analysis is that it cannot be used to compare two companies that are significantly different in size. 3. The gross margin percentage is computed by dividing the gross margin by total assets. 4. The sale of used equipment at book value for cash will increase earnings per share. 5. Earnings per share is computed by dividing net income (after deducting preferred dividends) by the average number of common shares outstanding. 6. The dividend payout ratio divided by the dividend yield ratio equals the price-earnings ratio. 7. An increase in the number of shares of common stock outstanding will decrease a company's price-earnings ratio if the market price per share remains unchanged. 8. A company's financial leverage is negative when its return on total assets is less than its return on common stockholders' equity. 9. When computing return on common stockholders' equity, retained earnings should be included as part of common stockholders' equity. 10. When a retailing company purchases inventory, the book value per share of the company increases. 11. If a company's acid-test ratio increases, its current ratio will also increase. 12. Assuming a current ratio greater than 1, acquiring land by issuing more of the company's common stock will increase the current ratio. 13. If a company successfully implements lean production, its inventory turnover ratio should decrease. 14. Short-term borrowing is not a source of working capital. 15. Working capital is computed by subtracting long-term liabilities from long-term assets.

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Financial Statement Analysis Multiple Choice Questions 16. Common size financial statements help an analyst to: A) Evaluate financial statements of companies within a given industry of the approximate same size. B) Determine which companies in a similar industry are at approximately the same stage of development. C) Compare the mix of assets, liabilities, capital, revenue, and expenses within a company over a period of time or between companies within a given industry without respect to size. D) Ascertain the relative potential of companies of similar size in different industries. 17. Which of the following ratios would be least useful in determining a company's ability to pay its expenses and liabilities? A) current ratio B) acid-test ratio C) price-earnings ratio D) times interest earned ratio 18. Most stockholders would ordinarily be least concerned with which of the following ratios: A) earnings per share. B) dividend yield ratio. C) price-earnings ratio. D) acid-test ratio.

Financial Statement Analysis 19. What effect will the issuance of common stock for cash at year-end have on the following ratios?

A) B) C) D)

Return on Total Assets Debt-to-Equity Ratio Increase Increase Increase Decrease Decrease Increase Decrease Decrease

20. The market price of Friden Company's common stock increased from $15 to $18. Earnings per share of common stock remained unchanged. The company's priceearnings ratio would: A) increase. B) decrease. C) remain unchanged. D) impossible to determine. 21. If a company is profitable and is effectively using leverage, which one of the following ratios is likely to be the largest? A) Return on total assets. B) Return on total liabilities. C) Return on common stockholders' equity. D) Cannot be determined. 22. Clark Company issued bonds with an interest rate of 10%. The company's return on assets is 12%. The company's return on common stockholders' equity would most likely: A) increase. B) decrease. C) remain unchanged. D) cannot be determined.

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Financial Statement Analysis 23. Which of the following transactions could generate positive financial leverage for a corporation? A) acquiring assets through the issuance of long-term debt. B) acquiring assets through the use of accounts payable. C) acquiring assets through the issuance of common stock. D) both A and B above

24. Book value per common share is the amount of stockholders' equity per outstanding share of common stock. Which one of the following statements about book value per common share is most correct? A) Market price per common share usually approximates book value per common share. B) Book value per common share is based on past transactions whereas the market price of a share of stock mainly reflects what investors expect to happen in the future. C) A market price per common share that is greater than book value per common share is an indication of an overvalued stock. D) Book value per common share is the amount that would be paid to stockholders if the company were sold to another company. 25. The ratio of total cash, marketable securities, accounts receivable, and short-term notes to current liabilities is: A) the debt-to-equity ratio. B) the current ratio. C) the acid-test ratio. D) working capital.

26. A company has just converted a long-term note receivable into a short-term note receivable. The company's acid-test and current ratios are both greater than 1. This transaction will: A) increase the current ratio and decrease the acid-test ratio. B) increase the current ratio and increase the acid-test ratio. C) decrease the current ratio and increase the acid-test ratio. D) decrease the current ratio and decrease the acid-test ratio. 27. Broca Corporation has a current ratio of 2.5. Which of the following transactions will increase Broca's current ratio? A) the purchase of inventory for cash. B) the collection of an account receivable. C) the payment of an account payable. D) none of the above.

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28. Allen Company's average collection period for accounts receivable was 25 days in year 1, but increased to 40 days in year 2. Which of the following would most likely be the cause of this change: A) a decrease in accounts receivable relative to sales in year 2. B) an increase in credit sales in year 2 as compared to year 1. C) a relaxation of credit policies in year 2. D) a decrease in accounts receivable in year 2 as compared to year 1. 29. Wolbers Company wrote off $100,000 in obsolete inventory. The company's inventory turnover ratio would: A) increase. B) decrease. C) remain unchanged. D) impossible to determine.

30. Gottlob Corporation's most recent income statement appears below: Sales (all on account) ................................ Cost of goods sold ..................................... Gross margin ............................................. Selling and administrative expense ........... Net operating income ................................ Interest expense ......................................... Net income before taxes ............................ Income taxes .............................................. Net income ................................................

$824,000 477,000 347,000 208,000 139,000 37,000 102,000 30,000 $ 72,000

The gross margin percentage is closest to: A) 20.7% B) 72.7% C) 42.1% D) 481.9%

31. Crandall Company's net income last year was $60,000. The company paid preferred dividends of $10,000 and its average common stockholders' equity was $480,000. The company's return on common stockholders' equity for the year was closest to: A) 12.5% B) 10.4% C) 2.1% D) 14.6%

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Financial Statement Analysis 32. Ardor Company's net income last year was $500,000. The company has 150,000 shares of common stock and 30,000 shares of preferred stock outstanding. There was no change in the number of common or preferred shares outstanding during the year. The company declared and paid dividends last year of $1.00 per share on the common stock and $0.70 per share on the preferred stock. The earnings per share of common stock is closest to: A) $3.33 B) $3.19 C) $2.33 D) $3.47

33. The following information relates to Konbu Corporation for last year: Price earnings ratio............ Dividend payout ratio........ Earnings per share .............

15 30% $5

What is Konbu's dividend yield ratio for last year? A) 1.5% B) 2.0% C) 4.5% D) 10.0% 34. Richmond Company has 100,000 shares of $10 par value common stock issued and outstanding. Total stockholders' equity is $2,800,000 and net income for the year is $800,000. During the year Richmond paid $3.00 per share in dividends on its common stock. The market value of Richmond's common stock is $24. What is the priceearnings ratio? A) 3.0 B) 3.5 C) 4.8 D) 8.0 35. Hurst Company has 20,000 shares of common stock outstanding. These shares were originally issued at a price of $15 per share. The current book value is $25.00 per share and the current market value is $30.00 per share. The dividends on common stock for the year totaled $45,000. The dividend yield ratio is: A) 9% B) 7.5% C) 15% D) 10%

Financial Statement Analysis 36. Bramble Company's net income last year was $65,000 and its interest expense was $15,000. Total assets at the beginning of the year were $620,000 and total assets at the end of the year were $650,000. The company's income tax rate was 40%. The company's return on total assets for the year was closest to: A) 11.7% B) 10.2% C) 12.6% D) 11.2%

37. Dahl Company can borrow funds at 15% interest. Since the company's tax rate is 40%, its after-tax cost of interest is only 9%. Thus, the company reasons that if it can earn $70,000 per year before interest and taxes on a new investment of $500,000, then it will be better off by $25,000 per year. A) The company's reasoning is correct. B) The company's reasoning is not correct, since the after-tax cost of interest would be 6 percent, rather than 9%. C) The company's reasoning is not correct, since interest is not tax-deductible. D) The company's reasoning is not correct, since it would be worse off by $3,000 per year after taxes. 38. Bucatini Corporation is contemplating the expansion of operations. This expansion will generate a 11% return on the funds invested. To finance this operation, Bucatini can either issue 12% bonds, issue 12% preferred stock, or issue common stock. Bucatini currently has a return on common stockholders' equity of 16%. Bucatini's tax rate is 30%. In which of the financing options above is positive financial leverage being generated? A) none of the options generate positive financial leverage B) the bonds C) the common stock D) the preferred stock

39. Consolo Corporation's net income for the most recent year was $809,000. A total of 100,000 shares of common stock and 200,000 shares of preferred stock were outstanding throughout the year. Dividends on common stock were $2.05 per share and dividends on preferred stock were $1.80 per share. The earnings per share of common stock is closest to: A) $2.44 B) $8.09 C) $4.49 D) $6.04

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Financial Statement Analysis 40. Bary Corporation's net income last year was $2,604,000. The dividend on common stock was $2.50 per share and the dividend on preferred stock was $2.40 per share. The market price of common stock at the end of the year was $73.50 per share. Throughout the year, 300,000 shares of common stock and 100,000 shares of preferred stock were outstanding. The price-earnings ratio is closest to: A) 9.33 B) 11.89 C) 13.66 D) 8.47 41. Arntson Corporation's net income last year was $7,975,000. The dividend on common stock was $8.20 per share and the dividend on preferred stock was $3.50 per share. The market price of common stock at the end of the year was $59.10 per share. Throughout the year, 500,000 shares of common stock and 200,000 shares of preferred stock were outstanding. The dividend payout ratio is closest to: A) 1.06 B) 0.51 C) 0.56 D) 1.29 42. Last year, Soley Corporation's dividend on common stock was $11.60 per share and the dividend on preferred stock was $1.10 per share. The market price of common stock at the end of the year was $54.80 per share. The dividend yield ratio is closest to: A) 0.02 B) 0.21 C) 0.23 D) 0.91 43. Inglish Corporation's most recent income statement appears below: Sales (all on account) ................................ Cost of goods sold ..................................... Gross margin ............................................. Selling and administrative expense ........... Net operating income ................................ Interest expense ......................................... Net income before taxes ............................ Income taxes (30%) ................................... Net income ................................................

$610,000 350,000 260,000 110,000 150,000 30,000 120,000 36,000 $ 84,000

The beginning balance of total assets was $560,000 and the ending balance was $580,000. The return on total assets is closest to: A) 18.4%

Financial Statement Analysis B) C) D)

14.7% 26.3% 21.1%

44. Excerpts from Bellis Corporation's most recent balance sheet appear below:

Preferred stock ................................................. Common stock ................................................. Additional paid-in capital–common stock ...... Retained earnings ............................................ Total stockholders’ equity ...............................

Year 2 Year 1 $ 100,000 $ 100,000 300,000 300,000 370,000 370,000 480,000 390,000 $1,250,000 $1,160,000

Net income for Year 2 was $160,000. Dividends on common stock were $47,000 in total and dividends on preferred stock were $23,000 in total. The return on common stockholders' equity for Year 2 is closest to: A) 9.4% B) 13.3% C) 12.4% D) 14.5% 45. Data from Baca Corporation's most recent balance sheet appear below: Preferred stock ................................................. Common stock ................................................. Additional paid-in capital–common stock ...... Retained earnings ............................................ Total stockholders’ equity ...............................

$ 100,000 400,000 360,000 580,000 $1,440,000

A total of 400,000 shares of common stock and 20,000 shares of preferred stock were outstanding at the end of the year. The book value per share is closest to: A) $3.35 B) $5.00 C) $1.90 D) $3.60 46. Dravis Company's working capital is $10,000 and its current liabilities are $84,000. The company's current ratio is closest to: A) 0.88 B) 0.12 C) 9.40 D) 1.12 47. Erascible Company has $13,000 in cash, $7,000 in marketable securities, $27,000 in

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Financial Statement Analysis accounts receivable, $20,000 in inventories, and $30,000 in current liabilities. The company's current assets consist of cash, marketable securities, accounts receivable, and inventory. The company's acid-test ratio is closest to: A) 1.57 B) 0.90 C) 1.33 D) 2.23 48. Frame Company had $160,000 in sales on account last year. The beginning accounts receivable balance was $10,000 and the ending accounts receivable balance was $16,000. The company's accounts receivable turnover was closest to: A) 12.31 B) 6.15 C) 16.00 D) 10.00 49. Graber Company had $130,000 in sales on account last year. The beginning accounts receivable balance was $18,000 and the ending accounts receivable balance was $12,000. The company's average collection period was closest to: A) 33.69 days B) 42.12 days C) 84.23 days D) 50.54 days 50. Harold Company, a retailer, had cost of goods sold of $260,000 last year. The beginning inventory balance was $20,000 and the ending inventory balance was $26,000. The company's inventory turnover was closest to: A) 5.65 B) 10.00 C) 13.00 D) 11.30 51. Ira Company, a retailer, had cost of goods sold of $160,000 last year. The beginning inventory balance was $26,000 and the ending inventory balance was $24,000. The company's average sale period was closest to: A) 114.06 days B) 54.75 days C) 59.31 days D) 57.03 days 52. Raatz Corporation's total current assets are $370,000, its noncurrent assets are $660,000, its total current liabilities are $220,000, its long-term liabilities are $410,000, and its stockholders' equity is $400,000. Working capital is: A) $370,000

Financial Statement Analysis B) C) D)

$150,000 $250,000 $400,000

53. Stubbs Corporation's total current assets are $390,000, its noncurrent assets are $630,000, its total current liabilities are $230,000, its long-term liabilities are $290,000, and its stockholders' equity is $500,000. The current ratio is closest to: A) 0.62 B) 0.59 C) 1.70 D) 0.79 54. Data from Hollingworth Corporation's most recent balance sheet appear below: Cash ................................... Marketable securities ......... Accounts receivable .......... Inventory ........................... Prepaid expenses ............... Current liabilities ...............

$12,000 $29,000 $37,000 $51,000 $20,000 $115,000

The company's acid-test ratio is closest to: A) 0.85 B) 0.10 C) 0.68 D) 0.36 55. Eachus Corporation has provided the following data:

Accounts receivable .......... Inventory ........................... Sales on account ................ Cost of goods sold .............

This Year Last Year $135,000 $119,000 $136,000 $155,000 $698,000 $429,000

The accounts receivable turnover for this year is closest to: A) 0.88 B) 5.50 C) 5.17 D) 1.13

56. Data from Millier Corporation's most recent balance sheet and income statement

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Financial Statement Analysis appear below:

Accounts receivable .......... Inventory ........................... Sales on account ................ Cost of goods sold .............

This Year Last Year $101,000 $125,000 $183,000 $190,000 $758,000 $457,000

The average collection period for this year is closest to: A) 48.7 days B) 70.6 days C) 85.6 days D) 54.4 days 57. Laware Corporation has provided the following data:

Accounts receivable .......... Inventory ........................... Sales on account ................ Cost of goods sold .............

This Year Last Year $118,000 $138,000 $180,000 $170,000 $714,000 $447,000

The inventory turnover for this year is closest to: A) 2.55 B) 0.94 C) 2.48 D) 1.06

58. Data from Buker Corporation's most recent balance sheet and income statement appear below:

Accounts receivable .......... Inventory ........................... Sales on account ................ Cost of goods sold .............

This Year Last Year $101,000 $125,000 $155,000 $153,000 $662,000 $399,000

The average sale period for this year is closest to: A) 142.0 days B) 3.6 days C) 140.9 days D) 3.7 days

Financial Statement Analysis 59. Last year Jar Company had a net income of $290,000, income tax expense of $66,000, and interest expense of $20,000. The company's times interest earned was closest to: A) 10.20 B) 14.50 C) 15.50 D) 18.80 60. The times interest earned ratio of Whiting Company is 4.0. The interest expense for the year is $15,000, and the company's tax rate is 30%. Whiting Company's after-tax net income must be: A) $60,000 B) $42,000 C) $31,500 D) $16,500

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Financial Statement Analysis 61. Karver Company has total assets of $180,000 and total liabilities of $130,000. The company's debt-to-equity ratio is closest to: A) 0.28 B) 0.72 C) 0.42 D) 2.60 62. Brewster Company's debt-to-equity ratio is 0.8. Current liabilities total $100,000 and long term liabilities total $200,000. Brewster Company's total assets must be: A) $375,000 B) $450,000 C) $550,000 D) $675,000 63. Boyington Corporation has provided the following data from its most recent income statement: Net operating income ........ Interest expense ................. Net income before taxes .... Income taxes ...................... Net income ........................

$87,000 $49,000 $38,000 $11,000 $27,000

The times interest earned ratio is closest to: A) 0.55 B) 0.78 C) 2.54 D) 1.78 64. Wohlfarth Corporation has provided the following data from its most recent balance sheet: Total assets .................................... Total liabilities ............................... Total stockholders’ equity ............. The debt-to-equity ratio is closest to: A) 4.00 B) 3.00 C) 0.75 D) 0.33

$760,000 $570,000 $190,000