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Exam 13: Financial Statement Analysis

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Question 71

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For Perez Corporation, return on equity is substantially higher than return on investment. What does that tell you about the company?

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Return on equity is hi...

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Question 72

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Accrual accounting requires the use of many estimates, including:

A) Uncollectible accounts expense.
B) Warranty costs.
C) Assets' useful lives.
D) All of these answers are correct.

E) All of the above
F) C) and D)

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Question 73

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Select the term from the list provided that bests matches each of the following descriptions or definitions:

Select the correct statement regarding vertical analysis.

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

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

The accounting profession assumes that financial statement users have an expert knowledge of business.

The following information was provided by Joseph Company as of December 31, Year 2: On the most recent trading date, Joseph's common shares sold at $36 and the preferred shares sold at $14.The following information on industry averages is provided: Earnings per share $2.06 Price-earnings ratio 13.2:1 Required: 1) Calculate and compare Joseph Company's ratios with the industry averages shown above. Round your answer to two decimal places.2) Discuss whether you would invest in this company. $\begin{array}{|l|r|}\hline \text { Net income } & \$ 528,000 \\\hline\text { Preferred stock, }(20,000 \text { shares at } \$ 10 \mathrm{par}, 4 \%) & \$ 200,000 \\\hline \text { Common stock (220,000 shares at \$1 par) } & \$ 220,000 \\\hline \text { Paid-in capital in excess of par-common } & \$ 2,475,500 \\\hline \text { Retained earnings } & \$ 3,824,500 \\\hline\\\hline\end{array}$

Indicate whether each of the following statements is true or false.Some forms of financial statement analysis involve identifying changes in the same item for the same company over a period of time.Some forms of financial statement analysis involve comparing operations of different companies in the same industry.Vertical analysis is also called trend analysis.Vertical analysis refers to studying the behavior of individual financial statement items over several periods.Horizontal analysis could be done using changes in the absolute dollar amount of an item or trends in percentages.

Which of the following statements regarding net margin is incorrect?

The following information applies to Markham Company: Additional information: Net credit sales equal $220,000 and beginning accounts receivable were $11,000.Required: Compute Markham's: (a) Quick ratio (b) Current ratio (c) Working capital (d) Accounts receivable turnover (e) Average days to collect receivables Round your answers to two decimal places. $\begin{array}{|l|c|}\hline \text { Assets } & \\\hline \text { Cash } & \$ 6,000 \\\hline \text { Accounts receivable } & 13,000 \\\hline \text { Inventory } & 16,000 \\\hline \text { Plant and equipment, net } & 21,000 \\\hline \text { Land } & 19,000 \\\hline \text { Total assets } & \$ 75,000 \\\hline\\\hline {\text { Liabilities and stockholders' equity }} \\\hline \text { Accounts payable } & 5,000 \\\hline \text { Salaries payable } & 10,000 \\\hline \text { Bonds payable (due 2020) } & 12,000 \\\hline \text { Capital stock, no par } & 23,000 \\\hline \text { Retained earnings } & 25,000 \\\hline \text { Total liabilities and stockholders' equity } & 75,000 \\\hline\end{array}$

Select the term from the list provided that bests matches each of the following descriptions or definitions: NEED TO MAKE CHANGES TO TABLE Center column - Reword D so it reads: D. Measure of efficiency in using assets; calculated as net sales divided by average total assets Renter column - Reword I so it reads: Indicates the number of times, on average, that inventory is totally replaced during the year. Center column - Reword L so it reads: Ratio that measures how quickly a company collects its accounts receivable; calculated by dividing net credit sales by average net receivables

The following balance sheet information is provided for Duke Company for Year 2: What is the company's current ratio (rounded to two decimal points) ? $\begin{array}{|l|r|}\hline \text { Assets } \\\hline \text { Cash } & \$5,400 \\\hline \text { Accounts receivable } & 15,500 \\\hline \text { Inventory } & 18,000 \\\hline \text { Prepaid expenses } & 1,600 \\\hline \text { Phant and equipment, net of depreciation } &20,200 \\\hline \text { Land } & 19,950 \\\hline \text { Total assets }&\$80,650\\\hline \text { Liabilities and Stockholders' Equity }\\\hline \text { Accounts payable } & \$ 4,500 \\\hline \text { Salaries payable } & 11,500 \\\hline \text { Bonds payable (Due in 2020) } & 19,000 \\\hline \text { Common stock, no par } & 30,000 \\\hline \text { Retained earnings } & 15,650 \\\hline \text { Total liabilities and stockholder' equity }&\$80,650\\\hline\end{array}$

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.)

Financial ratios can be used to assess which of the following aspects of a firm's performance?

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

The following partial balance sheet is provided for Groome Company: What is the company's debt to assets ratio (rounded to nearest whole percent) ? $\begin{array}{l}\begin{array} { | l | r | } \hline \text { Liabilities and Stockholders' Equity }\\\hline \text { Accounts payable } & \$ 9,000 \\\hline \text { Salaries payable } & 12,000 \\\hline \text { Bonds payable (Due in 2020) } & 20,000 \\\hline \text { Common stock, no par } & 30,000 \\\hline \text { Retained earnings } & 54,000 \\\hline \text { Total liabilities and stockholder' equity } & \$ \quad 125,000 \\\hline \text { Total liabilities and stockholder' equity }&\$125,000\\ \hline\end{array}\end{array}$

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

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:

Alpha Company provided the following balance sheet for Year 2: What is the company's plant assets to long-term liabilities ratio?