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Exam 14: Analyzing Financial Statements

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Question 1

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The return on assets ratio is influenced significantly by a company's relative debt and equity financing of its assets.

A) True
B) False

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Question 2

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Which of the following statements is correct?

A) A ratio calculation is most relevant in isolation.
B) One of the advantages of ratio analysis is that it allows companies of different sizes to be compared.
C) Finding benchmarks for comparison is a straight-forward task.
D) It is always preferable to compare a company's performance to industry-wide ratios rather than to use a competitor's ratios.

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

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Question 3

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Financial statement analysis is very precise and doesn't involve judgment.

The records of Everyday Electronics Corporation for a particular period include the following: $\begin{array} { l r } \text { Average total assets } & \$ 760,000 \\\text { Average total liabilities } & 485,000 \\\text { Total revenue } & 200,500 \\\text { Total expenses (including income tax) } & 135,000\end{array}$ What is the return on equity ratio?

The records of Marshall Company include the following: $\begin{array} { l r } \text { Average total assets } & \$ 3,500,000 \\\text { Average total liabilities } & 1,220,000 \\\text { Total revenue } & 4,580,000 \\\text { Total expense (including income tax) } & 4,100,000 \\\text { Interest expense (included in total expenses) } & 90,000 \\\text { Income tax rate } 40 \% &\end{array}$ The financial leverage percentage is which of the following?

Finding comparable companies in order to compare performance is important because ratios in isolation are difficult to evaluate.

Which of the following statements is correct?

Indicate the effect of each item on the ratios given below in the following manner: if an item would cause an increase in the ratio,place a check in the + column; if a decrease place a check in - column; and if no change,check the 0 column.Each item is independent of the others.

The cash ratio is less sensitive to small transactions involving cash than is either the current or quick ratios.

If the current ratio is 2,the payment of a cash dividend,which was recorded as a liability on the date of declaration,will result in which of the following?

The following data were shown in the records of Victoria Company at the end of 2010: $\begin{array} { l r } \text { Quick assets } & \$ 180,000 \\\text { Current assets } & 225,000 \\\text { Average net receivables } & 10,000 \\\text { Average inventory } & 42,000 \\\text { Current liabilities } & 50,000 \\\text { Net credit sales } & 120,000 \\\text { Cost of goods sold } & 84,000 \\\text { Assume } 365 \text { days in the year } &\end{array}$ Calculate each of the following ratios: A.Quick ratio B.Current ratio C.Receivable turnover ratio D.Inventory turnover ratio E.Average age of receivables F.Average days' supply in inventory

Which of the following ratios increases when inventory is sold on account for a price equal to its original cost?

Carolina Company computed the following ratios for a two year period: $\begin{array} { l l c c } & \underline { \text { Ratio } } & \underline { 2009 } & \underline { 2010 } \\\text { A. } & \text { Current ratio } & 1.3 \text { to } 1 & .6 \text { to } 1 \\\text { B. } & \text { Return on equity } & 25 \% & 16 \% \\\text { C. } & \text { Quality of income } & 1.7 & .5 \\\text { D. } & \text { Cash coverage ratio } & 346& 122 \\\text { E. } & \text { Profit margin } &6 \% & 4 \%\end{array}$ Required: Comment on the trend of each of the ratios from 2009 to 2010.State concerns or possible implications for the future of each.

The dividend yield ratio decreases when earnings per share increases.

Thomas Company had income before interest and taxes of $120,000.Interest expense for the period was $17,000 and income taxes amounted to $28,500.The average stockholders' equity was $680,000.What is Thomas' return on equity (ROE) ?

Cromwell Company began the year with a balance in inventory of $110,000 and ended the year with a balance of $102,000.The net sales for the year were $983,000 with a gross profit on sales of $295,000.What was the inventory turnover ratio?

The debt-to-equity ratio measures which of the following?

The following data were reported by Universe Company at year-end: $\begin{array} { l r } \text { Total assets } & \$ 525,000 \\\text { Quick assets } & 105,000 \\\text { Noncurrent assets } & 375,000 \\\text { Current liabilities } & 75,000 \\\text { Long-term liabilities } & 75,000 \\\text { Common stock (par } \$ 10 ) & 170,000 \\\text { Total owners' equity } & 375,000\end{array}$ Calculate each of the following ratios: A.Debt-to-equity B.Current ratio C.Quick ratio D.Which,if any,of the above are liquidity ratios? E.Which,if any,of the above are profitability ratios?

Packers Corporation reported the following data for the year ended December 31,2010: $\begin{array} { l r } \text { Net sales revenue } & \$ 400,000 \\\text { Net income } & \$ 25,000 \\\text { Interest expense (net of tax) } & \$ 3,000 \\\text { Average total assets } & \$ 200,000 \\\text { Average stockholders' equity } & \$ 160,000 \\\text { Average net fixed assets } & \$ 100,000 \\\text { Average shares of common stock outstanding } & 15,000 \\\text { Market value per share } & \$ 16.00\end{array}$ Calculate each of the following ratios: A.Profit margin B.Return on assets C.Return on equity D.Earnings per share E.Price/earnings ratio F.Debt-to-equity ratio G.Financial leverage percentage H.Fixed asset turnover ratio

The following return on investment ratios were computed for Steven Company: $\begin{array} { l l l l l l } & \underline{2010} & \underline{2009}& \underline{2008} &2007\\\text { Return on assets } & { 12 \% } & { 15 \% } & { 15 \% } & { 18 \% } \\\text { Return on equity } & 12 \% & 15 \% & 11 \% & 20 \%\end{array}$ Requirements: A.Compute financial leverage percentage for each year. B.Explain briefly the stockholders' advantage or disadvantage for each year.