Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
How is horizontal analysis of financial statements accomplished?
A) By placing statement items on an after-tax basis.
B) By calculating both earnings per share and the price-earnings ratio.
C) By trend percentages.
D) By common-size statements.
1)
Answer: C
Topic: 14-02 Comparison of Financial Data, 14-03 The Need to Look beyond Ratios, 14-05 Dollar and
Percentage Changes on Statements
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
2)
The gross margin percentage is most likely to be used to assess which of the following?
A) The overall profitability of the company's products.
B) How quickly inventories are sold.
C) The efficiency of administrative departments.
D) How quickly accounts receivables can be collected.
2)
Answer: A
Topic: 14-06 Common-Size Statements
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
3)
Earnings per common share will immediately increase as a result of which of the
following?
A) The issuance of bonds by the company to finance construction of new buildings.
B) An increase in the dividends paid to common shareholders by the company.
C) The sale of additional common shares by the company.
D) An increase in the company's net income.
Answer: D
Topic: 14-08 Earnings per Share
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
1
3)
4)
The market price of XYZ Company's common shares dropped from $25 to $21 per share.
The dividend paid per share remained unchanged. How would the company's dividend
payout ratio change?
A) Increase.
B) Remain unchanged.
C) Decrease.
D) Impossible to determine without more information.
4)
Answer: B
Topic: 14-10 Dividend Payout and Yield Ratios
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
5)
An increase in the market price of a company's common shares will immediately affect
which of the following?
A) Dividend payout ratio.
B) Earnings per common share.
Dividend
yield
ratio.
C)
D) Debt-to-equity ratio.
5)
Answer: C
Topic: 14-08 Earnings per Share, 14-10 Dividend Payout and Yield Ratios, 14-12 The Dividend Yield Ratio,
14-25 Debt-to-Equity Ratio
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder., 14-04
Compute and interpret financial ratios that would be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
6)
Which of the following is true regarding the calculation of return on total assets?
A) The numerator of the ratio consists of net income plus interest expense multiplied
by one minus the tax rate.
B) The denominator of the ratio consists of the balance of total assets at the end of the
period under consideration.
C) The numerator of the ratio consists only of net income.
D) The numerator of the ratio consists of net income plus interest expense multiplied
by the tax rate.
Answer: A
Topic: 14-13 Return on Total Assets
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
2
6)
7)
Financial leverage is negative in which of the following situations?
A) When total liabilities are less than total assets.
B) When total liabilities are less than shareholders' equity.
C) When the return on total assets is less than the rate of return demanded by creditors.
D) When the return on total assets is less than the rate of return on common
shareholders' equity.
7)
Answer: C
Topic: 14-15 Financial Leverage
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
8)
Which of the following is NOT a potential source of financial leverage?
A) Preferred shares.
B) Accounts payable.
C) Retained earnings.
D) Bonds payable.
8)
Answer: C
Topic: 14-15 Financial Leverage
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
9)
If a company's bonds bear an interest rate of 8%, its tax rate is 30%, and its assets are
generating an after-tax return of 7%, what would be the leverage?
A) Negative.
B) Positive.
C) Neither positive nor negative.
D) Impossible to determine without knowing the return on common shareholders'
equity.
9)
Answer: B
Topic: 14-15 Financial Leverage
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
10)
A company's current ratio and acid-test ratios are both greater than 1.0 to 1. If obsolete
inventory is written off, what would be the effect?
A) A decrease in the acid-test ratio.
B) An increase in net working capital.
An
increase
in
the
acid-test
ratio.
C)
D) A decrease in the current ratio.
Answer: D
Topic: 14-19 Current Ratio, 14-20 Acid-Test (Quick) Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
3
10)
11)
If a company converts a short-term note payable into a long-term note payable, what
would be the effect of this transaction?
A) A decrease in both working capital and the current ratio.
B) An increase in both working capital and the current ratio.
C) A decrease in both the current ratio and the acid-test ratio.
D) A decrease in working capital and an increase in the current ratio.
11)
Answer: B
Topic: 14-18 Working Capital, 14-19 Current Ratio, 14-20 Acid-Test (Quick) Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
12)
Which one of the following would increase the working capital of a company?
A) Refinancing a short-term note payable with a two-year note payable.
B) Cash collection of accounts receivable.
C) Cash payment of payroll taxes payable.
D) Payment of a 20-year mortgage payable with cash.
12)
Answer: A
Topic: 14-18 Working Capital
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
13)
What will be the effect of a sale of a piece of equipment at book value for cash?
A) A decrease in the debt-to-equity ratio.
B) An increase in net income.
C) A decrease in working capital.
D) An increase in working capital.
13)
Answer: D
Topic: 14-18 Working Capital, 14-25 Debt-to-Equity Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor., 14-04
Compute and interpret financial ratios that would be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
14)
If a firm has a high current ratio but a low acid-test ratio, one can conclude which of the
following?
A) The firm has a large investment in inventory.
B) The firm has a large amount of current liabilities.
C) The firm's financial leverage is very high.
D) The firm has a large outstanding accounts receivable balance.
Answer: A
Topic: 14-19 Current Ratio, 14-20 Acid-Test (Quick) Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
4
14)
15)
Desktop Co. presently has a current ratio of 1.2 to 1 and an acid-test ratio of 0.8 to 1.
What will be effect of prepaying next year's office rent of $50,000?
A) No effect on the company's current ratio but will decrease its acid-test ratio.
B) A decrease in both the company's current ratio and its acid-test ratio.
C) An increase in both the company's current ratio and its acid-test ratio.
D) No effect on either the company's current ratio or its acid-test ratio.
15)
Answer: A
Topic: 14-19 Current Ratio, 14-20 Acid-Test (Quick) Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
16)
The Miller Company's current ratio is greater than 1.0 to 1. By paying off some of its
accounts payable using cash, what would be the effect on the company's current ratio?
A) An increase.
B) A decrease.
C) Remain unchanged.
D) Impossible to determine from the information given.
16)
Answer: A
Topic: 14-19 Current Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
17)
Rahner Company has a current ratio of 1.75 to 1. This ratio will decrease if Rahner
Company engages in which of the following transactions?
A) Pays the following month's rent on the last day of the year.
B) Pays the taxes payable that have been a current liability.
C) Sells inventory for more than its cost.
D) Borrows cash using a six-month note.
Answer: D
Topic: 14-19 Current Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
5
17)
18)
Which of the following accounts would be included in the calculation of the acid-test ratio? 18)
Accounts
Receivable
Yes
No
No
Yes
A)
B)
C)
D)
A)
Option A
Prepaid
Expense
Yes
Yes
No
No
B) Option
Inventory
No
Yes
Yes
No
C)
B
Option C
D)
Option D
Answer: D
Topic: 14-20 Acid-Test (Quick) Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
19)
Last year, Allen Company's average collection period for accounts receivable was 40
days; this year, it increased to 60 days. Which of the following would most likely
account for this change?
A) A relaxation of credit policies.
B) A decrease in accounts receivable relative to sales.
C) A decrease in sales.
D) An increase in sales.
19)
Answer: A
Topic: 14-21 Accounts Receivable Turnover
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
20)
If a loss resulting from an earthquake is classified as extraordinary, which of the
following disclosures meets the minimum requirements in Canada?
A) One earnings per share figure, net of the after-tax effect of the extraordinary loss.
B) One earnings per share figure that ignores the extraordinary loss.
C) Two earnings per share figures, one before and the other after the net of tax effect of
the extraordinary loss.
D) One earnings per share figure, net of the before-tax effect of the extraordinary loss.
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-08 Earnings
per Share
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
6
20)
21)
Which of the following events is unique to the calculation of fully diluted earnings per
share?
A) Issuance of bonds that can be converted to common shares.
B) An extraordinary gain or loss resulting from fire.
C) Issuance of participating and cumulative preferred shares.
D) Issuance of common share.
21)
Answer: A
Topic: 14-08 Earnings per Share
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
22)
The net accounts receivable for Andante Company were $150,000 at the beginning of the
most recent year and $190,000 at the end of the year. If the accounts receivable turnover
for the year was 8.5, and 15% of total sales were cash sales, what were the total sales for
the year?
A) $1,700,000.
B) $1,500,000.
C) $1,900,000.
D) $1,445,000.
22)
Answer: A
Topic: 14-21 Accounts Receivable Turnover
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
23)
Selected data from Sheridan Corporation's year-end financial statements are presented below.
23)
The difference between average and ending inventory is immaterial.
Current Ratio
Acid-Test Ratio
Current Liabilities
Inventory Turnover
Gross Profit Margin
Prepaid Expenses
2.0
1.5
$120,000
8 times
40%
$0
What were Sheridan's sales for the year?
A) $800,000.
B) $1,200,000.
C)
Answer: A
$480,000.
D)
$240,000.
Topic: 14-18 Working Capital, 14-19 Current Ratio, 14-20 Acid-Test (Quick) Ratio, 14-22 Inventory Turnover
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
7
24)
Fulton Company's price-earnings ratio is 8.0, and the market price of its common shares
is $32. The company has 3,000 shares of preferred shares outstanding, with each share
receiving a dividend of $3. What is the earnings per common share?
A) $7.
B) $4.
C) $10.
D) $3.
24)
Answer: B
Topic: 14-08 Earnings per Share, 14-09 Price—Earnings Ratio
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
25)
Perlman Company had 100,000 common shares and 20,000 preferred shares at the end of
the year just completed. Preferred shareholders received total dividends of $140,000.
Common shareholders received total dividends of $210,000. If the dividend payout ratio
for the year was 70%, what was the net income for the year?
A) $147,000.
B) $300,000.
C) $287,000.
D) $440,000.
25)
Answer: D
Topic: 14-08 Earnings per Share, 14-10 Dividend Payout and Yield Ratios
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
26)
Arlberg Company's net income last year was $250,000. The company had 150,000
common shares and 80,000 preferred shares. 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 $1.30 per common share and $1.40 per preferred share. The
earnings per common share was closest to which of the following?
A) $1.67.
B) $0.37.
C) $0.92.
D) $2.41.
26)
Answer: C
Topic: 14-08 Earnings per Share
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
27)
Arget Company's net income last year was $600,000. The company had 150,000
common shares and 60,000 preferred shares. 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 $1.10 per common share and $0.60 per preferred share. The
earnings per common share was closest to which of the following?
A) $3.76.
B) $2.90.
C) $4.00.
D) $4.24.
Answer: A
Topic: 14-08 Earnings per Share
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
8
27)
28)
Arquandt Company's net income last year was $550,000. The company had 150,000
common shares and 50,000 preferred shares 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 $1.20 per common share and $1.70 per preferred
share. The earnings per common share was closest to which of the following?
A) $3.67.
B) $4.23.
C) $2.47.
D) $3.10.
28)
Answer: D
Topic: 14-08 Earnings per Share
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
29)
The following data have been taken from your company's financial records for the current year:
29)
Earnings per Share
Dividend per Share
Market Price per Share
Book Value per Share
$10
$6
$90
$70
What is the price-earnings ratio?
A) 9.00 to 1.
B) 7.00 to 1.
C)
15.00 to 1.
D)
1.67 to 1.
Answer: A
Topic: 14-09 Price—Earnings Ratio
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
30)
The following data have been taken from your company's financial records for the current year:
30)
Earnings per Share
Dividend per Share
Market Price per Share
Book Value per Share
$15
$9
$120
$90
What is the price-earnings ratio?
A) 12.5 to 1.
B) 8.0 to 1.
C)
Answer: B
7.5 to 1.
D)
6.0 to 1.
Topic: 14-09 Price—Earnings Ratio
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
9
31)
Information concerning the common shares of Morris Company as of the end of the company's
31)
fiscal year is presented below:
Number of Shares Outstanding
460,000
Par Values per Share
$5.00
Dividend per Share
$6.00
Market Price per Share
$54.00
Earnings per Share
$18.00
The dividend yield ratio is closest to which of the following?
A) 120.0%.
B) 33.3%.
C) 11.1%.
D)
50.0%.
Answer: C
Topic: 14-10 Dividend Payout and Yield Ratios
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
32)
Cameron Company had 50,000 common shares issued and outstanding during the year just ended.
32)
The following information pertains to these shares:
Price Originally Issued
Book Value at End of Current Year
Market Value, Beginning of Current Year
Market Value, End of Current Year
$40
$70
$85
$90
The total dividend on common shares for the year was $400,000. What was Cameron
Company's dividend yield ratio for the year?
A) 20.00%.
B) 8.89%.
C) 11.43%.
D) 9.41%.
Answer: B
Topic: 14-10 Dividend Payout and Yield Ratios
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
33)
Braverman Company's net income last year was $75,000, and its interest expense was
$10,000. Total assets at the beginning of the year were $650,000, and total assets at the
end of the year were $610,000. The company's income tax rate was 30%. The company's
return on total assets for the year was closest to which of the following?
A) 13.0%.
B) 11.9%.
C) 12.4%.
D) 13.5%.
Answer: A
Topic: 14-13 Return on Total Assets
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
10
33)
34)
Brachlan Company's net income last year was $80,000, and its interest expense was
$20,000. Total assets at the beginning of the year were $660,000, and total assets at the
end of the year were $620,000. The company's income tax rate was 30%. The company's
return on total assets for the year was closest to which of the following?
A) 15.6%.
B) 14.7%.
C) 13.4%.
D) 12.5%.
34)
Answer: B
Topic: 14-13 Return on Total Assets
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
35)
Brawer Company's net income last year was $55,000, and its interest expense was
$20,000. Total assets at the beginning of the year were $660,000, and total assets at the
end of the year were $620,000. The company's income tax rate was 30%. The company's
return on total assets for the year was closest to which of the following?
A) 10.8%.
B) 9.5%.
C) 8.6%.
D) 11.7%.
35)
Answer: A
Topic: 14-13 Return on Total Assets
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
36)
The total assets of the Philbin Company on January 1 were $2.3 million and on
December 31 were $2.5 million. Net income for the year was $188,000. Dividends for
the year were $75,000, interest expense was $70,000, and the tax rate was 30%. The
return on total assets for the year was closest to which of the following?
A) 9.9%.
B) 10.8%.
C) 9.5%.
D) 6.8%.
Answer: A
Topic: 14-13 Return on Total Assets
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
11
36)
37)
Selected financial data for Irvington Company appear below:
Preferred shares
Common shares
Retained earnings
37)
Account Balances
Beginning of yearEnd of year
$125,000
$125,000
300,000
400,000
75,000
185,000
During the year, the company paid dividends of $10,000 on its preferred shares. The company's net
income for the year was $120,000. The company's return on common shareholders' equity
for the year was closest to which of the following?
A) 25%.
B) 17%.
C) 19%.
D) 23%.
Answer: D
Topic: 14-14 Return on Common Shareholders' Equity
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
38)
Crasler Company's net income last year was $100,000. The company paid dividends on
preferred shares of $20,000, and its average common shareholders' equity was $580,000.
The company's return on common shareholders' equity for the year was closest to which
of the following?
A) 17.2%.
B) 3.4%.
C) 20.7%.
D) 13.8%.
38)
Answer: D
Topic: 14-14 Return on Common Shareholders' Equity
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
39)
Crawler Company's net income last year was $80,000. The company paid dividends on
preferred shares of $10,000, and its average common shareholders' equity was $400,000.
The company's return on common shareholders' equity for the year was closest to which
of the following?
A) 17.5%.
B) 22.5%.
C) 20.0%.
D) 2.5%.
Answer: A
Topic: 14-14 Return on Common Shareholders' Equity
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
12
39)
40)
Crabtree Company's net income last year was $50,000. The company paid dividends on
preferred shares of $20,000, and its average common shareholders' equity was $440,000.
The company's return on common shareholders' equity for the year was closest to which
of the following?
A) 11.4%.
B) 4.5%.
C) 6.8%.
D) 15.9%.
40)
Answer: C
Topic: 14-14 Return on Common Shareholders' Equity
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
41)
The following account balances have been provided for the end of the most recent year:
Total Assets
Total Shareholders' Equity
Total Common Shares
Total Preferred Shares
41)
$150,000
$120,000
$50,000 (5,000 shares)
$10,000 (1,000 shares)
What is the book value per common share?
A) $25.
B) $20.
C)
$28.
D)
$22.
Answer: D
Topic: 14-16 Book Value per Share
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
42)
Dratif Company's working capital is $33,000, and its current liabilities are $80,000. The
company's current ratio is closest to which of the following?
A) 0.59 to 1.
B) 3.42 to 1.
C) 0.41 to 1.
D) 1.41 to 1.
42)
Answer: D
Topic: 14-18 Working Capital, 14-19 Current Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
43)
Dragin Company's working capital is $36,000, and its current liabilities are $61,000. The
company's current ratio is closest to which of the following?
A) 1.59 to 1.
B) 0.41 to 1.
C) 0.59 to 1.
D) 2.69 to 1.
Answer: A
Topic: 14-18 Working Capital, 14-19 Current Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
13
43)
44)
Draban Company's working capital is $38,000, and its current liabilities are $59,000. The
company's current ratio is closest to which of the following?
A) 2.55 to 1.
B) 1.64 to 1.
C) 0.36 to 1.
D) 0.64 to 1.
44)
Answer: B
Topic: 14-18 Working Capital, 14-19 Current Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
45)
At the end of the year just completed, Orem Company's total current liabilities were
$75,000, and its total long-term liabilities were $225,000. Working capital at year-end
was $100,000. If the company's debt-to-equity ratio is 0.30 to 1, total long-term assets
must equal which of the following?
A) $1,300,000.
B) $1,225,000.
C) $1,000,000.
D) $1,125,000.
45)
Answer: D
Topic: 14-18 Working Capital, 14-25 Debt-to-Equity Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor., 14-04
Compute and interpret financial ratios that would be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
46)
Starrs Company has current assets of $300,000 and current liabilities of $200,000.
Which of the following transactions would increase its working capital?
A) Prepayment of $50,000 of next year's rent.
B) Purchase of $50,000 of marketable securities for cash.
C) Refinancing $50,000 of short-term debt with long-term debt.
D) Acquisition of land valued at $50,000 by issuing new common shares.
Answer: C
Topic: 14-18 Working Capital
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
14
46)
47)
47)
Selected year-end data for the Brayer Company are presented below:
Current Liabilities
Acid-Test Ratio
Current Ratio
Cost of Goods Sold
$600,000
2.5 to 1
3.0 to 1
$500,000
The company has no prepaid expenses, and inventories remained unchanged during the year.
Based on these data, the company's inventory turnover ratio for the year was closest to which of
the following?
A) 1.20 times.
B) 2.33 times.
C) 1.67 times.
D) 2.40 times.
Answer: C
Topic: 14-22 Inventory Turnover
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
48)
Harwichport Company has a current ratio of 3.5 to 1 and an acid-test ratio of 2.8 to 1.
Current assets equal $175,000, of which $5,000 consists of prepaid expenses. What must
be Harwichport Company's inventory?
A) $35,000.
B) $40,000.
C) $30,000.
D) $50,000.
48)
Answer: C
Topic: 14-18 Working Capital, 14-19 Current Ratio, 14-20 Acid-Test (Quick) Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
49)
49)
Ben Company has the following data for the year just ended:
Cash
$42,000
Accounts Receivable$28,000
Inventory
$35,000
Current Ratio
2.4 to 1
Acid-Test Ratio
1.6 to 1
What were Ben Company's current liabilities?
A) $35,000.
B) $50,400.
Answer: C
C)
$43,750.
D)
$63,000.
Topic: 14-19 Current Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
15
50)
Marcy Corporation's current ratio is currently 1.75 to 1. The firm's current ratio cannot
fall below 1.5 to 1 without violating agreements with its bondholders. If current
liabilities are presently $250 million, what is the maximum new short-term debt that can
be issued to finance an equivalent amount of inventory expansion?
A) $125.00 million.
B) $375.00 million.
C) $62.50 million.
D) $41.67 million.
50)
Answer: A
Topic: 14-18 Working Capital, 14-19 Current Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
51)
Eral Company has $17,000 in cash, $3,000 in marketable securities, $36,000 in current
receivables, $24,000 in inventories, and $45,000 in current liabilities. The company's
acid-test (quick) ratio is closest to which of the following?
A) 1.78 to 1.
B) 0.44 to 1.
C) 0.80 to 1.
D) 1.24 to 1.
51)
Answer: D
Topic: 14-20 Acid-Test (Quick) Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
52)
Erambo Company has $11,000 in cash, $6,000 in marketable securities, $27,000 in
current receivables, $8,000 in inventories, and $51,000 in current liabilities. The
company's acid-test (quick) ratio is closest to which of the following?
A) 0.53 to 1.
B) 1.02 to 1.
C) 0.86 to 1.
D) 0.75 to 1.
52)
Answer: C
Topic: 14-20 Acid-Test (Quick) Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
53)
Erack Company has $15,000 in cash, $4,000 in marketable securities, $38,000 in current
receivables, $18,000 in inventories, and $40,000 in current liabilities. The company's
acid-test (quick) ratio is closest to which of the following?
A) 1.43 to 1.
B) 1.88 to 1.
C) 1.33 to 1.
D) 0.95 to 1.
Answer: A
Topic: 14-20 Acid-Test (Quick) Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
16
53)
54)
Eastham Company's accounts receivable were $600,000 at the beginning of the year and
$800,000 at the end of the year. Cash sales for the year were $300,000. The accounts
receivable turnover for the year was 5 times. What were Eastham Company's total sales
for the year?
A) $1,300,000.
B) $3,800,000.
C) $800,000.
D) $3,300,000.
54)
Answer: B
Topic: 14-21 Accounts Receivable Turnover
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
55)
Frantic Company had $130,000 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 which of the
following?
A) 5.00 times.
B) 13.00 times.
C) 10.00 times.
D) 8.13 times.
55)
Answer: C
Topic: 14-21 Accounts Receivable Turnover
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
56)
Fracus Company had $100,000 in sales on account last year. The beginning accounts
receivable balance was $14,000, and the ending accounts receivable balance was
$16,000. The company's accounts receivable turnover was closest to which of the
following?
A) 6.25 times.
B) 6.67 times.
C) 7.14 times.
D) 3.33 times.
56)
Answer: B
Topic: 14-21 Accounts Receivable Turnover
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
57)
Frabine Company had $150,000 in sales on account last year. The beginning accounts
receivable balance was $14,000, and the ending accounts receivable balance was
$18,000. The company's accounts receivable turnover was closest to which of the
following?
A) 8.33 times.
B) 9.38 times.
C) 10.71 times.
D) 4.69 times.
Answer: B
Topic: 14-21 Accounts Receivable Turnover
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
17
57)
58)
Granger Company had $180,000 in sales on account last year. The beginning accounts
receivable balance was $10,000, and the ending accounts receivable balance was
$18,000. The company's average collection period (age of receivables) was closest to
which of the following? Do not round intermediate calculations.
A) 36.50 days.
B) 56.78 days.
C) 20.28 days.
D) 28.39 days.
58)
Answer: D
Topic: 14-21 Accounts Receivable Turnover
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
59)
Grapp 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
$16,000. The company's average collection period (age of receivables) was closest to
which of the following? Do not round intermediate calculations.
A) 50.54 days.
B) 44.92 days.
C) 47.73 days.
D) 95.46 days.
59)
Answer: C
Topic: 14-21 Accounts Receivable Turnover
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
60)
Grave Company had $150,000 in sales on account last year. The beginning accounts
receivable balance was $14,000, and the ending accounts receivable balance was
$10,000. The company's average collection period (age of receivables) was closest to
which of the following?
A) 34.07 days.
B) 29.20 days.
C) 24.33 days.
D) 58.40 days.
60)
Answer: B
Topic: 14-21 Accounts Receivable Turnover
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
61)
Harris Company, a retailer, had cost of goods sold of $290,000 last year. The beginning
inventory balance was $26,000, and the ending inventory balance was $24,000. The
company's inventory turnover was closest to which of the following?
A) 5.80 times.
B) 11.15 times.
C) 12.08 times.
D) 11.60 times.
Answer: D
Topic: 14-22 Inventory Turnover
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
18
61)
62)
Harton Company, a retailer, had cost of goods sold of $250,000 last year. The beginning
inventory balance was $20,000, and the ending inventory balance was $22,000. The
company's inventory turnover was closest to which of the following?
A) 11.36 times.
B) 11.90 times.
C) 5.95 times.
D) 12.50 times.
62)
Answer: B
Topic: 14-22 Inventory Turnover
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
63)
Harker 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 $20,000. The
company's inventory turnover was closest to which of the following?
A) 8.00 times.
B) 3.48 times.
C) 6.15 times.
D) 6.96 times.
63)
Answer: D
Topic: 14-22 Inventory Turnover
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
64)
Irawaddy Company, a retailer, had cost of goods sold of $230,000 last year. The
beginning inventory balance was $24,000, and the ending inventory balance was
$22,000. The company's average sale period (turnover in days) was closest to which of
the following?
A) 34.91 days.
B) 73.00 days.
C) 36.50 days.
D) 38.09 days.
64)
Answer: C
Topic: 14-22 Inventory Turnover
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
65)
Irappa Company, a retailer, had cost of goods sold of $170,000 last year. The beginning
inventory balance was $28,000, and the ending inventory balance was $26,000. The
company's average sale period (turnover in days) was closest to which of the following?
A) 60.12 days.
B) 55.82 days.
C) 57.97 days.
D) 115.94 days.
Answer: C
Topic: 14-22 Inventory Turnover
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
19
65)
66)
Irally Company, a retailer, had cost of goods sold of $150,000 last year. The beginning
inventory balance was $26,000, and the ending inventory balance was $24,000. The
company's average sale period (turnover in days) was closest to which of the following?
A) 60.83 days.
B) 58.40 days.
C) 121.67 days.
D) 63.27 days.
66)
Answer: A
Topic: 14-22 Inventory Turnover
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
67)
Last year, Dunn Company purchased $1,920,000 of inventory. The cost of good sold was
$1,800,000, and the ending inventory was $360,000. What was the inventory turnover?
A) 6.4 times.
B) 5.0 times.
C) 6.0 times.
D) 5.3 times.
67)
Answer: C
Topic: 14-22 Inventory Turnover
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
68)
During the year just ended, James Company purchased $425,000 of inventory. The
inventory balance at the beginning of the year was $175,000. If the cost of goods sold for
the year was $450,000, what was the inventory turnover for the year?
A) 3.00 times.
B) 2.77 times.
C) 2.62 times.
D) 2.57 times.
68)
Answer: B
Topic: 14-22 Inventory Turnover
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
69)
Last year, Javer Company had a net income of $200,000, income tax expense of $74,000,
and interest expense of $20,000. The company's times interest earned was closest to
which of the following?
A) 11.00 times.
B) 10.00 times.
C) 5.30 times.
D) 14.70 times.
69)
Answer: D
Topic: 14-24 Times Interest Earned Ratio
LO: 14-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
70)
Last year, Jabber Company had a net income of $180,000, income tax expense of
$62,000, and interest expense of $20,000. The company's times interest earned was
closest to which of the following?
A) 13.10 times.
B) 4.90 times.
C) 9.00 times.
D) 10.00 times.
Answer: A
Topic: 14-24 Times Interest Earned Ratio
LO: 14-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
20
70)
71)
Last year, Jackson Company had a net income of $160,000, income tax expense of
$66,000, and interest expense of $20,000. The company's times interest earned was
closest to which of the following?
A) 8.00 times.
B) 12.30 times.
C) 9.00 times.
D) 3.70 times.
71)
Answer: B
Topic: 14-24 Times Interest Earned Ratio
LO: 14-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
72)
The times interest earned ratio of McHugh Company was 4.5 times. The interest expense
for the year was $20,000, and the company's tax rate was 40%. What was the company's
net income?
A) $42,000.
B) $54,000.
C) $22,000.
D) $66,000.
72)
Answer: A
Topic: 14-24 Times Interest Earned Ratio
LO: 14-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
73)
Mariah Company had a times interest earned ratio of 3.0 for the year just ended. The
company's tax rate was 40%, and the interest expense for the year was $25,000. What
was Mariah Company's after-tax net income?
A) $25,000.
B) $75,000.
C) $30,000.
D) $50,000.
73)
Answer: C
Topic: 14-24 Times Interest Earned Ratio
LO: 14-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
74)
PFM Company has sales of $210,000, interest expense of $8,000, a tax rate of 30%, and
a net profit after tax of $35,000. What is PFM Company's times interest earned ratio?
A) 15.500 times.
B) 4.375 times.
C) 5.375 times.
D) 7.250 times.
74)
Answer: D
Topic: 14-24 Times Interest Earned Ratio
LO: 14-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
75)
Karma Company has total assets of $190,000 and total liabilities of $90,000. The
company's debt-to-equity ratio is closest to which of the following?
A) 0.32 to 1.
B) 0.53 to 1.
C) 0.90 to 1.
D) 0.47 to 1.
Answer: C
Topic: 14-25 Debt-to-Equity Ratio
LO: 14-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
21
75)
76)
Karl Company has total assets of $170,000 and total liabilities of $110,000. The
company's debt-to-equity ratio is closest to which of the following?
A) 0.39 to 1.
B) 1.83 to 1.
C) 0.33 to 1.
D) 0.65 to 1.
76)
Answer: B
Topic: 14-25 Debt-to-Equity Ratio
LO: 14-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
77)
Krakov Company has total assets of $170,000 and total liabilities of $80,000. The
company's debt-to-equity ratio is closest to which of the following?
A) 0.32 to 1.
B) 0.47 to 1.
C) 0.89 to 1.
D) 0.53 to 1.
77)
Answer: C
Topic: 14-25 Debt-to-Equity Ratio
LO: 14-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
78)
McGraw Electronics showed Bonds Payable of $7,500,000 in 2011 and $8,000,000 in
2010 on its comparative Balance Sheet. The percentage change is closest to:
A) 6.6%.
B) 6.3%.
C) (6.6)%.
D) (6.3)%.
78)
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
79)
Martin Company reported an extraordinary after-tax loss of $180,000, resulting from an
earthquake. What must have been the before-tax loss if Martin's marginal income tax
rate was 40%?
A) $450,000.
B) $300,000.
C) $108,000.
D) $72,000.
Answer: B
Topic: 14-02 Comparison of Financial Data, 14-03 The Need to Look beyond Ratios
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
22
79)
Reference: 14-01
Selected financial data for Barnstable Company appear below:
Year 2
(in thousands)
Sales
$1,500
Operating Expense
$450
Interest Expense
$75
Cost of Goods Sold
$900
Dividends Declared and Paid $30
80)
Year 1
$1,200
$400
$30
$720
$0
For Year 2, what was the gross margin as a percentage of sales?
A) 60%.
B) 40%.
C) 10%.
80)
D)
5%.
Answer: B
Topic: 14-06 Common-Size Statements
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
81)
For Year 2, what was the net income before taxes as a percentage of sales?
A) 3%.
B) 5%.
C) 10%.
D) 8%.
81)
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
82)
For Year 2, what was the net operating income as a percentage of sales?
A) 10%.
B) 70%.
C) 40%.
D) 8%.
82)
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
83)
Between Year 1 and Year 2, what happened to the times interest earned?
A) It increased.
B) It remained the same.
C) It decreased.
D) The effect cannot be determined from the data provided.
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-24 Times
Interest Earned Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-04 Compute
and interpret financial ratios that would be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
23
83)
Reference: 14-02
Financial statements for Larned Company appear below:
Larned Company
Statement of Financial
Position December 31, Year
2 and Year 1 (dollars in
thousands)
Year 2
Year 1
Current Assets:
Cash and Marketable Securities
$130
Accounts Receivable, Net
$150
Inventory
$100
Prepaid Expenses
$20
Total Current Assets
$400
Noncurrent Assets:
Plant & Equipment, Net
$1,640
Total Assets
$2,040
Current Liabilities:
Accounts Payable
$120
Accrued Liabilities
$110
Notes Payable, Short Term
$170
Total Current Liabilities
$400
Noncurrent Liabilities:
Bonds Payable
$370
Total Liabilities
$770
Shareholders' Equity:
Preferred Shares, $20 Par, 10%
$120
Common Shares, $10 Par
$180
Additional Paid-In Capital - Common$110
Shares
Retained Earnings
$860
Total Shareholders' Equity
$1,270
Total Liabilities & Shareholders' Equity
$2040
$100
$130
$100
$20
$350
$1,600
$1,950
$120
$80
$160
$360
$400
$760
$120
$180
$110
$780
$1190
$1950
Shareholders' Equity:
Sales (All on Account)
Costs of Goods Sold
Gross Margin
Larned Company
Income Statement For
the Year Ended
December 31, Year 2
(dollars in thousands)
$2930
$2050
$880
24
Gross Margin
Operating Expenses
Net Operating Income
Interest Expense
Net Income before Taxes
Income Taxes (30%)
Net Income
$880
$350
$530
$40
$490
$147
$343
Total dividends during Year 2 were $263,000, of which $12,000 were for preferred shares. The market price of a commo
share on December 31, Year 2 was $160.
84)
Larned Company's earnings per common share for Year 2 was closest to which of the
following?
A) $11.03.
B) $27.22.
C) $19.06.
D) $18.39.
84)
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-08 Earnings
per Share
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
85)
Larned Company's price-earnings ratio on December 31, Year 2 was closest to which of
the following?
A) 8.70.
B) 14.50.
C) 5.88.
D) 8.40.
85)
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-09 Price
—Earnings Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
86)
Larned Company's dividend payout ratio for Year 2 was closest to which of the
following?
A) 28.5%.
B) 76.7%.
C) 47.4%.
D) 75.8%.
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-10 Dividend
Payout and Yield Ratios
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
25
86)
87)
Larned Company's dividend yield ratio on December 31, Year 2 was closest to which of
the following?
A) 8.3%.
B) 9.1%.
C) 5.5%.
D) 8.7%.
87)
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-10 Dividend
Payout and Yield Ratios
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
88)
Larned Company's return on total assets for Year 2 was closest to which of the
following?
A) 17.8%.
B) 15.8%.
C) 18.6%.
D) 17.2%.
88)
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-13 Return on
Total Assets
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
89)
Larned Company's return on common shareholders' equity for Year 2 was closest to
which of the following?
A) 26.9%.
B) 29.8%.
C) 30.9%.
D) 27.9%.
89)
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-14 Return on
Common Shareholders' Equity
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
90)
Larned Company's book value per share at the end of Year 2 was closest to which of the
following?
A) $10.00.
B) $63.89.
C) $16.11.
D) $70.56.
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-16 Book
Value per Share
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
26
90)
Reference: 14-03
Financial statements for Laroche Company appear below:
Laroche Company
Statement of Financial
Position December 31, Year
2 and Year 1 (dollars in
thousands)
Year 2
Year 1
Current Assets:
Cash and Marketable Securities
$180
Accounts Receivable, Net
$140
Inventory
$160
Prepaid Expenses
$50
Total Current Assets
$530
Noncurrent Assets:
Plant & Equipment, Net
$1370
Total Assets
$1900
Current Liabilities:
Accounts Payable
$150
Accrued Liabilities
$70
Notes Payable, Short Term
$140
Total Current Liabilities
$360
Noncurrent Liabilities:
Bonds Payable
$280
Total Liabilities
$640
Shareholders’ Equity:
Preferred Shares, $20 Par, 10%
$100
Common Shares, $10 Par
$240
Additional Paid-In Capital - Common$180
Shares
Retained Earnings
$740
Total Shareholders’ Equity
$1260
Total Liabilities & Shareholders’ Equity
$1900
$170
$120
$180
$40
$510
$1370
$1880
$190
$80
$150
$420
$300
$720
$100
$240
$180
$640
$1160
$1880
Shareholder's Equity:
Sales (All on Account)
Costs of Goods Sold
Gross Margin
Operating Expenses
Laroche Company
Income Statement
For the Year Ended December
31, Year 2
(dollars in thousands)
$2250
$1570
$680
$270
27
Operating Expenses
Net Operating Income
Interest Expense
Net Income before Taxes
Income Taxes (30%)
Net Income
$270
$410
$30
$380
$114
$266
Total dividends during Year 2 were $166,000, of which $10,000 were preferred dividends. The market price of a commo
share on December 31, Year 2 was $150.
91) Laroche Company's earnings per common share for Year 2 was closest to which of the
91)
following?
A) $15.83.
B) $3.71.
C) $11.08.
D) $10.67.
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-08 Earnings
per Share
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
92)
Laroche Company's price-earnings ratio on December 31, Year 2 was closest to which of
the following?
A) 13.53.
B) 40.43.
C) 14.06.
D) 9.47.
92)
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-08 Earnings
per Share, 14-09 Price—Earnings Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
93)
Laroche Company's dividend payout ratio for Year 2 was closest to which of the
following?
A) 38.0%.
B) 62.4%.
C) 60.9%.
D) 22.9%.
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-08 Earnings
per Share, 14-09 Price—Earnings Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
28
93)
94)
Laroche Company's dividend yield ratio on December 31, Year 2 was closest to which of
the following?
A) 4.3%.
B) 4.6%.
C) 1.6%.
D) 4.1%.
94)
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-10 Dividend
Payout and Yield Ratios
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
95)
Laroche Company's return on total assets for Year 2 was closest to which of the
following?
A) 13.0%.
B) 14.6%.
C) 15.2%.
D) 14.1%.
95)
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-13 Return on
Total Assets
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
96)
Laroche Company's return on common shareholders' equity for Year 2 was closest to
which of the following?
A)
23.1%.
B) 22.0%.
C)
21.2%.
D)
96)
24.0%.
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-14 Return on
Common Shareholders' Equity
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
97)
Laroche Company's book value per share at the end of Year 2 was closest to which of the
following?
A) $17.50.
B) $52.50.
C) $48.33.
D) $10.00.
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-16 Book
Value per Share
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
29
97)
Reference: 14-04
Financial statements for Larosa Company appear below:
Larosa Company
Statement of Financial
Position December 31,
Year 2 and Year 1
(dollars in thousands)
Year 2
Year 1
Current Assets:
Cash and Marketable Securities$150
Accounts Receivable, Net
$190
Inventory
$150
Prepaid Expenses
$40
Total Current Assets
$530
Noncurrent Assets:
Plant & Equipment, Net
$1990
Total Assets
$2520
Current Liabilities:
Accounts Payable
$140
Accrued Liabilities
$10
Notes Payable, Short Term
$190
Total Current Liabilities
$340
Noncurrent Liabilities:
Bonds Payable
$370
Total Liabilities
$710
Shareholders' Equity:
Preferred Shares, $20 Par, 10%$100
Common Shares, $10 Par
$220
Additional Paid-In Capital - $250
Common Shares
Retained Earnings
$1240
Total Shareholders' Equity
$1810
Total Liabilities & Shareholders'$2520
Equity
Sales (All on Account)
Costs of Goods Sold
Gross Margin
$120
$160
$150
$40
$470
$1980
$2450
$170
$40
$200
$410
$400
$810
$100
$220
$250
$1070
$1640
$2450
Larosa Company Income
Statement For the Year Ended
December 31, Year 2 (dollars
in thousands)
$1870
$1300
$570
30
Gross Margin
Operating Expenses
Net Operating Income
Interest Expense
Net Income before Taxes
Income Taxes (30%)
Net Income
$570
$220
$350
$40
$310
$93
$217
Total dividends during Year 2 were $47,000, of which $10,000 were preferred dividends. The market price of a common
share on December 31, Year 2 was $70.
98) Larosa Company's earnings per common share for Year 2 was closest to which of the
98)
following?
A) $9.86.
B) $9.41.
C) $3.09.
D) $14.09.
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-08 Earnings
per Share
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
99)
Larosa Company's price-earnings ratio on December 31, Year 2 was closest to which of
the following?
A) 22.66.
B) 4.97.
C) 7.10.
D) 7.44.
99)
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-08 Earnings
per Share, 14-09 Price—Earnings Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
100)
Larosa Company's dividend payout ratio for Year 2 was closest to which of the
following?
A) 6.5%.
B) 17.9%.
C) 10.6%.
D) 21.7%.
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-08 Earnings
per Share, 14-10 Dividend Payout and Yield Ratios
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
31
100)
101)
Larosa Company's dividend yield ratio on December 31, Year 2 was closest to which of
the following?
A) 2.4%.
B) 3.1%.
C) 1.8%.
D) 1.0%.
101)
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-10 Dividend
Payout and Yield Ratios
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
102)
Larosa Company's return on total assets for Year 2 was closest to which of the
following?
A) 9.9%.
B) 8.7%.
C) 7.6%.
D) 9.2%.
102)
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-13 Return on
Total Assets
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
103)
Larosa Company's return on common shareholders' equity for Year 2 was closest to
which of the following?
A) 12.6%.
B) 12.7%.
C) 13.4%.
D) 12.0%.
103)
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-14 Return on
Common Shareholders' Equity
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
104)
Larosa Company's book value per share at the end of Year 2 was closest to which of the
following?
A) $10.00.
B) $82.27.
C) $77.73.
D) $21.36.
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-16 Book
Value per Share
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
32
104)
Reference: 14-05
The Dawson Corporation projects the following for the upcoming year:
Earnings before Interest and Taxes
$35 million
Interest Expense
$5 million
Preferred Shares Dividends
$4 million
Common Shares Dividend Payout Ratio
30%
Average Number of Common Shares Outstanding
2 million
Effective Corporate Income Tax Rate
40%
105)
What is the expected dividend per common share?
A) $3.90.
B) $1.80.
C) $2.10.
105)
D)
$2.70.
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-08 Earnings
per Share, 14-09 Price—Earnings Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
106)
If Dawson Corporation's common shares have a price-earnings ratio of eight, what would
be the market price per share, rounded to the nearest dollar?
A) $125.
B) $72.
C) $68.
D) $56.
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-08 Earnings
per Share, 14-09 Price—Earnings Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
Reference: 14-06
Financial statements for Orange Company appear below:
Orange Company
Statement of Financial
Position December 31,
Year 2 and Year 1 (dollars
in thousands)
Year 2
Year 1
Current Assets:
Cash and Marketable Securities$130
Accounts Receivable, Net
$180
Inventory
$160
Prepaid Expenses
$60
Total Current Assets
$530
Noncurrent Assets:
Plant & Equipment, Net
$1680
$110
$180
$160
$60
$510
$1620 33
106)
Plant & Equipment, Net
$1680
Total Assets
$2210
Current Liabilities:
Accounts Payable
$90
Accrued Liabilities
$60
Notes Payable, Short Term
$160
Total Current Liabilities
$310
Noncurrent Liabilities:
Bonds Payable
$250
Total Liabilities
$560
Shareholders' Equity:
Preferred Shares, $10 Par, 15%$120
Common Shares, $5 Par
$220
Additional Paid-In Capital - $210
Common Shares
Retained Earnings
$1100
Total Shareholders' Equity
$1650
Total Liabilities & Shareholders'$2210
Equity
$1620
$2130
$100
$80
$180
$360
$300
$660
$120
$220
$210
$920
$1470
$2130
Orange Company Income
Statement For the Year Ended
December 31, Year 2 (dollars
in thousands)
Sales (All on Account) $2830
Costs of Goods Sold
$1980
Gross Margin
$850
Operating Expenses
$340
Net Operating Income $510
Interest Expense
$30
Net Income before Taxes $480
Income Taxes (30%)
$144
Net Income
$336
Total dividends during Year 2 were $156,000, of which $18,000 were preferred dividends. The market price of a share o
common stock on December 31, Year 2 was $100.
34
107)
Orange Company's earnings per common share for Year 2 was closest to which of the
following?
A) $2.27.
B) $10.91.
C) $7.64.
D) $7.23.
107)
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-08 Earnings
per Share
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
108)
Orange Company's dividend yield ratio on December 31, Year 2 was closest to which of
the following?
A) 3.1%.
B) 3.5%.
C) 2.7%.
D) 1.1%.
108)
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-10 Dividend
Payout and Yield Ratios
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
109)
Orange Company's return on total assets for Year 2 was closest to which of the
following?
A) 16.5%.
B) 15.9%.
C) 14.5%.
D) 15.5%.
109)
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-14 Return on
Common Shareholders' Equity
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
110)
Orange Company's current ratio at the end of Year 2 was closest to which of the
following?
A) 0.44 to 1.
B) 0.55 to 1.
C) 1.71 to 1.
D) 1.24 to 1.
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-19 Current
Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
35
110)
111)
Orange Company's accounts receivable turnover for Year 2 was closest to which of the
following?
A) 11.0 times.
B) 17.7 times.
C) 15.7 times.
D) 12.4 times.
111)
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-21 Accounts
Receivable Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
112)
Orange Company's average sale period (turnover in days) for Year 2 was closest to
which of the following?
A) 23.2 days.
B) 29.5 days.
C) 33.2 days.
D) 20.6 days.
112)
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-21 Accounts
Receivable Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
113)
Orange Company's times interest earned for Year 2 was closest to which of the
following?
A) 16.0 times.
B) 17.0 times.
C) 28.3 times.
D) 11.2 times.
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-24 Times
Interest Earned Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-04 Compute
and interpret financial ratios that would be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
Reference: 14-07
Financial statements for Orantes Company appear below:
Orantes Company Statement
of Financial Position
December 31, Year 2 and
Year 1 (dollars in thousands)
Year 2
Year 1
Current Assets:
Cash and Marketable Securities$120
Accounts Receivable, Net
$180
Inventory
$130
Prepaid Expenses
$50
Total Current Assets
$480
Noncurrent Assets:
Plant & Equipment, Net
$2010
$100
$160
$130
$50
$440
$1970
36
113)
Plant & Equipment, Net
$2010
Total Assets
$2490
Current Liabilities:
Accounts Payable
$120
Accrued Liabilities
$30
Notes Payable, Short Term
$170
Total Current Liabilities
$320
Noncurrent Liabilities:
Bonds Payable
$270
Total Liabilities
$590
Shareholders' Equity:
Preferred Shares, $10 Par, 10%$120
Common Shares, $10 Par
$200
Additional Paid-In Capital - $270
Common Shares
Retained Earnings
$1310
Total Shareholders' Equity
$1900
Total Liabilities & Shareholders'$2490
Equity
Sales (All on Account)
Costs of Goods Sold
Gross Margin
Operating Expenses
Net Operating Income
Interest Expense
Net Income before Taxes
Income Taxes (30%)
Net Income
$1970
$2410
$120
$40
$170
$330
$300
$630
$120
$200
$270
$1190
$1780
$2410
Orantes Company Income
Statement For the Year Ended
December 31, Year 2 (dollars
in thousands)
$2510
$1750
$760
$300
$460
$30
$430
$129
$301
Total dividends during Year 2 were $181,000, of which $12,000 were preferred dividends. The market price of a commo
share on December 31, Year 2 was $280.
37
114)
Orantes Company's earnings per common share for Year 2 was closest to which of the
following?
A) $15.05.
B) $3.61.
C) $21.50.
D) $14.45.
114)
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-08 Earnings
per Share
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
115)
Orantes Company's dividend yield ratio on December 31, Year 2 was closest to which of
the following?
A) 0.8%.
B) 3.2%.
C) 2.8%.
D) 3.0%.
115)
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-10 Dividend
Payout and Yield Ratios
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
116)
Orantes Company's return on total assets for Year 2 was closest to which of the
following?
A) 12.7%.
B) 11.4%.
C) 13.1%.
D) 12.3%.
116)
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-13 Return on
Total Assets
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
117)
Orantes Company's current ratio at the end of Year 2 was closest to which of the
following?
A) 1.50 to 1.
B) 0.54 to 1.
C) 0.35 to 1.
D) 1.19 to 1.
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-19 Current
Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
38
117)
118)
Orantes Company's accounts receivable turnover for Year 2 was closest to which of the
following?
A) 13.5 times.
B) 14.8 times.
C) 19.3 times.
D) 10.3 times.
118)
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-21 Accounts
Receivable Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
119)
Orantes Company's average sale period (turnover in days) for Year 2 was closest to
which of the following? Do not round intermediate calculations.
A) 35.5 days.
B) 18.9 days.
C) 24.7 days.
D) 27.1 days.
119)
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-21 Accounts
Receivable Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
120)
Orantes Company's times interest earned for Year 2 was closest to which of the
following?
A) 10.0 times.
B) 25.3 times.
C) 14.3 times.
D) 15.3 times.
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-24 Times
Interest Earned Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-04 Compute
and interpret financial ratios that would be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
Reference: 14-08
Financial statements for Oratz Company appear below:
Oratz Company Statement of
Financial Position December
31, Year 2 and Year 1 (dollars
in thousands)
Year 2
Year 1
Current Assets:
Cash and Marketable Securities$150
Accounts Receivable, Net
$130
Inventory
$180
Prepaid Expenses
$30
Total Current Assets
$490
Noncurrent Assets:
Plant & Equipment, Net
$1430
$150
$130
$180
$30
$490
$1370
39
120)
Plant & Equipment, Net
$1430
Total Assets
$1920
Current Liabilities:
Accounts Payable
$70
Accrued Liabilities
$100
Notes Payable, Short Term
$230
Total Current Liabilities
$400
Noncurrent Liabilities:
Bonds Payable
$300
Total Liabilities
$700
Shareholders' Equity:
Preferred Shares, $10 Par, 5% $120
Common Shares, $15 Par
$140
Additional Paid-In Capital - $240
Common Shares
Retained Earnings
$720
Total Shareholders' Equity
$1220
Total Liabilities & Shareholders'$1920
Equity
Sales (All on Account)
Costs of Goods Sold
Gross Margin
Operating Expenses
Net Operating Income
Interest Expense
Net Income before Taxes
Income Taxes (30%)
Net Income
$1370
$1860
$100
$70
$220
$390
$300
$690
$120
$140
$240
$670
$1170
$1860
Oratz Company Income
Statement For the Year Ended
December 31, Year 2 (dollars
in thousands)
$1630
$1140
$490
$190
$300
$30
$270
$81
$189
Total dividends during Year 2 were $139,000, of which $6,000 were preferred dividends. The market price of a common
share on December 31, Year 2 was $260.
40
121)
Oratz Company's earnings per common share for Year 2 was closest to which of the
following? Do not round intermediate calculations.
A) $1.74.
B) $19.61.
C) $28.93.
D) $20.25.
121)
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-08 Earnings
per Share
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
122)
Oratz Company's dividend yield ratio on December 31, Year 2 was closest to which of
the following?
A) 5.7%.
B) 0.5%.
C) 5.2%.
D) 5.5%.
122)
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-10 Dividend
Payout and Yield Ratios
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
123)
Oratz Company's return on total assets for Year 2 was closest to which of the following?
Do not round intermediate calculations.
A) 8.9%.
B) 11.1%.
C) 10.5%.
D) 10.0%.
123)
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-13 Return on
Total Assets
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
124)
Oratz Company's current ratio at the end of Year 2 was closest to which of the
following?
A) 0.51 to 1.
B) 0.57 to 1.
C) 1.26 to 1.
D) 1.23 to 1.
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-19 Current
Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
41
124)
125)
Oratz Company's accounts receivable turnover for Year 2 was closest to which of the
following?
A) 12.5 times.
B) 6.3 times.
C) 8.8 times.
D) 9.1 times.
125)
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-21 Accounts
Receivable Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
126)
Oratz Company's average sale period (turnover in days) for Year 2 was closest to which
of the following?
A) 57.6 days.
B) 41.6 days.
C) 40.3 days.
D) 29.1 days.
126)
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-21 Accounts
Receivable Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
127)
Oratz Company's times interest earned for Year 2 was closest to which of the following?
A) 9.0 times.
B) 10.0 times.
C) 16.3 times.
D) 6.3 times.
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-24 Times
Interest Earned Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-04 Compute
and interpret financial ratios that would be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
42
127)
Reference: 14-09
Selected data for the MK Company follow:
Current Year
Preferred Shares, 8% Par Value $50 $250000
Common Shares, Per Value $10
$500000
Retained Earnings at End of Year
$257000
Net Income
$102000
Dividends Paid on Preferred Shares $20000
Dividends Paid on Common Shares $65000
Quoted Market Price per Common $25
Share at Year End
128)
Prior Year
$250000
$500000
$240000
$90000
$20000
$60000
$20
What was the price-earnings ratio for the prior year?
A) 12.2 to 1.
B) 14.3 to 1.
C) 11.1 to 1.
128)
D)
15.8 to 1.
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-09 Price
—Earnings Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
129)
What is the dividend yield ratio on common shares for the current year, rounded to the
nearest tenth of a percent?
A) 6.8%.
B) 6.6%.
C) 7.4%.
D) 5.2%
129)
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-10 Dividend
Payout and Yield Ratios
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
130)
What is MK Company's return on common shareholders' equity for the current year,
rounded to the nearest tenth of a percent?
A) 11.0%.
B) 13.6%.
C) 10.2%.
D) 8.2%.
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-14 Return on
Common Shareholders' Equity
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
43
130)
131)
What was the dividend payout ratio for the prior year?
A) 114.3%.
B) 85.7%.
C) 140.0%.
131)
D)
55.6%.
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-10 Dividend
Payout and Yield Ratios
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
132)
What is the book value per share for the current year, rounded to the nearest cent?
A) $20.14.
B) $22.18.
C) $18.31.
D) $15.14.
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-16 Book
Value per Share
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
Reference: 14-10
Lisa Inc.'s balance sheet appears below:
Cash
Marketable Securities
Accounts Receivable, Net
Inventories
Prepaid Expenses
Land
Building (Net)
Total Long-Term Assets
Equipment (Net)
Total Long-Term Assets
Total Assets
Accounts Payable
Accrued Interest
Short Term Notes Payable
Total Current Liabilities
Long- Term Notes Payable
Bonds Payable
Total Long-Term Liabilities
Total Liabilities
Lisa Inc. Statement of
Financial Position December
31, Year 2 and Year 1 (dollars
in thousands)
Year 2
Year 1
$30
$25
$20
$15
$45
$30
$60
$50
$15
$20
$170
$140
$155
$125
$80
$90
$95
$100
$330
$315
$500
$455
$47
$28
$15
$15
$23
$12
$85
$55
$10
$10
$15
$15
$25
$25
$110
$80
44
132)
Total Liabilities
$110
Preferred Shares, $100 Par, 5% $100
Common Shares, $10 Par Value
$150
Additional Paid-In Capital - $75
Common Shares
Retained Earnings
$65
Total Shareholders' Equity
$390
Total Liabilities & Shareholders'$500
Equity
$80
$100
$150
$750
$50
$375
$455
The company's sales for the year were $300,000, its cost of goods sold was $220,000, and its net income was $35,000. A
sales were on credit. Dividends paid on preferred shares for the year were $5,000.
133)
Lisa Inc.'s acid-test (quick) ratio at December 31, Year 2, was closest to which of the
following?
A) 1.8 to 1.
B) 2.0 to 1.
C) 1.1 to 1.
D) 0.6 to 1.
133)
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-20
Acid-Test (Quick) Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
134)
Lisa Inc.'s accounts receivable turnover for Year 2 was closest to which of the following?
A) 5.9 times.
B) 4.9 times.
C) 6.7 times.
D) 8.0 times.
134)
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-21 Accounts
Receivable Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
135)
Lisa Inc.'s inventory turnover for Year 2 was closest to which of the following?
A) 4.4 times.
B) 4.0 times.
C) 3.7 times.
D) 5.0 times.
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-22 Inventory
Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
45
135)
136)
Lisa Inc.'s book value per common share at December 31, Year 2, was closest to which
of the following?
A) $11.25.
B) $19.33.
C) $10.00.
D) $18.33.
136)
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-16 Book
Value per Share
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
137)
Lisa Inc.'s return on common shareholders' equity for Year 2 was closest to which of the
following?
A) 12.4%.
B) 10.9%.
C) 7.8%.
D) 10.6%.
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-14 Return on
Common Shareholders' Equity
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
Reference: 14-11
Financial statements for Marcell Company appear below:
Marcell Company
Statement of Financial
Position December 31,
Year 2 and Year 1
(dollars in thousands)
Year 2
Year 1
Current Assets:
Cash and Marketable Securities$160
Accounts Receivable, Net
$110
Inventory
$180
Prepaid Expenses
$20
Total Current Assets
$470
Noncurrent Assets:
Plant & Equipment, Net
$1700
Total Assets
$2170
Current Liabilities:
Accounts Payable
$110
Accrued Liabilities
$60
Notes Payable, Short Term
$280
Total Current Liabilities
$450
Noncurrent Liabilities:
Bonds Payable
$480
$150
$110
$180
$20
$460
$1680
$2140
150$
$60
$290
$500
$500
46
137)
Bonds Payable
$480
Total Liabilities
$930
Shareholders' Equity:
Preferred Shares, $10 Par, 8% $100
Common Shares, $5 Par
$140
Additional Paid-In Capital - $280
Common Shares
Retained Earnings
$720
Total Shareholders' Equity
$240
Total Liabilities & Shareholders'$2170
Equity
$500
$1000
$100
$140
$280
$620
$1140
$2140
Marcell Company Income
Statement For the Year Ended
December 31, Year 2 (dollars
in thousands)
Sales (All on Account) $2550
Costs of Goods Sold
$1780
Gross Margin
$770
Operating Expenses
$300
Net Operating Income $470
Interest Expense
$50
Net Income before Taxes$420
Income Taxes (30%) $126
Net Income
$294
138)
Marcell Company's working capital (in thousands of dollars) at the end of Year 2 was
closest to which of the following?
A) $1,240.
B) $20.
C) $520.
D) $470.
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-18 Working
Capital
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
47
138)
139)
Marcell Company's current ratio at the end of Year 2 was closest to which of the
following?
A) 0.42 to 1.
B) 1.22 to 1.
C) 0.48 to 1.
D) 1.04 to 1.
139)
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-19 Current
Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
140)
Marcell Company's acid-test (quick) ratio at the end of Year 2 was closest to which of
the following?
A) 0.74 to 1.
B) 0.60 to 1.
C) 1.35 to 1.
D) 0.33 to 1.
140)
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-20
Acid-Test (Quick) Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
141)
Marcell Company's accounts receivable turnover for Year 2 was closest to which of the
following?
A) 14.2 times.
B) 9.9 times.
C) 23.2 times.
D) 16.2 times.
141)
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-21 Accounts
Receivable Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
142)
Marcell Company's average collection period (age of receivables) for Year 2 was closest
to which of the following?
A) 15.7 days.
B) 36.9 days.
C) 22.6 days.
D) 25.8 days.
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-21 Accounts
Receivable Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
48
142)
143)
Marcell Company's inventory turnover for Year 2 was closest to which of the following?
A) 16.2 times.
B) 14.2 times.
C) 9.9 times.
D) 23.2 times.
143)
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-22 Inventory
Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
144)
Marcell Company's average sale period (turnover in days) for Year 2 was closest to
which of the following?
A) 25.8 days.
B) 22.6 days.
C) 36.9 days.
D) 15.7 days.
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-22 Inventory
Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
Reference: 14-12
Financial statements for March Company appear below:
March Company
Statement of Financial
Position December 31,
Year 2 and Year 1
(dollars in thousands)
Year 2
Year 1
Current Assets:
Cash and Marketable Securities$220
Accounts Receivable, Net
$160
Inventory
$150
Prepaid Expenses
$50
Total Current Assets
$580
Noncurrent Assets:
Plant & Equipment, Net
$1560
Total Assets
$2140
Current Liabilities:
Accounts Payable
$90
Accrued Liabilities
$80
Notes Payable, Short Term
$230
Total Current Liabilities
$400
Noncurrent Liabilities:
Bonds Payable
$450
Total Liabilities
$850
$190
$150
$150
$40
$530
$1560
$2090
$100
$60
$230
$390
$500
$890
49
144)
Total Liabilities
$850
Shareholders' Equity:
Preferred Shares, $10 Par, 8% $120
Common Shares, $5 Par
$180
Additional Paid-In Capital - $220
Common Shares
Retained Earnings
$770
Total Shareholders' Equity
$1290
Total Liabilities & Shareholders'$2140
Equity
$890
$120
$180
$220
$680
$1200
$2090
March Company Income
Statement For the Year Ended
December 31, Year 2 (dollars
in thousands)
Sales (All on Account) $1610
Costs of Goods Sold
$1120
Gross Margin
$490
Operating Expenses
$190
Net Operating Income $300
Interest Expense
$50
Net Income before Taxes$250
Income Taxes (30%) $75
Net Income
$175
145)
March Company's working capital (in thousands of dollars) at the end of Year 2 was
closest to which of the following?
A) $180.
B) $520.
C) $1,290.
D) $580.
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-18 Working
Capital
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
50
145)
146)
March Company's current ratio at the end of Year 2 was closest to which of the
following?
A) 1.27 to 1.
B) 0.47 to 1.
C) 1.45 to 1.
D) 0.49 to 1.
146)
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-19 Current
Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
147)
March Company's acid-test (quick) ratio at the end of Year 2 was closest to which of the
following?
A) 0.39 to 1.
B) 1.90 to 1.
C) 0.95 to 1.
D) 0.53 to 1.
147)
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-20
Acid-Test (Quick) Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
148)
March Company's accounts receivable turnover for Year 2 was closest to which of the
following?
A) 7.2 times.
B) 10.7 times.
C) 10.4 times.
D) 7.5 times.
148)
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-21 Accounts
Receivable Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
149)
March Company's average collection period (age of receivables) for Year 2 was closest
to which of the following?
A) 35.1 days.
B) 34.0 days.
C) 48.9 days.
D) 50.5 days.
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-21 Accounts
Receivable Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
51
149)
150)
March Company's inventory turnover for Year 2 was closest to which of the following?
A) 7.5 times.
B) 10.4 times.
C) 7.2 times.
D) 10.7 times.
150)
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-22 Inventory
Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
151)
March Company's average sale period (turnover in days) for Year 2 was closest to which
of the following? Round your intermediate calculations to 2 decimal places.
A) 35.1 days.
B) 48.9 days.
C) 50.5 days.
D) 34.0 days.
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-22 Inventory
Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
Reference: 14-13
Financial statements for Marcial Company appear below:
Marcial Company Statement of
Financial Position December 31,
Year 2 and Year 1 (dollars in
thousands)
Year 2
Year 1
Current Assets:
Cash and Marketable Securities$140
Accounts Receivable, Net
$110
Inventory
$140
Prepaid Expenses
$50
Total Current Assets
$440
Noncurrent Assets:
Plant & Equipment, Net
$1550
Total Assets
$1990
Current Liabilities:
Accounts Payable
$120
Accrued Liabilities
$10
Notes Payable, Short Term
$110
Total Current Liabilities
$240
Noncurrent Liabilities:
Bonds Payable
$390
Total Liabilities
$630
Shareholders' Equity:
$140
$110
$130
$50
$430
$1480
$1910
$170
$40
$100
$310
$400
$710
52
151)
Shareholders' Equity:
Preferred Shares, $10 Par, 8% $120
Common Shares, $5 Par
$200
Additional Paid-In Capital - $250
Common Shares
Retained Earnings
$790
Total Shareholders' Equity
$1360
Total Liabilities & Shareholders'$1990
Equity
$120
$200
$250
$630
$1200
$1910
Marcial Company Income
Statement For the Year Ended
December 31, Year 2 (dollars
in thousands)
Sales (All on Account) $1630
Costs of Goods Sold
$1140
Gross Margin
$490
Operating Expenses
$190
Net Operating Income
$300
Interest Expense
$40
Net Income before Taxes $260
Income Taxes (30%)
$78
Net Income
$182
152)
Marcial Company's working capital (in thousands of dollars) at the end of Year 2 was
closest to which of the following?
A) $200.
B) $440.
C) $1,360.
D) $570.
152)
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-18 Working
Capital
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
153)
Marcial Company's current ratio at the end of Year 2 was closest to which of the
following?
A) 1.22 to 1.
B) 1.83 to 1.
C) 0.35 to 1.
D) 0.38 to 1.
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-19 Current
Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
53
153)
154)
Marcial Company's acid-test (quick) ratio at the end of Year 2 was closest to which of
the following?
A) 0.76 to 1.
B) 1.04 to 1.
C) 1.32 to 1.
D) 0.25 to 1.
154)
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-20
Acid-Test (Quick) Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
155)
Marcial Company's accounts receivable turnover for Year 2 was closest to which of the
following?
A) 12.1 times.
B) 14.8 times.
C) 10.4 times.
D) 8.4 times.
155)
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-21 Accounts
Receivable Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
156)
Marcial Company's average collection period (age of receivables) for Year 2 was closest
to which of the following? Do not round intermediate calculations.
A) 30.2 days.
B) 43.2 days.
C) 24.6 days.
D) 35.2 days.
156)
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-21 Accounts
Receivable Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
157)
Marcial Company's inventory turnover for Year 2 was closest to which of the following?
A) 8.4 times.
B) 14.8 times.
C) 12.1 times.
D) 10.4 times.
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-22 Inventory
Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
54
157)
158)
Marcial Company's average sale period (turnover in days) for Year 2 was closest to
which of the following? Do not round intermediate calculations.
A) 30.2 days.
B) 35.2 days.
C) 43.2 days.
D) 24.6 days.
158)
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-22 Inventory
Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
Reference: 14-14
The following financial data have been taken from the records of CPZ Enterprises.
Accounts Receivable
Accounts Payable
Bonds Payable, Due in Ten Years
Cash
Interest Payable, Due in Three Months
Inventory
Land
Notes Payable, Due in Six Months
159)
$200000
$80000
$300000
$100000
$10000
$440000
$250000
$50000
What is the current ratio for CPZ Enterprises?
A) 5.29.
B) 5.00.
159)
C)
2.14.
D)
1.68.
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-19 Current
Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
160)
What is the company's acid-test (quick) ratio?
A) 1.68.
B) 2.31.
Answer: C
160)
C) 2.14.
D) 0.68.
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-20
Acid-Test (Quick) Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
55
161)
What will happen to the ratios below if CPZ Enterprises uses cash to pay 50% of its accounts
161)
payable?
Current Ratio
_Increase
_Decrease
_Increase
_Decrease
A)
B)
C)
D)
A)
Option A
Acid-Test Ratio
_Increase
_Decrease
_Decrease
_Increase
B) Option
C)
B
Option C
D)
Option D
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-19 Current
Ratio, 14-20 Acid-Test (Quick) Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
Reference: 14-15
At December 31, Curry Co. had the following balances in selected asset accounts:
Cash
Accounts receivable, Net
Inventory
Prepaid Expenses
Other Assets
Total Assets
Year 2
$300
$1200
$500
$100
$400
$2500
Year 1
$200
$800
$300
$60
$250
$1610
Curry had current liabilities of $1,000 at December 31, Year 2, and credit sales of $7,200 for Year 2.
162)
Curry Company's acid-test (quick) ratio at December 31, Year 2 was closest to which of
the following?
A) 1.5 to 1.
B) 1.6 to 1.
C) 2.1 to 1.
D) 2.0 to 1.
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-20
Acid-Test (Quick) Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
56
162)
163)
Curry Company's average collection period (age of receivables) for Year 2 was closest to
which of the following?
A) 40.6 days.
B) 50.7 days.
C) 60.8 days.
D) 30.4 days.
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-21 Accounts
Receivable Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute
and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
Reference: 14-16
Financial statements for Narita Company appear below:
Narita Company Statement of
Financial Position December 31,
Year 2 and Year 1 (dollars in
thousands)
Year 2
Year 1
Current Assets:
Cash and Marketable Securities$130
Accounts Receivable, Net
$210
Inventory
$120
Prepaid Expenses
$60
Total Current Assets
$520
Noncurrent Assets:
Plant & Equipment, Net
$1660
Total Assets
$2180
Current Liabilities:
Accounts Payable
$150
Accrued Liabilities
$50
Notes Payable, Short Term
$180
Total Current Liabilities
$380
Noncurrent Liabilities:
Bonds Payable
$260
Total Liabilities
$640
Shareholders' Equity:
Preferred Shares, $10 Par, 6% $120
Common Shares, $2 Par
140
Additional Paid-In Capital - $480
Common Shares
Retained Earnings
$1100
Total Shareholders' Equity
$1540
Total Liabilities & Shareholders'$2180
$130
$180
$120
$50
$480
$1660
$2140
$140
$60
$200
$400
$300
$700
$120
$140
$180
$1000
$1440
$2140
57
163)
$2180
$2140
Equity
Sales (All on Account)
Costs of Goods Sold
Gross Margin
Operating Expenses
Net Operating Income
Interest Expense
Net Income before Taxes
Income Taxes (30%)
Net Income
164)
Narita Company Income
Statement For the Year Ended
December 31, Year 2 (dollars
in thousands)
$2570
$1790
$780
$310
$470
$30
$440
$132
$308
Narita Company's times interest earned for Year 2 was closest to which of the following?
A) 26.0 times.
B) 10.3 times.
C) 14.7 times.
D) 15.7 times.
164)
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-24 Times
Interest Earned Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-04 Compute
and interpret financial ratios that would be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
165)
Narita Company's debt-to-equity ratio at the end of Year 2 was closest to which of the
following?
A) 0.17 to 1.
B) 0.42 to 1.
C) 0.25 to 1.
D) 0.58 to 1.
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-25
Debt-to-Equity Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-04 Compute
and interpret financial ratios that would be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
Reference: 14-17
Financial statements for Narlock Company appear below:
Narlock Company Statement of
Financial Position December 31, Year
2 and Year 1 (dollars in thousands)
Year 2
Year 1
Current Assets:
Cash and Marketable Securities$120
Accounts Receivable, Net
$150
$120
$15058
165)
Accounts Receivable, Net
$150
Inventory
$130
Prepaid Expenses
$90
Total Current Assets
$490
Noncurrent Assets:
Plant & Equipment, Net
$1670
Total Assets
$2160
Current Liabilities:
Accounts Payable
$100
Accrued Liabilities
$60
Notes Payable, Short Term
$250
Total Current Liabilities
$410
Noncurrent Liabilities:
Bonds Payable
$480
Total Liabilities
$890
Shareholders' Equity:
Preferred Shares, $10 Par, 6% $100
Common Shares, $2 Par
200
Additional Paid-In Capital - $150
Common Shares
Retained Earnings
$820
Total Shareholders' Equity
$1270
Total Liabilities & Shareholders'$2160
Equity
Sales (All on Account)
Costs of Goods Sold
Gross Margin
Operating Expenses
Net Operating Income
Interest Expense
Net Income before Taxes
Income Taxes (30%)
Net Income
$150
$120
$80
$470
$1600
$2070
$100
$70
$290
$460
$500
$960
100
$200
$150
$660
$1110
$2070
$
Narlock Company Income
Statement For the Year Ended
December 31, Year 2 (dollars
in thousands)
$2250
$1570
$680
$270
$410
$50
$360
$108
$252
59
166)
Narlock Company's times interest earned for Year 2 was closest to which of the
following?
A) 5.0 times.
B) 8.2 times.
C) 7.2 times.
D) 13.6 times.
166)
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-24 Times
Interest Earned Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-04 Compute
and interpret financial ratios that would be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
167)
Narlock Company's debt-to-equity ratio at the end of Year 2 was closest to which of the
following?
A) 0.32 to 1.
B) 1.09 to 1.
C) 0.70 to 1.
D) 0.38 to 1.
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-25
Debt-to-Equity Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-04 Compute
and interpret financial ratios that would be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
Reference: 14-18
Financial statements for Narumi Company appear below:
Narumi Company Statement
of Financial Position
December 31, Year 2 and Year
1 (dollars in thousands)
Year 2
Year 1
Current Assets:
Cash and Marketable Securities$150
Accounts Receivable, Net
$140
Inventory
$130
Prepaid Expenses
$40
Total Current Assets
$460
Noncurrent Assets:
Plant & Equipment, Net
$1340
Total Assets
$1800
Current Liabilities:
Accounts Payable
$120
Accrued Liabilities
$80
Notes Payable, Short Term
$180
Total Current Liabilities
$380
Noncurrent Liabilities:
Bonds Payable
$510
Total Liabilities
$890
$150
$130
$130
$30
$440
$1310
$1750
$110
$80
$230
$420
$500
$920
60
167)
Total Liabilities
$890
Shareholders' Equity:
Preferred Shares, $10 Par, 6% $120
Common Shares, $2 Par
160
Additional Paid-In Capital - $200
Common Shares
Retained Earnings
$430
Total Shareholders' Equity
$910
Total Liabilities & Shareholders'$1800
Equity
Sales (All on Account)
Costs of Goods Sold
Gross Margin
Operating Expenses
Net Operating Income
Interest Expense
Net Income before Taxes
Income Taxes (30%)
Net Income
168)
$920
120
$160
$200
$350
$830
$1750
Narumi Company Income
Statement For the Year Ended
December 31, Year 2 (dollars
in thousands)
$2050
$1430
$620
$240
$380
$50
$330
$99
$231
Narumi Company's times interest earned for Year 2 was closest to which of the
following?
A) 7.6 times.
B) 6.6 times.
C) 4.6 times.
D) 12.4 times.
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-24 Times
Interest Earned Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-04 Compute
and interpret financial ratios that would be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
61
168)
169)
Narumi Company's debt-to-equity ratio at the end of Year 2 was closest to which of the
following?
A) 0.56 to 1.
B) 2.07 to 1.
C) 0.42 to 1.
D) 0.98 to 1.
169)
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-25
Debt-to-Equity Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-04 Compute
and interpret financial ratios that would be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
Reference: 14-19
Selected data for the Boat Rental Company follow:
Preferred Shares, 8% Par Value $50
Common Shares, Per Value $10
Retained Earnings at End of Year
Net Income
Dividends Paid on Preferred Shares
Dividends Paid on Common Shares
Quoted Market Price per Common Share at
Year End
170)
Current Year
$250000
$500000
$257000
$102000
$20000
$55000
$25
Prior Year
$250000
$500000
$240000
$90000
$20000
$50000
$20
What is the dividend yield ratio on common shares for the current year, rounded to the
nearest tenth of a percent?
A) 6.8%.
B) 6.6%.
C) 7.4%.
D) 4.4%
170)
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-10 Dividend
Payout and Yield Ratios
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
171)
What was the dividend payout ratio for the prior year?
A) 140.0%.
B) 71.4%.
C) 114.3%.
Answer: B
171)
D)
55.6%.
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-10 Dividend
Payout and Yield Ratios
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
62
172)
What is the book value per share for the current year, rounded to the nearest cent?
A) $22.18.
B) $15.14.
C) $18.31.
D) $20.14.
172)
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-16 Book
Value per Share
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
173)
In determining whether a company's financial condition is improving or deteriorating
over time, vertical analysis of financial statement data would be more useful than
horizontal analysis.
Answer:
True
173)
False
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
174)
Trend percentages state several years' financial data in terms of a base year. For example,
sales for every year would be stated as a percentage of the sales in the base year.
Answer:
True
174)
False
Topic: 14-05 Dollar and Percentage Changes on Statements
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
175)
The gross margin percentage is calculated taking the difference between sales and cost of
goods and then dividing the result by sales.
Answer:
True
175)
False
Topic: 14-06 Common-Size Statements
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
176)
Common-size statements are particularly useful when comparing data from different
companies.
Answer:
True
False
Topic: 14-06 Common-Size Statements
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
63
176)
177)
The price-earnings ratio is determined by dividing the price of a product by its profit
margin.
Answer:
True
177)
False
Topic: 14-09 Price—Earnings Ratio
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
178)
The price-earnings ratio is calculated by dividing the market price per share by the
current earnings per share.
Answer:
True
178)
False
Topic: 14-09 Price—Earnings Ratio
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
179)
When calculating the return on total assets, the after-tax effect of interest expense must
be subtracted from net income.
Answer:
True
179)
False
Topic: 14-13 Return on Total Assets
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
180)
If the assets in which funds are invested have a rate of return lower than the fixed rate of
return paid to the supplier of the funds, then financial leverage is positive.
Answer:
True
180)
False
Topic: 14-15 Financial Leverage
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
181)
If the market value of a common share is greater than its book value, the common share
is probably overpriced.
Answer:
True
181)
False
Topic: 14-08 Earnings per Share, 14-16 Book Value per Share
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
182)
To put the working capital figure into perspective it must be supplemented with other
short-term ratios.
Answer:
True
False
Topic: 14-18 Working Capital
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
64
182)
183)
If a company has a current ratio greater than 1.0 to 1, repaying a short-term note payable
will increase the current ratio.
Answer:
True
183)
False
Topic: 14-19 Current Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
184)
The acid-test ratio is a test of the quality of accounts receivable-in other words, whether
they are likely to be collected.
Answer:
True
184)
False
Topic: 14-20 Acid-Test (Quick) Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
185)
When calculating the acid-test ratio, prepaid expenses are ignored.
Answer:
True
185)
False
Topic: 14-20 Acid-Test (Quick) Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
186)
Only credit sales (i.e., sales on account) are included in the computation of the accounts
receivable turnover.
Answer:
True
186)
False
Topic: 14-21 Accounts Receivable Turnover
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
187)
The inventory turnover ratio is equal to the average inventory balance divided by the cost
of goods sold.
Answer:
True
187)
False
Topic: 14-22 Inventory Turnover
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
188)
A positive fully diluted earnings per share can sometimes exceed basic (undiluted)
earnings per share.
Answer:
True
False
Topic: 14-08 Earnings per Share
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
65
188)
189)
M. K. Berry is the managing director of CE Ltd. a small, family-owned company that manufactures
cutlery. His company belongs to a trade association that publishes a monthly magazine. The latest
issue of the magazine contains a very brief article based on the analysis of the accounting statements
published by the 40 companies that manufacture this type of product. The article contains the following
table:
Average for All Companies In
the Industry
Return on Shareholders' Equity33%
Return on Total Assets
29%
Gross Margin Percentage
30%
Current Ratio
1.9:1
Average Sale Period
37 days
Average Collection Period 41 days
CE Ltd's latest financial statements are as follows:
Sales
Cost Of Goods Sold
Gross Margin
Selling and Administrative
Expenses
Interest
Net Income
CE Ltd. Income Statement For
the year end 31 October (in
thousands)
£900
£720
£180
£55
£15
£110
The country in which the company operates has no corporate income tax. No dividends were paid during the
year. All sales are on account.
CE Ltd. Balance
Sheets As of 31
October (in
thousands)
This Year
Last Year
Current assets:
Cash
Accounts Receivable
Inventories
Noncurrent assets
Total assets
Current liabilities:
Accounts payable
Noncurrent liabilities:
£5
120
96
500
£721
£20
110
80
460
£670
£147
£206
66
Noncurrent liabilities:
Bonds payable
150
Common shares
100
Retained earnings
324
Total liabilities and shareholders'
£721
equity
150
100
214
£670
Required:
a) Calculate each of the ratios listed in the magazine article for this year for CE, and comment briefly on CE
Ltd.'s performance in comparison to the industry averages.
b) Explain why it could be misleading to compare CE Ltd.'s ratios with those taken from the article.
Answer:
a)
Return on common shareholders' equity:
Net income = £110
Preferred dividends = £0
Average common shareholders' equity = [(£100 + £324) + (£100 + £214)]/2
= £369
Return on common shareholders' equity = (£110 - £0)/£369
= 29.8% (rounded)
Return on total assets:
Net income = £110
Tax rate = 0%
Interest expense = £15
Average total assets = (£721 + £670)/2 = £695.5
Return on total assets = [£110 + £15(1 - 0.00)]/£695.5
= 18.0% (rounded)
Gross margin percentage:
Gross margin = £180
Sales = £900
Gross margin percentage = £180/£900 = 20%
Current ratio:
Current assets = £5 + £120 + £96 = £221
Current liabilities = £147
Current ratio = £221/£147 = 1.5:1 (rounded)
Average sale period:
67
Answer:
Cost of goods sold = £720
Average inventory balance = (£96 + £80)/2 = £88
Inventory turnover = £720/£88 = 8.2 (rounded)
Average sale period = 365 days/8.2 = 45 days (rounded)
Average collection period:
Sales on account = £900
Average accounts receivable balance = (£120 + £110)/2 = £115
Accounts receivable turnover = £900/£115 = 7.8 (rounded)
Average collection period = 365 days/7.8 = 47 days (rounded)
CE Ltd.'s return on shareholders' equity is not as good as the industry's average. For every pound
invested, shareholders are obtaining a return that is smaller than they should expect, based on the
article's figures. Similarly, the return on total assets is much less than the average. This indicates that
the company is unable to make good use of the funds invested in the company.
CE Ltd.'s gross margin percentage is also lower than average-perhaps because its selling prices are
lower than the average or its cost of sales is higher.
The current ratio indicates that CE Ltd.'s current assets are more than its current liabilities by a factor o
1.5. The industry average shows an even higher figure, with current assets amounting to almost double
current liabilities.
Most companies aim to turn over inventory as quickly as possible, in order to improve cash flow. CE
Ltd. is not managing to do this as quickly as the industry's average of 37 days. Similarly, companies
should try to obtain payment from customers as soon as possible. CE Ltd. is taking much longer to do
this than the average for the industry.
b)
Care must be taken when comparing CE Ltd.'s ratios with industry averages because there may be
differences in accounting methods. Although accounting standards have reduced the range of
acceptable accounting policies, there is still scope for different firms to apply different accounting
policies. For example, one firm may use straight-line depreciation, while another may use accelerated
depreciation. These variations make comparisons difficult.
Size differences may also mean that ratios are not comparable. A very large manufacturing business
should be able to achieve economies of scale that are not possible for CE Ltd. For example, large
companies may be able to negotiate sizable discounts from suppliers.
A third problem arises from differences in product range. CE Ltd. may produce cutlery that is sold at th
top end of the market, for very high prices, and in small volumes. Alternatively, it may be producing
high-volume, low quality cutlery for the catering industry. Either situation will reduce the
value of comparisons with the industry average.
68
Topic: 14-13 Return on Total Assets, 14-14 Return on Common Shareholders' Equity, 14-19 Current Ratio, 14-21 Accounts
Answer:
Receivable Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute and interpret
financial ratios that would be useful to a common shareholder., 14-03 Compute and interpret financial ratios that
would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or internal).
190)
Comparative financial statements for Springville Company for the last two years appear below. The market
price of Springville's common shares was $25 per share on December 31, Year 2. During Year 2, dividends of
$2,000,000 were paid to preferred shareholders and $10,000,000 to common shareholders.
Springville Company Statement
of Financial Position December
31, Year 2 and Year 1 (dollars in
thousands)
Year 2
Year 1
Current Assets:
Cash and Marketable Securities$6000
Accounts Receivable, Net
$20000
Inventory
$28000
Total Current Assets
$54000
Noncurrent Assets:
Investments
$75000
Plant & Equipment, Net
$12000
Total Assets
$141000
Current Liabilities:
Accounts Payable
$7000
Accrued Liabilities
$1000
Total Current Liabilities
$8000
Noncurrent Liabilities:
Bonds Payable
$24000
Total Liabilities
$32000
Shareholders' Equity:
Preferred Shares, 8%, 1,000,000
$20000
shares
Common Shares, no Par,
$30000
5,000,000 shares
Retained Earnings
$59000
Total Shareholders' Equity
$109000
Total Liabilities & Shareholders'$141000
Equity
$4800
$16800
$28800
$50400
$81600
$12000
$144000
$6000
$1200
$7200
$24000
$31200
$20000
$30000
$62800
$112800
$144000
Springville Company Income
69
Sales (All on Account)
Costs of Goods Sold
Gross Margin
Operating Expenses
Net Operating Income
Interest Expense
Net Income before Taxes
Income Taxes (40%)
Net Income
Springville Company Income
Statement For the Year Ended
December 31, Year 2 (dollars
in thousands)
$280000
$200000
$80000
$61333
$18667
$5000
$13667
$5467
$8200
Required:
Calculate the following for Year 2:
a) Dividend payout ratio.
b) Dividend yield ratio.
c) Price-earnings ratio.
d) Accounts receivable turnover.
e) Inventory turnover.
f) Return on total assets.
g) Return on common shareholders' equity.
h) Was financial leverage positive or negative for the year? Explain.
Answer:
a) Dividend payout ratio = Dividends per share/Earnings per share.
= ($10,000,000/5,000,000)/(($8,200,000 - $2,000,000)/5,000,000))
= $2.00/$1.24
= 161.3%
b) Dividend yield ratio = Dividends paid per share/Market price per share
= $2.00/$25
= 8%
c) Price-earnings ratio = Market price per share/Earnings per share
= $25/(($8,200,000 - $2,000,000)/5,000,000))
= 20.16
d) Accounts receivable turnover = Sales on account/Average accounts receivable balance
= $280,000/(($16,800 + $20,000)/2))
= 15.22 times.
e) Inventory turnover = Cost of goods sold/Average inventory balance
= $200,000/(($28,800 + $28,000)/2))
= 7.04 times
70
Answer:
f) Return on total assets = [Net income + ((Interest expense × (1 - Tax rate))]
/Average total assets
= 8,200,000 + 5,000,000 × (1 - 0.40)
/[($144,000,000 + $141,000,000)/2]
= 7.9%
g) Return on common shareholders' equity = (Net income - preferred dividends)
/Average common shareholders' equity
= ($8,200,000 - $2,000,000)
/(($92,800,000 + $89,000,000)/2)
= 6.8%
h) Financial leverage was negative, since the rate of return to the common shareholders (6.8%)
was less than the rate of return on total assets (7.9%).
Topic: 14-09 Price—Earnings Ratio, 14-10 Dividend Payout and Yield Ratios, 14-13 Return on Total Assets, 14-21 Accounts
Receivable Turnover, 14-22 Inventory Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute and interpret
financial ratios that would be useful to a common shareholder., 14-03 Compute and interpret financial ratios that
would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or internal).
191)
Financial statements for Praeger Company appear below:
Praeger Company Statement of
Financial Position December 31, Year
2 and Year 1 (dollars in thousands)
Year 2
Year 1
Current Assets:
Cash and Marketable Securities$100
Accounts Receivable, Net
$170
Inventory
$110
Prepaid Expenses
$60
Total Current Assets
$440
Noncurrent Assets:
Plant & Equipment, Net
$2020
Total Assets
$2460
Current Liabilities:
Accounts Payable
$140
Accrued Liabilities
$70
Notes Payable, Short Term
$100
Total Current Liabilities
$310
Noncurrent Liabilities:
Bonds Payable
$500
Total Liabilities
$810
Shareholders' Equity:
$100
$170
$110
$60
$440
$1990
$2430
$170
$50
$120
$340
$500
$840
71
Shareholders' Equity:
Preferred Shares, $5 Par, 5% $100
Common Shares, $5 Par
200
Additional Paid-In Capital - $200
Common Shares
Retained Earnings
$1150
Total Shareholders' Equity
$1650
Total Liabilities & Shareholders'$2460
Equity
$100
$200
$200
$1090
$1590
$2430
Praeger Company Income Statement
For the Year Ended December 31,
Year 2 (dollars in thousands)
Sales (All on Account) $100
Costs of Goods Sold
$770
Gross Margin
$330
Operating Expenses
$130
Net Operating Income $200
Interest Expense
$50
Net Income before Taxes $150
Income Taxes (30%)
$45
Net Income
$105
Dividends during Year 2 totalled $45,000, of which $10,000 were preferred dividends. The market price of a
common share on December 31, Year 2 was $30.
The preferred shares are convertible to common shares on the basis of 2 common shares for each preferred
share.
Required:
Calculate the following for Year 2:
a) Basic earnings per common share.
b) Fully diluted earnings per common share.
c) Price-earnings ratio (use basic earnings per share).
d) Dividend payout ratio (use basic earnings per share).
e) Dividend yield ratio.
f) Return on total assets.
g) Return on common shareholders' equity.
h) Book value per share.
i) Working capital.
j) Current ratio.
k) Acid-test (quick) ratio.
72
l.) Accounts receivable turnover.
m) Average collection period (age of receivables).
n) Inventory turnover.
o) Average sale period (turnover in days).
p) Times interest earned.
q) Debt-to-equity ratio.
Answer:
a) Basic earnings per share = (Net income - Preferred dividends)
/Average number of common shares outstanding *
= ($105 - $5)/40
= $2.50
* Number of common shares outstanding = Common shares/Par value
= $200/$5
= 40
b) Fully diluted earnings per share = Net income
/(Number of common shares outstanding
+ Common shares to be issued on assumed
conversion of preferred shares *)
= $105/(40 + 40 *)
= $105/80
= $1.31
* Number of common shares to be issued on assumed conversion of preferred shares
= ($100/$5) × 2
= 20 × 2
= 40
c) Price-earnings ratio = Market price per share/Basic earnings per share*
= $30/$2.50
= 12.0
** See part a) above
d) Dividend payout ratio = Dividend per share*/Basic earnings per share**
= $1/$2.50
= 40.0%
* Dividends per share = Common dividends/Common shares***
= $40/40
= $1.00
** See part a) above
e) Dividend yield ratio = Dividends per share*/Market price per share
= $1.00/$30.00
73
Answer:
= 3.33%
** See part d) above
f) Return on total assets = Adjusted net income*/Average total assets**
= $140/$2,445
= 5.73%
* Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]
= $105 + 50 × (1 - 0.30)
= $140
** Average total assets = ($2,460 + $2,430)/2
= $2,445
g) Return on common shareholders' equity = (Net income - Preferred dividends)
/Average common shareholders' equity*
= ($105 - $5)/$1,520
= 6.58%
* Average common shareholders' equity = ($1,550 + $1,490)/2
= $1,520
h) Book value per share = Common shareholders' equity
/Number of common shares outstanding*
= $1,550/40
= $38.75
* Number of common shares outstanding = Common shares/Par value
= $200/$5
= 40
i) Working capital = Current assets - Current liabilities
= $440 - $310
= $130
j) Current ratio = Current assets/Current liabilities
= $440/$310
= 1.42 to 1
k) Acid-test ratio = Quick assets*/Current liabilities
= $270/$310
= 0.87 to 1
* Quick assets = Cash + Marketable securities + Current receivables
74
Answer:
= $100 + $170
= $270
l.) Accounts receivable turnover = Sales on account/Average accounts receivable*
= $1,100/$170
= 6.47 times
* Average accounts receivable = ($170 + $170)/2
= $170
m) Average collection period = 365 days/Accounts receivable turnover*
= 365/6.47
= 56.4 days
* See part l.) above
n) Inventory turnover = Cost of goods sold/Average inventory*
= $770/$110
= 7.00 times
* Average inventory = ($110 + $110)/2
= $110
o) Average sale period = 365 days/Inventory turnover*
= 365/7.00
= 52.1 days
* See part n.) above
p) Times interest earned = Net operating income/Interest expense
= $200/$50
= 4.00 times
q) Debt-to-equity ratio = Liabilities/Shareholders' equity
= $810/$1,650
= 0.49 to 1
75
Topic: 14-01 Limitations of Financial Statement Analysis, 14-02 Comparison of Financial Data, 14-03 The Need to Look
Answer:
beyond Ratios, 14-04 Statements in Comparative and Common-Size Form, 14-05 Dollar and Percentage Changes on
Statements, 14-06 Common-Size Statements, 14-07 Ratio Analysis–The Common Shareholder (Profitability Ratios),
14-08 Earnings per Share, 14-09 Price—Earnings Ratio, 14-10 Dividend Payout and Yield Ratios, 14-11 The
Dividend Payout Ratio, 14-12 The Dividend Yield Ratio, 14-13 Return on Total Assets, 14-14 Return on Common
Shareholders' Equity, 14-15 Financial Leverage, 14-16 Book Value per Share, 14-17 Ratio Analysis–The Short-Term
Creditor (Liquidity Ratios), 14-18 Working Capital, 14-19 Current Ratio, 14-20 Acid-Test (Quick) Ratio, 14-21
Accounts Receivable Turnover, 14-22 Inventory Turnover, 14-23 Ratio Analysis–The Long-Term Creditor (Solvency
Ratios), 14-24 Times Interest Earned Ratio, 14-25 Debt-to-Equity Ratio, 14-26 Summary of Ratios and Sources of
Comparative Information
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute and interpret
financial ratios that would be useful to a common shareholder., 14-03 Compute and interpret financial ratios that
would be useful to a short-term creditor., 14-04 Compute and interpret financial ratios that would be useful to a
long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or internal).
192)
Financial statements for AAR Company appear below:
AAR Company
Statement of Financial
Position December 31
Current Assets:
Cash and Marketable Securities
Accounts Receivable, Net
Inventory
Prepaid Expenses
Total Current Assets
Noncurrent Assets:
Plant & Equipment, Net
Total Assets
Current Liabilities:
Accounts Payable
Accrued Liabilities
Notes Payable, Short Term
Total Current Liabilities
Noncurrent Liabilities:
Bonds Payable
Total Liabilities
Shareholders' Equity:
Common Shares, $5 Par
Retained Earnings
Total Shareholders' Equity
Total Liabilities & Shareholders' Equity
$21000
$160000
$300000
$9000
$490000
$810000
$1300000
$75000
$25000
$100000
$200000
$300000
$500000
$100000
$700000
$800000
$1300000
AAR Company Income
76
Sales (All on Account)
Costs of Goods Sold
Gross Margin
Operating Expenses
Net Operating Income
Interest Expense
Net Income before Taxes
Income Taxes (30%)
Net Income
AAR Company Income
Statement For the Year Ended
December 31, Year 2 (dollars
in thousands)
$2100000
$1770000
$330000
$130000
$200000
$50000
$150000
$45000
$105000
AAR Company paid dividends of $3.15 per share during the year. The market price of the company's common
shares at December 31 was $63 per share. Total assets at the beginning of the year were $1,100,000, and total
shareholders' equity was $725,000. The balance of accounts receivable at the beginning of the year was
$150,000. The balance in inventory at the beginning of the year was $250,000.
Required:
Calculate the following:
a) Current ratio.
b) Acid-test (quick) ratio.
c) Average collection period (age of receivables).
d) Inventory turnover.
e) Times interest earned.
f) Debt-to-equity ratio.
g) Dividend payout ratio.
h) Price-earnings ratio.
i) Return on total assets.
j) Return on common shareholders' equity.
k) Was financial leverage positive or negative for the year? Explain.
Answer:
a) Current ratio = Current assets/Current liabilities
= $490,000/$200,000
= 2.45 to 1
b) Acid-test ratio = Quick assets*/Current liabilities
= $181,000/$200,000
= 0.91 to 1
* Quick assets = Cash + Marketable securities + Current receivables
= $21,000 + $160,000
= $181,000
77
Answer:
c) Accounts receivable turnover = Sales on account/Average accounts receivable*
= $2,100,000/$155,000
= 13.55 times
* Average accounts receivable = ($160,000 + $150,000)/2
= $155,000
Average collection period = 365 days/Accounts receivable turnover
= 365/13.55
= 26.94 days
d) Inventory turnover = Cost of goods sold/Average inventory*
= $1,770,000/$275,000
= 6.4 times
* Average inventory = ($300,000 + $250,000)/2
= $275,000
e) Times interest earned = Net operating income/Interest expense
= $200,000/$50,000
= 4.00 times
f) Debt-to-equity ratio = Liabilities/Shareholders' equity
= $500,000/$800,000
= 0.625 to 1
g) Dividend payout ratio = Dividends per share/Earnings per share.
= $3.15/($105,000/20,000 shares)
= $3.15/$5.25
= 60%
h) Dividend yield ratio = Dividends paid per share/Market price per share
= $3.15/$63.00
= 5%
i) Price-earnings ratio = Market price per share/Earnings per share
= $63/$5.25
= 12.0
j) Return on total assets = ((Net income + (Interest expense × (1 - Tax rate))
/Average total assets
= (($105,000 + (50,000 × (1 - 0.30))
/(($1,100,000 + $1,300,000)/2))
= $140,000/$1,200,000
= 11.67%
78
Answer:
k) Return on common shareholders' equity = (Net income - Preferred dividends)
/Average common shareholders' equity
= $105,000/[($725,000 + $800,000)/2]
= 13.8%
l.) Financial leverage was positive, since the rate of return to the common shareholders (13.8%) was
greater than the rate of return on total assets (11.67%).
Topic: 14-01 Limitations of Financial Statement Analysis, 14-02 Comparison of Financial Data, 14-03 The Need to Look
beyond Ratios, 14-04 Statements in Comparative and Common-Size Form, 14-05 Dollar and Percentage Changes on
Statements, 14-06 Common-Size Statements, 14-07 Ratio Analysis–The Common Shareholder (Profitability Ratios),
14-08 Earnings per Share, 14-09 Price—Earnings Ratio, 14-10 Dividend Payout and Yield Ratios, 14-11 The
Dividend Payout Ratio, 14-12 The Dividend Yield Ratio, 14-13 Return on Total Assets, 14-14 Return on Common
Shareholders' Equity, 14-15 Financial Leverage, 14-16 Book Value per Share, 14-17 Ratio Analysis–The Short-Term
Creditor (Liquidity Ratios), 14-18 Working Capital, 14-19 Current Ratio, 14-20 Acid-Test (Quick) Ratio, 14-21
Accounts Receivable Turnover, 14-22 Inventory Turnover, 14-23 Ratio Analysis–The Long-Term Creditor (Solvency
Ratios), 14-24 Times Interest Earned Ratio, 14-25 Debt-to-Equity Ratio, 14-26 Summary of Ratios and Sources of
Comparative Information
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute and interpret
financial ratios that would be useful to a common shareholder., 14-03 Compute and interpret financial ratios that
would be useful to a short-term creditor., 14-04 Compute and interpret financial ratios that would be useful to a
long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or internal).
193)
Financial statements for Qiang Company appear below:
Qiang Company Statement of Financial
Position December 31, Year 2 and Year 1
(dollars in thousands)
Year 2
Year 1
Current Assets:
Cash and Marketable Securities$170
Accounts Receivable, Net
$130
Inventory
$130
Prepaid Expenses
$60
Total Current Assets
$490
Noncurrent Assets:
Plant & Equipment, Net
$1900
Total Assets
$2390
Current Liabilities:
Accounts Payable
$160
Accrued Liabilities
$50
Notes Payable, Short Term
$80
Total Current Liabilities
$290
Noncurrent Liabilities:
Bonds Payable
$400
Total Liabilities
$690
Shareholders' Equity:
$160
$100
$130
$70
$460
$1880
$2340
$160
$70
$110
$340
$400
$740
79
Shareholders' Equity:
Preferred Shares, $5 Par, 10% $120
Common Shares, $5 Par
180
Additional Paid-In Capital - $120
Common Shares
Retained Earnings
$1280
Total Shareholders' Equity
$1700
Total Liabilities & Shareholders'$2390
Equity
Sales (All on Account)
Costs of Goods Sold
Gross Margin
Operating Expenses
Net Operating Income
Interest Expense
Net Income before Taxes
Income Taxes (30%)
Net Income
$120
$180
$120
$1180
$1600
$2340
Qiang Company Income
Statement For the Year Ended
December 31, Year 2 (dollars in
thousands)
$1500
$1050
$450
$180
$270
$40
$230
$69
$161
Total dividends paid during Year 2 were $61,000, of which $12,000 were for preferred shares. The market
price of a common share on December 31, Year 2 was $50.
The preferred shares are convertible to common shares on the basis of four common shares for each preferred
share.
Required:
Calculate the following for Year 2:
a) Basic earnings per common share.
b) Fully diluted earnings per common share.
c) Price-earnings ratio (use basic earnings per share).
d) Dividend yield ratio.
e) Return on total assets.
f) Return on common shareholders' equity.
g) Book value per share.
80
Answer:
a) Basic earnings per share = (Net Income - Preferred Dividends)
/Average number of common shares outstanding*
= ($161 - $12)/36
= $4.14
* Number of common shares outstanding = Common shares/Par value
= $180/$5
= 36
b) Fully diluted earnings per share = Net Income
/(Number of common shares outstanding
+ Common shares to be issued on assumed
conversion of preferred shares*)
= $161/(36 + 96*)
= $161/132
= $1.22
* Number of common shares to be issued on assumed conversion of preferred shares
= ($120/$5) × 4
= 24 × 4
= 96
c) Price-earnings ratio = Market price per share/Basic earnings per share*
= $50/$4.14
= 12.1
* See part a) above
d) Dividend yield ratio = Dividends per share*/Market price per share
= $1.36/$50.00
= 2.72%
* Dividends per share = Common dividends/Common shares**
= $49/36
= $1.36
** See part a) above
e) Return on total assets = Adjusted net income*/Average total assets**
= $189/$2,365
= 7.99%
* Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]
= $161 + 40 × (1 - 0.30)
= $189
81
Answer:
** Average total assets = ($2,390 + $2,340)/2
= $2,365
f) Return on common shareholders' equity = (Net income - Preferred dividends)
/Average common shareholders' equity*
= ($161 - $12)/$1,530
= 9.74%
* Average common shareholders' equity = ($1,580 + $1,480)/2
= $1,530
g) Book value per share = Common shareholders' equity
/Number of common shares outstanding*
= $1,580/36
= $43.89
* See part a) above
Topic: 14-08 Earnings per Share, 14-09 Price—Earnings Ratio, 14-10 Dividend Payout and Yield Ratios, 14-13 Return on
Total Assets
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute and interpret
financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or internal).
194)
Financial statements for Qualle Company appear below:
Qualle Company Statement of
Financial Position December 31, Year
2 and Year 1 (dollars in thousands)
Year 2
Year 1
Current Assets:
Cash and Marketable Securities$130
Accounts Receivable, Net
$110
Inventory
$170
Prepaid Expenses
$30
Total Current Assets
$440
Noncurrent Assets:
Plant & Equipment, Net
$1890
Total Assets
$130
Current Liabilities:
Accounts Payable
$130
Accrued Liabilities
$40
Notes Payable, Short Term
$250
Total Current Liabilities
$420
Noncurrent Liabilities:
Bonds Payable
$470
Total Liabilities
$890
$120
$100
$170
$30
$420
$1880
$2300
$130
$50
$290
$470
82
$500
$970
Total Liabilities
$890
Shareholders' Equity:
Preferred Shares, $5 Par, 10% $100
Common Shares, $10 Par
160
Additional Paid-In Capital - $170
Common Shares
Retained Earnings
$1010
Total Shareholders' Equity
$1440
Total Liabilities & Shareholders'$2330
Equity
Sales (All on Account)
Costs of Goods Sold
Gross Margin
Operating Expenses
Net Operating Income
Interest Expense
Net Income before Taxes
Income Taxes (30%)
Net Income
$970
$100
$160
$170
$900
$1330
$2300
Qualle Company Income
Statement For the Year Ended
December 31, Year 2 (dollars
in thousands)
$2300
$1610
$690
$270
$420
$50
$370
$111
$259
Total dividends paid during Year 2 were $149,000, of which $10,000 were preferred dividends. The market
price of a common share on December 31, Year 2 was $280.
Required:
Calculate the following for Year 2:
a) Earnings per share.
b) Price-earnings ratio.
c) Dividend yield ratio.
d) Return on total assets.
e) Return on common shareholders' equity.
f) Book value per share.
Answer:
a) Earnings per share = (Net Income - Preferred Dividends)
/Average number of common shares outstanding*
= ($259 - $10)/16
= $15.56
* Number of common shares outstanding = Common shares/Par value
83
Answer:
= $160/$10
= 16
b) Price-earnings ratio = Market price per share/Earnings per share*
= $280/$15.56
= 18.0
* See part a) above
c) Dividend yield ratio = Dividends per share*/Market price per share
= $8.69/$280.00
= 3.10%
* Dividends per share = Common dividends/Common shares**
= $139/16
= $8.69
** See part a) above
d) Return on total assets = Adjusted net income*/Average total assets**
= $294/$2,315
= 12.70%
*Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]
= $259 + 50 × (1 - 0.30)
= $294
**Average total assets = ($2,330 + $2,300)/2
= $2,315
e) Return on common shareholders' equity = (Net income - Preferred dividends)
/Average common shareholders' equity*
= ($259 - $10)/$1,285
= 19.38%
* Average common shareholders' equity = ($1,340 + $1,230)/2
= $1,285
f) Book value per share = Common shareholders' equity
/Number of common shares outstanding*
= $1,340/16
= $83.75
* See part a) above
84
Topic: 14-08 Earnings per Share, 14-09 Price—Earnings Ratio, 14-10 Dividend Payout and Yield Ratios, 14-13 Return on
Answer:
Total Assets, 14-16 Book Value per Share
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute and interpret
financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or internal).
195)
Financial statements for Quade Company appear below:
Quade Company Statement of
Financial Position December 31, Year
2 and Year 1 (dollars in thousands)
Year 2
Year 1
Current Assets:
Cash and Marketable Securities$110
Accounts Receivable, Net
$150
Inventory
$120
Prepaid Expenses
$80
Total Current Assets
$460
Noncurrent Assets:
Plant & Equipment, Net
$1550
Total Assets
$2010
Current Liabilities:
Accounts Payable
$130
Accrued Liabilities
$20
Notes Payable, Short Term
$260
Total Current Liabilities
$410
Noncurrent Liabilities:
Bonds Payable
$380
Total Liabilities
$790
Shareholders' Equity:
Preferred Shares, $5 Par, 15% $120
Common Shares, $10 Par
160
Additional Paid-In Capital - $280
Common Shares
Retained Earnings
$660
Total Shareholders' Equity
$1220
Total Liabilities & Shareholders'$2010
Equity
Sales (All on Account)
$110
$140
$140
$80
$470
$1520
$1990
$130
$40
$270
$440
$400
$840
$120
$160
$280
$590
$1150
$1990
Quade Company Income
Statement For the Year Ended
December 31, Year 2 (dollars
in thousands)
$2400
85
Sales (All on Account)
Costs of Goods Sold
Gross Margin
Operating Expenses
Net Operating Income
Interest Expense
Net Income before Taxes
Income Taxes (30%)
Net Income
$2400
$1680
$720
$280
$440
$40
$400
$120
$280
Total dividends paid during Year 2 were $210,000, of which $18,000 were preferred dividends. The market
price of a common share on December 31, Year 2 was $230.
Required:
Calculate the following for Year 2:
a) Earnings per share.
b) Price-earnings ratio.
c) Dividend yield ratio.
d) Return on total assets.
e) Return on common shareholders' equity.
f) Book value per share.
Answer:
a) Earnings per share = (Net Income - Preferred Dividends)
/Average number of common shares outstanding*
= ($280 - $18)/16
= $16.38
* Number of common shares outstanding = Common shares/Par value
= $160/$10
= 16
b) Price-earnings ratio = Market price per share/Earnings per share*
= $230/$16.38
= 14.0
* See part a) above
c) Dividend yield ratio = Dividends per share*/Market price per share
= $12.00/$230.00
= 5.22%
* Dividends per share = Common dividends/Common shares**
= $192/16
= $12.00
86
Answer:
** See part a) above
d) Return on total assets = Adjusted net income*/Average total assets**
= $308/$2,000
= 15.40%
* Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]
= $280 + 40 × (1 - 0.30)
= $308
** Average total assets = ($2,010 + $1,990)/2
= $2,000
e) Return on common shareholders' equity = (Net income - Preferred dividends)
/Average common shareholders' equity*
= ($280 - $18)/$1,065
= 24.60%
* Average common shareholders' equity = ($1,100 + $1,030)/2
= $1,065
f) Book value per share = Common shareholders' equity
/Number of common shares outstanding*
= $1,100/16
= $68.75
* See part a) above
Topic: 14-08 Earnings per Share, 14-09 Price—Earnings Ratio, 14-10 Dividend Payout and Yield Ratios, 14-13 Return on
Total Assets, 14-16 Book Value per Share
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute and interpret
financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or internal).
196)
Condensed financial statements of Miller Company at the beginning and at the end of the current year are
given below:
Miller Company. Balance Sheet
End of Current YearBeginning of Current
Year
Cash
$10000
$8000
Marketable Securities
20000
22000
Accounts Receivable, Net
90000
110000
Inventories
150000
100000
Prepaid and equipment, net
280000
260000
Total Assets
$550000
$500000
Accounts Payable
80000
$60000
87
Accrued Short Term liabilities 20000
25000
Accrued Short Term liabilities 20000
Bonds Payable
75000
Preferred Shares, 10%, $100 Par50000
Common Shares, $10 Par
100000
Additional Paid-In Capital - 50000
Common Shares
Retained Earnings
175000
Total Liabilities & Equity
550000
Sales (All on Account)
Costs of Goods Sold
Gross Margin
Operating Expenses
Net Operating Income
Interest Expense
Net Income before Taxes
Income Taxes (30%)
Net Income
25000
75000
50000
100000
50000
140000
500000
Miller Company Condensed
Income Statement For the
Current Year
$650000
$350000
$300000
$200000
$100000
$10000
$90000
$40000
$50000
The company paid total dividends of $15,000 during the year, of which $5,000 were to preferred shareholders.
The market price of a common share at the end of the year was $30.
Required:
On the basis of the information given above, fill in the blanks with the appropriate figures.
Example: The current ratio at the end of the current year would be computed by dividing $270,000 by $100,000
a) The acid-test (quick) ratio at the end of the current year would be computed by dividing ________ by
________ .
b) The inventory turnover for the year would be computed by dividing ________ by ________ .
c) The debt-to-equity ratio at the end of the current year would be computed by dividing ________ by
________
d) The earnings per common share would be computed by dividing ________ by ________ .
e) The accounts receivable turnover for the year would be computed by dividing ________ by ________ .
f) The times interest earned for the year would be computed by dividing _______________ by ________ .
g) The return on common shareholders' equity for the year would be computed by dividing ________ by
________ .
h) The dividend yield would be computed by dividing ________ by ________ .
88
Answer:
a) $120,000; $100,000.
b) $350,000; $125,000.
c) $175,000; $375,000.
d) $45,000; 10,000 shares.
e) $650,000; $100,000.
f) $100,000; $10,000.
g) $45,000; $307,500.
h) $1; $30.
Topic: 14-08 Earnings per Share, 14-21 Accounts Receivable Turnover, 14-22 Inventory Turnover, 14-24 Times Interest
Earned Ratio, 14-25 Debt-to-Equity Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute and interpret
financial ratios that would be useful to a common shareholder., 14-03 Compute and interpret financial ratios that
would be useful to a short-term creditor., 14-04 Compute and interpret financial ratios that would be useful to a
long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or internal).
197)
Shelzo Inc., a manufacturer of construction equipment is considering the purchase of one of its
suppliers, Raritron Industries. The purchase has been given preliminary approval by Shelzo's board
of directors, and several discussions have taken place between the management of both companies.
Raritron has submitted financial data for the past several years. Shelzo's controller has analyzed
Raritron's financial statements and prepared the following ratio analysis comparing Raritron's performance
with the industry averages.
Return on common
shareholders' equity
Average sale period
Times interest earned
Price-earnings ratio
Debt-to-equity ratio
Accounts receivable turnover
Current ratio
Dividend yield ratio
Year 3
13.03
Year 2
13.02
Year 1
12.98
Average
12.96
51.16
3.87
10.96
0.50
6.98
1.65
2.08
47.29
3.46
11.23
0.46
7.25
1.95
2.06
42.15
3.28
11.39
0.4
7.83
1.70
2.12
38.63
3.56
11.54
80.57
7.78
2.30
2.25
Required:
Using the information provided above for Raritron Industries:
a)
(1.) Identify the two ratios from the above list that would be of most interest to short-term creditors.
(2.) Explain what these two ratios measure.
(3.) What do these two ratios indicate about Shelzo Inc.?
b)
(1.) Identify the three ratios from the above list that would be of most interest to shareholders.
(2.) Explain what these three ratios measure.
(3.) What do these three ratios indicate about Shelzo Inc.?
89
c)
(1.) Identify the two ratios from the above list that would be of most interest to long-term creditors.
(2.) Explain what these two ratios measure.
(3.) What do these two ratios indicate about Shelzo Inc.?
Answer:
a)
(1.) Two ratios that would be of most interest to short-term creditors would be the average sale period
and the current ratio.
(2.) The average sale period relates the average amount of inventory to the cost of goods sold. This rati
measures the length of time it takes on average to sell inventory and is a gauge of how well the compan
manages its inventory. The current ratio is calculated by dividing current assets by current liabilities.
This ratio measures short-run solvency, i.e., the ability to meet current obligations.
(3.) For Shelzo Inc., the average sale period has been increasing and is well above the industry average
while the current ratio has been below the industry average. Both of these ratios indicate that there may
be problems with the company's liquidity position. This could be caused by poor inventory control.
b)
(1.) The three ratios that would be of most interest to common shareholders are the return on common
shareholders' equity, the price-earnings ratio, and the dividend yield ratio.
(2.) The return on common shareholders' equity is a measure of how effectively the company
has used the shareholders' investment in the company to generate profits. The price-earnings
ratio provides a measure of how the stock market perceives the company's future earnings
prospects. The higher the ratio, the more favourable the future looks for the company. The
dividend yield ratio tells what proportion of the company's profits is paid out as cash dividends to
common shareholders.
(3.) These three ratios are close to the industry averages and there are no discernible significant trends.
c)
(1.) The two ratios that would be of most interest to long-term creditors are times interest earned and
the debt-to-equity ratio.
(2.) Times interest earned is earnings before interest expense and taxes divided by interest expense.
This ratio measures debt-paying ability. If stable, the company will be able to refinance or obtain new
funds at reasonable rates. The debt-to-equity ratio measures the relative proportions of debt and equity
in the company's capital structure. The lower the level of the debt-to-equity ratio, the more security
long-term debtors have.
(3.) For Shelzo Inc., times interest earned has been improving and is currently above the industry
average, indicating that the company should be able to borrow additional funds if needed. The
company's debt-to-equity ratio is below the industry average, which also indicates the company
has the capacity to perhaps take on additional debt.
90
Topic: 14-01 Limitations of Financial Statement Analysis, 14-02 Comparison of Financial Data, 14-03 The Need to Look
beyond Ratios, 14-04 Statements in Comparative and Common-Size Form, 14-05 Dollar and Percentage Changes on
Statements, 14-06 Common-Size Statements, 14-07 Ratio Analysis–The Common Shareholder (Profitability Ratios),
14-08 Earnings per Share, 14-09 Price—Earnings Ratio, 14-10 Dividend Payout and Yield Ratios, 14-11 The
Dividend Payout Ratio, 14-12 The Dividend Yield Ratio, 14-13 Return on Total Assets, 14-14 Return on Common
Shareholders' Equity, 14-15 Financial Leverage, 14-16 Book Value per Share, 14-17 Ratio Analysis–The Short-Term
Creditor (Liquidity Ratios), 14-18 Working Capital, 14-19 Current Ratio, 14-20 Acid-Test (Quick) Ratio, 14-21
Accounts Receivable Turnover, 14-22 Inventory Turnover, 14-23 Ratio Analysis–The Long-Term Creditor (Solvency
Ratios), 14-24 Times Interest Earned Ratio, 14-25 Debt-to-Equity Ratio, 14-26 Summary of Ratios and Sources of
Comparative Information
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute and interpret
financial ratios that would be useful to a common shareholder., 14-03 Compute and interpret financial ratios that
would be useful to a short-term creditor., 14-04 Compute and interpret financial ratios that would be useful to a
long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or internal).
198)
Financial statements for Lowe Company appear below:
Lowe Company Statement of
Financial Position December 31,
Year 2 and Year 1 (dollars in
thousands)
Year 2
Year 1
Cash
$45
$30
Accounts receivable, net
$38
$40
Inventory
$67
$60
Long term investments
$162
$150
Land
$128
$100
Building
98
50
Total Assets
$538
$430
Accounts Payable
$36
$40
Notes Payable, Short Term
$24
$30
Bonds Payable
$35
$50
Mortgage payable
$100
-0Preferred Shares, 12%
$100
$100
Common Shares
195
$170
Retained Earnings
$48
$40
Total Liabilities & Shareholders'$538
$430
Equity
Sales (All on Account)
Costs of Goods Sold
Gross Margin
Lowe Company Income
Statement For the Year Ended
December 31, Year 2 (dollars
in thousands)
$145
$74
$71
91
Gross Margin
$71
Operating Expenses (including$16
interest expense of $5,000)
Net Income before Taxes
$55
Income Taxes (40%)
$22
Net Income
$33
Total dividends paid during the year were $25,000, of which $12,000 was paid to the preferred shareholders.
Required:
Calculate the following for Year 2:
a) Current ratio.
b) Acid-test (quick) ratio.
c) Average collection period (age of receivables).
d) Inventory turnover.
e) Return on total assets.
f) Times interest earned.
g) Debt-to-equity ratio.
Answer:
a) Current ratio = Current assets/Current liabilities
= ($45 + $38 + $67)/($36 + $24)
= 2.5 to 1
b) Acid-test ratio = Quick assets*/Current liabilities
= $83/($36 + $24)
= 1.38 to 1
* Quick assets = Cash + Current receivables
= $45 + $38
= $83
c) Accounts receivable turnover = Sales on account/Average accounts receivable*
= $145/$39
= 3.72 times
* Average accounts receivable = ($38 + $40)/2
= $39
Average collection period = 365 days/Accounts receivable turnover
= 365/3.72
= 98.1 days
d) Inventory turnover = Cost of goods sold/Average inventory*
= $74/$63.5
= 1.17 times
92
Answer:
* Average inventory = ($67 + $60)/2
= $63.5
e) Return on total assets = ((Net income + (Interest expense × (1 - tax rate))
/Average total assets
= (($33 + ($5 × (1 - 0.40))/(($538 + $430)/2))
= $36/$484
= 7.4%
f) Times interest earned = Earnings before interest and taxes/Interest expense
= ($55 + $5)/$5
= 12.00 times
g) Debt-to-equity ratio = Liabilities/Shareholders' equity
= ($36 + $24 + $35 + $100)/($100 + $195 + $48)
= $195/$343
= 0.57 to 1
Topic: 14-01 Limitations of Financial Statement Analysis, 14-02 Comparison of Financial Data, 14-03 The Need to Look
beyond Ratios, 14-04 Statements in Comparative and Common-Size Form, 14-05 Dollar and Percentage Changes on
Statements, 14-06 Common-Size Statements, 14-07 Ratio Analysis–The Common Shareholder (Profitability Ratios),
14-08 Earnings per Share, 14-09 Price—Earnings Ratio, 14-10 Dividend Payout and Yield Ratios, 14-11 The
Dividend Payout Ratio, 14-12 The Dividend Yield Ratio, 14-13 Return on Total Assets, 14-14 Return on Common
Shareholders' Equity, 14-15 Financial Leverage, 14-16 Book Value per Share, 14-17 Ratio Analysis–The Short-Term
Creditor (Liquidity Ratios), 14-18 Working Capital, 14-19 Current Ratio, 14-20 Acid-Test (Quick) Ratio, 14-21
Accounts Receivable Turnover, 14-22 Inventory Turnover, 14-23 Ratio Analysis–The Long-Term Creditor (Solvency
Ratios), 14-24 Times Interest Earned Ratio, 14-25 Debt-to-Equity Ratio, 14-26 Summary of Ratios and Sources of
Comparative Information
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute and interpret
financial ratios that would be useful to a common shareholder., 14-03 Compute and interpret financial ratios that
would be useful to a short-term creditor., 14-04 Compute and interpret financial ratios that would be useful to a
long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or internal).
199)
Several investors are in the process of organizing a new company. The investors feel that $800,000 would be
adequate to finance the new company's operations. Three methods are available to finance the new company:
(1.) All $800,000 could be obtained through the issuance of common shares.
(2.) Common shares could be issued to provide $400,000 with the other $400,000 obtained by issuing $100 par
value, l0% preferred shares.
(3.) Common shares could be issued to provide $40,000 with the other $400,000 obtained by issuing bonds wit
an interest rate of 10%.
The investors are confident that the company could earn $175,000 each year before interest and taxes. The tax
rate is 40%.
Required:
a) If the estimates are correct, compute the net income available to common shareholders under each of the
93
three financing methods proposed above.
b) Using the income data computed in part a) above, compute the return on common shareholders' equity under
each of the three methods.
c) Why do methods 2 and 3 provided a greater return on common equity than does method 1? Why does
method 3 provide a greater return on common equity than method 2?
Answer:
a) Net income available to common shareholders:
Method A
$175,000
Method B
$175,000
Method C
$175,000
-
40,000
$175,000
70,000
$105,000
40,000
$135,000
54,000
$81,000
U
$65,000
$81,000
Method A
Method B
Method C
$105,000
$65,000
$81,000
$800,000
13.10%
$400,000
16.25%
$400,000
20.25%
Income before interest and
taxes
Deduct interest expense: 0.10 ×
$400,00
Income before taxes
$175,000
Deduct income taxes (40%) 70,000
Net income
$105,000
Deduct preferred dividends: 0.10 × $400,000
Net income to common
$105,000
shareholders
b) Return on common equity:
Net income to common
shareholders
Common shareholders'
investment
Return on common equity
c) Methods 2 and 3 provide a greater return on common equity than Method 1 due to the effect
of positive leverage. Methods 2 and 3 each contain sources of funds that require a fixed
annual return on the funds provided. This fixed annual return is less than what is being earned
on the assets of the company, with the difference going to common shareholders.
Method 3 uses debt and provides more leverage than Method 2, in which preferred shares are issued.
The difference is due to the deductibility for tax purposes of the interest on debt, whereas dividends on
preferred shares are not deductible for tax purposes.
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-08 Earnings per Share
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute and interpret
financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or internal).
94
200)
Financial statements for Raridan Company appear below:
Raridan Company Statement of
Financial Position December 31,
Year 2 and Year 1 (dollars in
thousands)
Year 2
Year 1
Current Assets:
Cash and Marketable Securities$140
Accounts Receivable, Net
$190
Inventory
$100
Prepaid Expenses
$70
Total Current Assets
$500
Noncurrent Assets:
Plant & Equipment, Net
$1540
Total Assets
$2040
Current Liabilities:
Accounts Payable
$110
Accrued Liabilities
$50
Notes Payable, Short Term
$110
Total Current Liabilities
$270
Noncurrent Liabilities:
Bonds Payable
$280
Total Liabilities
$550
Shareholders' Equity:
Preferred Shares, $10 Par, 5% $120
Common Shares, $10 Par
200
Additional Paid-In Capital - $260
Common Shares
Retained Earnings
$910
Total Shareholders' Equity
$1490
Total Liabilities & Shareholders'$2040
Equity
Sales (All on Account)
Costs of Goods Sold
Gross Margin
Operating Expenses
Net Operating Income
$140
$170
$110
$70
$490
$1520
$2010
$110
$40
$110
$260
$300
$560
$120
$200
$260
$870
$1450
$2010
Raridan Company Income
Statement For the Year Ended
December 31, Year 2 (dollars
in thousands)
$1900
$1330
$570
$220
95
$350
Net Operating Income
Interest Expense
Net Income before Taxes
Income Taxes (30%)
Net Income
$350
$30
$320
$96
$224
Required:
Calculate the following for Year 2:
a) Current ratio.
b) Acid-test (quick) ratio.
c) Average collection period (age of receivables).
d) Inventory turnover.
e) Times interest earned.
f) Debt-to-equity ratio.
Answer:
a) Current ratio = Current assets/Current liabilities
= $500/$270
= 1.85 to 1
b) Acid-test ratio = Quick assets*/Current liabilities
= $330/$270
= 1.22 to 1
* Quick assets = Cash + Marketable securities + Current receivables
= $140 + $190
= $330
c) Accounts receivable turnover = Sales on account/Average accounts receivable*
= $1,900/$180
= 10.56 times
* Average accounts receivable = ($190 + $170)/2
= $180
Average collection period = 365 days/Accounts receivable turnover
= 365/10.56
= 34.6 days
d) Inventory turnover = Cost of goods sold/Average inventory*
= $1,330/$105
= 12.67 times
* Average inventory = ($100 + $110)/2
= $105
96
Answer:
e) Times interest earned = Net operating income/Interest expense
= $350/$30
= 11.67 times
f) Debt-to-equity ratio = Liabilities/Shareholders' equity
= $550/$1,490
= 0.37 to 1
Topic: 14-20 Acid-Test (Quick) Ratio, 14-21 Accounts Receivable Turnover, 14-22 Inventory Turnover, 14-24 Times
Interest Earned Ratio, 14-25 Debt-to-Equity Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute and interpret
financial ratios that would be useful to a short-term creditor., 14-04 Compute and interpret financial ratios that would
be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or internal).
201)
Financial statements for Rarig Company appear below:
Rarig Company Statement of
Financial Position December 31,
Year 2 and Year 1 (dollars in
thousands)
Year 2
Year 1
Current Assets:
Cash and Marketable Securities
Accounts Receivable, Net
Inventory
Prepaid Expenses
Total Current Assets
Noncurrent Assets:
Plant & Equipment, Net
Total Assets
Current Liabilities:
Accounts Payable
Accrued Liabilities
Notes Payable, Short Term
Total Current Liabilities
Noncurrent Liabilities:
Bonds Payable
Total Liabilities
Shareholders' Equity:
Preferred Shares, $5 Par, 15%
Common Shares, $5 Par
Additional Paid-In Capital - Common
Shares
Retained Earnings
Total Shareholders' Equity
Total Liabilities & Shareholders' Equity
$210
$160
$190
$30
$590
$190
$150
$180
$30
$550
$1500
$2090
$1470
$2020
$170
$60
$80
$310
$190
$60
$120
$370
$460
$770
$500
$870
$100
160
$110
$100
$160
$110
$950
$1320
$2090
$780
$1150
$2020
97
Total Liabilities & Shareholders' Equity $2090
$2020
Rarig Company Income
Statement For the Year Ended
December 31, Year 2 (dollars
in thousands)
Sales (All on Account) $1800
Costs of Goods Sold
$1260
Gross Margin
$540
Operating Expenses
$210
Net Operating Income $330
Interest Expense
$50
Net Income before Taxes $280
Income Taxes (30%)
$84
Net Income
$196
Required:
Calculate the following for Year 2:
a) Current ratio.
b) Acid-test (quick) ratio.
c) Average collection period (age of receivables).
d) Inventory turnover.
e) Times interest earned.
f) Debt-to-equity ratio.
Answer:
a) Current ratio = Current assets/Current liabilities
= $590/$310
= 1.90 to 1
b) Acid-test ratio = Quick assets*/Current liabilities
= $370/$310
= 1.19 to 1
* Quick assets = Cash + Marketable securities + Current receivables
= $210 + $160
= $370
c) Accounts receivable turnover = Sales on account/Average accounts receivable*
= $1,800/$155
= 11.61 times
* Average accounts receivable = ($160 + $150)/2
= $155
98
Answer:
Average collection period = 365 days/Accounts receivable turnover
= 365/11.61
= 31.4 days
d) Inventory turnover = Cost of goods sold/Average inventory*
= $1,260/$185
= 6.81 times
* Average inventory = ($190 + $180)/2
= $185
e) Times interest earned = Net operating income/Interest expense
= $330/$50
= 6.60 times
f) Debt-to-equity ratio = Liabilities/Shareholders' equity
= $770/$1,320
= 0.58 to 1
Topic: 14-01 Limitations of Financial Statement Analysis, 14-02 Comparison of Financial Data, 14-03 The Need to Look
beyond Ratios, 14-04 Statements in Comparative and Common-Size Form, 14-05 Dollar and Percentage Changes on
Statements, 14-06 Common-Size Statements, 14-07 Ratio Analysis–The Common Shareholder (Profitability Ratios),
14-08 Earnings per Share, 14-09 Price—Earnings Ratio, 14-10 Dividend Payout and Yield Ratios, 14-11 The
Dividend Payout Ratio, 14-12 The Dividend Yield Ratio, 14-13 Return on Total Assets, 14-14 Return on Common
Shareholders' Equity, 14-15 Financial Leverage, 14-16 Book Value per Share, 14-17 Ratio Analysis–The Short-Term
Creditor (Liquidity Ratios), 14-18 Working Capital, 14-19 Current Ratio, 14-20 Acid-Test (Quick) Ratio, 14-21
Accounts Receivable Turnover, 14-22 Inventory Turnover, 14-23 Ratio Analysis–The Long-Term Creditor (Solvency
Ratios), 14-24 Times Interest Earned Ratio, 14-25 Debt-to-Equity Ratio, 14-26 Summary of Ratios and Sources of
Comparative Information
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute and interpret
financial ratios that would be useful to a common shareholder., 14-03 Compute and interpret financial ratios that
would be useful to a short-term creditor., 14-04 Compute and interpret financial ratios that would be useful to a
long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or internal).
202)
Financial statements for Rarity Company appear below:
Rarity Company Statement of
Financial Position December 31,
Year 2 and Year 1 (dollars in
thousands)
Year 2
Year 1
Current Assets:
Cash and Marketable Securities$210
Accounts Receivable, Net
$130
Inventory
$90
Prepaid Expenses
$70
Total Current Assets
$500
Noncurrent Assets:
Plant & Equipment, Net
$1440
$180
$120
$110
$70
$480
99
$1400
Plant & Equipment, Net
$1440
Total Assets
$1940
Current Liabilities:
Accounts Payable
$180
Accrued Liabilities
$60
Notes Payable, Short Term
$240
Total Current Liabilities
$480
Noncurrent Liabilities:
Bonds Payable
$480
Total Liabilities
$960
Shareholders' Equity:
Preferred Shares, $10 Par, 5% $100
Common Shares, $5 Par
220
Additional Paid-In Capital - $200
Common Shares
Retained Earnings
$460
Total Shareholders' Equity
$980
Total Liabilities & Shareholders'$1940
Equity
Sales (All on Account)
Costs of Goods Sold
Gross Margin
Operating Expenses
Net Operating Income
Interest Expense
Net Income before Taxes
Income Taxes (30%)
Net Income
$1400
$1880
$170
$80
$240
$490
$500
$990
$100
$220
$200
$370
$890
$1880
Rarity Company Income
Statement For the Year Ended
December 31, Year 2 (dollars
in thousands)
$1100
$770
$330
$130
$200
$50
$150
$45
$105
Required:
Calculate the following for Year 2:
a) Current ratio.
b) Acid-test (quick) ratio.
c) Average collection period (age of receivables).
d) Inventory turnover.
e) Times interest earned.
f) Debt-to-equity ratio.
100
Answer:
a) Current ratio = Current assets/Current liabilities
= $500/$480
= 1.04 to 1
b) Acid-test ratio = Quick assets*/Current liabilities
= $340/$480
= 0.71 to 1
* Quick assets = Cash + Marketable securities + Current receivables
= $210 + $130
= $340
c) Accounts receivable turnover = Sales on account/Average accounts receivable*
= $1,100/$125
= 8.80 times
* Average accounts receivable = ($130 + $120)/2
= $125
Average collection period = 365 days/Accounts receivable turnover
= 365/8.80
= 41.5 days
d) Inventory turnover = Cost of goods sold/Average inventory*
= $770/$100
= 7.70 times
* Average inventory = ($90 + $110)/2
= $100
e) Times interest earned = Net operating income/Interest expense
= $200/$50
= 4.00 times
f) Debt-to-equity ratio = Liabilities/Shareholders' equity
= $960/$980
= 0.98 to 1
Topic: 14-19 Current Ratio, 14-20 Acid-Test (Quick) Ratio, 14-21 Accounts Receivable Turnover, 14-22 Inventory
Turnover, 14-24 Times Interest Earned Ratio, 14-25 Debt-to-Equity Ratio
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-03 Compute and interpret
financial ratios that would be useful to a short-term creditor., 14-04 Compute and interpret financial ratios that would
be useful to a long-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or internal).
101
203)
Financial statements for Sarosa Company appear below:
Sarosa Company Statement of
Financial Position December 31, Year
2 and Year 1 (dollars in thousands)
Year 2
Year 1
Current Assets:
Cash and Marketable Securities$150
Accounts Receivable, Net
$190
Inventory
$150
Prepaid Expenses
$40
Total Current Assets
$530
Noncurrent Assets:
Plant & Equipment, Net
$1990
Total Assets
$2520
Current Liabilities:
Accounts Payable
$140
Accrued Liabilities
$10
Notes Payable, Short Term
$190
Total Current Liabilities
$340
Noncurrent Liabilities:
Bonds Payable
$370
Total Liabilities
$710
Shareholders' Equity:
Preferred Shares, $20 Par, 10%$100
Common Shares, $10 Par
220
Additional Paid-In Capital - $250
Common Shares
Retained Earnings
$1240
Total Shareholders' Equity
$1810
Total Liabilities & Shareholders'$2520
Equity
Sales (All on Account)
Costs of Goods Sold
Gross Margin
Operating Expenses
Net Operating Income
Interest Expense
$120
$160
$150
$40
$470
$1980
$2450
$170
$40
$200
$410
$400
$810
$100
$220
$250
$1070
$1640
$2450
Sarosa Company Income
Statement For the Year Ended
December 31, Year 2 (dollars
in thousands)
$1870
$1300
$570
$220
$350
102
$40
Interest Expense
Net Income before Taxes
Income Taxes (30%)
Net Income
$40
$310
$93
$217
Required:
a) Calculate Sarosa Company's return on total assets for Year 2.
b) Calculate Sarosa Company's return on common shareholders' equity for Year 2.
c) Financial leverage was positive for Year 2. Why?
d) Assume all current liabilities are interest free and that the interest expense of $40 is for the bonds payable.
(i) Calculate the dollar amount of the financial leverage (in $1,000)
(ii) Allocate the dollar amount of the financial leverage to the following sources of financing: Preferred
Shares, Bonds Payable, and Current Liabilities (rounded to the nearest $1,000)
Answer:
a) Return on total assets = Adjusted net income*/Average total assets**
= $245/$2,485
= 9.86%
* Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]
= $217 + 40 × (1 - 0.30)
= $217 + $28
= $245
** Average total assets = ($2,520 + $2,450)/2
= $2,485
b) Return on common shareholders' equity = (Net income - Preferred dividends)
/Average common shareholders' equity*
= [($217 - ($100 × 0.10)]/$1,625
= 12.74%
* Average common shareholders' equity = [($1,810 - $100) + ($1,640 - $100)]/2
= ($1,710 + $1,540)/2
= $1,625
c) Financial leverage is positive because return on common shareholders' equity is greater than return
on total assets.
d)
(i) Dollar amount of financial leverage = (12.74% - 9.86%) × $1,625
= 2.88% × $1,625
= $47
(ii) Allocations:
Preferred shares = (9.86% - 10%) × $100
103
Answer:
= -0.14% × $100
= 0 (rounded)
Bonds payable = (9.86% × [($370 + 400)/2]) - $40 × (1 - 30%)
= (9.86% × $385) - $28
= $38 - $28
= 10
Current liabilities = (9.86% - 0%) × [($340 + $410)/2]
= $37 (rounded)
Note: The dollar amount of return on common shareholders' equity is $207 (that is, net income
of $217 less $10 dividends to preferred shareholders) is made up of $160 (assuming zero
financial leverage calculated as 9.86% × $1,625) and net positive financial leverage of $47
Topic: 14-13 Return on Total Assets, 14-14 Return on Common Shareholders' Equity, 14-15 Financial Leverage
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute and interpret
financial ratios that would be useful to a common shareholder.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or internal).
104