Chapter 18
“How Well Am I Doing?” Financial Statement Analysis
True/False
1.
F
Medium
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.
2.
T
Easy
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.
3.
T
Easy
The gross margin percentage is computed taking the difference
between sales and cost of goods and then dividing the result by
sales.
4.
F
Medium
The gross margin percentage is computed by dividing net income
before interest and taxes by sales.
5.
F
Easy
The price-earnings ratio is determined by dividing the price of
a product by its profit margin.
6.
T
Easy
The price-earnings ratio is computed by dividing the market
price per share by the current earnings per share.
7.
F
Medium
When computing the return on total assets, the after-tax effect
of interest expense must be subtracted from net income.
8.
F
Medium
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.
9.
F
Easy
If the market value of a share of stock is greater than its
book value, the stock is probably overpriced.
10.
T
Hard
Working capital equals current assets, plus noncurrent
liabilities and stockholders' equity, less total assets.
664Managerial Accounting, 9/e
11.
T
Medium
Assuming that a company has a current ratio greater than 1.0 to
1, repaying a short-term note payable will increase the current
ratio.
12.
F
Medium
The acid-test ratio is a test of the quality of accounts
receivable--in other words, whether they are likely to be
collected.
13.
T
Medium
When computing the acid-test ratio, prepaid expenses are
ignored.
14.
T
Easy
Only credit sales (i.e., sales on account) are included in the
computation of the accounts receivable turnover.
15.
F
Easy
The inventory turnover ratio is equal to the average inventory
balance divided by the cost of goods sold.
Multiple Choice
16.
D
Easy
Horizontal analysis of financial statements is accomplished
through:
a. placing statement items on an after-tax basis.
b. common-size statements.
c. computing both earnings per share and the price-earnings
ratio.
d. trend percentages.
17.
D
Easy
The gross margin percentage is most likely to be used to
assess:
a. how quickly accounts receivables can be collected.
b. how quickly inventories are sold.
c. the efficiency of administrative departments.
d. the overall profitability of the company's products.
18.
C
Medium
Earnings per share of common stock will immediately increase as
a result of:
a. the sale of additional shares of common stock by the
company.
b. an increase in the dividends paid to common stockholders by
the company.
c. an increase in the company's net income.
d. the issuance of bonds by the company to finance construction
of new buildings.
Managerial Accounting, 9/e
665
19.
C
Easy
The market price of XYZ Company's common stock dropped from $25
to $21 per share. The dividend paid per share remained
unchanged. The company’s dividend payout ratio would:
a. increase.
b. decrease.
c. be unchanged.
d. impossible to determine without more information.
20.
A
Medium
CMA
adapted
An increase in the market price of a company’s common stock
will immediately affect its:
a. dividend yield ratio.
b. debt-to-equity ratio.
c. earnings per share of common stock.
d. dividend payout ratio.
21.
D
Medium
Which of the following is true regarding the calculation of
return on total assets?
a. The numerator of the ratio consists only of net income.
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 of net income plus
interest expense times the tax rate.
d. The numerator of the ratio consists of net income plus
interest expense times one minus the tax rate.
22.
D
Medium
Financial leverage is negative when:
a. the return on total assets is less than the rate of return
on common stockholders' equity.
b. total liabilities are less than stockholders' equity.
c. total liabilities are less than total assets.
d. the return on total assets is less than the rate of return
demanded by creditors.
23.
D
Medium
Which of the following is not a source of financial leverage?
a. Bonds payable.
b. Accounts payable.
c. Preferred stock.
d. Retained earnings.
24.
A
Medium
If a company's bonds bear an interest rate of 8%, the tax rate
is 30%, and the company's assets are generating an after-tax
return of 7%, then the leverage would be:
a. positive.
b. negative.
c. neither positive or negative.
d. impossible to determine without knowing the return on common
stockholders' equity.
666Managerial Accounting, 9/e
25.
D
Medium
CMA
adapted
A company’s
than 1.0 to
would:
a. decrease
b. increase
c. increase
d. decrease
current ratio and acid-test ratios are both greater
1. If obsolete inventory is written off, this
26.
D
Medium
If a company converts a short-term note payable into a longterm note payable, this transaction would:
a. decrease working capital and increase the current ratio.
b. decrease working capital and decrease the current ratio.
c. decrease the current ratio and decrease the acid-test ratio.
d. increase working capital and increase the current ratio.
27.
B
Hard
CMA
adapted
Which one of the following would increase the working capital
of a company?
a. Cash payment of payroll taxes payable.
b. Refinancing a short-term note payable with a two year note
payable.
c. Cash collection of accounts receivable.
d. Payment of a 20-year mortgage payable with cash.
28.
A
Medium
Sale of a piece of equipment at book value for cash will:
a. increase working capital.
b. decrease working capital.
c. decrease the debt-to-equity ratio.
d. increase net income.
29.
B
Medium
CMA
adapted
If a firm has a high current ratio but a low acid-test ratio,
one can conclude that:
a. the firm has a large outstanding accounts receivable
balance.
b. the firm has a large investment in inventory.
c. the firm has a large amount of current liabilities.
d. the firm's financial leverage is very high.
30
B
Hard
Desktop Co. presently has a current ratio of 1.2 to 1 and an
acid-test ratio of 0.8 to 1. Prepaying next year's office rent
of $50,000 will:
a. have no effect on either the company's current ratio or its
acid-test ratio.
b. have no effect on the company's current ratio but will
decrease its acid-test ratio.
c. decrease the company's current ratio and decrease its acidtest ratio.
d. increase the company's current ratio and increase its acidtest ratio.
the
the
net
the
acid-test ratio.
acid-test ratio.
working capital.
current ratio.
Managerial Accounting, 9/e
667
31.
A
Medium
The Miller Company paid off some of its accounts payable using
cash. The company's current ratio is greater than 1.0 to 1. The
company’s current ratio would:
a. increase.
b. decrease.
c. remain unchanged.
d. impossible to determine from the information given.
32.
A
Hard
Rahner Company has a current ratio of 1.75 to 1. This ratio
will decrease if Rahner Company:
a. borrows cash using a six-month note.
b. pays the taxes payable which have been a current liability.
c. pays the following month's rent on the last day of the year.
d. sells inventory for more than their cost.
33.
D
Easy
Which of the following accounts would be included in the
calculation of the acid-test ratio:
a.
b.
c.
d.
Accounts Receivable
yes
no
no
yes
Prepaid Expense
yes
yes
no
no
Inventory
no
yes
yes
no
34.
C
Medium
Allen Company's average collection period for accounts
receivable was 40 days last year, but increased to 60 days this
year. Which of the following would most likely account for this
change?
a. a decrease in accounts receivable relative to sales.
b. a decrease in sales.
c. a relaxation of credit policies.
d. an increase in sales.
35.
B
Hard
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, then the
total sales for the year were:
a. $1,445,000.
b. $1,700,000.
c. $1,900,000.
d. $1,500,000.
668Managerial Accounting, 9/e
36.
A
Hard
CMA
adapted
Selected data from Sheridan Corporation’s year-end financial
statements are presented below. The difference between average
and ending inventory is immaterial.
Current ratio ............
Acid-test ratio ..........
Current liabilities ......
Inventory turnover .......
Gross profit margin ......
2.0
1.5
$120,000
8 times
40%
Sheridan's sales for the year was:
a. $800,000.
b. $480,000.
c. $1,200,000.
d. $240,000.
37.
C
Hard
Fulton Company's price-earnings ratio is 8.0 and the market
price of a share of common stock is $32. The company has 3,000
shares of preferred stock outstanding with each share receiving
a dividend of $3 per share. The earnings per share of common
stock is:
a. $10.
b. $7.
c. $4.
d. $3.
38.
C
Hard
Perlman Company had 100,000 shares of common stock and 20,000
shares of preferred stock at the end of the year just
completed. Preferred stockholders received dividends totaling
$140,000. Common stockholders received dividends totaling
$210,000. If the dividend payout ratio for the year was 70%,
then the net income for the year was:
a. $300,000.
b. $287,000.
c. $440,000.
d. $147,000.
39.
C
Medium
NOTE TO THE INSTRUCTOR: Questions 39, 40, and 41 are different
versions of the same question.
Arlberg Company's net income last year was $250,000. The
company has 150,000 shares of common stock and 80,000 shares of
preferred stock outstanding. There was no change in the number
of common or preferred shares outstanding during the year. The
company declared and paid dividends last year of $1.30 per
share on the common stock and $1.40 per share on the preferred
stock. The earnings per share of common stock is closest to:
a. $1.67.
b. $2.41.
c. $0.92.
d. $0.37.
Managerial Accounting, 9/e
669
40.
C
Medium
NOTE TO THE INSTRUCTOR: Questions 39, 40, and 41 are different
versions of the same question.
Arget Company's net income last year was $600,000. The company
has 150,000 shares of common stock and 60,000 shares of
preferred stock outstanding. There was no change in the number
of common or preferred shares outstanding during the year. The
company declared and paid dividends last year of $1.10 per
share on the common stock and $0.60 per share on the preferred
stock. The earnings per share of common stock is closest to:
a. $4.24.
b. $4.00.
c. $3.76.
d. $2.90.
41.
D
Medium
NOTE TO THE INSTRUCTOR: Questions 39, 40, and 41 are different
versions of the same question.
Arquandt Company's net income last year was $550,000. The
company has 150,000 shares of common stock and 50,000 shares of
preferred stock outstanding. There was no change in the number
of common or preferred shares outstanding during the year. The
company declared and paid dividends last year of $1.20 per
share on the common stock and $1.70 per share on the preferred
stock. The earnings per share of common stock is closest to:
a. $3.67.
b. $2.47.
c. $4.23.
d. $3.10.
42.
C
Easy
NOTE TO THE INSTRUCTOR: Questions 42 and 43 are different
versions of the same question.
The following data have been taken from your company's
financial records for the current year:
Earnings per share ......
Dividend per share ......
Market price per share ..
Book value per share ....
The price-earnings ratio is:
a. 1.67 to 1.
b. 15.0 to 1.
c. 9.0 to 1.
d. 7.0 to 1.
670Managerial Accounting, 9/e
$10
$6
$90
$70
43.
C
Easy
NOTE TO THE INSTRUCTOR: Questions 42 and 43 are different
versions of the same question.
The following data have been taken from your company's
financial records for the current year:
Earnings per share ...... $15
Dividend per share ......
$9
Market price per share .. $120
Book value per share .... $90
The price-earnings ratio is:
a. 12.5 to 1.
b. 6.0 to 1.
c. 8.0 to 1.
d. 7.5 to 1.
44.
D
Medium
Information concerning the common stock of Morris Company as of
the end of the company's fiscal year is presented below.
Number of shares outstanding ...... 460,000
Par value per share ...............
$5.00
Dividends paid per share ..........
$6.00
Market price per share ............ $54.00
Earnings per share ................ $18.00
The dividend yield ratio is closest to:
a. 50.0%.
b. 33.3%.
c. 120.0%.
d. 11.1%.
45.
D
Hard
Cameron Company had 50,000 shares of common stock issued and
outstanding during the year just ended. 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 stock for the year was $400,000.
Cameron Company's dividend yield ratio for the year was:
a. 20.00%
b. 11.43%.
c. 9.41%.
d. 8.89%.
Managerial Accounting, 9/e
671
46.
C
Medium
NOTE TO THE INSTRUCTOR: Questions 46, 47, and 48 are different
versions of the same question.
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:
a. 13.5%.
b. 12.4%.
c. 13.0%.
d. 11.9%.
47.
D
Medium
NOTE TO THE INSTRUCTOR: Questions 46, 47, and 48 are different
versions of the same question.
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:
a. 12.5%.
b. 13.4%.
c. 15.6%.
d. 14.7%.
48.
A
Medium
NOTE TO THE INSTRUCTOR: Questions 46, 47, and 48 are different
versions of the same question.
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:
a. 10.8%.
b. 8.6%.
c. 11.7%.
d. 9.5%.
49.
C
Medium
The total assets of the Philbin Company on January 1, 19x9 were
$2.3 million and on December 31, 19x9 were $2.5 million. Net
income for 19x9 was $188,000. Dividends for 19x9 totaled
$75,000, interest expenses totaled $70,000, and the tax rate
was 30%. The return on total assets for 19x9 was closest to:
a. 9.5%.
b. 6.8%.
c. 9.9%.
d. 10.8%.
672Managerial Accounting, 9/e
50.
C
Medium
CPA
adapted
Selected financial data for Irvington Company appear below:
Account Balances
o
Beginning
End of
of year
year
Preferred stock ......... $125,000
$125,000
Common stock ............. 300,000
400,000
Retained earnings.........
75,000
185,000
During the year, the company paid dividends of $10,000 on its
preferred stock. The company's net income for the year was
$120,000. The company's return on common stockholders' equity
for the year is closest to:
a. 17%.
b. 19%.
c. 23%.
d. 25%.
51.
A
Easy
NOTE TO THE INSTRUCTOR: Questions 51, 52, and 53 are different
versions of the same question.
Crasler Company's net income last year was $100,000. The
company paid preferred dividends of $20,000 and its average
common stockholders' equity was $580,000. The company's return
on common stockholders' equity for the year was closest to:
a. 13.8%.
b. 3.4%.
c. 20.7%.
d. 17.2%.
52.
D
Easy
NOTE TO THE INSTRUCTOR: Questions 51, 52, and 53 are different
versions of the same question.
Crawler Company's net income last year was $80,000. The company
paid preferred dividends of $10,000 and its average common
stockholders' equity was $400,000. The company's return on
common stockholders' equity for the year was closest to:
a. 20.0%.
b. 22.5%.
c. 2.5%.
d. 17.5%.
Managerial Accounting, 9/e
673
53.
C
Easy
NOTE TO THE INSTRUCTOR: Questions 51, 52, and 53 are different
versions of the same question.
Crabtree Company's net income last year was $50,000. The
company paid preferred dividends of $20,000 and its average
common stockholders' equity was $440,000. The company's return
on common stockholders' equity for the year was closest to:
a. 15.9%.
b. 11.4%.
c. 6.8%.
d. 4.5%.
54.
A
Medium
The following account balances have been provided for the end
of the most recent year:
Total
Total
Total
Total
assets
stockholders' equity
common stock
preferred stock
$150,000
$120,000
$50,000
$10,000
(5,000 shares)
(1,000 shares)
The book value per share of common stock is:
a. $22.
b. $25.
c. $20.
d. $28.
55.
A
Medium
NOTE TO THE INSTRUCTOR: Questions 55, 56, and 57 are different
versions of the same question.
Dratif Company's working capital is $33,000 and its current
liabilities are $80,000. The company's current ratio is closest
to:
a. 1.41 to 1.
b. 0.59 to 1.
c. 3.42 to 1.
d. 0.41 to 1.
56.
D
Medium
NOTE TO THE INSTRUCTOR: Questions 55, 56, and 57 are different
versions of the same question.
Dragin Company's working capital is $36,000 and its current
liabilities are $61,000. The company's current ratio is closest
to:
a. 2.69 to 1.
b. 0.41 to 1.
c. 0.59 to 1.
d. 1.59 to 1.
674Managerial Accounting, 9/e
57.
B
Medium
NOTE TO THE INSTRUCTOR: Questions 55, 56, and 57 are different
versions of the same question.
Draban Company's working capital is $38,000 and its current
liabilities are $59,000. The company's current ratio is closest
to:
a. 0.36 to 1.
b. 1.64 to 1.
c. 0.64 to 1.
d. 2.55 to 1.
58.
C
Hard
At the end of the year just completed, Orem Company's current
liabilities totaled $75,000, and its long-term liabilities
totaled $225,000. Working capital at year-end was $100,000. If
the company's debt-to-equity ratio is 0.30 to 1, total longterm assets must equal:
a. $1,000,000.
b. $1,300,000.
c. $1,125,000.
d. $1,225,000.
59.
B
Hard
CMA
adapted
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. Refinancing $50,000 of short-term debt with long-term debt.
c. Acquisition of land valued at $50,000 by issuing new common
stock.
d. Purchase of $50,000 of marketable securities for cash.
60.
C
Hard
CMA
adapted
Selected year-end data for the Brayer Company are presented
below:
Current liabilities ........ $600,000
Acid-test ratio ............ 2.5 to 1
Current ratio .............. 3.0 to 1
Cost of goods sold ......... $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:
a. 1.20 times.
b. 2.40 times.
c. 1.67 times.
d. 2.33 times.
Managerial Accounting, 9/e
675
61.
A
Hard
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. Harwichport
Company's inventory must be:
a. $30,000.
b. $40,000.
c. $50,000.
d. $35,000.
62.
A
Hard
Ben Company has the following data for the year just ended:
Cash ....................
Accounts Receivable .....
Inventory ...............
Current ratio ...........
Acid test ratio .........
?
$28,000
$35,000
2.4 to 1
1.6 to 1
Ben Company's current liabilities were:
a. $43,750.
b. $50,400.
c. $35,000.
d. $63,000.
63.
C
Hard
CMA
adapted
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, the maximum new shortterm debt that can be issued to finance an equivalent amount of
inventory expansion is:
a. $ 41.67 million.
b. $375.00 million.
c. $125.00 million.
d. $ 62.50 million.
64.
B
Easy
NOTE TO THE INSTRUCTOR: Questions 64, 65, and 66 are different
versions of the same question.
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:
a. 1.78 to 1.
b. 1.24 to 1.
c. 0.80 to 1.
d. 0.44 to 1.
676Managerial Accounting, 9/e
65.
C
Easy
NOTE TO THE INSTRUCTOR: Questions 64, 65, and 66 are different
versions of the same question.
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:
a. 0.75 to 1.
b. 1.02 to 1.
c. 0.86 to 1.
d. 0.53 to 1.
66.
A
Easy
NOTE TO THE INSTRUCTOR: Questions 64, 65, and 66 are different
versions of the same question.
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:
a. 1.43 to 1.
b. 0.95 to 1.
c. 1.33 to 1.
d. 1.88 to 1.
67.
D
Hard
CPA
adapted
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. Eastham Company's total
sales for the year were:
a. $ 800,000.
b. $1,300,000.
c. $3,300,000.
d. $3,800,000.
68.
C
Easy
NOTE TO THE INSTRUCTOR: Questions 68, 69, and 70 are different
versions of the same question.
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:
a. 5.00 times.
b. 13.00 times.
c. 10.00 times.
d. 8.13 times.
Managerial Accounting, 9/e
677
69.
D
Easy
NOTE TO THE INSTRUCTOR: Questions 68, 69, and 70 are different
versions of the same question.
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:
a. 6.25 times.
b. 7.14 times.
c. 3.33 times.
d. 6.67 times.
70.
B
Easy
NOTE TO THE INSTRUCTOR: Questions 68, 69, and 70 are different
versions of the same question.
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:
a. 4.69 times.
b. 9.38 times.
c. 8.33 times.
d. 10.71 times.
71.
B
Easy
NOTE TO THE INSTRUCTOR: Questions 71, 72, and 73 are different
versions of the same question.
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:
a. 20.28 days.
b. 28.39 days.
c. 36.50 days.
d. 56.78 days.
72.
A
Easy
NOTE TO THE INSTRUCTOR: Questions 71, 72, and 73 are different
versions of the same question.
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:
a. 47.73 days.
b. 50.54 days.
c. 44.92 days.
d. 95.46 days.
678Managerial Accounting, 9/e
73.
D
Easy
NOTE TO THE INSTRUCTOR: Questions 71, 72, and 73 are different
versions of the same question.
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:
a. 24.33 days.
b. 58.40 days.
c. 34.07 days.
d. 29.20 days.
74.
B
Easy
NOTE TO THE INSTRUCTOR: Questions 74, 75, and 76 are different
versions of the same question.
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:
a. 12.08 times.
b. 11.60 times.
c. 5.80 times.
d. 11.15 times.
75.
D
Easy
NOTE TO THE INSTRUCTOR: Questions 74, 75, and 76 are different
versions of the same question.
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:
a. 5.95 times.
b. 11.36 times.
c. 12.50 times.
d. 11.90 times.
76.
C
Easy
NOTE TO THE INSTRUCTOR: Questions 74, 75, and 76 are different
versions of the same question.
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:
a. 6.15 times.
b. 8.00 times.
c. 6.96 times.
d. 3.48 times.
Managerial Accounting, 9/e
679
77.
A
Easy
NOTE TO THE INSTRUCTOR: Questions 77, 78, and 79 are different
versions of the same question.
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:
a. 36.50 days.
b. 73.00 days.
c. 38.09 days.
d. 34.91 days.
78.
D
Easy
NOTE TO THE INSTRUCTOR: Questions 77, 78, and 79 are different
versions of the same question.
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:
a. 55.82 days.
b. 60.12 days.
c. 115.94 days.
d. 57.97 days.
79.
A
Easy
NOTE TO THE INSTRUCTOR: Questions 77, 78, and 79 are different
versions of the same question.
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:
a. 60.83 days.
b. 63.27 days.
c. 58.40 days.
d. 121.67 days.
80.
C
Hard
CPA
adapted
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. 5.0 times.
b. 5.3 times.
c. 6.0 times.
d. 6.4 times.
81.
A
Hard
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, then the inventory turnover for the year was:
a. 2.77 times.
b. 2.57 times.
c. 3.00 times.
d. 2.62 times.
680Managerial Accounting, 9/e
82.
D
Easy
NOTE TO THE INSTRUCTOR: Questions 82, 83, and 84 are different
versions of the same question.
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:
a. 10.00 times.
b. 11.00 times.
c. 5.30 times.
d. 14.70 times.
83.
C
Easy
NOTE TO THE INSTRUCTOR: Questions 82, 83, and 84 are different
versions of the same question.
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:
a. 9.00 times.
b. 4.90 times.
c. 13.10 times.
d. 10.00 times.
84.
B
Easy
NOTE TO THE INSTRUCTOR: Questions 82, 83, and 84 are different
versions of the same question.
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:
a. 9.00 times.
b. 12.30 times.
c. 8.00 times.
d. 3.70 times.
85.
B
Hard
The times interest earned ratio of McHugh Company is 4.5 times.
The interest expense for the year was $20,000, and the
company's tax rate is 40%. The company's net income is:
a. $22,000.
b. $42,000.
c. $54,000.
d. $66,000.
86.
D
Hard
Mariah Company has a times interest earned ratio of 3.0 for the
year just ended. The company's tax rate is 40% and the interest
expense for the year was $25,000. Mariah Company's after-tax
net income was:
a. $50,000.
b. $75,000.
c. $25,000.
d. $30,000.
Managerial Accounting, 9/e
681
87.
A
Hard
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. PFM
Company's times interest earned ratio is:
a. 7.25 times.
b. 4.375 times.
c. 5.375 times.
d. 15.5 times.
88.
B
Easy
NOTE TO THE INSTRUCTOR: Questions 88, 89, and 90 are different
versions of the same question.
Karma Company has total assets of $190,000 and total
liabilities of $90,000. The company's debt-to-equity ratio is
closest to:
a. 0.47 to 1.
b. 0.90 to 1.
c. 0.53 to 1.
d. 0.32 to 1.
89.
D
Easy
NOTE TO THE INSTRUCTOR: Questions 88, 89, and 90 are different
versions of the same question.
Karl Company has total assets of $170,000 and total liabilities
of $110,000. The company's debt-to-equity ratio is closest to:
a. 0.39 to 1.
b. 0.65 to 1.
c. 0.35 to 1.
d. 1.83 to 1.
90.
A
Easy
NOTE TO THE INSTRUCTOR: Questions 88, 89, and 90 are different
versions of the same question.
Krakov Company has total assets of $170,000 and total
liabilities of $80,000. The company's debt-to-equity ratio is
closest to:
a. 0.89 to 1.
b. 0.32 to 1.
c. 0.47 to 1.
d. 0.53 to 1.
682Managerial Accounting, 9/e
Reference: 18-1
Selected financial data for Barnstable Company appear below:
Sales .........................
Operating Expenses ............
Interest Expense ..............
Cost of Goods Sold ............
Dividends Declared and Paid ...
19x9
19x8
(in thousands)
$1,500
$1,200
450
400
75
30
900
720
30
0
91.
D
Easy
Refer To:
18-1
For 19x9, the gross margin as a percentage of sales was:
a. 5%.
b. 60%.
c. 10%.
d. 40%.
92.
D
Easy
Refer To:
18-1
For 19x9, the net income before taxes as a percentage of sales
was:
a. 10%.
b. 3%.
c. 8%.
d. 5%.
93.
C
Easy
Refer To:
18-1
For 19x9, the net operating income as a percentage of sales
was:
a. 70%.
b. 8%.
c. 10%.
d. 40%.
94.
B
Medium
Refer To:
18-1
Between 19x8 and 19x9, the times interest earned ratio:
a. increased.
b. decreased.
c. remained the same.
d. cannot be determined from the data provided.
Managerial Accounting, 9/e
683
Reference: 18-2
NOTE TO THE INSTRUCTOR: Questions 95 to 101, 102 to 108, and 109 to 115 are
different versions of the same question.
Financial statements for Larned Company appear below:
Larned Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)
19X6
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
Stockholders' equity:
Preferred stock, $20 par, 10% ..............
120
Common stock, $10 par ......................
180
Additional paid-in capital--common stock ...
110
Retained earnings ..........................
860
Total stockholders' equity ............... 1,270
Total liabilities & stockholders' equity ..... $2,040
684Managerial Accounting, 9/e
19X5
$
100
130
100
20
350
1,600
$1,950
$
120
80
160
360
400
760
120
180
110
780
1,190
$1,950
Larned Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)
Sales (all on account) ...................
Cost of goods sold .......................
Gross margin .............................
Operating expenses .......................
Net operating income .....................
Interest expense .........................
Net income before taxes ..................
Income taxes (30%) .......................
Net income ...............................
$2,930
2,050
880
350
530
40
490
147
$ 343
Dividends during 19X6 totalled $263 thousand, of which $12 thousand were
preferred dividends.
The market price of a share of common stock on December 31, 19X6 was $160.
95.
A
Medium
Refer To:
18-2
Larned Company's earnings per share of common stock for 19X6
was closest to:
a. $18.39.
b. $27.22.
c. $19.06.
d. $11.03.
96.
C
Medium
Refer To:
18-2
Larned Company's price-earnings ratio on December 31, 19X6 was
closest to:
a. 5.88.
b. 14.50.
c. 8.70.
d. 8.40.
97.
A
Medium
Refer To:
18-2
Larned Company's dividend payout ratio for 19X6 was closest to:
a. 75.8%.
b. 28.5%.
c. 76.7%.
d. 47.4%.
98.
A
Medium
Refer To:
18-2
Larned Company's dividend yield ratio on December 31, 19X6 was
closest to:
a. 8.7%.
b. 9.1%.
c. 8.3%.
d. 5.5%.
99.
C
Medium
Refer To:
18-2
Larned Company's return on total assets for 19X6 was closest
to:
a. 15.8%.
b. 17.2%.
c. 18.6%.
d. 17.8%.
Managerial Accounting, 9/e
685
100.
A
Medium
Refer To:
18-2
Larned Company's return on common stockholders' equity for 19X6
was closest to:
a. 29.8%.
b. 26.9%.
c. 30.9%.
d. 27.9%.
101.
B
Medium
Refer To:
18-2
Larned Company's book value per share at the end of 19X6 was
closest to:
a. $16.11.
b. $63.89.
c. $70.56.
d. $10.00.
Reference: 18-3
NOTE TO THE INSTRUCTOR: Questions 95 to 101, 102 to 108, and 109 to 115 are
different versions of the same question.
Financial statements for Laroche Company appear below:
Laroche Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)
19X6
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 ..................... 1,370
Total assets ................................. $1,900
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
Stockholders' equity:
Preferred stock, $20 par, 10% ..............
100
Common stock, $10 par ......................
240
Additional paid-in capital--common stock ...
180
Retained earnings ..........................
740
Total stockholders' equity ............... 1,260
Total liabilities & stockholders' equity ..... $1,900
686Managerial Accounting, 9/e
19X5
$
170
120
180
40
510
1,370
$1,880
$
190
80
150
420
300
720
100
240
180
640
1,160
$1,880
Laroche Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)
Sales (all on account) ...................
Cost of goods sold .......................
Gross margin .............................
Operating expenses .......................
Net operating income .....................
Interest expense .........................
Net income before taxes ..................
Income taxes (30%) .......................
Net income ...............................
$2,250
1,570
680
270
410
30
380
114
$ 266
Dividends during 19X6 totaled $166 thousand, of which $10 thousand were
preferred dividends.
The market price of a share of common stock on December 31, 19X6 was $150.
102.
A
Medium
Refer To:
18-3
Laroche Company's earnings per share of common stock for 19X6
was closest to:
a. $10.67.
b. $15.83.
c. $3.71.
d. $11.08.
103.
C
Medium
Refer To:
18-3
Laroche Company's price-earnings ratio on December 31, 19X6 was
closest to:
a. 13.53.
b. 40.43.
c. 14.06.
d. 9.47.
104.
C
Medium
Refer To:
18-3
Laroche Company's dividend payout ratio for 19X6 was closest
to:
a. 22.9%.
b. 62.4%.
c. 60.9%.
d. 38.0%.
105.
C
Medium
Refer To:
18-3
Laroche Company's dividend yield ratio on December 31, 19X6 was
closest to:
a. 4.6%.
b. 4.1%.
c. 4.3%.
d. 1.6%.
106.
B
Medium
Refer To:
18-3
Laroche Company's return on total assets for 19X6 was closest
to:
a. 14.1%.
b. 15.2%.
c. 14.6%.
d. 13.0%.
Managerial Accounting, 9/e
687
107.
D
Medium
Refer To:
18-3
Laroche Company's return on common stockholders' equity for
19X6 was closest to:
a. 24.0%.
b. 21.2%.
c. 22.0%.
d. 23.1%.
108.
C
Medium
Refer To:
18-3
Laroche Company's book value per share at the end of 19X6 was
closest to:
a. $52.50.
b. $10.00.
c. $48.33.
d. $17.50.
Reference: 18-4
NOTE TO THE INSTRUCTOR: Questions 95 to 101, 102 to 108, and 109 to 115 are
different versions of the same question.
Financial statements for Larosa Company appear below:
Larosa Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)
19X6
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 ..................... 1,990
Total assets ................................. $2,520
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
Stockholders' equity:
Preferred stock, $20 par, 10% ..............
100
Common stock, $10 par ......................
220
Additional paid-in capital--common stock ...
250
Retained earnings .......................... 1,240
Total stockholders' equity ............... 1,810
Total liabilities & stockholders' equity ..... $2,520
Larosa Company
688Managerial Accounting, 9/e
19X5
$
120
160
150
40
470
1,980
$2,450
$
170
40
200
410
400
810
100
220
250
1,070
1,640
$2,450
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)
Sales (all on account) ...................
Cost of goods sold .......................
Gross margin .............................
Operating expenses .......................
Net operating income .....................
Interest expense .........................
Net income before taxes ..................
Income taxes (30%) .......................
Net income ...............................
$1,870
1,300
570
220
350
40
310
93
$ 217
Dividends during 19X6 totaled $47 thousand, of which $10 thousand were
preferred dividends.
The market price of a share of common stock on December 31, 19X6 was $70.
109.
B
Medium
Refer To:
18-4
Larosa Company's earnings per share of common stock for 19X6
was closest to:
a. $3.09.
b. $9.41.
c. $14.09.
d. $9.86.
110.
C
Medium
Refer To:
18-4
Larosa Company's price-earnings ratio on December 31, 19X6 was
closest to:
a. 7.10.
b. 22.66.
c. 7.44.
d. 4.97.
111.
B
Medium
Refer To:
18-4
Larosa Company's dividend payout ratio for 19X6 was closest to:
a. 21.7%.
b. 17.9%.
c. 6.5%.
d. 10.6%.
112.
C
Medium
Refer To:
18-4
Larosa Company's dividend yield ratio on December 31, 19X6 was
closest to:
a. 1.8%.
b. 3.1%.
c. 2.4%.
d. 1.0%.
113.
B
Medium
Refer To:
18-4
Larosa Company's return on total assets for 19X6 was closest
to:
a. 8.7%.
b. 9.9%.
c. 7.6%.
d. 9.2%.
Managerial Accounting, 9/e
689
114.
B
Medium
Refer To:
18-4
Larosa Company's return on common stockholders' equity for 19X6
was closest to:
a. 12.0%.
b. 12.7%.
c. 13.4%.
d. 12.6%.
115.
A
Medium
Refer To:
18-4
Larosa Company's book value per share at the end of 19X6 was
closest to:
a. $77.73.
b. $82.27.
c. $10.00.
d. $21.36.
Reference: 18-5
The Dawson Corporation projects the following for the upcoming year:
Earnings before interest and taxes .............
Interest expense ...............................
Preferred stock dividends ......................
Common stock dividend payout ratio .............
Average number of common shares outstanding ....
Effective corporate income tax rate ............
$35 million
$ 5 million
$ 4 million
30%
2 million
40%
116.
A
Hard
CMA
adapted
Refer To:
18-5
The expected dividend per share of common stock is
a. $2.10.
b. $2.70.
c. $1.80.
d. $3.90.
117.
B
Hard
CMA
adapted
Refer To:
18-5
If Dawson corporation’s common stock has a price-earnings ratio
of eight, the market price per share (to the nearest dollar)
would be
a. $125.
b. $56.
c. $72.
d. $68.
Reference: 18-6
NOTE TO THE INSTRUCTOR: Questions 118 to 124, 125 to 131, and 132 to 138 are
different versions of the same question.
Financial statements for Orange Company appear below:
690Managerial Accounting, 9/e
Orange Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)
19X6
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 ..................... 1,680
Total assets ................................. $2,210
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
Stockholders' equity:
Preferred stock, $10 par, 15% ...............
120
Common stock, $5 par .......................
220
Additional paid-in capital--common stock ...
210
Retained earnings .......................... 1,100
Total stockholders' equity ............... 1,650
Total liabilities & stockholders' equity ..... $2,210
19X5
$
110
180
160
60
510
1,620
$2,130
$
100
80
180
360
300
660
120
220
210
920
1,470
$2,130
Orange Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)
Sales (all on account) ...................
Cost of goods sold .......................
Gross margin .............................
Operating expenses .......................
Net operating income .....................
Interest expense .........................
Net income before taxes ..................
Income taxes (30%) .......................
Net income ...............................
$2,830
1,980
850
340
510
30
480
144
$ 336
Dividends during 19X6 totaled $156 thousand, of which $18 thousand were
preferred dividends.
The market price of a share of common stock on December 31, 19X6 was $100.
Managerial Accounting, 9/e
691
118.
A
Medium
Refer To:
18-6
Orange Company's earnings per share of common stock for 19X6
was closest to:
a. $7.23.
b. $2.27.
c. $10.91.
d. $7.64.
119.
A
Medium
Refer To:
18-6
Orange Company's dividend yield ratio on December 31, 19X6 was
closest to:
a. 3.1%.
b. 1.1%.
c. 3.5%.
d. 2.7%.
120.
C
Medium
Refer To:
18-6
Orange Company's return on total assets for 19X6 was closest
to:
a. 15.5%.
b. 15.9%.
c. 16.5%.
d. 14.5%.
121.
D
Medium
Refer To:
18-6
Orange Company's current ratio at the end of 19X6 was closest
to:
a. 1.24 to 1.
b. 0.55 to 1.
c. 0.44 to 1.
d. 1.71 to 1.
122.
A
Medium
Refer To:
18-6
Orange Company's accounts receivable turnover for 19X6 was
closest to:
a. 15.7 times.
b. 11.0 times.
c. 17.7 times.
d. 12.4 times.
123.
B
Medium
Refer To:
18-6
Orange Company's average sale period (turnover in days) for
19X6 was closest to:
a. 23.2 days.
b. 29.5 days.
c. 33.2 days.
d. 20.6 days.
124.
C
Medium
Refer To:
18-6
Orange Company's times interest earned for 19X6 was closest to:
a. 16.0 times.
b. 28.3 times.
c. 17.0 times.
d. 11.2 times.
692Managerial Accounting, 9/e
Reference: 18-7
NOTE TO THE INSTRUCTOR: Questions 118 to 124, 125 to 131, and 132 to 138 are
different versions of the same question.
Financial statements for Orantes Company appear below:
Orantes Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)
19X6
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 ..................... 2,010
Total assets ................................. $2,490
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
Stockholders' equity:
Preferred stock, $10 par, 10% ...............
120
Common stock, $10 par .......................
200
Additional paid-in capital--common stock ...
270
Retained earnings .......................... 1,310
Total stockholders' equity ............... 1,900
Total liabilities & stockholders' equity ..... $2,490
19X5
$
100
160
130
50
440
1,970
$2,410
$
120
40
170
330
300
630
120
200
270
1,190
1,780
$2,410
Orantes Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)
Sales (all on account) ...................
Cost of goods sold .......................
Gross margin .............................
Operating expenses .......................
Net operating income .....................
Interest expense .........................
Net income before taxes ..................
Income taxes (30%) .......................
Net income ...............................
$2,510
1,750
760
300
460
30
430
129
$ 301
Dividends during 19X6 totaled $181 thousand, of which $12 thousand were
preferred dividends.
The market price of a share of common stock on December 31, 19X6 was $280.
Managerial Accounting, 9/e
693
125.
B
Medium
Refer To:
18-7
Orantes Company's earnings per share of common stock for 19X6
was closest to:
a. $3.61.
b. $14.45.
c. $15.05.
d. $21.50.
126.
A
Medium
Refer To:
18-7
Orantes Company's dividend yield ratio on December 31, 19X6 was
closest to:
a. 3.0%.
b. 0.8%.
c. 2.8%.
d. 3.2%.
127.
C
Medium
Refer To:
18-7
Orantes Company's return on total assets for 19X6 was closest
to:
a. 12.3%.
b. 11.4%.
c. 13.1%.
d. 12.7%.
128.
D
Medium
Refer To:
18-7
Orantes
to:
a. 0.54
b. 1.19
c. 0.35
d. 1.50
Company's current ratio at the end of 19X6 was closest
129.
C
Medium
Refer To:
18-7
Orantes
closest
a. 19.3
b. 13.5
c. 14.8
d. 10.3
Company's accounts receivable turnover for 19X6 was
to:
times.
times.
times.
times.
130.
B
Medium
Refer To:
18-7
Orantes Company's average sale period (turnover in days) for
19X6 was closest to:
a. 24.7 days.
b. 27.1 days.
c. 18.9 days.
d. 35.5 days.
131.
B
Medium
Refer To:
18-7
Orantes
to:
a. 10.0
b. 15.3
c. 14.3
d. 25.3
to
to
to
to
1.
1.
1.
1.
Company's times interest earned for 19X6 was closest
times.
times.
times.
times.
694Managerial Accounting, 9/e
Reference: 18-8
NOTE TO THE INSTRUCTOR: Questions 118 to 124, 125 to 131, and 132 to 138 are
different versions of the same question.
Financial statements for Oratz Company appear below:
Oratz Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)
19X6
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 ..................... 1,430
Total assets ................................. $1,920
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
Stockholders' equity:
Preferred stock, $10 par, 5% ...............
120
Common stock, $15 par .......................
140
Additional paid-in capital--common stock ...
240
Retained earnings ..........................
720
Total stockholders' equity ............... 1,220
Total liabilities & stockholders' equity ..... $1,920
19X5
$
150
130
180
30
490
1,370
$1,860
$
100
70
220
390
300
690
120
140
240
670
1,170
$1,860
Oratz Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)
Sales (all on account) ...................
Cost of goods sold .......................
Gross margin .............................
Operating expenses .......................
Net operating income .....................
Interest expense .........................
Net income before taxes ..................
Income taxes (30%) .......................
Net income ...............................
$1,630
1,140
490
190
300
30
270
81
$ 189
Dividends during 19X6 totaled $139 thousand, of which $6 thousand were
preferred dividends.
The market price of a share of common stock on December 31, 19X6 was $260.
Managerial Accounting, 9/e
695
132.
D
Medium
Refer To:
18-8
Oratz Company's earnings per share of common stock for 19X6 was
closest to:
a. $1.74.
b. $28.93.
c. $20.25.
d. $19.61.
133.
C
Medium
Refer To:
18-8
Oratz Company's dividend yield ratio on December 31, 19X6 was
closest to:
a. 5.7%.
b. 5.2%.
c. 5.5%.
d. 0.5%.
134.
B
Medium
Refer To:
18-8
Oratz Company's return on total assets for 19X6 was closest to:
a. 8.9%.
b. 11.1%.
c. 10.5%.
d. 10.0%.
135.
B
Medium
Refer To:
18-8
Oratz Company's current ratio at the end of 19X6 was closest
to:
a. 0.57 to 1.
b. 1.23 to 1.
c. 0.51 to 1.
d. 1.26 to 1.
136.
B
Medium
Refer To:
18-8
Oratz Company's accounts receivable turnover for 19X6 was
closest to:
a. 9.1 times.
b. 12.5 times.
c. 8.8 times.
d. 6.3 times.
137.
D
Medium
Refer To:
18-8
Oratz Company's average sale period (turnover in days) for 19X6
was closest to:
a. 29.1 days.
b. 40.3 days.
c. 41.6 days.
d. 57.6 days.
138.
C
Medium
Refer To:
18-8
Oratz Company's times interest earned for 19X6 was closest to:
a. 6.3 times.
b. 16.3 times.
c. 10.0 times.
d. 9.0 times.
696Managerial Accounting, 9/e
Reference: 18-9
Selected data for the MK Company follow:
Current Year
Preferred stock, 8%, par value $50 ....... $250,000
Common stock, par value $10 .............. 500,000
Retained earnings at end of year ......... 257,000
Net income ............................... 102,000
Dividends paid on preferred stock ........
20,000
Dividends paid on common stock ...........
65,000
Quoted market price per common
share at year end......................
25.00
Prior Year
$250,000
500,000
240,000
90,000
20,000
60,000
20.00
139.
B
Hard
Refer To:
17-9
The price-earnings ratio for the prior year was:
a. 15.8 to 1.
b. 14.3 to 1.
c. 12.2 to 1.
d. 11.1 to 1.
140.
A
Medium
Refer To:
17-9
The dividend yield ratio on common stock for the current year
was
(rounded to the nearest tenth of a percent):
a. 5.2%
b. 6.8%.
c. 6.6%.
d. 7.4%.
141.
D
Hard
Refer To:
17-9
MK Company's return on common stockholders' equity for the
current year was (rounded to the nearest tenth of a percent):
a. 10.2%.
b. 8.2%.
c. 13.6%.
d. 10.9%.
142.
D
Medium
Refer To:
17-9
The dividend payout ratio for the prior year was:
a. 55.6%
b. 140%.
c. 114.3%.
d. 85.7%.
143.
C
Medium
Refer To:
17-9
The book value per share for the current year is (rounded to
the nearest cent:
a. $22.18.
b. $18.31.
c. $15.14.
d. $20.14.
Managerial Accounting, 9/e
697
Reference: 18-10
Lisa Inc.'s balance sheet appears below:
Lisa Inc.
Statement of Financial Position
December 31
(in thousands)
19X7
Cash ...................................
$ 30
Marketable securities ...................
20
Accounts receivable (net) ...............
45
Inventories .............................
60
Prepaid expenses ........................
15
Total current assets ...................
170
Land ....................................
155
Building (net) ..........................
80
Equipment (net) .........................
95
Total long-term assets .................
330
Total Assets .........................
$500
19X6
$ 25
15
30
50
20
140
125
90
100
315
$455
Accounts payable ........................
Accrued interest ........................
Short-term notes payable ................
Total current liabilities ..............
Long-term otes payable ..................
Bonds payable ...........................
Total long-term liabilities ............
Total liabilities ......................
Preferred stock ($100 par value, 5%) ....
Common Stock ($10 par value) ............
Additional paid-in capital--common stock
Retained earnings .......................
Total shareholders’ equity .............
Total liabilities & equity ...........
$ 28
15
12
55
10
15
25
80
100
150
75
50
375
$455
$ 47
15
23
85
10
15
25
110
100
150
75
65
390
$500
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. All sales were on credit.
Preferred dividends for the year were $5,000.
144.
B
Medium
CMA
adapted
Refer To:
18-10
Lisa Inc.’s acid test (quick) ratio at December 31, 19X7, was
closest to:
a. 0.6 to 1.
b. 1.1 to 1.
c. 1.8 to 1.
d. 2.0 to 1.
698Managerial Accounting, 9/e
145.
D
Medium
CMA
adapted
Refer To:
18-10
Lisa Inc.’s accounts receivable turnover for 19X7 was closest
to:
a. 4.9 times.
b. 5.9 times.
c. 6.7 times.
d. 8.0 times.
146.
B
Medium
CMA
adapted
Refer To:
18-10
Lisa Inc.’s inventory turnover for 19X7 was closest to:
a. 3.7 times.
b. 4.0 times.
c. 4.4 times.
d. 5.0 times.
147.
C
Medium
CMA
adapted
Refer To:
18-10
Lisa Inc.’s book value per share of common stock at December
31, 19X7, was closest to:
a. $10.00.
b. $11.25.
c. $19.33.
d. $18.33.
148.
B
Medium
CMA
adapted
Refer To:
18-10
Lisa Inc.’s return on common stockholders' equity for 19X7 was
closest to:
a. 7.8%.
b. 10.6%.
c. 10.9%.
d. 12.4%.
Managerial Accounting, 9/e
699
Reference: 18-11
NOTE TO THE INSTRUCTOR: Questions 149 to 155, 156 to 162, and 163 to 169 are
different versions of the same question.
Financial statements for Marcell Company appear below:
Marcell Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)
19X6
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 ..................... 1,700
Total assets ................................. $2,170
Current liabilities:
Accounts payable ........................... $ 110
Accrued liabilities ........................
60
Notes payable, short term ..................
280
Total current liabilities ...............
450
Noncurrent liabilities:
Bonds payable ..............................
480
Total liabilities ........................
930
Stockholders' equity:
Preferred stock, $10 par, 8% ...............
100
Common stock, $5 par .......................
140
Additional paid-in capital--common stock ...
280
Retained earnings ..........................
720
Total stockholders' equity ............... 1,240
Total liabilities & stockholders' equity ..... $2,170
Marcell Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)
Sales (all on account) ...................
Cost of goods sold .......................
Gross margin .............................
Operating expenses .......................
Net operating income .....................
Interest expense .........................
Net income before taxes ..................
Income taxes (30%) .......................
Net income ...............................
700Managerial Accounting, 9/e
$2,550
1,780
770
300
470
50
420
126
$ 294
19X5
$
150
110
180
20
460
1,680
$2,140
$
150
60
290
500
500
1,000
100
140
280
620
1,140
$2,140
149.
B
Medium
Refer To:
18-11
Marcell Company's working capital (in thousands of dollars) at
the end of 19X6 was closest to:
a. $470.
b. $20.
c. $520.
d. $1,240.
150.
A
Medium
Refer To:
18-11
Marcell
to:
a. 1.04
b. 0.42
c. 0.48
d. 1.22
151.
C
Medium
Refer To:
18-11
Marcell Company's acid-test (quick) ratio at the end of 19X6
was closest to:
a. 0.33 to 1.
b. 1.35 to 1.
c. 0.60 to 1.
d. 0.74 to 1.
152.
C
Medium
Refer To:
18-11
Marcell Company's accounts receivable turnover for 19X6 was
closest to:
a. 16.2 times.
b. 9.9 times.
c. 23.2 times.
d. 14.2 times.
153.
B
Medium
Refer To:
18-11
Marcell Company's average collection period (age of
receivables) for 19X6 was closest to:
a. 22.6 days.
b. 15.7 days.
c. 25.8 days.
d. 36.9 days.
154.
D
Medium
Refer To:
18-11
Marcell Company's inventory turnover for 19X6 was closest to:
a. 16.2 times.
b. 23.2 times.
c. 14.2 times.
d. 9.9 times.
155.
C
Medium
Refer To:
18-11
Marcell Company's average sale period (turnover in days) for
19X6 was closest to:
a. 15.7 days.
b. 25.8 days.
c. 36.9 days.
d. 22.6 days.
Company's current ratio at the end of 19X6 was closest
to
to
to
to
1.
1.
1.
1.
Managerial Accounting, 9/e
701
Reference: 18-12
NOTE TO THE INSTRUCTOR: Questions 149 to 155, 156 to 162, and 163 to 169 are
different versions of the same question.
Financial statements for March Company appear below:
March Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)
19X6
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 ..................... 1,560
Total assets ................................. $2,140
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
Stockholders' equity:
Preferred stock, $10 par, 8% ...............
120
Common stock, $5 par .......................
180
Additional paid-in capital--common stock ...
220
Retained earnings ..........................
770
Total stockholders' equity ............... 1,290
Total liabilities & stockholders' equity ..... $2,140
March Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)
Sales (all on account) ...................
Cost of goods sold .......................
Gross margin .............................
Operating expenses .......................
Net operating income .....................
Interest expense .........................
Net income before taxes ..................
Income taxes (30%) .......................
Net income ...............................
702Managerial Accounting, 9/e
$1,610
1,120
490
190
300
50
250
75
$ 175
19X5
$
190
150
150
40
530
1,560
$2,090
$
100
60
230
390
500
890
120
180
220
680
1,200
$2,090
156.
C
Medium
Refer To:
18-12
March Company's working capital (in thousands of dollars) at
the end of 19X6 was closest to:
a. $520.
b. $1,290.
c. $180.
d. $580.
157.
D
Medium
Refer To:
18-12
March Company's current ratio at the end of 19X6 was closest
to:
a. 1.27 to 1.
b. 0.47 to 1.
c. 0.49 to 1.
d. 1.45 to 1.
158.
A
Medium
Refer To:
18-12
March Company's acid-test (quick) ratio at the end of 19X6 was
closest to:
a. 0.95 to 1.
b. 0.39 to 1.
c. 1.90 to 1.
d. 0.53 to 1.
159.
B
Medium
Refer To:
18-12
March Company's accounts receivable turnover for 19X6 was
closest to:
a. 7.2 times.
b. 10.4 times.
c. 7.5 times.
d. 10.7 times.
160.
B
Medium
Refer To:
18-12
March Company's average collection period (age of receivables)
for 19X6 was closest to:
a. 48.9 days.
b. 35.1 days.
c. 34.0 days.
d. 50.5 days.
161.
A
Medium
Refer To:
18-12
March Company's inventory turnover for 19X6 was closest to:
a. 7.5 times.
b. 10.4 times.
c. 10.7 times.
d. 7.2 times.
162.
A
Medium
Refer To:
18-12
March Company's average sale period (turnover in days) for 19X6
was closest to:
a. 48.9 days.
b. 34.0 days.
c. 35.1 days.
d. 50.5 days.
Managerial Accounting, 9/e
703
Reference: 18-13
NOTE TO THE INSTRUCTOR: Questions 149 to 155, 156 to 162, and 163 to 169 are
different versions of the same question.
Financial statements for Marcial Company appear below:
Marcial Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)
19X6
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 ..................... 1,550
Total assets ................................. $1,990
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
Stockholders' equity:
Preferred stock, $10 par, 8% ...............
120
Common stock, $5 par .......................
200
Additional paid-in capital--common stock ...
250
Retained earnings ..........................
790
Total stockholders' equity ............... 1,360
Total liabilities & stockholders' equity ..... $1,990
Marcial Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)
Sales (all on account) ...................
Cost of goods sold .......................
Gross margin .............................
Operating expenses .......................
Net operating income .....................
Interest expense .........................
Net income before taxes ..................
Income taxes (30%) .......................
Net income ...............................
704Managerial Accounting, 9/e
$1,630
1,140
490
190
300
40
260
78
$ 182
19X5
$
140
110
130
50
430
1,480
$1,910
$
170
40
100
310
400
710
120
200
250
630
1,200
$1,910
163.
D
Medium
Refer To:
18-13
Marcial Company's working capital (in thousands of dollars) at
the end of 19X6 was closest to:
a. $440.
b. $570.
c. $1,360.
d. $200.
164.
A
Medium
Refer To:
18-13
Marcial
to:
a. 1.83
b. 0.38
c. 0.35
d. 1.22
165.
C
Medium
Refer To:
18-13
Marcial Company's acid-test (quick) ratio at the end of 19X6
was closest to:
a. 0.76 to 1.
b. 1.32 to 1.
c. 1.04 to 1.
d. 0.25 to 1.
166.
B
Medium
Refer To:
18-13
Marcial Company's accounts receivable turnover for 19X6 was
closest to:
a. 8.4 times.
b. 14.8 times.
c. 12.1 times.
d. 10.4 times.
167.
A
Medium
Refer To:
18-13
Marcial Company's average collection period (age of
receivables) for 19X6 was closest to:
a. 24.6 days.
b. 35.2 days.
c. 43.2 days.
d. 30.2 days.
168.
A
Medium
Refer To:
18-13
Marcial Company's inventory turnover for 19X6 was closest to:
a. 8.4 times.
b. 12.1 times.
c. 14.8 times.
d. 10.4 times.
169.
C
Medium
Refer To:
18-13
Marcial Company's average sale period (turnover in days) for
19X6 was closest to:
a. 35.2 days.
b. 30.2 days.
c. 43.2 days.
d. 24.6 days.
Company's current ratio at the end of 19X6 was closest
to
to
to
to
1.
1.
1.
1.
Managerial Accounting, 9/e
705
Reference: 18-14
The following financial data have been taken from the records of CPZ
Enterprises.
Accounts receivable ......................
Accounts payable .........................
Bonds payable, due in 10 years ...........
Cash .....................................
Interest payable, due in three months ....
Inventory ................................
Land .....................................
Notes payable, due in six months .........
$200,000
80,000
300,000
100,000
10,000
440,000
250,000
50,000
170.
D
Medium
CMA
adapted
Refer To:
18-14
The current ratio for CPZ Enterprises is:
a. 1.68.
b. 2.14.
c. 5.00.
d. 5.29.
171.
C
Medium
CMA
adapted
Refer To:
18-14
What is the company’s acid test (quick) ratio?
a. 0.68.
b. 1.68.
c. 2.14.
d. 2.31.
172.
A
Hard
CMA
adapted
Refer To:
18-14
What will happen to the ratios below if CPZ Enterprises uses
cash to pay 50% of its accounts payable?
a.
b.
c.
d.
Current Ratio
increase
decrease
increase
decrease
Acid-test Ratio
increase
decrease
decrease
increase
Reference: 18-15
At December 31, Curry Co. had the following balances in selected asset
accounts:
19x7
Cash ........................... $ 300
Accounts receivable, net ....... 1,200
Inventory ......................
500
Prepaid expenses ...............
100
Other assets ...................
400
Total assets ................... $2,500
19x6
200
800
300
60
250
$1,610
$
Curry had current liabilities of $1,000 at December 31, 19x7, and credit
sales of $7,200 for 19x7.
706Managerial Accounting, 9/e
173.
A
Medium
CPA
adapted
Refer To:
18-15
Curry Company’s acid-test (quick) ratio at December 31, 19x7
was closest to:
a. 1.5 to 1.
b. 1.6 to 1.
c. 2.0 to 1.
d. 2.1 to 1.
174.
C
Medium
CPA
adapted
Refer To:
18-15
Drew Company's average collection period (age of receivables)
for 19x7 was closest to:
a. 30.4 days.
b. 40.6 days.
c. 50.7 days.
d. 60.8 days.
Reference: 18-16
NOTE TO THE INSTRUCTOR: Questions 175 to 176, 177 to 178, and 179 to 180 are
different versions of the same question.
Financial statements for Narita Company appear below:
Narita Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)
19X6
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 ..................... 1,660
Total assets ................................. $2,180
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
Stockholders' equity:
Preferred stock, $10 par, 6% ...............
120
Common stock, $2 par .......................
140
Additional paid-in capital--common stock ...
180
Retained earnings .......................... 1,100
Total stockholders' equity ............... 1,540
Total liabilities & stockholders' equity ..... $2,180
Managerial Accounting, 9/e
19X5
$
130
180
120
50
480
1,660
$2,140
$
140
60
200
400
300
700
120
140
180
1,000
1,440
$2,140
707
Narita Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)
Sales (all on account) ...................
Cost of goods sold .......................
Gross margin .............................
Operating expenses .......................
Net operating income .....................
Interest expense .........................
Net income before taxes ..................
Income taxes (30%) .......................
Net income ...............................
$2,570
1,790
780
310
470
30
440
132
$ 308
175.
D
Medium
Refer To:
18-16
Narita Company's times interest earned for 19X6 was closest to:
a. 14.7 times.
b. 26.0 times.
c. 10.3 times.
d. 15.7 times.
176.
D
Medium
Refer To:
18-16
Narita Company's debt-to-equity ratio at the end of 19X6 was
closest to:
a. 0.17 to 1.
b. 0.58 to 1.
c. 0.25 to 1.
d. 0.42 to 1.
Reference: 18-17
NOTE TO THE INSTRUCTOR: Questions 175 to 176, 177 to 178, and 179 to 180 are
different versions of the same question.
Financial statements for Narlock Company appear below:
Narlock Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)
19X6
Current assets:
Cash and marketable securities ............. $ 120
Accounts receivable, net ...................
150
Inventory ..................................
130
Prepaid expenses ...........................
90
Total current assets .....................
490
Noncurrent assets:
Plant & equipment, net ..................... 1,670
Total assets ................................. $2,160
708Managerial Accounting, 9/e
19X5
$
120
150
120
80
470
1,600
$2,070
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
Stockholders' equity:
Preferred stock, $10 par, 6% ...............
100
Common stock, $2 par .......................
200
Additional paid-in capital--common stock ...
150
Retained earnings ..........................
820
Total stockholders' equity ............... 1,270
Total liabilities & stockholders' equity ..... $2,160
$
100
70
290
460
500
960
100
200
150
660
1,110
$2,070
Narlock Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)
Sales (all on account) ...................
Cost of goods sold .......................
Gross margin .............................
Operating expenses .......................
Net operating income .....................
Interest expense .........................
Net income before taxes ..................
Income taxes (30%) .......................
Net income ...............................
$2,250
1,570
680
270
410
50
360
108
$ 252
177.
B
Medium
Refer To:
18-17
Narlock Company's times interest earned for 19X6 was closest
to:
a. 7.2 times.
b. 8.2 times.
c. 13.6 times.
d. 5.0 times.
178.
A
Medium
Refer To:
18-17
Narlock
closest
a. 0.70
b. 0.32
c. 0.38
d. 1.09
Company's debt-to-equity ratio at the end of 19X6 was
to:
to 1.
to 1.
to 1.
to 1.
Managerial Accounting, 9/e
709
Reference: 18-18
NOTE TO THE INSTRUCTOR: Questions 175 to 176, 177 to 178, and 179 to 180 are
different versions of the same question.
Financial statements for Narumi Company appear below:
Narumi Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)
19X6
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 ..................... 1,340
Total assets ................................. $1,800
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
Stockholders' equity:
Preferred stock, $10 par, 6% ...............
120
Common stock, $2 par .......................
160
Additional paid-in capital--common stock ...
200
Retained earnings ..........................
430
Total stockholders' equity ...............
910
Total liabilities & stockholders' equity ..... $1,800
Narumi Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)
Sales (all on account) ...................
Cost of goods sold .......................
Gross margin .............................
Operating expenses .......................
Net operating income .....................
Interest expense .........................
Net income before taxes ..................
Income taxes (30%) .......................
Net income ...............................
710Managerial Accounting, 9/e
$2,050
1,430
620
240
380
50
330
99
$ 231
19X5
$
150
130
130
30
440
1,310
$1,750
$
110
80
230
420
500
920
120
160
200
350
830
$1,750
179.
B
Medium
Refer To:
18-18
Narumi Company's times interest earned for 19X6 was closest to:
a. 12.4 times.
b. 7.6 times.
c. 6.6 times.
d. 4.6 times.
180.
C
Medium
Refer To:
18-18
Narumi Company's debt-to-equity ratio at the end of 19X6 was
closest to:
a. 2.07 to 1.
b. 0.42 to 1.
c. 0.98 to 1.
d. 0.56 to 1.
Essay
181.
Medium
CIMA (UK)
adapted
M. K. Berry is the managing director of CE Ltd. a small,
family-owned company which manufactures cutlery. His company
belongs to a trade association which 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 which manufacture this
type of product. The article contains the following table:
Average for all companies
Return on stockholders' equity ......
Return on total assets ..............
Gross margin percentage .............
Current ratio .......................
Average sale period .................
Average collection period ...........
in the industry
33%
29%
30%
1.9:1
37 days
41 days
CE Ltd's latest financial statements are as follows:
CE Ltd.
Income Statement
for the year ended 31 October
(in thousands)
Sales ......................................
Cost of goods sold .........................
Gross margin ...............................
Selling and administrative expenses ........
Interest ...................................
Net income .................................
£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.
Managerial Accounting, 9/e
711
Balance Sheets
as of 31 October
(in thousands)
This Year
Current assets:
Cash ............................... £ 5
Accounts receivable ................ 120
Inventories ........................
96
Noncurrent assets .................... 500
Total assets ....................... £721
Current liabilities:
Accounts payable ................... £147
Noncurrent liabilities:
Bonds payable ...................... 150
Common stock ......................... 100
Retained earnings .................... 324
Total liabilities and
stockholders’ equity ............ £721
Last Year
£ 20
110
80
460
£670
£206
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 industrial 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 stockholders’ equity:
Net income = £110
Preferred dividends = £0
Average common stockholders’
equity = [(£100 + £324) + (£100 + £214)] ÷ 2
= £369
Return on common stockholders’ 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 + £15x(1 - 0.00)] ÷ £695.5
= 18.0% (rounded)
712Managerial Accounting, 9/e
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:
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 stockholders' equity is not as good as the
industry’s average. For every pound invested, shareholders are
obtaining a return which 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 it's selling prices are lower than the average
or its cost of sales are higher.
The current ratio indicates that CE Ltd's current assets are
greater than its current liabilities by a factor of 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.
Managerial Accounting, 9/e
713
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 straightline 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 which 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 which is sold at the 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.
714Managerial Accounting, 9/e
182.
Medium
Comparative financial statements for Springville Company for
the last two years appear below. The market price of
Springville's common stock was $25 per share on December 31,
Year 2. During Year 2, dividends of $2,000,000 were paid to
preferred stockholders and $10,000,000 to stockholders.
Springville Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)
Year 2
Current assets:
Cash and marketable securities ........... $ 6,000
Accounts receivable, net .................
20,000
Inventory ................................
28,000
Total current assets ...................
54,000
Noncurrent assets:
Investments...............................
75,000
Plant & equipment, net ...................
12,000
Total assets ............................... $141,000
Current liabilities:
Accounts payable ......................... $ 7,000
Accrued liabilities ......................
1,000
Total current liabilities .............
8,000
Noncurrent liabilities:
Bonds payable ............................
24,000
Total liabilities ......................
32,000
Stockholders' equity:
Preferred stock, 8%, 1,000,000 shares.....
20,000
Common stock, no par, 5,000,000 shares....
30,000
Retained earnings ........................
59,000
Total stockholders' equity ............. 109,000
Total liabilities & stockholders' equity ... $141,000
Year 1
$
4,800
16,800
28,800
50,400
81,600
12,000
$144,000
$
6,000
1,200
7,200
24,000
31,200
20,000
30,000
62,800
112,800
$144,000
Springville Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)
Sales (all on account) ...................
Cost of goods sold .......................
Gross margin .............................
Operating expenses .......................
Net operating income .....................
Interest expense .........................
Net income before taxes ..................
Income taxes (40%) .......................
Net income ...............................
Managerial Accounting, 9/e
$280,000
200,000
$ 80,000
61,333
18,667
5,000
13,667
5,467
$ 8,200
715
Required:
Compute 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 stockholders' 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
f. Return on total
= [Net income +

= [$8,200,000 +

= 7.9%
716Managerial Accounting, 9/e
assets
((Interest expense x (1 - Tax rate))]
Average total assets
5,000,000 x (1 - 0.40)]
[($144,000,000 + $141,000,000)/2]
g. Return on common stockholders' equity
= (Net income - preferred dividends)
 Average common stockholders' 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 stockholders (6.8%) was less than the rate of return
on total assets (7.8%).
183.
Medium
Financial statements for Praeger Company appear below:
Praeger Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)
19X6
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 ..................... 2,020
Total assets ................................. $2,460
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
Stockholders' equity:
Preferred stock, $5 par, 5% ................
100
Common stock, $5 par .......................
200
Additional paid-in capital--common stock ...
200
Retained earnings .......................... 1,150
Total stockholders' equity ............... 1,650
Total liabilities & stockholders' equity ..... $2,460
Managerial Accounting, 9/e
19X5
$
100
170
110
60
440
1,990
$2,430
$
170
50
120
340
500
840
100
200
200
1,090
1,590
$2,430
717
Praeger Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)
Sales (all on account) ...................
Cost of goods sold .......................
Gross margin .............................
Operating expenses .......................
Net operating income .....................
Interest expense .........................
Net income before taxes ..................
Income taxes (30%) .......................
Net income ...............................
$1,100
770
330
130
200
50
150
45
$ 105
Dividends during 19X6 totalled $45 thousand, of which $5
thousand were preferred dividends.
The market price of a share of common stock on December 31,
19X6 was $30.
Required:
Compute the following for 19X6:
a. Earnings per share of common stock.
b. Price-earnings ratio.
c. Dividend payout ratio.
d. Dividend yield ratio.
e. Return on total assets.
f. Return on common stockholders' equity.
g. Book value per share.
h. Working capital.
i. Current ratio.
j. Acid-test (quick) ratio.
k. Accounts receivable turnover.
l. Average collection period (age of receivables).
m. Inventory turnover.
n. Average sale period (turnover in days).
o. Times interest earned.
p. Debt-to-equity ratio.
Answer:
a. Earnings per share = (Net Income - Preferred Dividends)
÷ Average number of common shares
outstanding*
= ($105 - $5) ÷ 40
= $2.50
*Number of common
shares outstanding = Common stock ÷ Par value
= $200 ÷ $5
= 40
718Managerial Accounting, 9/e
b. Price-earnings ratio = Market price per share
÷ Earnings per share (see above)
= $30 ÷ $2.50
= 12.0
c. Dividend payout ratio = Dividends per share*
÷ Earnings per share (see above)
= $1.00 ÷ $2.50
= 40.0%
*Dividends per share = Common dividends ÷ Common shares**
= $40 ÷ 40
= $1.00
**See above
d. Dividend yield ratio = Dividends per share*
÷ Market price per share
= $1.00 ÷ $30.00
= 3.33%
*See above
e. Return on total assets = Adjusted net income*
÷ Average total assets**
= $140 ÷ $2,445
= 5.73%
*Adjusted net income = Net income
+ [Interest expense x (1-Tax rate)]
= $105 + [$50 x (1 – 0.30)]
= $140
**Average total assets = ($2,460 + $2,430) ÷ 2
= $2,445
f. Return on common
stockholders' equity = (Net income - Preferred dividends)
÷ Average common stockholders' equity*
= ($105 - $5) ÷ $1,520
= 6.58%
*Average common stockholders' equity = ($1,550 + $1,490) ÷ 2
= $1,520
g. Book value per share = Common stockholders' equity
÷ Number of common shares outstanding*
= $1,550 ÷ 40
= $38.75
*Number of common
shares outstanding = Common stock ÷ Par value
= $200 ÷ $5
= 40
Managerial Accounting, 9/e
719
h. Working capital = Current assets - Current liabilities
= $440 - $310
= $130
i. Current ratio = Current assets ÷ Current liabilities
= $440 ÷ $310
= 1.42 to 1
j. Acid-test ratio = Quick assets* ÷ Current liabilities
= $270 ÷ $310
= 0.87 to 1
*Quick assets = Cash + Marketable securities
+ Current receivables
= $100 + $170
= $270
k. Accounts receivable
turnover = Sales on account ÷ Average accounts
receivable*
= $1,100 ÷ $170
= 6.47 times
*Average accounts receivable = ($170 + $170) ÷ 2
= $170
l. Average collection
period = 365 days ÷ Accounts receivable turnover*
= 365 ÷ 6.47
= 56.4 days
*See above
m. Inventory turnover = Cost of goods sold ÷ Average inventory*
= $770 ÷ $110
= 7.00 times
*Average inventory = ($110 + $110)÷2
= $110
n. Average sale period = 365 days ÷ Inventory turnover*
= 365 ÷7.00
= 52.1 days
*See above
o. Times interest earned = Net operating income
÷ Interest expense
= $200 ÷ $50
= 4.00 times
p. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity
= $810 ÷ $1,650
= 0.49 to 1
720Managerial Accounting, 9/e
184.
Medium
Financial statements for AAR Company appear below:
AAR Company
Statement of Financial Position
December 31
Current assets:
Cash and marketable securities ............. $
21,000
Accounts receivable, net ...................
160,000
Inventory ..................................
300,000
Prepaid expenses ...........................
9,000
Total current assets .....................
490,000
Noncurrent assets:
Plant & equipment, net .....................
810,000
Total assets ................................. $1,300,000
Current liabilities:
Accounts payable ........................... $
75,000
Accrued liabilities ........................
25,000
Notes payable, short term ..................
100,000
Total current liabilities ...............
200,000
Noncurrent liabilities:
Bonds payable ..............................
300,000
Total liabilities ........................
500,000
Stockholders' equity:
Common stock, $5 par .......................
100,000
Retained earnings ..........................
700,000
Total stockholders' equity ...............
800,000
Total liabilities & stockholders' equity ..... $1,300,000
AAR Company
Income Statement
For the Year Ended December 31
(dollars in thousands)
Sales (all on account) .................. $2,100,000
Cost of goods sold ...................... 1,770,000
Gross margin ............................
330,000
Operating expenses ......................
130,000
Net operating income ....................
200,000
Interest expense ........................
50,000
Net income before taxes .................
150,000
Income taxes (30%) ......................
45,000
Net income .............................. $ 105,000
AAR Company paid dividends of $3.15 per share during the year.
The market price of the company's stock at December 31 was $63
per share. Assets at the beginning of the year totaled
$1,100,000, and stockholders' equity totaled $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.
Managerial Accounting, 9/e
721
Required:
Compute 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 stockholders' 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
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.
722Managerial Accounting, 9/e
e. Times interest earned = Net operating income
÷ Interest expense
= $200,000 ÷ $50,000
= 4.00 times
f. Debt-to-equity ratio = Liabilities ÷ Stockholders' 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 x (1 - Tax rate))
 Average total assets
= (($105,000 + (50,000 x (1 - 0.30))
 (($1,100,000 + $1,300,000)/2))
= $140,000  $1,200,000
= 11.67%.
k. Return on common stockholders' equity
= (Net income – Preferred dividends)
 Average common stockholders' equity
= $105,000  [($725,000 + $800,000)/2]
= 13.8%
l. Financial leverage was positive, since the rate of return to
the common stockholders (13.8%) was greater than the rate of
return on total assets (11.67%).
Managerial Accounting, 9/e
723
185.
Medium
NOTE TO THE INSTRUCTOR: Questions 185, 186, and 187 are different
versions of the same question.
Financial statements for Qiang Company appear below:
Qiang Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)
19X6
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 ..................... 1,900
Total assets ................................. $2,390
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
Stockholders' equity:
Preferred stock, $5 par, 10% ...............
120
Common stock, $5 par .......................
180
Additional paid-in capital--common stock ...
120
Retained earnings .......................... 1,280
Total stockholders' equity ............... 1,700
Total liabilities & stockholders' equity ..... $2,390
724Managerial Accounting, 9/e
19X5
$
160
100
130
70
460
1,880
$2,340
$
160
70
110
340
400
740
120
180
120
1,180
1,600
$2,340
Qiang Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)
Sales (all on account) ...................
Cost of goods sold .......................
Gross margin .............................
Operating expenses .......................
Net operating income .....................
Interest expense .........................
Net income before taxes ..................
Income taxes (30%) .......................
Net income ...............................
$1,500
1,050
450
180
270
40
230
69
$ 161
Dividends during 19X6 totaled $61 thousand, of which $12
thousand were preferred dividends.
The market price of a share of common stock on December 31,
19X6 was $50.
Required:
Compute the following for 19X6:
a. Earnings per share of common stock.
b. Price-earnings ratio.
c. Dividend yield ratio.
d. Return on total assets.
e. Return on common stockholders' equity.
f. Book value per share.
Answer:
a. Earnings per share = (Net Income - Preferred Dividends)
÷ Average number of common
shares outstanding*
= ($161 - $12) ÷ 36
= $4.14
*Number of common
shares outstanding = Common stock ÷ Par value
= $180 ÷ $5
= 36
b. Price-earnings ratio = Market price per share
÷ Earnings per share (see above)
= $50 ÷ $4.14
= 12.1
c. Dividend yield ratio = Dividends per share*
Managerial Accounting, 9/e
725
÷ Market price per share
= $1.36 ÷ $50.00
= 2.72%
*Dividends per share = Common dividends ÷ Common shares**
= $49 ÷ 36
= $1.36
**See above
d. Return on total assets = Adjusted net income*
÷ Average total assets**
= $189 ÷ $2,365
= 7.99%
*Adjusted net income = Net income
+ [Interest expense x (1-Tax rate)]
= $161 + [$40 x (1 - 0.30)]
= $189
**Average total assets = ($2,390 + $2,340) ÷ 2
= $2,365
e. Return on common
stockholders' equity = (Net income – Preferred dividends)
÷ Average common stockholders' equity*
= ($161 - $12)÷$1,530
= 9.74%
*Average common stockholders' equity = ($1,580 + $1,480) ÷ 2
= $1,530
f. Book value per share = Common stockholders' equity
÷ Number of common shares outstanding*
= $1,580 ÷ 36
= $43.89
*Number of common
shares outstanding = Common stock ÷ Par value
= $180 ÷ $5
= 36
726Managerial Accounting, 9/e
186.
Medium
NOTE TO THE INSTRUCTOR: Questions 185, 186, and 187 are
different versions of the same question.
Financial statements for Qualle Company appear below:
Qualle Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)
19X6
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 ..................... 1,890
Total assets ................................. $2,330
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
Stockholders' equity:
Preferred stock, $5 par, 10% ...............
100
Common stock, $10 par ......................
160
Additional paid-in capital--common stock ...
170
Retained earnings .......................... 1,010
Total stockholders' equity ............... 1,440
Total liabilities & stockholders' equity ..... $2,330
Managerial Accounting, 9/e
19X5
$
120
100
170
30
420
1,880
$2,300
$
130
50
290
470
500
970
100
160
170
900
1,330
$2,300
727
Qualle Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)
Sales (all on account) ...................
Cost of goods sold .......................
Gross margin .............................
Operating expenses .......................
Net operating income .....................
Interest expense .........................
Net income before taxes ..................
Income taxes (30%) .......................
Net income ...............................
$2,300
1,610
690
270
420
50
370
111
$ 259
Dividends during 19X6 totaled $149 thousand, of which $10
thousand were preferred dividends.
The market price of a share of common stock on December 31,
19X6 was $280.
Required:
Compute the following for 19X6:
a. Earnings per share of common stock.
b. Price-earnings ratio.
c. Dividend yield ratio.
d. Return on total assets.
e. Return on common stockholders' 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 stock ÷ Par value
= $160 ÷ $10
= 16
b. Price-earnings ratio = Market price per share
÷ Earnings per share (see above)
= $280 ÷ $15.56
= 18.0
c. Dividend yield ratio = Dividends per share*
728Managerial Accounting, 9/e
÷ Market price per share
= $8.69 ÷ $280.00
= 3.10%
*Dividends per share = Common dividends ÷ Common shares**
= $139 ÷ 16
= $8.69
**See above
d. Return on total assets = Adjusted net income*
÷ Average total assets**
= $294 ÷ $2,315
= 12.70%
*Adjusted net income = Net income + [Interest expense
x (1-Tax rate)]
= $259 + [$50 x (1 - 0.30)]
= $294
**Average total assets = ($2,330 + $2,300) ÷ 2
= $2,315
e. Return on common
stockholders' equity = (Net income – Preferred dividends)
÷ Average common
stockholders' equity*
= ($259 - $10)÷$1,285
= 19.38%
*Average common stockholders' equity = ($1,340 + $1,230) ÷ 2
= $1,285
f. Book value per share = Common stockholders' equity
÷ Number of common
shares outstanding*
= $1,340 ÷ 16
= $83.75
*Number of common
shares outstanding = Common stock ÷ Par value
= $160 ÷ $10
= 16
Managerial Accounting, 9/e
729
187.
Medium
NOTE TO THE INSTRUCTOR: Questions 185, 186, and 187 are
different versions of the same question.
Financial statements for Quade Company appear below:
Quade Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)
19X6
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 ..................... 1,550
Total assets ................................. $2,010
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
Stockholders' equity:
Preferred stock, $5 par, 15% ...............
120
Common stock, $10 par ......................
160
Additional paid-in capital--common stock ...
280
Retained earnings ..........................
660
Total stockholders' equity ............... 1,220
Total liabilities & stockholders' equity ..... $2,010
730Managerial Accounting, 9/e
19X5
$
110
140
140
80
470
1,520
$1,990
$
130
40
270
440
400
840
120
160
280
590
1,150
$1,990
Quade Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)
Sales (all on account) ...................
Cost of goods sold .......................
Gross margin .............................
Operating expenses .......................
Net operating income .....................
Interest expense .........................
Net income before taxes ..................
Income taxes (30%) .......................
Net income ...............................
$2,400
1,680
720
280
440
40
400
120
$ 280
Dividends during 19X6 totaled $210 thousand, of which $18
thousand were preferred dividends.
The market price of a share of common stock on December 31,
19X6 was $230.
Required:
Compute the following for 19X6:
a. Earnings per share of common stock.
b. Price-earnings ratio.
c. Dividend yield ratio.
d. Return on total assets.
e. Return on common stockholders' 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 stock ÷ Par value
= $160 ÷ $10
= 16
b. Price-earnings ratio = Market price per share
÷ Earnings per share (see above)
= $230 ÷ $16.38
= 14.0
Managerial Accounting, 9/e
731
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
**See above
d. Return on total assets = Adjusted net income*
÷ Average total assets**
= $308 ÷ $2,000
= 15.40%
*Adjusted net income = Net income + [Interest expense
x (1-Tax rate)]
= $280 + [$40 x (1 – 0.30)]
= $308
**Average total assets = ($2,010 + $1,990) ÷ 2
= $2,000
e. Return on common
stockholders' equity = (Net income – Preferred dividends)
÷ Average common stockholders' equity*
= ($280 - $18)÷$1,065
= 24.60%
*Average common stockholders' equity = ($1,100 + $1,030) ÷ 2
= $1,065
f. Book value per share = Common stockholders' equity
÷ Number of common shares outstanding*
= $1,100 ÷ 16
= $68.75
*Number of common
shares outstanding = Common stock ÷ Par value
= $160 ÷ $10
= 16
732Managerial Accounting, 9/e
188.
Medium
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 Year
Cash ........................... $ 10,000
Marketable securities ..........
20,000
Accounts receivable ............
90,000
Inventories ....................
150,000
Plant and equipment, net .......
280,000
Total assets ................ $550,000
Accounts payable ...............
Accrued short-term liabilities
Bonds payable ..................
Preferred stock, 10%, $100 par
Common stock, $10 par ..........
Additional paid-in capital,
common stock .................
Retained earnings ..............
Total liabilities and equity
Beginning of
Current Year
$ 8,000
22,000
110,000
100,000
260,000
$500,000
$ 80,000
20,000
75,000
50,000
100,000
$ 60,000
25,000
75,000
50,000
100,000
50,000
175,000
$550,000
50,000
140,000
$500,000
Miller Company
Condensed Income Statement
For the Current Year
Sales (all on account) ............ $650,000
Less cost of goods sold ........... 350,000
Gross margin ...................... 300,000
Less operating expenses ........... 200,000
Net operating income .............. 100,000
Less interest expense .............
10,000
Net income before income taxes ....
90,000
Less income taxes .................
40,000
Net income ........................ $ 50,000
The company paid total dividends of $15,000 during the year, of
which $5,000 were to preferred stockholders. The market price
of a share of common stock at the end of the year was $30.
Managerial Accounting, 9/e
733
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 share of common stock 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 stockholders' equity for the year would
be computed by dividing _______________ by
_________________.
h. The dividend yield would be computed by dividing
_______________ by _________________.
Answer:
a. $120,000;
b. $350,000;
c. $175,000;
d. $ 45,000;
e. $650,000;
f. $100,000;
g. $ 45,000;
h. $1; $30
$100,000
$125,000
$375,000
10,000 shares
$100,000
$ 10,000
$307,500
734Managerial Accounting, 9/e
189.
Hard
CMA
adapted
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.
1993
1992
1991
Return on common
stockholders’ equity ......... 13.03
Average sale period ............ 51.16
Times interest earned .......... 3.87
Price-earnings ratio ........... 10.96
Debt-to-equity ratio ........... 0.50
Accounts receivable turnover ... 6.98
Current ratio .................. 1.65
Dividend yield ratio ........... 2.08
13.02
47.29
3.46
11.23
0.46
7.25
1.95
2.06
12.98
42.15
3.28
11.39
0.48
7.83
1.70
2.12
Industry
Average
12.96
38.63
3.56
11.54
0.57
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 stockholders.
2. Explain what these three ratios measure.
3. What do these three ratios indicate about Shelzo Inc.?
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 ratio measures
the length of time it takes on average to sell inventory
and is a gauge of how well the company 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.
Managerial Accounting, 9/e
735
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
stockholders are the return on common stockholders’
equity, the price-earnings ratio, and the dividend yield
ratio.
2. The return on common stockholders’ equity is a measure of
how effectively the company has used the stockholders’
investment in the company to generate profits. The priceearnings ratio provides a measure of how the stock market
perceives the company’s future earnings prospects. The
higher the ratio, the more favorable the future looks for
the company. The dividend yield ratio tells us what
proportion of the company’s profits are paid out as cash
dividends to common stockholders.
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 longterm creditors are times interest earned and the debt-toequity 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.
736Managerial Accounting, 9/e
190.
Medium
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
Cash........................................ $ 45
Accounts receivable, net ...................
38
Inventory ..................................
67
Long-term investments.......................
162
Land........................................
128
Building....................................
98
Total assets.............................. $ 538
Year 1
$ 30
40
60
150
100
50
$ 430
Accounts payable ........................... $ 36
Notes payable, short term ..................
24
Bonds payable...............................
35
Mortgage payable............................
100
Preferred stock,12%.........................
100
Common stock................................
195
Retained earnings ..........................
48
Total liabilities & stockholders' equity.. $ 538
$
40
30
50
-0100
170
40
$ 430
Lowe Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)
Sales (all on account) ...................
Cost of goods sold .......................
Gross margin .............................
Operating expenses (including interest
expense of $5,000)......................
Net income before taxes ..................
Income taxes (40%) .......................
Net income ...............................
$145
74
$ 71
16
55
22
$ 33
Dividends totaled $25,000 for the year, of which $12,000 was paid
to the preferred stockholder.
Required:
Compute 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. Debt-to-equity ratio.
g. Times-interest-earned ratio.
Managerial Accounting, 9/e
737
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
*Average inventory = ($67 + $60) ÷ 2
= $63.5
e. Return on total assets
= ((Net income + (Interest expense x (1 - tax rate))
 Average total assets
= (($33 + ($5 x (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 ÷ Stockholders' equity
= ($36 + $24 + $35 + $100) ÷ ($100 + $195 + $48)
= $195 ÷ $343
= 0.57 to 1
738Managerial Accounting, 9/e
191.
Medium
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:
a. All $800,000 could be obtained through the issuance of
common stock.
b. Common stock could be issued to provide $400,000 with the
other $400,000 obtained by issuing $100 par value, l0%
preferred stock.
c. Common stock could be issued to provide $40,000 with the
other $400,000 obtained by issuing bonds with 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. Assuming that the estimates are correct, compute the net
income available to common stockholders under each of the
three financing methods proposed above.
b. Using the income data computed in (a) above, compute the
return on common stockholders’ equity under each of the
three methods.
c. Why do methods B and C provided a greater return on common
equity than does method A? Why does method C provide a
greater return on common equity than method B?
Answer:
a. Net income available to common stockholders:
Income before interest and taxes...
Deduct interest expense:
0.10 x $400,000..................
Income before taxes................
Deduct income taxes (40%)..........
Net income.........................
Deduct preferred dividends:
0.10 x $400,000...................
Net income to common stockholders..
Managerial Accounting, 9/e
Method A
$175,000
Method B
$175,000
Method C
$175,000
________
$175,000
70,000
$105,000
________
$175,000
70,000
$105,000
40,000
$135,000
54,000
$ 81,000
o
40,000
$105,000 $ 65,000
o
$ 81,000
739
b. Return on common equity:
Method A Method B Method C
Net income to common stockholders $105,000 $ 65,000 $ 81,000
Common stockholders' investment... $800,000 $400,000 $400,000
Return on common equity...........
13.10%
16.25%
20.25%
c. Methods B and C provide a greater return on common equity
than Method A due to the effect of positive leverage.
Methods B and C 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
stockholders.
Method C uses debt and provides more leverage than Method B
in which preferred stock is issued. The difference is due to
the deductibility for tax purposes of the interest on debt,
whereas dividends on preferred stock are not deductible for
tax purposes.
740Managerial Accounting, 9/e
192.
Medium
NOTE TO THE INSTRUCTOR: Questions 192, 193, and 194 are different
versions of the same question.
Financial statements for Raridan Company appear below:
Raridan Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)
19X6
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 .................... 1,540
Total assets ................................ $2,040
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
Stockholders' equity:
Preferred stock, $10 par, 5% ..............
120
Common stock, $10 par .....................
200
Additional paid-in capital--common stock ..
260
Retained earnings .........................
910
Total stockholders' equity .............. 1,490
Total liabilities & stockholders' equity .... $2,040
19X5
$
140
170
110
70
490
1,520
$2,010
$
110
40
110
260
300
560
120
200
260
870
1,450
$2,010
Raridan Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)
Sales (all on account) ...................
Cost of goods sold .......................
Gross margin .............................
Operating expenses .......................
Net operating income .....................
Interest expense .........................
Net income before taxes ..................
Income taxes (30%) .......................
Net income ...............................
Managerial Accounting, 9/e
$1,900
1,330
570
220
350
30
320
96
$ 224
741
Required:
Compute the following for 19X6:
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
e. Times interest earned = Net operating income
÷ Interest expense
= $350 ÷ $30
= 11.67 times
f. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity
= $550 ÷ $1,490
= 0.37 to 1
742Managerial Accounting, 9/e
193.
Medium
NOTE TO THE INSTRUCTOR: Questions 192, 193, and 194 are different
versions of the same question.
Financial statements for Rarig Company appear below:
Rarig Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)
19X6
Current assets:
Cash and marketable securities ............ $ 210
Accounts receivable, net ..................
160
Inventory .................................
190
Prepaid expenses ..........................
30
Total current assets ....................
590
Noncurrent assets:
Plant & equipment, net .................... 1,500
Total assets ................................ $2,090
Current liabilities:
Accounts payable .......................... $ 170
Accrued liabilities .......................
60
Notes payable, short term .................
80
Total current liabilities ..............
310
Noncurrent liabilities:
Bonds payable .............................
460
Total liabilities .......................
770
Stockholders' equity:
Preferred stock, $5 par, 15% ..............
100
Common stock, $5 par ......................
160
Additional paid-in capital—common stock ..
110
Retained earnings .........................
950
Total stockholders' equity .............. 1,320
Total liabilities & stockholders' equity .... $2,090
19X5
$
190
150
180
30
550
1,470
$2,020
$
190
60
120
370
500
870
100
160
110
780
1,150
$2,020
Rarig Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)
Sales (all on account) ...................
Cost of goods sold .......................
Gross margin .............................
Operating expenses .......................
Net operating income .....................
Interest expense .........................
Net income before taxes ..................
Income taxes (30%) .......................
Net income ...............................
Managerial Accounting, 9/e
$1,800
1,260
540
210
330
50
280
84
$ 196
743
Required:
Compute the following for 19X6:
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
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 ÷ Stockholders' equity
= $770 ÷ $1,320
= 0.58 to 1
744Managerial Accounting, 9/e
194.
Medium
NOTE TO THE INSTRUCTOR: Questions 192, 193, and 194 are different
versions of the same question.
Financial statements for Rarity Company appear below:
Rarity Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)
19X6
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 .................... 1,440
Total assets ................................ $1,940
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
Stockholders' equity:
Preferred stock, $10 par, 5% ..............
100
Common stock, $5 par ......................
220
Additional paid-in capital--common stock ..
200
Retained earnings .........................
460
Total stockholders' equity ..............
980
Total liabilities & stockholders' equity .... $1,940
19X5
$
180
120
110
70
480
1,400
$1,880
$
170
80
240
490
500
990
100
220
200
370
890
$1,880
Rarity Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)
Sales (all on account) ...................
Cost of goods sold .......................
Gross margin .............................
Operating expenses .......................
Net operating income .....................
Interest expense .........................
Net income before taxes ..................
Income taxes (30%) .......................
Net income ...............................
Managerial Accounting, 9/e
$1,100
770
330
130
200
50
150
45
$ 105
745
Required:
Compute the following for 19X6:
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 ÷ $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 ÷ Stockholders' equity
= $960 ÷ $980
= 0.98 to 1
746Managerial Accounting, 9/e