Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis True/False Questions 1. Common-size statements are financial statements of companies of similar size. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 2. One limitation of vertical analysis is that it cannot be used to compare two companies that are significantly different in size. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 3. The gross margin percentage is computed by dividing the gross margin by total assets. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium 4. The sale of used equipment at book value for cash will increase earnings per share. Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium 5. Earnings per share is computed by dividing net income (after deducting preferred dividends) by the average number of common shares outstanding. Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 16-5
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Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
True/False Questions
1. Common-size statements are financial statements of companies of similar size.
7. An increase in the number of shares of common stock outstanding will decrease a company's price-earnings ratio if the market price per share remains unchanged.
17. Which of the following ratios would be least useful in determining a company's ability to pay its expenses and liabilities?A) current ratioB) acid-test ratioC) price-earnings ratioD) times interest earned ratio
Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,3,4 Level: Medium
18. Most stockholders would ordinarily be least concerned with which of the following ratios:A) earnings per share.B) dividend yield ratio.C) price-earnings ratio.D) acid-test ratio.
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
19. What effect will the issuance of common stock for cash at year-end have on the following ratios?
Return on Total Assets Debt-to-Equity RatioA) Increase IncreaseB) Increase DecreaseC) Decrease IncreaseD) Decrease Decrease
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,4 Level: Medium
20. The market price of Friden Company's common stock increased from $15 to $18. Earnings per share of common stock remained unchanged. The company's price-earnings ratio would:A) increase.B) decrease.C) remain unchanged.D) impossible to determine.
21. If a company is profitable and is effectively using leverage, whichone of the following ratios is likely to be the largest?A) Return on total assets.B) Return on total liabilities.C) Return on common stockholders' equity.D) Cannot be determined.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
22. Clark Company issued bonds with an interest rate of 10%. The company's return on assets is 12%. The company's return on common stockholders' equity would most likely:A) increase.B) decrease.C) remain unchanged.D) cannot be determined.
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
23. Which of the following transactions could generate positive financial leverage for a corporation?A) acquiring assets through the issuance of long-term debt.B) acquiring assets through the use of accounts payable.C) acquiring assets through the issuance of common stock.D) both A and B above
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard
24. Book value per common share is the amount of stockholders' equity per outstanding share of common stock. Which one of the following statements about book value per common share is most correct?A) Market price per common share usually approximates book value per common
share.B) Book value per common share is based on past transactions whereas the market
price of a share of stock mainly reflects what investors expect to happen in the future.
C) A market price per common share that is greater than book value per common share is an indication of an overvalued stock.
D) Book value per common share is the amount that would be paid to stockholders if the company were sold to another company.
25. The ratio of total cash, marketable securities, accounts receivable, and short-term notes to current liabilities is:A) the debt-to-equity ratio.B) the current ratio.C) the acid-test ratio.D) working capital.
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
26. A company has just converted a long-term note receivable into a short-term note receivable. The company's acid-test and current ratios are both greater than 1. This transaction will:A) increase the current ratio and decrease the acid-test ratio.B) increase the current ratio and increase the acid-test ratio.C) decrease the current ratio and increase the acid-test ratio.D) decrease the current ratio and decrease the acid-test ratio.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Hard
27. Broca Corporation has a current ratio of 2.5. Which of the following transactions will increase Broca's current ratio?A) the purchase of inventory for cash.B) the collection of an account receivable.C) the payment of an account payable.D) none of the above.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Hard
28. Allen Company's average collection period for accounts receivable was 25 days in year 1, but increased to 40 days in year 2. Which of the following would most likely be the cause of this change:A) a decrease in accounts receivable relative to sales in year 2.B) an increase in credit sales in year 2 as compared to year 1.C) a relaxation of credit policies in year 2.D) a decrease in accounts receivable in year 2 as compared to year 1.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Hard
29. Wolbers Company wrote off $100,000 in obsolete inventory. The company's inventory turnover ratio would:A) increase.B) decrease.C) remain unchanged.D) impossible to determine.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
30. Gottlob Corporation's most recent income statement appears below:
Sales (all on account)................................. $824,000Cost of goods sold...................................... 477,000 Gross margin.............................................. 347,000Selling and administrative expense............ 208,000 Net operating income................................. 139,000Interest expense.......................................... 37,000 Net income before taxes............................. 102,000Income taxes.............................................. 30,000 Net income................................................. $ 72,000
The gross margin percentage is closest to:A) 20.7%B) 72.7%C) 42.1%D) 481.9%
31. Crandall Company's net income last year was $60,000. The company paid preferred dividends of $10,000 and its average common stockholders' equity was $480,000. The company's return on common stockholders' equity for the year was closest to:A) 12.5%B) 10.4%C) 2.1%D) 14.6%
Return on common stockholders' equity = (Net income − Preferred dividends)÷ Average common stockholders' equity= ($60,000 − $10,000) ÷ $480,000 = 10.4%
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
32. Ardor Company's net income last year was $500,000. The company has 150,000 shares of common stock and 30,000 shares of preferred stock outstanding. There was no change in the number of common or preferred shares outstanding during the year. The company declared and paid dividends last year of $1.00 per share on the common stock and $0.70 per share on the preferred stock. The earnings per share of common stock is closest to:A) $3.33B) $3.19C) $2.33D) $3.47
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding= ($500,000 − $21,000) ÷ [(150,000 shares + 150,000 shares) ÷ 2] = $3.19 per share
33. The following information relates to Konbu Corporation for last year:
Price earnings ratio............ 15Dividend payout ratio........ 30%Earnings per share.............. $5
What is Konbu's dividend yield ratio for last year?A) 1.5%B) 2.0%C) 4.5%D) 10.0%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Solution:
Dividend yield ratio = Dividends per share* ÷ Market price per share **= $0.06 ÷ $3 = 2.0%* Dividends per share = Dividend payout ratio ÷ Earnings per share= 30% ÷ $5 = $0.06 per share** Market price per share = Price earnings ratio ÷ Earnings per share= 15 ÷ $5 = $3 per share
34. Richmond Company has 100,000 shares of $10 par value common stock issued and outstanding. Total stockholders' equity is $2,800,000 and net income for the year is $800,000. During the year Richmond paid $3.00 per share in dividends on its common stock. The market value of Richmond's common stock is $24. What is the price-earnings ratio?A) 3.0B) 3.5C) 4.8D) 8.0
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Source: CPA, adapted
Solution:
Price-earnings ratio = Market price per share ÷ Earnings per share*= $24 ÷ $8 = 3.0* Earnings per share = (Net income - Preferred dividends) ÷ Average # of common shares outstanding= ($800,000 - $0) ÷ [(100,000 shares + 100,000 shares) ÷ 2] = $8 per share
35. Hurst Company has 20,000 shares of common stock outstanding. These shares were originally issued at a price of $15 per share. The current book value is $25.00 per share and the current market value is $30.00 per share. The dividends on common stock for the year totaled $45,000. The dividend yield ratio is:A) 9%B) 7.5%C) 15%D) 10%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Solution:
Dividend yield ratio = Dividends per share ÷ Market price per share= ($45,000 ÷ 20,000) ÷ $30.00 = 7.5%
36. Bramble Company's net income last year was $65,000 and its interest expense was $15,000. Total assets at the beginning of the year were $620,000 and total assets at the end of the year were $650,000. The company's income tax rate was 40%. The company's return on total assets for the year was closest to:A) 11.7%B) 10.2%C) 12.6%D) 11.2%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**= $74,000 ÷ $635,000 = 11.7%*Adjusted net income = Net income + [Interest expense × (1-Tax rate)]= $65,000 + 15,000 × (1 − 0.40) = $74,000**Average total assets = ($620,000 + $650,000) ÷ 2 = $635,000
37. Dahl Company can borrow funds at 15% interest. Since the company's tax rate is 40%, its after-tax cost of interest is only 9%. Thus, the company reasons that if it can earn $70,000 per year before interest and taxes on a new investment of $500,000, then it will be better off by $25,000 per year.A) The company's reasoning is correct.B) The company's reasoning is not correct, since the after-tax cost of interest would
be 6 percent, rather than 9%.C) The company's reasoning is not correct, since interest is not tax-deductible.D) The company's reasoning is not correct, since it would be worse off by $3,000
per year after taxes.
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
38. Bucatini Corporation is contemplating the expansion of operations. This expansion will generate a 11% return on the funds invested. To finance this operation, Bucatini can either issue 12% bonds, issue 12% preferred stock, or issue common stock. Bucatini currently has a return on common stockholders' equity of 16%. Bucatini's tax rate is 30%. In which of the financing options above is positive financial leverage being generated?A) none of the options generate positive financial leverageB) the bondsC) the common stockD) the preferred stock
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
39. Consolo Corporation's net income for the most recent year was $809,000. A total of 100,000 shares of common stock and 200,000 shares of preferred stock were outstanding throughout the year. Dividends on common stock were $2.05 per share and dividends on preferred stock were $1.80 per share. The earnings per share of common stock is closest to:A) $2.44B) $8.09C) $4.49D) $6.04
Earnings per share = (Net Income - Preferred Dividends)÷ Average number of common shares outstanding= [$809,000 − (200,000 × $1.80)] ÷ [(100,000 shares + 100,000 shares) ÷ 2] = $4.49
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
40. Bary Corporation's net income last year was $2,604,000. The dividend on common stock was $2.50 per share and the dividend on preferred stock was $2.40 per share. The market price of common stock at the end of the year was $73.50 per share. Throughout the year, 300,000 shares of common stock and 100,000 shares of preferred stock were outstanding. The price-earnings ratio is closest to:A) 9.33B) 11.89C) 13.66D) 8.47
Price-earnings ratio = Market price per share ÷ Earnings per share*= $73.50 ÷ $7.88 = 9.33* Earnings per share = (Net income − Preferred dividends) ÷ Average number of common shares outstanding= [$2,604,000 − (100,000 × $2.40)] ÷ [(300,000 shares + 300,000 shares) ÷ 2] = $7.88
41. Arntson Corporation's net income last year was $7,975,000. The dividend on common stock was $8.20 per share and the dividend on preferred stock was $3.50 per share. The market price of common stock at the end of the year was $59.10 per share. Throughout the year, 500,000 shares of common stock and 200,000 shares of preferred stock were outstanding. The dividend payout ratio is closest to:A) 1.06B) 0.51C) 0.56D) 1.29
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
42. Last year, Soley Corporation's dividend on common stock was $11.60 per share and the dividend on preferred stock was $1.10 per share. The market price of common stock at the end of the year was $54.80 per share. The dividend yield ratio is closest to:A) 0.02B) 0.21C) 0.23D) 0.91
Dividend yield ratio = Dividends per share (see above) ÷ Market price per share= $11.60 ÷ $54.80 = 0.21
43. Inglish Corporation's most recent income statement appears below:
Sales (all on account)................................. $610,000Cost of goods sold...................................... 350,000 Gross margin.............................................. 260,000Selling and administrative expense............ 110,000 Net operating income................................. 150,000Interest expense.......................................... 30,000 Net income before taxes............................. 120,000Income taxes (30%)................................... 36,000 Net income................................................. $ 84,000
The beginning balance of total assets was $560,000 and the ending balance was $580,000. The return on total assets is closest to:A) 18.4%B) 14.7%C) 26.3%D) 21.1%
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**= $105,000 ÷ $570,000 = 18.4%*Adjusted net income= Net income + [Interest expense × (1 − Tax rate)]= $84,000 + [$30,000 × (1 − 0.30)] = $105,000**Average total assets = ($560,000 + $580,000) ÷ 2 = $570,000
44. Excerpts from Bellis Corporation's most recent balance sheet appear below:
Year 2 Year 1Preferred stock................................................. $ 100,000 $ 100,000Common stock................................................. 300,000 300,000Additional paid-in capital–common stock....... 370,000 370,000Retained earnings............................................. 480,000 390,000 Total stockholders’ equity................................ $1,250,000 $1,160,000
Net income for Year 2 was $160,000. Dividends on common stock were $47,000 in total and dividends on preferred stock were $23,000 in total. The return on common stockholders' equity for Year 2 is closest to:A) 9.4%B) 13.3%C) 12.4%D) 14.5%
A total of 400,000 shares of common stock and 20,000 shares of preferred stock were outstanding at the end of the year. The book value per share is closest to:A) $3.35B) $5.00C) $1.90D) $3.60
Book value per share= Common stockholders' equity ÷ Number of common shares outstanding* = $1,340,000 ÷ 400,000 shares = $3.35 per share
46. Dravis Company's working capital is $10,000 and its current liabilities are $84,000. The company's current ratio is closest to:A) 0.88B) 0.12C) 9.40D) 1.12
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Current ratio = Current assets ÷ Current liabilities = ($84,000 + $10,000) ÷ $84,000 = 1.12
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
47. Erascible Company has $13,000 in cash, $7,000 in marketable securities, $27,000 in accounts receivable, $20,000 in inventories, and $30,000 in current liabilities. The company's current assets consist of cash, marketable securities, accounts receivable, and inventory. The company's acid-test ratio is closest to:A) 1.57B) 0.90C) 1.33D) 2.23
48. Frame Company had $160,000 in sales on account last year. The beginning accounts receivable balance was $10,000 and the ending accounts receivable balance was $16,000. The company's accounts receivable turnover was closest to:A) 12.31B) 6.15C) 16.00D) 10.00
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
49. Graber Company had $130,000 in sales on account last year. The beginning accounts receivable balance was $18,000 and the ending accounts receivable balance was $12,000. The company's average collection period was closest to:A) 33.69 daysB) 42.12 daysC) 84.23 daysD) 50.54 days
Average collection period = 365 days ÷ Accounts receivable turnover* = 365 days ÷ 8.6667 = 42.12 days* Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance= $130,000 ÷ [($18,000 + $12,000) ÷ 2] = 8.6667
50. Harold Company, a retailer, had cost of goods sold of $260,000 last year. The beginning inventory balance was $20,000 and the ending inventory balance was $26,000. The company's inventory turnover was closest to:A) 5.65B) 10.00C) 13.00D) 11.30
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
51. Ira Company, a retailer, had cost of goods sold of $160,000 last year. The beginning inventory balance was $26,000 and the ending inventory balance was $24,000. The company's average sale period was closest to:A) 114.06 daysB) 54.75 daysC) 59.31 daysD) 57.03 days
Average sale period = 365 days ÷ Inventory turnover*= 365 days ÷ 6.4 = 57.03 days* Inventory turnover = Cost of goods sold ÷ Average inventory = $160,000 ÷ [($26,000 + $24,000) ÷ 2] = 6.4
52. Raatz Corporation's total current assets are $370,000, its noncurrent assets are $660,000, its total current liabilities are $220,000, its long-term liabilities are $410,000, and its stockholders' equity is $400,000. Working capital is:A) $370,000B) $150,000C) $250,000D) $400,000
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
53. Stubbs Corporation's total current assets are $390,000, its noncurrent assets are $630,000, its total current liabilities are $230,000, its long-term liabilities are $290,000, and its stockholders' equity is $500,000. The current ratio is closest to:A) 0.62A) 0.59B) 1.70C) 0.79
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
55. Eachus Corporation has provided the following data:
This Year Last YearAccounts receivable........... $135,000 $119,000Inventory............................ $136,000 $155,000Sales on account................. $698,000Cost of goods sold.............. $429,000
The accounts receivable turnover for this year is closest to:A) 0.88B) 5.50C) 5.17D) 1.13
56. Data from Millier Corporation's most recent balance sheet and income statement appear below:
This Year Last YearAccounts receivable........... $101,000 $125,000Inventory............................ $183,000 $190,000Sales on account................. $758,000Cost of goods sold.............. $457,000
The average collection period for this year is closest to:A) 48.7 daysB) 70.6 daysC) 85.6 daysD) 54.4 days
Average collection period = 365 days ÷ Accounts receivable turnover*= 365 ÷ 6.71 = 54.4 days *See above
57. Laware Corporation has provided the following data:
This Year Last YearAccounts receivable........... $118,000 $138,000Inventory............................ $180,000 $170,000Sales on account................. $714,000Cost of goods sold.............. $447,000
The inventory turnover for this year is closest to:A) 2.55B) 0.94C) 2.48D) 1.06
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
58. Data from Buker Corporation's most recent balance sheet and income statement appear below:
This Year Last YearAccounts receivable........... $101,000 $125,000Inventory............................ $155,000 $153,000Sales on account................. $662,000Cost of goods sold.............. $399,000
The average sale period for this year is closest to:A) 142.0 daysB) 3.6 daysC) 140.9 daysD) 3.7 days
Average sale period = 365 days ÷ Inventory turnover* = 365 ÷ 2.59= 140.9 days *See above
59. Last year Jar Company had a net income of $290,000, income tax expense of $66,000, and interest expense of $20,000. The company's times interest earned was closest to:A) 10.20B) 14.50C) 15.50D) 18.80
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
60. The times interest earned ratio of Whiting Company is 4.0. The interest expense for the year is $15,000, and the company's tax rate is 30%. Whiting Company's after-tax net income must be:A) $60,000B) $42,000C) $31,500D) $16,500
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Hard
Solution:
Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense4.0 = (Before-tax income + $15,000) ÷ $15,000$60,000 = Earnings before income taxes + $15,000Earnings before income taxes = $45,000After-tax net income = Earnings before income taxes × (1 − Tax rate)= $45,000 × (1 − 0.30) = $31,500
61. Karver Company has total assets of $180,000 and total liabilities of $130,000. The company's debt-to-equity ratio is closest to:A) 0.28B) 0.72C) 0.42D) 2.60
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
62. Brewster Company's debt-to-equity ratio is 0.8. Current liabilities total $100,000 and long term liabilities total $200,000. Brewster Company's total assets must be:A) $375,000B) $450,000C) $550,000D) $675,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Hard
63. Boyington Corporation has provided the following data from its most recent income statement:
Net operating income......... $87,000Interest expense.................. $49,000Net income before taxes..... $38,000Income taxes...................... $11,000Net income......................... $27,000
The times interest earned ratio is closest to:A) 0.55B) 0.78C) 2.54D) 1.78
Total current assets................................................ 560 510Plant and equipment, net........................................ 840 900 Total assets............................................................. $1,400 $1,410
Liabilities and Stockholders’ EquityCurrent liabilities:
Total current liabilities........................................... 270 270Bonds payable........................................................ 230 270 Total liabilities....................................................... 500 540 Stockholders’ equity:
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Income StatementFor the Year Ended December 31, Year 2
(in thousands of dollars)Sales (all on account)............................................. $1,370Cost of goods sold.................................................. 800 Gross margin.......................................................... 570Selling and administrative expense........................ 439 Net operating income............................................. 131Interest expense...................................................... 31 Net income before taxes......................................... 100Income taxes (30%)............................................... 30 Net income............................................................. $ 70
Dividends on common stock during Year 2 totaled $30 thousand. Dividends on preferred stock totaled $10 thousand. The market price of common stock at the end of Year 2 was $4.86 per share.
65. The gross margin percentage for Year 2 is closest to:A) 814.3%B) 71.3%C) 41.6%D) 12.3%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Solution:
Earnings per share = (Net Income - Preferred Dividends) ÷Average number of common shares outstanding* = ($70 − $10) ÷ 100 = $0.60
*Number of common shares outstanding = Common stock ÷ Par value= $100 ÷ $1 = 100
Dividend payout ratio = Dividends per share* ÷ Earnings per share= $0.30 ÷ $0.60 = 50.0%*Dividends per share = Common dividends ÷ Common shares= $30 ÷ 100 shares = $0.30 per share
69. The dividend yield ratio for Year 2 is closest to:A) 75.00%B) 8.23%C) 2.06%D) 6.17%
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷Average number of common shares outstanding* = ($70 − $10) ÷ 100 = $0.60
*Number of common shares outstanding = Common stock ÷ Par value= $100 ÷ $1 = 100
Dividend payout ratio = Dividends per share* ÷ Earnings per share= $0.30 ÷ $0.60 = 50.0%*Dividends per share = Common dividends ÷ Common shares= $30 ÷ 100 shares = $0.30 per share
Dividend yield ratio = Dividends per share ÷ Market price per share = $0.30 ÷ $4.86 = 6.17%
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
72. The book value per share at the end of Year 2 is closest to:A) $0.60B) $7.00C) $9.00D) $14.00
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Book value per share = Common stockholders' equity÷ Number of common shares outstanding* = $700 ÷ 100 shares = $7.00 per share*Number of common shares outstanding = Common stock ÷ Par value= $100 ÷ $1 per share = 100 shares
73. The working capital at the end of Year 2 is:A) $840 thousandB) $560 thousandC) $290 thousandD) $900 thousand
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Working capital = Current assets - Current liabilities = $560 thousand − $270 thousand = $290 thousand
74. The current ratio at the end of Year 2 is closest to:A) 0.36B) 0.40C) 0.89D) 2.07
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Current ratio = Current assets ÷ Current liabilities = $560 ÷ $270 = 2.07
Total current assets.......................................... 660 540Plant and equipment, net.................................. 680 750 Total assets....................................................... $1,340 $1,290
Liabilities and Stockholders’ EquityCurrent liabilities:
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Income StatementFor the Year Ended December 31, Year 2
(in thousands of dollars)Sales (all on account)....................................... $1,260Cost of goods sold............................................ 800 Gross margin.................................................... 460Selling and administrative expense.................. 272 Net operating income....................................... 188Interest expense................................................ 38 Net income before taxes................................... 150Income taxes (30%)......................................... 45 Net income....................................................... $ 105
Dividends on common stock during Year 2 totaled $50 thousand. Dividends on preferred stock totaled $5 thousand. The market price of common stock at the end of Year 2 was $11.30 per share.
82. The gross margin percentage for Year 2 is closest to:A) 57.5%B) 22.8%C) 438.1%D) 36.5%
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Solution:
Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($105 − $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $2 per share = 100 shares
84. The price-earnings ratio for Year 2 is closest to:A) 11.30B) 10.76C) 7.53D) 6.01
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income - Preferred Dividends)÷ Average number of common shares outstanding*= ($105 - $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $2 per share = 100 sharesPrice-earnings ratio = Market price per share ÷ Earnings per share= $11.30 ÷ $1.00 = 11.30
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
85. The dividend payout ratio for Year 2 is closest to:A) 47.6%B) 55.0%C) 50.0%D) 500.0%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($105 − $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $2 per share = 100 sharesDividend payout ratio = Dividends per share* ÷ Earnings per share= $0.50 ÷ $1.00 = 50.0%*Dividends per share = Common dividends ÷ Common shares= $50 ÷ 100 shares = $0.50 per share
86. The dividend yield ratio for Year 2 is closest to:A) 4.42%B) 0.45%C) 90.91%D) 4.87%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($105 − $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $2 per share = 100 sharesDividend payout ratio = Dividends per share* ÷ Earnings per share= $0.50 ÷ $1.00 = 50.0%*Dividends per share = Common dividends ÷ Common shares= $50 ÷ 100 shares = $0.50 per shareDividend yield ratio = Dividends per share ÷ Market price per share = $0.50 ÷ $11.30 = 4.42%
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
89. The book value per share at the end of Year 2 is closest to:A) $1.00B) $7.60C) $13.40D) $6.60
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Book value per share = Common stockholders' equity÷ Number of common shares outstanding* = $660 ÷ 100 shares = $6.60 per share*Number of common shares outstanding = Common stock ÷ Par value= $200 ÷ $2 per share = 100 shares
Use the following to answer questions 90-92:
Payne Company's sales and current assets have been reported as follows over the last four years:
Year 4 Year 3 Year 2 Year 1Sales................................... $810,000 $720,000 $630,000 $600,000
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
90. Suppose that Payne Company employs trend percentages to analyze performance with Year 1 as the base year. Sales for Year 4 expressed as a trend percentage would be closest to:A) 128.6%B) 74.1%C) 112.5%D) 135.0%
Sales as trend percentage = Year 4 sales ÷ Year 1 sales = ($810,000 ÷ $600,000) = 135.0%
91. Suppose that Payne Company employs trend percentages to analyze performance with Year 2 as the base year. Inventory for Year 3 expressed as a trend percentage would be closest to:A) 125%B) 80%C) 90%D) 36%
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
92. Suppose that Payne Company employs common size statements to analyze changes in the current assets. The increase in the Accounts Receivable account when comparing Year 3 to Year 2 would be closest to:A) 1.3% increaseB) 0.4% increaseC) 5.3% increaseD) 4.2% increase
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Orahood CompanyIncome Statement
For the Year Ended December 31, Year 2(dollars in thousands)
Sales (all on account).......................................... $1,740Cost of goods sold............................................... 1,210 Gross margin....................................................... 530Selling and administrative expense..................... 210 Net operating income.......................................... 320Interest expense................................................... 30 Net income before taxes...................................... 290Income taxes (30%)............................................ 87 Net income.......................................................... $ 203
Dividends during Year 2 totaled $153 thousand, of which $10 thousand were preferred dividends. The market price of a share of common stock on December 31, Year 2 was $80.
93. Orahood Company's earnings per share of common stock for Year 2 was closest to:A) $7.25B) $2.14C) $4.83D) $5.08
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($203 − $10) ÷ (40 shares + 40 shares)/2 = $4.83 per share*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $5 per share = 40 shares
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
94. Orahood Company's dividend yield ratio on December 31, Year 2 was closest to:A) 4.2%B) 4.5%C) 2.1%D) 4.8%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($203 − $10) ÷ (40 shares + 40 shares)/2 = $4.83 per share*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $5 per share = 40 sharesDividends per share = Common dividends ÷ Common shares = $143 ÷ 40 shares = $3.58 per shareDividend yield ratio = Dividends per share ÷ Market price per share = $3.58 ÷ $80 = 4.5%
95. Orahood Company's return on total assets for Year 2 was closest to:A) 11.1%B) 10.0%C) 9.0%D) 10.5%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**= $224 ÷ $2,020 = 11.1%*Adjusted net income= Net income + [Interest expense × (1 − Tax rate)]= $203 + [$30 × (1 − 0.30)] = $224**Average total assets = ($2,000 + $2,040) ÷ 2 = $2,020
98. Orahood Company's average sale period for Year 2 was closest to:A) 25.2 daysB) 46.8 daysC) 32.5 daysD) 36.2 days
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Average sale period = 365 days ÷ Inventory turnover*= 365 days ÷ 10.08 = 36.2 days*Inventory turnover = Cost of goods sold ÷ Average inventory = $1,210 ÷ ($120 + $120)/2 = 10.08
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Use the following to answer questions 100-103:
Financial statements for Matti Company appear below:
Matti CompanyBalance Sheet
As of December 31Year 2 Year 1
Current assets......................................................... $ 90,000 $ 70,000Long term investments........................................... 110,000 110,000Plant, property, and equipment (net)...................... 500,000 420,000 Total assets............................................................. $700,000 $600,000
Current liabilities................................................... $110,000 $80,000Bonds payable........................................................ 140,000 100,000Preferred stock (par value $100, 8%).................... 75,000 75,000Common stock (par value $5)................................ 125,000 125,000Additional paid-in capital–common stock............. 220,000 220,000Retained earnings................................................... 30,000 0 Total liabilities and equities................................... $700,000 $600,000
Matti CompanyIncome Statement
For the Year Ended December 31, Year 2
Sales....................................................................... $800,000Cost of goods sold.................................................. 450,000 Gross margin.......................................................... 350,000Selling and administrative expense........................ 250,000 Net operating income............................................. 100,000Interest expense...................................................... 10,000 Net income before taxes......................................... 90,000Income taxes (30%)............................................... 27,000 Net Income............................................................. $ 63,000
Dividends were $33,000 for the year, of which $6,000 were for preferred stock.
101. The return on total assets for Matti Company for Year 2 is closest to:A) 10.8%B) 10.0%C) 9.0%D) 10.2%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**= $70,000 ÷ $650,000 = 10.8%*Adjusted net income = Net income + [Interest expense × (1 − Tax rate)]= $63,000 + [$10,000 × (1 − 0.30)] = $70,000**Average total assets = ($600,000 + $700,000) ÷ 2 = $650,000
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Lardy CompanyIncome Statement
For the Year Ended December 31, Year 2(dollars in thousands)
Sales (all on account)............................................. $2,060Cost of goods sold.................................................. 1,440 Gross margin.......................................................... 620Selling and administrative expense........................ 240 Net operating income............................................. 380Interest expense...................................................... 40 Net income before taxes......................................... 340Income taxes (30%)............................................... 102 Net income............................................................. $ 238
Dividends during Year 2 totaled $158 thousand, of which $12 thousand were preferred dividends. The market price of a share of common stock on December 31, Year 2 was $210.
104. Lardy Company's earnings per share of common stock for Year 2 was closest to:A) $16.14B) $24.29C) $17.00D) $3.65
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷Average number of common shares outstanding*= ($238 − $12) ÷ 14 = $16.14
*Number of common shares outstanding = Common stock ÷ Par value= $140 ÷ $10 =14
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
110. Lardy Company's book value per share at the end of Year 2 was closest to:A) $21.43B) $114.29C) $10.00D) $122.86
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Book value per share = Common stockholders' equity ÷Number of common shares outstanding* = $1,600 ÷ 14 = $114.29
*Number of common shares outstanding = Common stock ÷ Par value= $140 ÷ $10 = 14
Use the following to answer questions 111-113:
Information concerning the common stock of Hopkins Company follows:
Market price per share on December 31.... $36.00Book value per share on December 31...... $27.00Earnings per share for the year.................. $4.50Par value per share..................................... $10.00Dividend per share for the year.................. $1.80
Total current assets................................................ 550 540Plant and equipment, net........................................ 830 830 Total assets............................................................. $1,380 $1,370
Liabilities and Stockholders’ EquityCurrent liabilities:
Total current liabilities........................................... 190 180Bonds payable........................................................ 250 300 Total liabilities....................................................... 440 480 Stockholders’ equity:
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Income StatementFor the Year Ended December 31, Year 2
(in thousands of dollars)Sales (all on account)............................................. $1,290Cost of goods sold.................................................. 770 Gross margin.......................................................... 520Selling and administrative expense........................ 294 Net operating income............................................. 226Interest expense...................................................... 33 Net income before taxes......................................... 193Income taxes (30%)............................................... 58 Net income............................................................. $ 135
Dividends on common stock during Year 2 totaled $80 thousand. Dividends on preferred stock totaled $5 thousand. The market price of common stock at the end of Year 2 was $11.05 per share.
114. The earnings per share of common stock for Year 2 is closest to:A) $0.68B) $0.65C) $1.13D) $0.97
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷Average number of common shares outstanding*= ($135 − $5) ÷ 200 = $0.65
*Number of common shares outstanding = Common stock ÷ Par value= $200 ÷ $1 = 200
Total stockholders’ equity...................................... $1,070 $1,040
Sales (all on account) $1,290Cost of goods sold 790 Gross margin 500Selling and administrative expense 334 Net operating income 166Interest expense 30 Net income before taxes 136Income taxes (30%) 41 Net income $ 95
Dividends on common stock during Year 2 totaled $60 thousand. Dividends on preferred stock totaled $5 thousand. The market price of common stock at the end of Year 2 was $3.87 per share.
Sales (all on account)............................................. $1,800,000Cost of goods sold.................................................. 1,120,000 Gross margin.......................................................... 680,000Selling and administrative expenses...................... 520,000 Net operating income............................................. 160,000Interest expense...................................................... 20,000 Net income before taxes......................................... 140,000Income taxes (30%)............................................... 42,000 Net income............................................................. $ 98,000
130. Suppose that the Inventory account had a balance of $300,000 at the beginning of the year. Spencer Company's inventory turnover for the year was closest to:A) 3.50B) 6.00C) 5.63D) 3.23
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
131. Suppose that the balance of Accounts Receivable remained unchanged between the beginning and end of the year. Spencer Company's average collection period for the year was closest to:A) 27 daysB) 28 daysC) 49 daysD) 75 days
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,800,000 ÷ $240,000 = 7.5
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Marbet CompanyIncome Statement
For the Year Ended December 31, Year 2(dollars in thousands)
Sales (all on account)............................................. $1,600Cost of goods sold.................................................. 1,120 Gross margin.......................................................... 480Selling and administrative expense........................ 190 Net operating income............................................. 290Interest expense...................................................... 50 Net income before taxes......................................... 240Income taxes (30%)............................................... 72 Net income............................................................. $ 168
133. Marbet Company's working capital (in thousands of dollars) at the end of Year 2 was closest to:A) $90B) $1,500C) $490D) $600
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Working capital = Current assets − Current liabilities = $490 − $400 = $90
134. Marbet Company's current ratio at the end of Year 2 was closest to:A) 0.37B) 1.20C) 1.23D) 0.44
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Current ratio = Current assets ÷ Current liabilities = $490 ÷ $400 = 1.23
Total current assets................................................ 320 400Plant and equipment, net........................................ 890 830 Total assets............................................................. $1,210 $1,230
Liabilities and Stockholders’ EquityCurrent liabilities:
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Income StatementFor the Year Ended December 31, Year 2
(in thousands of dollars)Sales (all on account)............................................. $1,280Cost of goods sold.................................................. 870 Gross margin.......................................................... 410Selling and administrative expense........................ 215 Net operating income............................................. 195Interest expense...................................................... 16 Net income before taxes......................................... 179Income taxes (30%)............................................... 54 Net income............................................................. $ 125
143. The working capital at the end of Year 2 is:A) $320 thousandB) $860 thousandC) $890 thousandD) $40 thousand
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Working capital = Current assets − Current liabilities = $320 thousand − $280 thousand = $40 thousand
144. The current ratio at the end of Year 2 is closest to:A) 1.09B) 1.14C) 0.26D) 0.29
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Current ratio = Current assets ÷ Current liabilities = $320 ÷ $280 = 1.14
Inventory turnover = Cost of goods sold ÷ Average inventory* = $700 ÷ $155 = 4.52*Average inventory = ($150 + $160) ÷ 2 = $155Average sale period = 365 days ÷ Inventory turnover= 365 days ÷ 4.52 = 80.8 days
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Narasaki CompanyIncome Statement
For the Year Ended December 31, Year 2(dollars in thousands)
Sales (all on account)............................................. $2,960Cost of goods sold.................................................. 2,070 Gross margin.......................................................... 890Selling and administrative expense........................ 350 Net operating income............................................. 540Interest expense...................................................... 50 Net income before taxes......................................... 490Income taxes (30%)............................................... 147 Net income............................................................. $ 343
167. Narasaki Company's times interest earned for Year 2 was closest to:A) 17.8B) 10.8C) 9.8D) 6.9
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Solution:
Times interest earned = Net operating income ÷ Interest expense= $540 ÷ $50 = 10.8
168. Narasaki Company's debt-to-equity ratio at the end of Year 2 was closest to:A) 0.48B) 0.34C) 1.55D) 0.82
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Total current assets............................................. 430 450Plant and equipment, net..................................... 670 730 Total assets.......................................................... $1,100 $1,180
Liabilities and Stockholders’ EquityCurrent liabilities:
Total current liabilities........................................ 290 330Bonds payable..................................................... 70 120 Total liabilities.................................................... 360 450 Stockholders’ equity:..........................................
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Income StatementFor the Year Ended December 31, Year 2
(in thousands of dollars)Sales (all on account).......................................... $1,270Cost of goods sold............................................... 790 Gross margin....................................................... 480Selling and administrative expense..................... 369 Net operating income.......................................... 111Interest expense................................................... 18 Net income before taxes...................................... 93Income taxes (30%)............................................ 28 Net income.......................................................... $ 65
169. The times interest earned for Year 2 is closest to:A) 5.17B) 8.81C) 6.17D) 3.61
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Solution:
Times interest earned = Net operating income ÷ Interest expense= $111 ÷ $18 = 6.17
170. The debt-to-equity ratio at the end of Year 2 is closest to:A) 0.20B) 0.56C) 0.09D) 0.49
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Use the following to answer questions 171-172:
Data from Pruette Corporation's most recent balance sheet and the company's income statement appear below:
Year 2 Year 1Total assets..................................... $1,260 $1,230Total liabilities............................... $580 $560Total stockholders’ equity.............. $680 $670
Income StatementFor the Year Ended December 31, Year 2
(in thousands of dollars)Sales (all on account)................................. $1,270Cost of goods sold.................................................. 860 Gross margin..........................................................410Selling and administrative expense........................ 280 Net operating income.............................................130Interest expense...................................................... 30 Net income before taxes.........................................100Income taxes (30%)............................................... 30 Net income.............................................................$ 70
171. The times interest earned for Year 2 is closest to:A) 6.19B) 3.33C) 4.33D) 2.33
Total current assets............................................... 700 570Plant and equipment, net...................................... 860 920 Total assets........................................................... $1,560 $1,490
Liabilities and Stockholders’ EquityCurrent liabilities:
Total current liabilities......................................... 320 290Bonds payable...................................................... 210 220 Total liabilities...................................................... 530 510 Stockholders’ equity:
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Income StatementFor the Year Ended December 31, Year 2
(in thousands of dollars)Sales (all on account)............................................ $1,220Cost of goods sold................................................ 790 Gross margin........................................................ 430Selling and administrative expense...................... 268 Net operating income........................................... 162Interest expense.................................................... 26 Net income before taxes....................................... 136Income taxes (30%).............................................. 41 Net income............................................................ $ 95
Dividends on common stock during Year 2 totaled $40 thousand. Dividends on preferred stock totaled $5 thousand. The market price of common stock at the end of Year 2 was $12.87 per share.
Required:
Compute the following for Year 2:a. Gross margin percentage.b. Earnings per share (of common stock).c. Price-earnings ratio.d. Dividend payout ratio.e. Dividend yield ratio.f. Return on total assets.g. Return on common stockholders' equity.h. Book value per share.i. Working capital.j. Current ratio.k. Acid-test ratio.l. Accounts receivable turnover.m. Average collection period.n. Inventory turnover.o. Average sale period.p. Times interest earned.q. Debt-to-equity ratio.
b. Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($95 − $5) ÷ (100 shares + 100 shares)/2 = $0.90 per share*Number of common shares outstanding= Common stock ÷ Par value = $100 ÷ $1 per share = 100 shares
c. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)= $12.87 ÷ $0.90 = 14.3
d. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)= $0.40 ÷ $0.90 = 44.4%*Dividends per share = Common dividends ÷ Common shares (see above)= $40 ÷ 100 shares = $0.40 per share
e. Dividend yield ratio = Dividends per share (see above) ÷ Market price per share= $0.40 ÷ $12.87 = 3.11%
f. Return on total assets = Adjusted net income* ÷ Average total assets**= $113.2 ÷ $1,525 = 7.42%*Adjusted net income= Net income + [Interest expense × (1−Tax rate)]= $95 + 26 × (1-0.30) = $113.2**Average total assets = ($1,560 + $1,490) ÷ 2 = $1,525
g. Return on common stockholders' equity = (Net income − Preferred dividends)÷ Average common stockholders' equity*= ($95 − $5) ÷ $905 = 9.94%*Average common stockholders' equity = ($930 + $880) ÷ 2 = $905
h. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding* = $930 ÷ 100 shares = $9.30 per share*Number of common shares outstanding = Common stock ÷ Par value= $100 ÷ $1 per share = 100 shares
i. Working capital = Current assets − Current liabilities = $700 - $320 = $380
Total current assets................................................ 510 560Plant and equipment, net........................................ 860 820 Total assets............................................................. $1,370 $1,380
Liabilities and Stockholders’ EquityCurrent liabilities:
Total current liabilities........................................... 320 340Bonds payable........................................................ 70 100 Total liabilities....................................................... 390 440 Stockholders’ equity:
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Income StatementFor the Year Ended December 31, Year 2
(in thousands of dollars)Sales (all on account)............................................. $1,350Cost of goods sold.................................................. 820 Gross margin.......................................................... 530Selling and administrative expense........................ 399 Net operating income............................................. 131Interest expense...................................................... 17 Net income before taxes......................................... 114Income taxes (30%)............................................... 34 Net income............................................................. $ 80
Dividends on common stock during Year 2 totaled $20 thousand. Dividends on preferred stock totaled $20 thousand. The market price of common stock at the end of Year 2 was $2.88 per share.
Required:
Compute the following for Year 2:a. Gross margin percentage.b. Earnings per share (of common stock).c. Price-earnings ratio.d. Dividend payout ratio.e. Dividend yield ratio.f. Return on total assets.g. Return on common stockholders' equity.h. Book value per share.
b. Earnings per share = (Net Income - Preferred Dividends)÷ Average number of common shares outstanding*= ($80 - $20) ÷ (200 shares + 200 shares)/2 = $0.30 per share*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $1 per share = 200 shares
c. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)= $2.88 ÷ $0.30 = 9.6
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
d. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)= $0.10 ÷ $0.30 = 33.3%*Dividends per share = Common dividends ÷ Common shares (see above)= $20 ÷ 200 shares = $0.10 per share
e. Dividend yield ratio = Dividends per share (see above) ÷ Market price per share= $0.10 ÷ $2.88 = 3.47%
f. Return on total assets = Adjusted net income* ÷ Average total assets**= $91.9 ÷ $1,375 = 6.68%*Adjusted net income = Net income + [Interest expense × (1−Tax rate)]= $80 + 17 × (1−0.30) = $91.9**Average total assets = ($1,370 + $1,380) ÷ 2 = $1,375
g. Return on common stockholders' equity = (Net income − Preferred dividends)÷ Average common stockholders' equity*= ($80 − $20) ÷ $760 = 7.89%*Average common stockholders' equity = ($780 + $740) ÷ 2 = $760
h. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding*= $780 ÷ 200 shares = $3.90 per share*Number of common shares outstanding = Common stock ÷ Par value= $200 ÷ $1 per share = 200 shares
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
175. Philo Corporation's most recent income statement appears below:
Sales (all on account)................................. $561,000Cost of goods sold...................................... 325,000 Gross margin.............................................. 236,000Selling and administrative expense............ 106,000 Net operating income................................. 130,000Interest expense.......................................... 35,000 Net income before taxes............................. 95,000Income taxes.............................................. 30,000 Net income................................................. $ 65,000
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Pratt CompanyIncome Statement
For the Year Ended December 31, Year 2(dollars in thousands)
Sales (all on account)............................................. $2,000Cost of goods sold.................................................. 1,400 Gross margin.......................................................... 600Selling and administrative expense........................ 240 Net operating income............................................. 360Interest expense...................................................... 30 Net income before taxes......................................... 330Income taxes (30%)............................................... 99 Net income............................................................. $ 231
Dividends during Year 2 totaled $121 thousand, of which $12 thousand were preferred dividends. The market price of a share of common stock on December 31, Year 2 was $80.
Required:
Compute the following for Year 2: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 ratio.k. Accounts receivable turnover.l. Average collection period.m. Inventory turnover.n. Average sale period.o. Times interest earned.p. Debt-to-equity ratio.
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Qadri CompanyIncome Statement
For the Year Ended December 31, Year 2(dollars in thousands)
Sales (all on account)............................................. $2,300Cost of goods sold.................................................. 1,610 Gross margin.......................................................... 690Selling and administrative expense........................ 270 Net operating income............................................. 420Interest expense...................................................... 30 Net income before taxes......................................... 390Income taxes (30%)............................................... 117 Net income............................................................. $ 273
Dividends during Year 2 totaled $163 thousand, of which $6 thousand were preferred dividends. The market price of a share of common stock on December 31, Year 2 was $150.
Required:
Compute the following for Year 2: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.
Ans:
a. Earnings per share = (Net Income − Preferred Dividends) ÷Average number of common shares outstanding* = ($273 − $6) ÷ 22 = $12.14
*Number of common shares outstanding = Common stock ÷ Par value= $220 ÷ $10 = 22
b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)= $150 ÷ $12.14 = 12.4
Total current assets................................................ 570 580Plant and equipment, net........................................ 840 830 Total assets............................................................. $1,410 $1,410
Liabilities and Stockholders’ EquityCurrent liabilities:
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Income StatementFor the Year Ended December 31, Year 2
(in thousands of dollars)Sales (all on account)............................................. $1,410Cost of goods sold.................................................. 860 Gross margin.......................................................... 550Selling and administrative expense........................ 449 Net operating income............................................. 101Interest expense...................................................... 15 Net income before taxes......................................... 86Income taxes (30%)............................................... 26 Net income............................................................. $ 60
Dividends on common stock during Year 2 totaled $20 thousand. Dividends on preferred stock totaled $20 thousand. The market price of common stock at the end of Year 2 was $2.36 per share.
Required:
Compute the following for Year 2: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.
Ans:
a. Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($60 - $20) ÷ (200 shares + 200 shares)/2 = $0.20 per share*Number of common shares outstanding = Common stock ÷ Par value = $400 ÷ $2 per share = 200 shares
b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)= $2.36 ÷ $0.20 = 11.8
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
c. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)= $0.10 ÷ $0.20 = 50.0%*Dividends per share = Common dividends ÷ Common shares (see above)= $20 ÷ 200 shares = $0.10 per share
d. Dividend yield ratio = Dividends per share (see above) ÷ Market price per share = $0.10 ÷ $2.36 = 4.24%
e. Return on total assets = Adjusted net income* ÷ Average total assets**= $70.5 ÷ $1,410 = 5.00%*Adjusted net income= Net income + [Interest expense × (1−Tax rate)]= $60 + 15 × (1 − 0.30) = $70.5**Average total assets = ($1,410 + $1,410) ÷ 2 = $1,410
f. Return on common stockholders' equity= (Net income − Preferred dividends) ÷ Average common stockholders' equity*= ($60 − $20) ÷ $870 = 4.60%*Average common stockholders' equity = ($880 + $860) ÷ 2 = $870
g. Book value per share = Common stockholders' equity÷ Number of common shares outstanding* = $880 ÷ 200 shares = $4.40 per share*Number of common shares outstanding = Common stock ÷ Par value= $400 ÷ $2 per share = 200 shares
Net income for Year 2 was $110 thousand. Interest expense was $21 thousand. The tax rate was 30%. Dividends on common stock during Year 2 totaled $40 thousand. Dividends on preferred stock totaled $10 thousand. The market price of common stock at the end of Year 2 was $9.15 per share.
Required:
Compute the following for Year 2: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.
Ans:
a. Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding*= ($110 − $10) ÷ (200 shares + 200 shares)/2 = $0.50 per share*Number of common shares outstanding = Common stock ÷ Par value= $400 ÷ $2 per share = 200 shares
b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)= $9.15 ÷ $0.50 = 18.3
c. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)= $0.20 ÷ $0.50 = 40.0%*Dividends per share = Common dividends ÷ Common shares (see above)= $40 ÷ 200 shares = $0.20 per share
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
d. Dividend yield ratio = Dividends per share (see above) ÷ Market price per share = $0.20 ÷ $9.15 = 2.19%
e. Return on total assets = Adjusted net income* ÷ Average total assets**= $124.7 ÷ $1,505 = 8.29%*Adjusted net income = Net income + [Interest expense × (1−Tax rate)]= $110 + 21 × (1 − 0.30) = $124.7**Average total assets = ($1,520 + $1,490) ÷ 2 = $1,505
f. Return on common stockholders' equity = (Net income − Preferred dividends)÷ Average common stockholders' equity* = ($110 − $10) ÷ $910 = 10.99%*Average common stockholders' equity = ($940 + $880) ÷ 2 = $910
g. Book value per share = Common stockholders' equity÷ Number of common shares outstanding*= $940 ÷ 200 shares = $4.70 per share*Number of common shares outstanding = Common stock ÷ Par value= $400 ÷ $2 per share = 200 shares
180. Mikolajczyk Corporation's net income for the most recent year was $1,379,000. A total of 100,000 shares of common stock and 200,000 shares of preferred stock were outstanding throughout the year. Dividends on common stock were $1.15 per share and dividends on preferred stock were $1.30 per share.
Required:
Compute the earnings per share of common stock. Show your work!
Ans:
Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding= ($1,379,000 − $260,000) ÷ 100,000 shares = $11.19 per share
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
181. Hoa Corporation's net income last year was $7,460,000. The dividend on common stock was $8.40 per share and the dividend on preferred stock was $4.30 per share. The market price of common stock at the end of the year was $78.90 per share. Throughout the year, 500,000 shares of common stock and 100,000 shares of preferred stock were outstanding.
Required:
Compute the price-earnings ratio. Show your work!
Ans:
Price-earnings ratio = Market price per share ÷ Earnings per share*= $78.90 ÷ $14.06 = 5.61*Earnings per share= (Net Income - Preferred Dividends) ÷ Average number of common shares outstanding = ($7,460,000 - $430,000) ÷ 500,000 shares = $14.06 per share
182. Dupas Corporation's net income last year was $7,330,000. The dividend on common stock was $12.70 per share and the dividend on preferred stock was $1.70 per share. The market price of common stock at the end of the year was $47.20 per share. Throughout the year, 500,000 shares of common stock and 200,000 shares of preferred stock were outstanding.
Required:
Compute the dividend payout ratio. Show your work!
Ans:
Dividend payout ratio = Dividends per share ÷ Earnings per share*= $12.70 ÷ $13.98 = 0.91*Earnings per share = (Net Income − Preferred Dividends)÷ Average number of common shares outstanding= ($7,330,000 − $340,000) ÷ 500,000 shares = $13.98 per share
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
183. Last year, Sheline Corporation's dividend on common stock was $13.00 per share and the dividend on preferred stock was $2.10 per share. The market price of common stock at the end of the year was $68.60 per share.
Required:
Compute the dividend yield ratio. Show your work!
Ans:
Dividend yield ratio = Dividends per share ÷ Market price per share= $13.00 ÷ $68.60 = 0.19
184. Allaman Corporation's most recent income statement appears below:
Sales (all on account)................................. $760,000Cost of goods sold...................................... 450,000 Gross margin.............................................. 310,000Selling and administrative expense............ 100,000 Net operating income................................. 210,000Interest expense.......................................... 40,000 Net income before taxes............................. 170,000Income taxes (30%)................................... 51,000 Net income................................................. $119,000
The beginning balance of total assets was $930,000 and the ending balance was $970,000.
Required:
Compute the return on total assets. Show your work!
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Ans:
Return on total assets = Adjusted net income* ÷ Average total assets**= $147,000 ÷ $950,000 = 15.5%*Adjusted net income = Net income + [Interest expense × (1−Tax rate)]= $119,000 + 40,000 × (1 − 0.30) = $147,000**Average total assets = ($930,000 + $970,000) ÷ 2 = $950,000
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Rarick CompanyIncome Statement
For the Year Ended December 31, Year 2(dollars in thousands)
Sales (all on account)............................................. $2,400Cost of goods sold.................................................. 1,680 Gross margin.......................................................... 720Selling and administrative expense........................ 280 Net operating income............................................. 440Interest expense...................................................... 30 Net income before taxes......................................... 410Income taxes (30%)............................................... 123 Net income............................................................. $ 287
Required:
Compute the following for Year 2:a. Current ratio.b. Acid-test ratio.c. Average collection period.d. Inventory turnover.e. Times interest earned.f. Debt-to-equity ratio.
Ans:
a. Current ratio = Current assets ÷ Current liabilities = $410 ÷ $430 = 0.95
b. Acid-test ratio = Quick assets* ÷ Current liabilities = $300 ÷ $430 = 0.70
Total current assets................................................ 500 610Plant and equipment, net........................................ 810 740 Total assets............................................................. $1,310 $1,350
Liabilities and Stockholders’ EquityCurrent liabilities:
Total current liabilities........................................... 210 220Bonds payable........................................................ 190 240 Total liabilities....................................................... 400 460 Stockholders’ equity:
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Income StatementFor the Year Ended December 31, Year 2
(in thousands of dollars)Sales (all on account)............................................. $1,260Cost of goods sold.................................................. 770 Gross margin.......................................................... 490Selling and administrative expense........................ 400 Net operating income............................................. 90Interest expense...................................................... 26 Net income before taxes......................................... 64Income taxes (30%)............................................... 19 Net income............................................................. $ 45
Required:
Compute the following for Year 2:a. Working capital.b. Current ratio.c. Acid-test ratio.d. Accounts receivable turnover.e. Average collection period.f. Inventory turnover.g. Average sale period.
Ans:
a. Working capital = Current assets − Current liabilities = $500 thousand − $210 thousand = $290 thousand
b. Current ratio = Current assets ÷ Current liabilities = $500 ÷ $210 = 2.38
Total current liabilities................... $320 $340
Sales on account during the year totaled $1,320 thousand. Cost of goods sold was $730 thousand.
Required:
Compute the following for Year 2:a. Working capital.b. Current ratio.c. Acid-test ratio.d. Accounts receivable turnover.e. Average collection period.f. Inventory turnover.g. Average sale period.
190. Romaine Corporation's total current assets are $300,000, its noncurrent assets are $570,000, its total current liabilities are $270,000, its long-term liabilities are $360,000, and its stockholders' equity is $240,000.
Required:
Compute the company's working capital. Show your work!
Ans:
Working capital = Current assets − Current liabilities = $300,000 − $270,000 = $30,000
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
191. Wayment Corporation's total current assets are $310,000, its noncurrent assets are $680,000, its total current liabilities are $270,000, its long-term liabilities are $460,000, and its stockholders' equity is $260,000.
Required:
Compute the company's current ratio. Show your work!
Ans:
Current ratio = Current assets ÷ Current liabilities = $310,000 ÷ $270,000 = 1.15
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
193. Cozzolino Corporation has provided the following data:
This Year Last YearAccounts receivable........... $118,000 $123,000Inventory............................ $141,000 $165,000Sales on account................. $687,000Cost of goods sold.............. $455,000
Required:
Compute the accounts receivable turnover for this year. Show your work!
194. Data from Ringwald Corporation's most recent balance sheet and income statement appear below:
This Year Last YearAccounts receivable........... $118,000 $103,000Inventory............................ $164,000 $173,000Sales on account................. $727,000Cost of goods sold.............. $481,000
Required:
Compute the average collection period for this year:
195. Hsieh Corporation has provided the following data:
This Year Last YearAccounts receivable........... $104,000 $115,000Inventory............................ $150,000 $157,000Sales on account................. $879,000Cost of goods sold.............. $575,000
Required:
Compute the inventory turnover for this year:
Ans:
Inventory turnover = Cost of goods sold ÷ Average inventory*= $575,000 ÷ $153,500 = 3.75*Average inventory = ($150,000 + $157,000) ÷ 2 = $153,500
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
196. Data from Buttler Corporation's most recent balance sheet and income statement appear below:
This Year Last YearAccounts receivable........... $134,000 $138,000Inventory............................ $151,000 $171,000Sales on account................. $864,000Cost of goods sold.............. $675,000
Required:
Compute the average sale period for this year:
Ans:
Average sale period = 365 days ÷ Inventory turnover*= 365 days ÷ 4.19 = 87.1 days*Inventory turnover = Cost of goods sold ÷ Average inventory*= $675,000 ÷ $161,000 = 4.19**Average inventory = ($151,000 + $171,000) ÷ 2 = $161,000
Total current assets................................................ 360 390Plant and equipment, net........................................ 890 840 Total assets............................................................. $1,250 $1,230
Liabilities and Stockholders’ EquityCurrent liabilities:
Total current liabilities........................................... 300 280Bonds payable........................................................ 130 150 Total liabilities....................................................... 430 430 Stockholders’ equity:
Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Income StatementFor the Year Ended December 31, Year 2
(in thousands of dollars)Sales (all on account)............................................. $1,150Cost of goods sold.................................................. 710 Gross margin.......................................................... 440Selling and administrative expense........................ 358 Net operating income............................................. 82Interest expense...................................................... 18 Net income before taxes......................................... 64Income taxes (30%)............................................... 19 Net income............................................................. $ 45
Required:
Compute the following for Year 2:a. Times interest earned.b. Debt-to-equity ratio.
Ans:
a. Times interest earned = Net operating income ÷ Interest expense= $82 ÷ $18 = 4.56
b. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity= $430 ÷ $820 = 0.52
198. Froemming Corporation's net operating income last year was $193,000; its interest expense was $22,000; its total stockholders' equity was $950,000; and its total liabilities were $400,000.
Required:
Compute the following for Year 2:a. Times interest earned.b. Debt-to-equity ratio.
199. Brandy Corporation has provided the following data from its most recent income statement:
Net operating income..................... $51,000Interest expense.............................. $37,000Net income before taxes................. $14,000Income taxes.................................. $4,000Net income..................................... $10,000
Required:
Compute the times interest earned ratio. Show your work!
Ans:
Times interest earned = Net operating income ÷ Interest expense= $51,000 ÷ $37,000 = 1.38