Financial Management

Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) How is horizontal analysis of financial statements accomplished? 1)

A) By placing statement items on an after-tax basis.
B) By calculating both earnings per share and the price-earnings ratio.
C) By trend percentages.
D) By common-size statements.
Answer: C
Topic: 14-02 Comparison of Financial Data, 14-03 The Need to Look beyond Ratios, 14-05 Dollar and
Percentage Changes on Statements
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal).
2) The gross margin percentage is most likely to be used to assess which of the following? 2)
A) The overall profitability of the company's products.
B) How quickly inventories are sold.
C) The efficiency of administrative departments.
D) How quickly accounts receivables can be collected.
Answer: A
Topic: 14-06 Common-Size Statements
internal).
3) Earnings per common share will immediately increase as a result of which of the 3)
following?
A) The issuance of bonds by the company to finance construction of new buildings.
B) An increase in the dividends paid to common shareholders by the company.
C) The sale of additional common shares by the company.
D) An increase in the company's net income.
Answer: D
Topic: 14-08 Earnings per Share
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder.
internal).
1
4) The market price of XYZ Company's common shares dropped from $25 to $21 per share. 4)
The dividend paid per share remained unchanged. How would the company's dividend
payout ratio change?
A) Increase.
B) Remain unchanged.
C) Decrease.
D) Impossible to determine without more information.
Answer: B
Topic: 14-10 Dividend Payout and Yield Ratios
internal).
5) An increase in the market price of a company's common shares will immediately affect 5)
which of the following?
A) Dividend payout ratio. B) Earnings per common share.
C) Dividend yield ratio. D) Debt-to-equity ratio.
Answer: C
Topic: 14-08 Earnings per Share, 14-10 Dividend Payout and Yield Ratios, 14-12 The Dividend Yield Ratio,
14-25 Debt-to-Equity Ratio
LO: 14-02 Compute and interpret financial ratios that would be useful to a common shareholder., 14-04
Compute and interpret financial ratios that would be useful to a long-term creditor.
internal).
6) Which of the following is true regarding the calculation of return on total assets? 6)
A) The numerator of the ratio consists of net income plus interest expense multiplied
by one minus the tax rate.
B) The denominator of the ratio consists of the balance of total assets at the end of the
period under consideration.
C) The numerator of the ratio consists only of net income.
D) The numerator of the ratio consists of net income plus interest expense multiplied
by the tax rate.
Answer: A
Topic: 14-13 Return on Total Assets
internal).
2
7) Financial leverage is negative in which of the following situations? 7)
A) When total liabilities are less than total assets.
B) When total liabilities are less than shareholders' equity.
C) When the return on total assets is less than the rate of return demanded by creditors.
D) When the return on total assets is less than the rate of return on common
shareholders' equity.
Answer: C
Topic: 14-15 Financial Leverage
internal).
8) Which of the following is NOT a potential source of financial leverage? 8)

A) Preferred shares. B) Accounts payable.
C) Retained earnings. D) Bonds payable.
Answer: C
internal).
9) If a company's bonds bear an interest rate of 8%, its tax rate is 30%, and its assets are 9)
generating an after-tax return of 7%, what would be the leverage?
A) Negative.
B) Positive.
C) Neither positive nor negative.
D) Impossible to determine without knowing the return on common shareholders'
equity.
Answer: B
internal).
10) A company's current ratio and acid-test ratios are both greater than 1.0 to 1. If obsolete 10)
inventory is written off, what would be the effect?
A) A decrease in the acid-test ratio. B) An increase in net working capital.
C) An increase in the acid-test ratio. D) A decrease in the current ratio.
Answer: D
Topic: 14-19 Current Ratio, 14-20 Acid-Test (Quick) Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
internal).
3
11) If a company converts a short-term note payable into a long-term note payable, what 11)
would be the effect of this transaction?
A) A decrease in both working capital and the current ratio.
B) An increase in both working capital and the current ratio.
C) A decrease in both the current ratio and the acid-test ratio.
D) A decrease in working capital and an increase in the current ratio.
Answer: B
Topic: 14-18 Working Capital, 14-19 Current Ratio, 14-20 Acid-Test (Quick) Ratio
internal).
12) Which one of the following would increase the working capital of a company? 12)
A) Refinancing a short-term note payable with a two-year note payable.
B) Cash collection of accounts receivable.
C) Cash payment of payroll taxes payable.
D) Payment of a 20-year mortgage payable with cash.
Answer: A
Topic: 14-18 Working Capital
internal).
13) What will be the effect of a sale of a piece of equipment at book value for cash? 13)
A) A decrease in the debt-to-equity ratio.
B) An increase in net income.
C) A decrease in working capital.
D) An increase in working capital.
Answer: D
Topic: 14-18 Working Capital, 14-25 Debt-to-Equity Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor., 14-04
internal).
14) If a firm has a high current ratio but a low acid-test ratio, one can conclude which of the 14)
following?
A) The firm has a large investment in inventory.
B) The firm has a large amount of current liabilities.
C) The firm's financial leverage is very high.
D) The firm has a large outstanding accounts receivable balance.
Answer: A
internal).
4
15) Desktop Co. presently has a current ratio of 1.2 to 1 and an acid-test ratio of 0.8 to 1. 15)
What will be effect of prepaying next year's office rent of $50,000?
A) No effect on the company's current ratio but will decrease its acid-test ratio.
B) A decrease in both the company's current ratio and its acid-test ratio.
C) An increase in both the company's current ratio and its acid-test ratio.
D) No effect on either the company's current ratio or its acid-test ratio.
Answer: A
internal).
16) The Miller Company's current ratio is greater than 1.0 to 1. By paying off some of its 16)
accounts payable using cash, what would be the effect on the company's current ratio?
A) An increase.
B) A decrease.
C) Remain unchanged.
D) Impossible to determine from the information given.
Answer: A
Topic: 14-19 Current Ratio
internal).
17) Rahner Company has a current ratio of 1.75 to 1. This ratio will decrease if Rahner 17)
Company engages in which of the following transactions?
A) Pays the following month's rent on the last day of the year.
B) Pays the taxes payable that have been a current liability.
C) Sells inventory for more than its cost.
D) Borrows cash using a six-month note.
Answer: D
internal).
5
18) Which of the following accounts would be included in the calculation of the acid-test ratio? 18)
Accounts Prepaid Inventory

Receivable Expense
A) Yes Yes No
B) No Yes Yes
C) No No Yes
D) Yes No No
A) Option A B) Option B C) Option C D) Option D

Answer: D
Topic: 14-20 Acid-Test (Quick) Ratio
internal).
19) Last year, Allen Company's average collection period for accounts receivable was 40 19)
days; this year, it increased to 60 days. Which of the following would most likely
account for this change?
A) A relaxation of credit policies.
B) A decrease in accounts receivable relative to sales.
C) A decrease in sales.
D) An increase in sales.
Answer: A
Topic: 14-21 Accounts Receivable Turnover
internal).
20) If a loss resulting from an earthquake is classified as extraordinary, which of the 20)
following disclosures meets the minimum requirements in Canada?
A) One earnings per share figure, net of the after-tax effect of the extraordinary loss.
B) One earnings per share figure that ignores the extraordinary loss.
C) Two earnings per share figures, one before and the other after the net of tax effect of
the extraordinary loss.
D) One earnings per share figure, net of the before-tax effect of the extraordinary loss.
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-08 Earnings
per Share
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute
and interpret financial ratios that would be useful to a common shareholder.
internal).
6
21) Which of the following events is unique to the calculation of fully diluted earnings per 21)
share?
A) Issuance of bonds that can be converted to common shares.
B) An extraordinary gain or loss resulting from fire.
C) Issuance of participating and cumulative preferred shares.
D) Issuance of common share.
Answer: A
internal).
22) The net accounts receivable for Andante Company were $150,000 at the beginning of the 22)
most recent year and $190,000 at the end of the year. If the accounts receivable turnover
for the year was 8.5, and 15% of total sales were cash sales, what were the total sales for
the year?
A) $1,700,000. B) $1,500,000. C) $1,900,000. D) $1,445,000.
Answer: A
internal).
23) 23)
Selected data from Sheridan Corporation's year-end financial statements are presented below.
The difference between average and ending inventory is immaterial.
Current Ratio 2.0

Acid-Test Ratio 1.5
Current Liabilities $120,000
Inventory Turnover 8 times
Gross Profit Margin 40%
Prepaid Expenses $0
What were Sheridan's sales for the year?

A) $800,000. B) $1,200,000. C) $480,000. D) $240,000.
Answer: A
Topic: 14-18 Working Capital, 14-19 Current Ratio, 14-20 Acid-Test (Quick) Ratio, 14-22 Inventory Turnover
internal).
7
24) Fulton Company's price-earnings ratio is 8.0, and the market price of its common shares 24)
is $32. The company has 3,000 shares of preferred shares outstanding, with each share
receiving a dividend of $3. What is the earnings per common share?
A) $7. B) $4. C) $10. D) $3.
Answer: B
Topic: 14-08 Earnings per Share, 14-09 Price—Earnings Ratio
internal).
25) Perlman Company had 100,000 common shares and 20,000 preferred shares at the end of 25)
the year just completed. Preferred shareholders received total dividends of $140,000.
Common shareholders received total dividends of $210,000. If the dividend payout ratio
for the year was 70%, what was the net income for the year?
A) $147,000. B) $300,000. C) $287,000. D) $440,000.
Answer: D
Topic: 14-08 Earnings per Share, 14-10 Dividend Payout and Yield Ratios
internal).
26) Arlberg Company's net income last year was $250,000. The company had 150,000 26)
common shares and 80,000 preferred shares. There was no change in the number of
common or preferred shares outstanding during the year. The company declared and paid
dividends last year of $1.30 per common share and $1.40 per preferred share. The
earnings per common share was closest to which of the following?
A) $1.67. B) $0.37. C) $0.92. D) $2.41.
Answer: C
internal).
27) Arget Company's net income last year was $600,000. The company had 150,000 27)
common shares and 60,000 preferred shares. There was no change in the number of
common or preferred shares outstanding during the year. The company declared and paid
dividends last year of $1.10 per common share and $0.60 per preferred share. The
earnings per common share was closest to which of the following?
A) $3.76. B) $2.90. C) $4.00. D) $4.24.
Answer: A
internal).
8
28) Arquandt Company's net income last year was $550,000. The company had 150,000 28)
common shares and 50,000 preferred shares outstanding. There was no change in the
number of common or preferred shares outstanding during the year. The company
declared and paid dividends last year of $1.20 per common share and $1.70 per preferred
share. The earnings per common share was closest to which of the following?
A) $3.67. B) $4.23. C) $2.47. D) $3.10.
Answer: D
internal).
29) 29)
The following data have been taken from your company's financial records for the current year:
Earnings per Share $10

Dividend per Share $6
Market Price per Share $90
Book Value per Share $70
What is the price-earnings ratio?

A) 9.00 to 1. B) 7.00 to 1. C) 15.00 to 1. D) 1.67 to 1.
Answer: A
Topic: 14-09 Price—Earnings Ratio
internal).
30) 30)
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
What is the price-earnings ratio?

A) 12.5 to 1. B) 8.0 to 1. C) 7.5 to 1. D) 6.0 to 1.
Answer: B
internal).
9
31) 31)
Information concerning the common shares of Morris Company as of the end of the company's
fiscal year is presented below:
Number of Shares Outstanding

460,000
Par Values per Share $5.00
Dividend per Share $6.00
Market Price per Share $54.00
Earnings per Share $18.00
The dividend yield ratio is closest to which of the following?

A) 120.0%. B) 33.3%. C) 11.1%. D) 50.0%.
Answer: C
internal).
32) 32)
Cameron Company had 50,000 common shares issued and outstanding during the year just ended.
The following information pertains to these shares:
Price Originally Issued $40

Book Value at End of Current Year $70
Market Value, Beginning of Current Year $85
Market Value, End of Current Year $90
The total dividend on common shares for the year was $400,000. What was Cameron
Company's dividend yield ratio for the year?
A) 20.00%. B) 8.89%. C) 11.43%. D) 9.41%.
Answer: B
internal).
33) Braverman Company's net income last year was $75,000, and its interest expense was 33)
$10,000. Total assets at the beginning of the year were $650,000, and total assets at the
end of the year were $610,000. The company's income tax rate was 30%. The company's
return on total assets for the year was closest to which of the following?
A) 13.0%. B) 11.9%. C) 12.4%. D) 13.5%.
Answer: A
internal).
10
34) Brachlan Company's net income last year was $80,000, and its interest expense was 34)
A) 15.6%. B) 14.7%. C) 13.4%. D) 12.5%.
Answer: B
internal).
35) Brawer Company's net income last year was $55,000, and its interest expense was 35)
A) 10.8%. B) 9.5%. C) 8.6%. D) 11.7%.
Answer: A
internal).
36) The total assets of the Philbin Company on January 1 were $2.3 million and on 36)
December 31 were $2.5 million. Net income for the year was $188,000. Dividends for
the year were $75,000, interest expense was $70,000, and the tax rate was 30%. The
A) 9.9%. B) 10.8%. C) 9.5%. D) 6.8%.
Answer: A
internal).
11
37) Selected financial data for Irvington Company appear below: 37)
Account Balances
Beginning of yearEnd of year
Preferred shares $125,000 $125,000
Common shares 300,000 400,000
Retained earnings 75,000 185,000
During the year, the company paid dividends of $10,000 on its preferred shares. The company's net
income for the year was $120,000. The company's return on common shareholders' equity
for the year was closest to which of the following?
A) 25%. B) 17%. C) 19%. D) 23%.
Answer: D
Topic: 14-14 Return on Common Shareholders' Equity
internal).
38) Crasler Company's net income last year was $100,000. The company paid dividends on 38)
preferred shares of $20,000, and its average common shareholders' equity was $580,000.
The company's return on common shareholders' equity for the year was closest to which
of the following?
A) 17.2%. B) 3.4%. C) 20.7%. D) 13.8%.
Answer: D
internal).
39) Crawler Company's net income last year was $80,000. The company paid dividends on 39)
of the following?
A) 17.5%. B) 22.5%. C) 20.0%. D) 2.5%.
Answer: A
internal).
12
40) Crabtree Company's net income last year was $50,000. The company paid dividends on 40)
of the following?
A) 11.4%. B) 4.5%. C) 6.8%. D) 15.9%.
Answer: C
internal).
41) The following account balances have been provided for the end of the most recent year: 41)
Total Assets $150,000

Total Shareholders' Equity $120,000
Total Common Shares $50,000 (5,000 shares)
Total Preferred Shares $10,000 (1,000 shares)
What is the book value per common share?

A) $25. B) $20. C) $28. D) $22.
Answer: D
Topic: 14-16 Book Value per Share
internal).
42) Dratif Company's working capital is $33,000, and its current liabilities are $80,000. The 42)
company's current ratio is closest to which of the following?
A) 0.59 to 1. B) 3.42 to 1. C) 0.41 to 1. D) 1.41 to 1.
Answer: D
Topic: 14-18 Working Capital, 14-19 Current Ratio
internal).
43) Dragin Company's working capital is $36,000, and its current liabilities are $61,000. The 43)
A) 1.59 to 1. B) 0.41 to 1. C) 0.59 to 1. D) 2.69 to 1.
Answer: A
internal).
13
44) Draban Company's working capital is $38,000, and its current liabilities are $59,000. The 44)
A) 2.55 to 1. B) 1.64 to 1. C) 0.36 to 1. D) 0.64 to 1.
Answer: B
internal).
45) At the end of the year just completed, Orem Company's total current liabilities were 45)
$75,000, and its total long-term liabilities were $225,000. Working capital at year-end
was $100,000. If the company's debt-to-equity ratio is 0.30 to 1, total long-term assets
must equal which of the following?
A) $1,300,000. B) $1,225,000. C) $1,000,000. D) $1,125,000.
Answer: D
Topic: 14-18 Working Capital, 14-25 Debt-to-Equity Ratio
LO: 14-03 Compute and interpret financial ratios that would be useful to a short-term creditor., 14-04
internal).
46) Starrs Company has current assets of $300,000 and current liabilities of $200,000. 46)
Which of the following transactions would increase its working capital?
A) Prepayment of $50,000 of next year's rent.
B) Purchase of $50,000 of marketable securities for cash.
C) Refinancing $50,000 of short-term debt with long-term debt.
D) Acquisition of land valued at $50,000 by issuing new common shares.
Answer: C
internal).
14
47) Selected year-end data for the Brayer Company are presented below: 47)
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 which of
the following?
A) 1.20 times. B) 2.33 times. C) 1.67 times. D) 2.40 times.
Answer: C
Topic: 14-22 Inventory Turnover
internal).
48) Harwichport Company has a current ratio of 3.5 to 1 and an acid-test ratio of 2.8 to 1. 48)
Current assets equal $175,000, of which $5,000 consists of prepaid expenses. What must
be Harwichport Company's inventory?
A) $35,000. B) $40,000. C) $30,000. D) $50,000.
Answer: C
Topic: 14-18 Working Capital, 14-19 Current Ratio, 14-20 Acid-Test (Quick) Ratio
internal).
49) Ben Company has the following data for the year just ended: 49)
Cash $42,000
Accounts Receivable$28,000
Inventory $35,000
Current Ratio 2.4 to 1
Acid-Test Ratio 1.6 to 1
What were Ben Company's current liabilities?

A) $35,000. B) $50,400. C) $43,750. D) $63,000.
Answer: C
internal).
15
50) Marcy Corporation's current ratio is currently 1.75 to 1. The firm's current ratio cannot 50)
fall below 1.5 to 1 without violating agreements with its bondholders. If current
liabilities are presently $250 million, what is the maximum new short-term debt that can
be issued to finance an equivalent amount of inventory expansion?
A) $125.00 million. B) $375.00 million.
C) $62.50 million. D) $41.67 million.
Answer: A
internal).
51) Eral Company has $17,000 in cash, $3,000 in marketable securities, $36,000 in current 51)
receivables, $24,000 in inventories, and $45,000 in current liabilities. The company's
acid-test (quick) ratio is closest to which of the following?
A) 1.78 to 1. B) 0.44 to 1. C) 0.80 to 1. D) 1.24 to 1.
Answer: D
internal).
52) Erambo Company has $11,000 in cash, $6,000 in marketable securities, $27,000 in 52)
current receivables, $8,000 in inventories, and $51,000 in current liabilities. The
company's acid-test (quick) ratio is closest to which of the following?
A) 0.53 to 1. B) 1.02 to 1. C) 0.86 to 1. D) 0.75 to 1.
Answer: C
internal).
53) Erack Company has $15,000 in cash, $4,000 in marketable securities, $38,000 in current 53)
receivables, $18,000 in inventories, and $40,000 in current liabilities. The company's
acid-test (quick) ratio is closest to which of the following?
A) 1.43 to 1. B) 1.88 to 1. C) 1.33 to 1. D) 0.95 to 1.
Answer: A
internal).
16
54) Eastham Company's accounts receivable were $600,000 at the beginning of the year and 54)
$800,000 at the end of the year. Cash sales for the year were $300,000. The accounts
receivable turnover for the year was 5 times. What were Eastham Company's total sales
for the year?
A) $1,300,000. B) $3,800,000. C) $800,000. D) $3,300,000.
Answer: B
internal).
55) Frantic Company had $130,000 in sales on account last year. The beginning accounts 55)
receivable balance was $10,000, and the ending accounts receivable balance was
$16,000. The company's accounts receivable turnover was closest to which of the
following?
Answer: C
internal).
56) Fracus Company had $100,000 in sales on account last year. The beginning accounts 56)
following?
Answer: B
internal).
57) Frabine Company had $150,000 in sales on account last year. The beginning accounts 57)
following?
Answer: B
internal).
17
58) Granger Company had $180,000 in sales on account last year. The beginning accounts 58)
$18,000. The company's average collection period (age of receivables) was closest to
which of the following? Do not round intermediate calculations.
A) 36.50 days. B) 56.78 days. C) 20.28 days. D) 28.39 days.
Answer: D
internal).
59) Grapp Company had $130,000 in sales on account last year. The beginning accounts 59)
Answer: C
internal).
60) Grave Company had $150,000 in sales on account last year. The beginning accounts 60)
Answer: B
internal).
61) Harris Company, a retailer, had cost of goods sold of $290,000 last year. The beginning 61)
inventory balance was $26,000, and the ending inventory balance was $24,000. The
company's inventory turnover was closest to which of the following?
Answer: D
internal).
18
62) Harton Company, a retailer, had cost of goods sold of $250,000 last year. The beginning 62)
Answer: B
internal).
63) Harker Company, a retailer, had cost of goods sold of $160,000 last year. The beginning 63)
Answer: D
internal).
64) Irawaddy Company, a retailer, had cost of goods sold of $230,000 last year. The 64)
beginning inventory balance was $24,000, and the ending inventory balance was
$22,000. The company's average sale period (turnover in days) was closest to which of
the following?
Answer: C
internal).
65) Irappa Company, a retailer, had cost of goods sold of $170,000 last year. The beginning 65)
company's average sale period (turnover in days) was closest to which of the following?
Answer: C
internal).
19
66) Irally Company, a retailer, had cost of goods sold of $150,000 last year. The beginning 66)
company's average sale period (turnover in days) was closest to which of the following?
Answer: A
internal).
67) Last year, Dunn Company purchased $1,920,000 of inventory. The cost of good sold was 67)
$1,800,000, and the ending inventory was $360,000. What was the inventory turnover?
Answer: C
internal).
68) During the year just ended, James Company purchased $425,000 of inventory. The 68)
inventory balance at the beginning of the year was $175,000. If the cost of goods sold for
the year was $450,000, what was the inventory turnover for the year?
Answer: B
internal).
69) Last year, Javer Company had a net income of $200,000, income tax expense of $74,000, 69)
and interest expense of $20,000. The company's times interest earned was closest to
Answer: D
Topic: 14-24 Times Interest Earned Ratio
LO: 14-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
internal).
70) Last year, Jabber Company had a net income of $180,000, income tax expense of 70)
$62,000, and interest expense of $20,000. The company's times interest earned was
closest to which of the following?
Answer: A
internal).
20
71) Last year, Jackson Company had a net income of $160,000, income tax expense of 71)
$66,000, and interest expense of $20,000. The company's times interest earned was
Answer: B
internal).
72) The times interest earned ratio of McHugh Company was 4.5 times. The interest expense 72)
for the year was $20,000, and the company's tax rate was 40%. What was the company's
net income?
A) $42,000. B) $54,000. C) $22,000. D) $66,000.
Answer: A
internal).
73) Mariah Company had a times interest earned ratio of 3.0 for the year just ended. The 73)
company's tax rate was 40%, and the interest expense for the year was $25,000. What
was Mariah Company's after-tax net income?
A) $25,000. B) $75,000. C) $30,000. D) $50,000.
Answer: C
internal).
74) PFM Company has sales of $210,000, interest expense of $8,000, a tax rate of 30%, and 74)
a net profit after tax of $35,000. What is PFM Company's times interest earned ratio?
Answer: D
internal).
75) Karma Company has total assets of $190,000 and total liabilities of $90,000. The 75)
company's debt-to-equity ratio is closest to which of the following?
A) 0.32 to 1. B) 0.53 to 1. C) 0.90 to 1. D) 0.47 to 1.
Answer: C
Topic: 14-25 Debt-to-Equity Ratio
internal).
21
76) Karl Company has total assets of $170,000 and total liabilities of $110,000. The 76)
A) 0.39 to 1. B) 1.83 to 1. C) 0.33 to 1. D) 0.65 to 1.
Answer: B
internal).
77) Krakov Company has total assets of $170,000 and total liabilities of $80,000. The 77)
A) 0.32 to 1. B) 0.47 to 1. C) 0.89 to 1. D) 0.53 to 1.
Answer: C
internal).
78) McGraw Electronics showed Bonds Payable of $7,500,000 in 2011 and $8,000,000 in 78)
2010 on its comparative Balance Sheet. The percentage change is closest to:
A) 6.6%. B) 6.3%. C) (6.6)%. D) (6.3)%.
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements
internal).
79) Martin Company reported an extraordinary after-tax loss of $180,000, resulting from an 79)
earthquake. What must have been the before-tax loss if Martin's marginal income tax
rate was 40%?
A) $450,000. B) $300,000. C) $108,000. D) $72,000.
Answer: B
Topic: 14-02 Comparison of Financial Data, 14-03 The Need to Look beyond Ratios
internal).
22
Reference: 14-01
Selected financial data for Barnstable Company appear below:
Year 2 Year 1
(in thousands)
Sales $1,500 $1,200
Operating Expense $450 $400
Interest Expense $75 $30
Cost of Goods Sold $900 $720
Dividends Declared and Paid $30 $0
80) For Year 2, what was the gross margin as a percentage of sales? 80)
A) 60%. B) 40%. C) 10%. D) 5%.
Answer: B
internal).
81) For Year 2, what was the net income before taxes as a percentage of sales? 81)
A) 3%. B) 5%. C) 10%. D) 8%.
Answer: B
internal).
82) For Year 2, what was the net operating income as a percentage of sales? 82)
A) 10%. B) 70%. C) 40%. D) 8%.
Answer: A
internal).
83) Between Year 1 and Year 2, what happened to the times interest earned? 83)
A) It increased.
B) It remained the same.
C) It decreased.
D) The effect cannot be determined from the data provided.
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-24 Times
Interest Earned Ratio
and interpret financial ratios that would be useful to a long-term creditor.
internal).
23
Reference: 14-02
Financial statements for Larned Company appear below:
Larned Company
Statement of Financial
Position December 31, Year
2 and Year 1 (dollars in
thousands)
Year 2 Year 1
Current Assets:
Cash and Marketable Securities $130 $100
Accounts Receivable, Net $150 $130
Inventory $100 $100
Prepaid Expenses $20 $20
Total Current Assets $400 $350
Noncurrent Assets:
Plant & Equipment, Net $1,640 $1,600
Total Assets $2,040 $1,950
Current Liabilities:
Accounts Payable $120 $120
Accrued Liabilities $110 $80
Notes Payable, Short Term $170 $160
Total Current Liabilities $400 $360
Noncurrent Liabilities:
Bonds Payable $370 $400
Total Liabilities $770 $760
Shareholders' Equity:
Preferred Shares, $20 Par, 10% $120 $120
Common Shares, $10 Par $180 $180
Additional Paid-In Capital - Common$110 $110
Shares
Retained Earnings $860 $780
Total Shareholders' Equity $1,270 $1190
Total Liabilities & Shareholders' Equity
$2040 $1950
Larned Company
Income Statement For
the Year Ended
December 31, Year 2
(dollars in thousands)
Sales (All on Account) $2930
Costs of Goods Sold $2050
Gross Margin $880 24
Gross Margin $880
Operating Expenses $350
Net Operating Income $530
Interest Expense $40
Net Income before Taxes $490
Income Taxes (30%) $147
Net Income $343
Total dividends during Year 2 were $263,000, of which $12,000 were for preferred shares. The market price of a commo
share on December 31, Year 2 was $160.
84) Larned Company's earnings per common share for Year 2 was closest to which of the 84)
following?
A) $11.03. B) $27.22. C) $19.06. D) $18.39.
Answer: D
per Share
internal).
85) Larned Company's price-earnings ratio on December 31, Year 2 was closest to which of 85)
the following?
A) 8.70. B) 14.50. C) 5.88. D) 8.40.
Answer: A
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-09 Price
—Earnings Ratio
internal).
86) Larned Company's dividend payout ratio for Year 2 was closest to which of the 86)
following?
A) 28.5%. B) 76.7%. C) 47.4%. D) 75.8%.
Answer: D
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-10 Dividend
Payout and Yield Ratios
internal).
25
87) Larned Company's dividend yield ratio on December 31, Year 2 was closest to which of 87)
the following?
A) 8.3%. B) 9.1%. C) 5.5%. D) 8.7%.
Answer: D
internal).
88) Larned Company's return on total assets for Year 2 was closest to which of the 88)
following?
A) 17.8%. B) 15.8%. C) 18.6%. D) 17.2%.
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-13 Return on
Total Assets
internal).
89) Larned Company's return on common shareholders' equity for Year 2 was closest to 89)
A) 26.9%. B) 29.8%. C) 30.9%. D) 27.9%.
Answer: B
Common Shareholders' Equity
internal).
90) Larned Company's book value per share at the end of Year 2 was closest to which of the 90)
following?
A) $10.00. B) $63.89. C) $16.11. D) $70.56.
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-16 Book
Value per Share
internal).
26
Reference: 14-03
Financial statements for Laroche Company appear below:
Laroche Company
Position December 31, Year
2 and Year 1 (dollars in
thousands)
Year 2 Year 1
Current Assets:
Inventory $160 $180
Noncurrent Assets:
Plant & Equipment, Net $1370 $1370
Total Assets $1900 $1880
Shareholders’ Equity:
Additional Paid-In Capital - Common$180 $180
Shares
Total Shareholders’ Equity $1260 $1160
Total Liabilities & Shareholders’ Equity
$1900 $1880
Shareholder's Equity:
Laroche Company
Income Statement
For the Year Ended December
31, Year 2
Gross Margin $680
Operating Expenses $270 27
Net Income $266
Total dividends during Year 2 were $166,000, of which $10,000 were preferred dividends. The market price of a commo
91) Laroche Company's earnings per common share for Year 2 was closest to which of the 91)
following?
A) $15.83. B) $3.71. C) $11.08. D) $10.67.
Answer: D
per Share
internal).
92) Laroche Company's price-earnings ratio on December 31, Year 2 was closest to which of 92)
the following?
A) 13.53. B) 40.43. C) 14.06. D) 9.47.
Answer: C
per Share, 14-09 Price—Earnings Ratio
internal).
93) Laroche Company's dividend payout ratio for Year 2 was closest to which of the 93)
following?
A) 38.0%. B) 62.4%. C) 60.9%. D) 22.9%.
Answer: C
internal).
28
94) Laroche Company's dividend yield ratio on December 31, Year 2 was closest to which of 94)
the following?
A) 4.3%. B) 4.6%. C) 1.6%. D) 4.1%.
Answer: A
internal).
95) Laroche Company's return on total assets for Year 2 was closest to which of the 95)
following?
A) 13.0%. B) 14.6%. C) 15.2%. D) 14.1%.
Answer: C
Total Assets
internal).
96) Laroche Company's return on common shareholders' equity for Year 2 was closest to 96)
A) 23.1%. B) 22.0%. C) 21.2%. D) 24.0%.

Answer: A
internal).
97) Laroche Company's book value per share at the end of Year 2 was closest to which of the 97)
following?
A) $17.50. B) $52.50. C) $48.33. D) $10.00.
Answer: C
Value per Share
internal).
29
Reference: 14-04
Financial statements for Larosa Company appear below:
Larosa Company
Position December 31,
Year 2 and Year 1
Year 2 Year 1
Current Assets:
Cash and Marketable Securities$150 $120
Inventory $150 $150
Noncurrent Assets:
Preferred Shares, $20 Par, 10%$100 $100
Additional Paid-In Capital - $250 $250
Common Shares
Total Shareholders' Equity $1810 $1640
Total Liabilities & Shareholders'$2520 $2450
Equity
Larosa Company Income

Statement For the Year Ended
December 31, Year 2 (dollars
in thousands)
Gross Margin $570 30
Gross Margin $570
Net Income $217
Total dividends during Year 2 were $47,000, of which $10,000 were preferred dividends. The market price of a common
98) Larosa Company's earnings per common share for Year 2 was closest to which of the 98)
following?
A) $9.86. B) $9.41. C) $3.09. D) $14.09.
Answer: B
per Share
internal).
99) Larosa Company's price-earnings ratio on December 31, Year 2 was closest to which of 99)
the following?
A) 22.66. B) 4.97. C) 7.10. D) 7.44.
Answer: D
internal).
100) Larosa Company's dividend payout ratio for Year 2 was closest to which of the 100)
following?
A) 6.5%. B) 17.9%. C) 10.6%. D) 21.7%.
Answer: B
per Share, 14-10 Dividend Payout and Yield Ratios
internal).
31
101) Larosa Company's dividend yield ratio on December 31, Year 2 was closest to which of 101)
the following?
A) 2.4%. B) 3.1%. C) 1.8%. D) 1.0%.
Answer: A
internal).
102) Larosa Company's return on total assets for Year 2 was closest to which of the 102)
following?
A) 9.9%. B) 8.7%. C) 7.6%. D) 9.2%.
Answer: A
Total Assets
internal).
103) Larosa Company's return on common shareholders' equity for Year 2 was closest to 103)
A) 12.6%. B) 12.7%. C) 13.4%. D) 12.0%.
Answer: B
internal).
104) Larosa Company's book value per share at the end of Year 2 was closest to which of the 104)
following?
A) $10.00. B) $82.27. C) $77.73. D) $21.36.
Answer: C
Value per Share
internal).
32
Reference: 14-05
The Dawson Corporation projects the following for the upcoming year:
Earnings before Interest and Taxes $35 million

Interest Expense $5 million
Preferred Shares Dividends $4 million
Common Shares Dividend Payout Ratio 30%
Average Number of Common Shares Outstanding
2 million
Effective Corporate Income Tax Rate 40%
105) What is the expected dividend per common share? 105)

A) $3.90. B) $1.80. C) $2.10. D) $2.70.
Answer: C
internal).
106) If Dawson Corporation's common shares have a price-earnings ratio of eight, what would 106)
be the market price per share, rounded to the nearest dollar?
A) $125. B) $72. C) $68. D) $56.
Answer: D
internal).
Reference: 14-06
Financial statements for Orange Company appear below:
Orange Company
Year 2 and Year 1 (dollars
in thousands)
Year 2 Year 1
Current Assets:
Inventory $160 $160
Noncurrent Assets:
Plant & Equipment, Net $1680 $1620 33
Common Shares
Equity
Orange Company Income

in thousands)
Gross Margin $850
Net Income $336
Total dividends during Year 2 were $156,000, of which $18,000 were preferred dividends. The market price of a share o
common stock on December 31, Year 2 was $100.
34
107) Orange Company's earnings per common share for Year 2 was closest to which of the 107)
following?
A) $2.27. B) $10.91. C) $7.64. D) $7.23.
Answer: D
per Share
internal).
108) Orange Company's dividend yield ratio on December 31, Year 2 was closest to which of 108)
the following?
A) 3.1%. B) 3.5%. C) 2.7%. D) 1.1%.
Answer: A
internal).
109) Orange Company's return on total assets for Year 2 was closest to which of the 109)
following?
A) 16.5%. B) 15.9%. C) 14.5%. D) 15.5%.
Answer: A
internal).
110) Orange Company's current ratio at the end of Year 2 was closest to which of the 110)
following?
A) 0.44 to 1. B) 0.55 to 1. C) 1.71 to 1. D) 1.24 to 1.
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-19 Current
Ratio
and interpret financial ratios that would be useful to a short-term creditor.
internal).
35
111) Orange Company's accounts receivable turnover for Year 2 was closest to which of the 111)
following?
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-21 Accounts
Receivable Turnover
internal).
112) Orange Company's average sale period (turnover in days) for Year 2 was closest to 112)
Answer: B
Receivable Turnover
internal).
113) Orange Company's times interest earned for Year 2 was closest to which of the 113)
following?
Answer: B
internal).
Reference: 14-07
Financial statements for Orantes Company appear below:
Orantes Company Statement

of Financial Position
December 31, Year 2 and
Year 1 (dollars in thousands)
Year 2 Year 1
Current Assets:
Inventory $130 $130
Noncurrent Assets:
36
Common Shares
Equity
Orantes Company Income

in thousands)
Gross Margin $760
Net Income $301
Total dividends during Year 2 were $181,000, of which $12,000 were preferred dividends. The market price of a commo
37
114) Orantes Company's earnings per common share for Year 2 was closest to which of the 114)
following?
A) $15.05. B) $3.61. C) $21.50. D) $14.45.
Answer: D
per Share
internal).
115) Orantes Company's dividend yield ratio on December 31, Year 2 was closest to which of 115)
the following?
A) 0.8%. B) 3.2%. C) 2.8%. D) 3.0%.
Answer: D
internal).
116) Orantes Company's return on total assets for Year 2 was closest to which of the 116)
following?
A) 12.7%. B) 11.4%. C) 13.1%. D) 12.3%.
Answer: C
Total Assets
internal).
117) Orantes Company's current ratio at the end of Year 2 was closest to which of the 117)
following?
A) 1.50 to 1. B) 0.54 to 1. C) 0.35 to 1. D) 1.19 to 1.
Answer: A
Ratio
internal).
38
118) Orantes Company's accounts receivable turnover for Year 2 was closest to which of the 118)
following?
Answer: B
Receivable Turnover
internal).
119) Orantes Company's average sale period (turnover in days) for Year 2 was closest to 119)
Answer: D
Receivable Turnover
internal).
120) Orantes Company's times interest earned for Year 2 was closest to which of the 120)
following?
Answer: D
internal).
Reference: 14-08
Financial statements for Oratz Company appear below:
Oratz Company Statement of

Financial Position December
31, Year 2 and Year 1 (dollars
in thousands)
Year 2 Year 1
Current Assets:
Inventory $180 $180
Noncurrent Assets:
39
Common Shares
Equity
Oratz Company Income

in thousands)
Gross Margin $490
Net Income $189
Total dividends during Year 2 were $139,000, of which $6,000 were preferred dividends. The market price of a common
40
121) Oratz Company's earnings per common share for Year 2 was closest to which of the 121)
following? Do not round intermediate calculations.
A) $1.74. B) $19.61. C) $28.93. D) $20.25.
Answer: B
per Share
internal).
122) Oratz Company's dividend yield ratio on December 31, Year 2 was closest to which of 122)
the following?
A) 5.7%. B) 0.5%. C) 5.2%. D) 5.5%.
Answer: D
internal).
123) Oratz Company's return on total assets for Year 2 was closest to which of the following? 123)
Do not round intermediate calculations.
A) 8.9%. B) 11.1%. C) 10.5%. D) 10.0%.
Answer: B
Total Assets
internal).
124) Oratz Company's current ratio at the end of Year 2 was closest to which of the 124)
following?
A) 0.51 to 1. B) 0.57 to 1. C) 1.26 to 1. D) 1.23 to 1.
Answer: D
Ratio
internal).
41
125) Oratz Company's accounts receivable turnover for Year 2 was closest to which of the 125)
following?
Answer: A
Receivable Turnover
internal).
126) Oratz Company's average sale period (turnover in days) for Year 2 was closest to which 126)
of the following?
Answer: A
Receivable Turnover
internal).
127) Oratz Company's times interest earned for Year 2 was closest to which of the following? 127)
Answer: B
internal).
42
Reference: 14-09
Selected data for the MK Company follow:
Current Year Prior Year

Preferred Shares, 8% Par Value $50 $250000 $250000
Common Shares, Per Value $10 $500000 $500000
Retained Earnings at End of Year $257000 $240000
Net Income $102000 $90000
Dividends Paid on Preferred Shares $20000 $20000
Dividends Paid on Common Shares $65000 $60000
Quoted Market Price per Common $25 $20
Share at Year End
128) What was the price-earnings ratio for the prior year? 128)
A) 12.2 to 1. B) 14.3 to 1. C) 11.1 to 1. D) 15.8 to 1.
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-09 Price
—Earnings Ratio
internal).
129) What is the dividend yield ratio on common shares for the current year, rounded to the 129)
nearest tenth of a percent?
A) 6.8%. B) 6.6%. C) 7.4%. D) 5.2%
Answer: D
internal).
130) What is MK Company's return on common shareholders' equity for the current year, 130)
rounded to the nearest tenth of a percent?
A) 11.0%. B) 13.6%. C) 10.2%. D) 8.2%.
Answer: A
internal).
43
131) What was the dividend payout ratio for the prior year? 131)
A) 114.3%. B) 85.7%. C) 140.0%. D) 55.6%.
Answer: B
internal).
132) What is the book value per share for the current year, rounded to the nearest cent? 132)
A) $20.14. B) $22.18. C) $18.31. D) $15.14.
Answer: D
Value per Share
internal).
Reference: 14-10
Lisa Inc.'s balance sheet appears below:
Lisa Inc. Statement of

Financial Position December
31, Year 2 and Year 1 (dollars
in thousands)
Year 2 Year 1
Cash $30 $25
Marketable Securities $20 $15
Inventories $60 $50
Land $170 $140
Building (Net) $155 $125
Total Long-Term Assets $80 $90
Equipment (Net) $95 $100
Total Long-Term Assets $330 $315
Accrued Interest $15 $15
Short Term Notes Payable $23 $12
Long- Term Notes Payable $10 $10
Total Long-Term Liabilities $25 $25
44
Common Shares, $10 Par Value $150 $150
Common Shares
Equity
The company's sales for the year were $300,000, its cost of goods sold was $220,000, and its net income was $35,000. A
sales were on credit. Dividends paid on preferred shares for the year were $5,000.
133) Lisa Inc.'s acid-test (quick) ratio at December 31, Year 2, was closest to which of the 133)
following?
A) 1.8 to 1. B) 2.0 to 1. C) 1.1 to 1. D) 0.6 to 1.
Answer: C
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-20
Acid-Test (Quick) Ratio
internal).
134) Lisa Inc.'s accounts receivable turnover for Year 2 was closest to which of the following? 134)
Answer: D
Receivable Turnover
internal).
135) Lisa Inc.'s inventory turnover for Year 2 was closest to which of the following? 135)
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-22 Inventory
Turnover
internal).
45
136) Lisa Inc.'s book value per common share at December 31, Year 2, was closest to which 136)
of the following?
A) $11.25. B) $19.33. C) $10.00. D) $18.33.
Answer: B
Value per Share
internal).
137) Lisa Inc.'s return on common shareholders' equity for Year 2 was closest to which of the 137)
following?
A) 12.4%. B) 10.9%. C) 7.8%. D) 10.6%.
Answer: D
internal).
Reference: 14-11
Financial statements for Marcell Company appear below:
Marcell Company
Year 2 and Year 1
Year 2 Year 1
Current Assets:
Inventory $180 $180
Noncurrent Assets:
Accounts Payable $110 150$
46
Common Shares
Equity
Marcell Company Income

in thousands)
Gross Margin $770
Net Income before Taxes$420
Net Income $294
138) Marcell Company's working capital (in thousands of dollars) at the end of Year 2 was 138)
A) $1,240. B) $20. C) $520. D) $470.
Answer: B
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-18 Working
Capital
internal).
47
139) Marcell Company's current ratio at the end of Year 2 was closest to which of the 139)
following?
A) 0.42 to 1. B) 1.22 to 1. C) 0.48 to 1. D) 1.04 to 1.
Answer: D
Ratio
internal).
140) Marcell Company's acid-test (quick) ratio at the end of Year 2 was closest to which of 140)
the following?
A) 0.74 to 1. B) 0.60 to 1. C) 1.35 to 1. D) 0.33 to 1.
Answer: B
internal).
141) Marcell Company's accounts receivable turnover for Year 2 was closest to which of the 141)
following?
Answer: C
Receivable Turnover
internal).
142) Marcell Company's average collection period (age of receivables) for Year 2 was closest 142)
to which of the following?
Answer: A
Receivable Turnover
internal).
48
143) Marcell Company's inventory turnover for Year 2 was closest to which of the following? 143)
Answer: C
Turnover
internal).
144) Marcell Company's average sale period (turnover in days) for Year 2 was closest to 144)
Answer: C
Turnover
internal).
Reference: 14-12
Financial statements for March Company appear below:
March Company
Year 2 and Year 1
Year 2 Year 1
Current Assets:
Inventory $150 $150
Noncurrent Assets:
49
Common Shares
Equity
March Company Income

in thousands)
Gross Margin $490
Net Income before Taxes$250
Net Income $175
145) March Company's working capital (in thousands of dollars) at the end of Year 2 was 145)
A) $180. B) $520. C) $1,290. D) $580.
Answer: A
Capital
internal).
50
146) March Company's current ratio at the end of Year 2 was closest to which of the 146)
following?
A) 1.27 to 1. B) 0.47 to 1. C) 1.45 to 1. D) 0.49 to 1.
Answer: C
Ratio
internal).
147) March Company's acid-test (quick) ratio at the end of Year 2 was closest to which of the 147)
following?
A) 0.39 to 1. B) 1.90 to 1. C) 0.95 to 1. D) 0.53 to 1.
Answer: C
internal).
148) March Company's accounts receivable turnover for Year 2 was closest to which of the 148)
following?
Answer: C
Receivable Turnover
internal).
149) March Company's average collection period (age of receivables) for Year 2 was closest 149)
to which of the following?
Answer: A
Receivable Turnover
internal).
51
150) March Company's inventory turnover for Year 2 was closest to which of the following? 150)
Answer: A
Turnover
internal).
151) March Company's average sale period (turnover in days) for Year 2 was closest to which 151)
of the following? Round your intermediate calculations to 2 decimal places.
Answer: B
Turnover
internal).
Reference: 14-13
Financial statements for Marcial Company appear below:
Marcial Company Statement of

Financial Position December 31,
Year 2 and Year 1 (dollars in
thousands)
Year 2 Year 1
Current Assets:
Inventory $140 $130
Noncurrent Assets:
52
Common Shares
Equity
Marcial Company Income

in thousands)
Gross Margin $490
Net Income $182
152) Marcial Company's working capital (in thousands of dollars) at the end of Year 2 was 152)
A) $200. B) $440. C) $1,360. D) $570.
Answer: A
Capital
internal).
153) Marcial Company's current ratio at the end of Year 2 was closest to which of the 153)
following?
A) 1.22 to 1. B) 1.83 to 1. C) 0.35 to 1. D) 0.38 to 1.
Answer: B
Ratio
internal).
53
154) Marcial Company's acid-test (quick) ratio at the end of Year 2 was closest to which of 154)
the following?
A) 0.76 to 1. B) 1.04 to 1. C) 1.32 to 1. D) 0.25 to 1.
Answer: B
internal).
155) Marcial Company's accounts receivable turnover for Year 2 was closest to which of the 155)
following?
Answer: B
Receivable Turnover
internal).
156) Marcial Company's average collection period (age of receivables) for Year 2 was closest 156)
to which of the following? Do not round intermediate calculations.
Answer: C
Receivable Turnover
internal).
157) Marcial Company's inventory turnover for Year 2 was closest to which of the following? 157)
Answer: A
Turnover
internal).
54
158) Marcial Company's average sale period (turnover in days) for Year 2 was closest to 158)
Answer: C
Turnover
internal).
Reference: 14-14
The following financial data have been taken from the records of CPZ Enterprises.
Accounts Receivable $200000

Accounts Payable $80000
Bonds Payable, Due in Ten Years $300000
Cash $100000
Interest Payable, Due in Three Months $10000
Inventory $440000
Land $250000
Notes Payable, Due in Six Months $50000
159) What is the current ratio for CPZ Enterprises? 159)

A) 5.29. B) 5.00. C) 2.14. D) 1.68.
Answer: A
Ratio
internal).
160) What is the company's acid-test (quick) ratio? 160)

A) 1.68. B) 2.31. C) 2.14. D) 0.68.
Answer: C
internal).
55
161) 161)
What will happen to the ratios below if CPZ Enterprises uses cash to pay 50% of its accounts
payable?
Current Ratio Acid-Test Ratio

A) _Increase _Increase
B) _Decrease _Decrease
C) _Increase _Decrease
D) _Decrease _Increase
A) Option A B) Option B C) Option C D) Option D

Answer: A
Ratio, 14-20 Acid-Test (Quick) Ratio
internal).
Reference: 14-15
At December 31, Curry Co. had the following balances in selected asset accounts:
Year 2 Year 1
Cash $300 $200
Accounts receivable, Net $1200 $800
Inventory $500 $300
Other Assets $400 $250
Curry had current liabilities of $1,000 at December 31, Year 2, and credit sales of $7,200 for Year 2.
162) Curry Company's acid-test (quick) ratio at December 31, Year 2 was closest to which of 162)
the following?
A) 1.5 to 1. B) 1.6 to 1. C) 2.1 to 1. D) 2.0 to 1.
Answer: A
internal).
56
163) Curry Company's average collection period (age of receivables) for Year 2 was closest to 163)
Answer: B
Receivable Turnover
internal).
Reference: 14-16
Financial statements for Narita Company appear below:
Narita Company Statement of

thousands)
Year 2 Year 1
Current Assets:
Inventory $120 $120
Noncurrent Assets:
Common Shares, $2 Par 140 $140
Common Shares
57
$2180 $2140
Equity
Narita Company Income

in thousands)
Gross Margin $780
Net Income $308
164) Narita Company's times interest earned for Year 2 was closest to which of the following? 164)
Answer: D
internal).
165) Narita Company's debt-to-equity ratio at the end of Year 2 was closest to which of the 165)
following?
A) 0.17 to 1. B) 0.42 to 1. C) 0.25 to 1. D) 0.58 to 1.
Answer: B
Debt-to-Equity Ratio
internal).
Reference: 14-17
Financial statements for Narlock Company appear below:
Narlock Company Statement of

Financial Position December 31, Year
2 and Year 1 (dollars in thousands)
Year 2 Year 1
Current Assets:
Inventory $130 $120
Noncurrent Assets:
Shareholders' Equity: 100
Common Shares
Total Liabilities & Shareholders'$2160 $
Equity
Narlock Company Income

in thousands)
Gross Margin $680
Net Income $252
59
166) Narlock Company's times interest earned for Year 2 was closest to which of the 166)
following?
Answer: B
internal).
167) Narlock Company's debt-to-equity ratio at the end of Year 2 was closest to which of the 167)
following?
A) 0.32 to 1. B) 1.09 to 1. C) 0.70 to 1. D) 0.38 to 1.
Answer: C
internal).
Reference: 14-18
Financial statements for Narumi Company appear below:
Narumi Company Statement

of Financial Position
December 31, Year 2 and Year
1 (dollars in thousands)
Year 2 Year 1
Current Assets:
Inventory $130 $130
Noncurrent Assets:
60
Preferred Shares, $10 Par, 6% $120 120
Common Shares
Equity
Narumi Company Income

in thousands)
Gross Margin $620
Net Income $231
168) Narumi Company's times interest earned for Year 2 was closest to which of the 168)
following?
Answer: A
internal).
61
169) Narumi Company's debt-to-equity ratio at the end of Year 2 was closest to which of the 169)
following?
A) 0.56 to 1. B) 2.07 to 1. C) 0.42 to 1. D) 0.98 to 1.
Answer: D
internal).
Reference: 14-19
Selected data for the Boat Rental Company follow:
Current Year Prior Year

Preferred Shares, 8% Par Value $50 $250000 $250000
Common Shares, Per Value $10 $500000 $500000
Retained Earnings at End of Year $257000 $240000
Net Income $102000 $90000
Dividends Paid on Preferred Shares $20000 $20000
Dividends Paid on Common Shares $55000 $50000
Quoted Market Price per Common Share at $25 $20
Year End
170) What is the dividend yield ratio on common shares for the current year, rounded to the 170)
nearest tenth of a percent?
A) 6.8%. B) 6.6%. C) 7.4%. D) 4.4%
Answer: D
internal).
171) What was the dividend payout ratio for the prior year? 171)
A) 140.0%. B) 71.4%. C) 114.3%. D) 55.6%.
Answer: B
internal).
62
172) What is the book value per share for the current year, rounded to the nearest cent? 172)
A) $22.18. B) $15.14. C) $18.31. D) $20.14.
Answer: B
Value per Share
internal).
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
173) In determining whether a company's financial condition is improving or deteriorating 173)

over time, vertical analysis of financial statement data would be more useful than
horizontal analysis.
Answer: True False
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements
internal).
174) Trend percentages state several years' financial data in terms of a base year. For example, 174)
sales for every year would be stated as a percentage of the sales in the base year.
Answer: True False
internal).
175) The gross margin percentage is calculated taking the difference between sales and cost of 175)
goods and then dividing the result by sales.
Answer: True False
internal).
176) Common-size statements are particularly useful when comparing data from different 176)
companies.
Answer: True False
internal).
63
177) The price-earnings ratio is determined by dividing the price of a product by its profit 177)
margin.
Answer: True False
internal).
178) The price-earnings ratio is calculated by dividing the market price per share by the 178)
current earnings per share.
Answer: True False
internal).
179) When calculating the return on total assets, the after-tax effect of interest expense must 179)
be subtracted from net income.
Answer: True False
internal).
180) If the assets in which funds are invested have a rate of return lower than the fixed rate of 180)
return paid to the supplier of the funds, then financial leverage is positive.
Answer: True False
internal).
181) If the market value of a common share is greater than its book value, the common share 181)
is probably overpriced.
Answer: True False
Topic: 14-08 Earnings per Share, 14-16 Book Value per Share
internal).
182) To put the working capital figure into perspective it must be supplemented with other 182)
short-term ratios.
Answer: True False
internal).
64
183) If a company has a current ratio greater than 1.0 to 1, repaying a short-term note payable 183)
will increase the current ratio.
Answer: True False
internal).
184) The acid-test ratio is a test of the quality of accounts receivable-in other words, whether 184)
they are likely to be collected.
Answer: True False
internal).
185) When calculating the acid-test ratio, prepaid expenses are ignored. 185)
Answer: True False
internal).
186) Only credit sales (i.e., sales on account) are included in the computation of the accounts 186)
receivable turnover.
Answer: True False
internal).
187) The inventory turnover ratio is equal to the average inventory balance divided by the cost 187)
of goods sold.
Answer: True False
internal).
188) A positive fully diluted earnings per share can sometimes exceed basic (undiluted) 188)
earnings per share.
Answer: True False
internal).
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
65
189) M. K. Berry is the managing director of CE Ltd. a small, family-owned company that manufactures
cutlery. His company belongs to a trade association that publishes a monthly magazine. The latest
issue of the magazine contains a very brief article based on the analysis of the accounting statements
published by the 40 companies that manufacture this type of product. The article contains the following
table:
Average for All Companies In

the Industry
Return on Shareholders' Equity33%
Return on Total Assets 29%
Gross Margin Percentage 30%
Current Ratio 1.9:1
Average Sale Period 37 days
Average Collection Period 41 days
CE Ltd's latest financial statements are as follows:
CE Ltd. Income Statement For

the year end 31 October (in
thousands)
Sales £900
Cost Of Goods Sold £720
Gross Margin £180
Selling and Administrative £55
Expenses
Interest £15
Net Income £110
The country in which the company operates has no corporate income tax. No dividends were paid during the
year. All sales are on account.
CE Ltd. Balance
Sheets As of 31
October (in
thousands)
This Year Last Year
Current assets:
Cash £5 £20
Accounts Receivable 120 110
Inventories 96 80
Noncurrent assets 500 460
Total assets £721 £670
Current liabilities:
Accounts payable £147 £206
Noncurrent liabilities:
66
Noncurrent liabilities:
Bonds payable 150 150
Common shares 100 100
Retained earnings 324 214
Total liabilities and shareholders'
£721 £670
equity
Required:
a) Calculate each of the ratios listed in the magazine article for this year for CE, and comment briefly on CE
Ltd.'s performance in comparison to the industry averages.
b) Explain why it could be misleading to compare CE Ltd.'s ratios with those taken from the article.
Answer: a)
Return on common shareholders' equity:
Net income = £110

Preferred dividends = £0
Average common shareholders' equity = [(£100 + £324) + (£100 + £214)]/2
= £369
Return on common shareholders' equity = (£110 - £0)/£369
= 29.8% (rounded)
Return on total assets:
Net income = £110

Tax rate = 0%
Interest expense = £15
Average total assets = (£721 + £670)/2 = £695.5
Return on total assets = [£110 + £15(1 - 0.00)]/£695.5
= 18.0% (rounded)
Gross margin percentage:
Gross margin = £180

Sales = £900
Gross margin percentage = £180/£900 = 20%
Current ratio:
Current assets = £5 + £120 + £96 = £221

Current liabilities = £147
Current ratio = £221/£147 = 1.5:1 (rounded)
Average sale period:
67
Answer: Cost of goods sold = £720
Average inventory balance = (£96 + £80)/2 = £88
Inventory turnover = £720/£88 = 8.2 (rounded)
Average sale period = 365 days/8.2 = 45 days (rounded)
Average collection period:
Sales on account = £900

Average accounts receivable balance = (£120 + £110)/2 = £115
Accounts receivable turnover = £900/£115 = 7.8 (rounded)
Average collection period = 365 days/7.8 = 47 days (rounded)
CE Ltd.'s return on shareholders' equity is not as good as the industry's average. For every pound
invested, shareholders are obtaining a return that is smaller than they should expect, based on the
article's figures. Similarly, the return on total assets is much less than the average. This indicates that
the company is unable to make good use of the funds invested in the company.
CE Ltd.'s gross margin percentage is also lower than average-perhaps because its selling prices are
lower than the average or its cost of sales is higher.
The current ratio indicates that CE Ltd.'s current assets are more than its current liabilities by a factor o
1.5. The industry average shows an even higher figure, with current assets amounting to almost double
current liabilities.
Most companies aim to turn over inventory as quickly as possible, in order to improve cash flow. CE
Ltd. is not managing to do this as quickly as the industry's average of 37 days. Similarly, companies
should try to obtain payment from customers as soon as possible. CE Ltd. is taking much longer to do
this than the average for the industry.
b)
Care must be taken when comparing CE Ltd.'s ratios with industry averages because there may be
differences in accounting methods. Although accounting standards have reduced the range of
acceptable accounting policies, there is still scope for different firms to apply different accounting
policies. For example, one firm may use straight-line depreciation, while another may use accelerated
depreciation. These variations make comparisons difficult.
Size differences may also mean that ratios are not comparable. A very large manufacturing business
should be able to achieve economies of scale that are not possible for CE Ltd. For example, large
companies may be able to negotiate sizable discounts from suppliers.
A third problem arises from differences in product range. CE Ltd. may produce cutlery that is sold at th
top end of the market, for very high prices, and in small volumes. Alternatively, it may be producing
high-volume, low quality cutlery for the catering industry. Either situation will reduce the
value of comparisons with the industry average.
68
Topic: 14-13 Return on Total Assets, 14-14 Return on Common Shareholders' Equity, 14-19 Current Ratio, 14-21 Accounts
Answer:
Receivable Turnover
LO: 14-01 Prepare and interpret financial statements in comparative and common-size form., 14-02 Compute and interpret
financial ratios that would be useful to a common shareholder., 14-03 Compute and interpret financial ratios that
would be useful to a short-term creditor.
CPA Compdtency:: CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or internal).
190) Comparative financial statements for Springville Company for the last two years appear below. The market
price of Springville's common shares was $25 per share on December 31, Year 2. During Year 2, dividends of
$2,000,000 were paid to preferred shareholders and $10,000,000 to common shareholders.
Springville Company Statement

of Financial Position December
31, Year 2 and Year 1 (dollars in
thousands)
Year 2 Year 1
Current Assets:
Inventory $28000 $28800
Noncurrent Assets:
Investments $75000 $81600
Total Assets $141000 $144000
Preferred Shares, 8%, 1,000,000
$20000 $20000
shares
Common Shares, no Par, $30000 $30000
5,000,000 shares
Equity
Springville Company Income
69
Springville Company Income
in thousands)
Gross Margin $80000
Net Income $8200
Required:
Calculate the following for Year 2:

a) Dividend payout ratio.
b) Dividend yield ratio.
c) Price-earnings ratio.
d) Accounts receivable turnover.
e) Inventory turnover.
f) Return on total assets.
g) Return on common shareholders' equity.
h) Was financial leverage positive or negative for the year? Explain.
Answer: a) Dividend payout ratio = Dividends per share/Earnings per share.
= ($10,000,000/5,000,000)/(($8,200,000 - $2,000,000)/5,000,000))
= $2.00/$1.24
= 161.3%
b) Dividend yield ratio = Dividends paid per share/Market price per share
= $2.00/$25
= 8%
c) Price-earnings ratio = Market price per share/Earnings per share

= $25/(($8,200,000 - $2,000,000)/5,000,000))
= 20.16
d) Accounts receivable turnover = Sales on account/Average accounts receivable balance

= $280,000/(($16,800 + $20,000)/2))
= 15.22 times.
e) Inventory turnover = Cost of goods sold/Average inventory balance

= $200,000/(($28,800 + $28,000)/2))
= 7.04 times
70
Answer:
f) Return on total assets = [Net income + ((Interest expense × (1 - Tax rate))]
/Average total assets
= 8,200,000 + 5,000,000 × (1 - 0.40)
/[($144,000,000 + $141,000,000)/2]
= 7.9%
g) Return on common shareholders' equity = (Net income - preferred dividends)

/Average common shareholders' equity
= ($8,200,000 - $2,000,000)
/(($92,800,000 + $89,000,000)/2)
= 6.8%
h) Financial leverage was negative, since the rate of return to the common shareholders (6.8%)
was less than the rate of return on total assets (7.9%).
Topic: 14-09 Price—Earnings Ratio, 14-10 Dividend Payout and Yield Ratios, 14-13 Return on Total Assets, 14-21 Accounts
Receivable Turnover, 14-22 Inventory Turnover
would be useful to a short-term creditor.
191) Financial statements for Praeger Company appear below:
Praeger Company Statement of

Year 2 Year 1
Current Assets:
Inventory $110 $110
Noncurrent Assets:
Common Shares
Equity
Praeger Company Income Statement

For the Year Ended December 31,
Year 2 (dollars in thousands)
Gross Margin $330
Net Income $105
Dividends during Year 2 totalled $45,000, of which $10,000 were preferred dividends. The market price of a
common share on December 31, Year 2 was $30.
The preferred shares are convertible to common shares on the basis of 2 common shares for each preferred
share.
Required:

a) Basic earnings per common share.
b) Fully diluted earnings per common share.
c) Price-earnings ratio (use basic earnings per share).
d) Dividend payout ratio (use basic earnings per share).
e) Dividend yield ratio.
f) Return on total assets.
g) Return on common shareholders' equity.
h) Book value per share.
i) Working capital.
j) Current ratio.
k) Acid-test (quick) ratio.
72
l.) Accounts receivable turnover.
m) Average collection period (age of receivables).
n) Inventory turnover.
o) Average sale period (turnover in days).
p) Times interest earned.
q) Debt-to-equity ratio.
Answer: a) Basic earnings per share = (Net income - Preferred dividends)
/Average number of common shares outstanding *
= ($105 - $5)/40
= $2.50
* Number of common shares outstanding = Common shares/Par value

= $200/$5
= 40
b) Fully diluted earnings per share = Net income

/(Number of common shares outstanding
+ Common shares to be issued on assumed
conversion of preferred shares *)
= $105/(40 + 40 *)
= $105/80
= $1.31
* Number of common shares to be issued on assumed conversion of preferred shares
= ($100/$5) × 2
= 20 × 2
= 40
c) Price-earnings ratio = Market price per share/Basic earnings per share*

= $30/$2.50
= 12.0
** See part a) above
d) Dividend payout ratio = Dividend per share*/Basic earnings per share**

= $1/$2.50
= 40.0%
* Dividends per share = Common dividends/Common shares***

= $40/40
= $1.00
e) Dividend yield ratio = Dividends per share*/Market price per share

= $1.00/$30.00
73
Answer: = 3.33%
** See part d) above
f) Return on total assets = Adjusted net income*/Average total assets**

= $140/$2,445
= 5.73%
* Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]

= $105 + 50 × (1 - 0.30)
= $140
** Average total assets = ($2,460 + $2,430)/2

= $2,445
g) Return on common shareholders' equity = (Net income - Preferred dividends)

/Average common shareholders' equity*
= ($105 - $5)/$1,520
= 6.58%
* Average common shareholders' equity = ($1,550 + $1,490)/2

= $1,520
h) Book value per share = Common shareholders' equity

/Number of common shares outstanding*
= $1,550/40
= $38.75

= $200/$5
= 40
i) Working capital = Current assets - Current liabilities

= $440 - $310
= $130
j) Current ratio = Current assets/Current liabilities

= $440/$310
= 1.42 to 1
k) Acid-test ratio = Quick assets*/Current liabilities

= $270/$310
= 0.87 to 1
* Quick assets = Cash + Marketable securities + Current receivables
74
Answer: = $100 + $170
= $270
l.) Accounts receivable turnover = Sales on account/Average accounts receivable*

= $1,100/$170
= 6.47 times
* Average accounts receivable = ($170 + $170)/2

= $170
m) Average collection period = 365 days/Accounts receivable turnover*

= 365/6.47
= 56.4 days
* See part l.) above
n) Inventory turnover = Cost of goods sold/Average inventory*

= $770/$110
= 7.00 times
* Average inventory = ($110 + $110)/2

= $110
o) Average sale period = 365 days/Inventory turnover*

= 365/7.00
= 52.1 days
* See part n.) above
p) Times interest earned = Net operating income/Interest expense

= $200/$50
= 4.00 times
q) Debt-to-equity ratio = Liabilities/Shareholders' equity

= $810/$1,650
= 0.49 to 1
75
Topic: 14-01 Limitations of Financial Statement Analysis, 14-02 Comparison of Financial Data, 14-03 The Need to Look
Answer:
beyond Ratios, 14-04 Statements in Comparative and Common-Size Form, 14-05 Dollar and Percentage Changes on
Statements, 14-06 Common-Size Statements, 14-07 Ratio Analysis–The Common Shareholder (Profitability Ratios),
14-08 Earnings per Share, 14-09 Price—Earnings Ratio, 14-10 Dividend Payout and Yield Ratios, 14-11 The
Dividend Payout Ratio, 14-12 The Dividend Yield Ratio, 14-13 Return on Total Assets, 14-14 Return on Common
Shareholders' Equity, 14-15 Financial Leverage, 14-16 Book Value per Share, 14-17 Ratio Analysis–The Short-Term
Creditor (Liquidity Ratios), 14-18 Working Capital, 14-19 Current Ratio, 14-20 Acid-Test (Quick) Ratio, 14-21
Accounts Receivable Turnover, 14-22 Inventory Turnover, 14-23 Ratio Analysis–The Long-Term Creditor (Solvency
Ratios), 14-24 Times Interest Earned Ratio, 14-25 Debt-to-Equity Ratio, 14-26 Summary of Ratios and Sources of
Comparative Information
would be useful to a short-term creditor., 14-04 Compute and interpret financial ratios that would be useful to a
long-term creditor.
192) Financial statements for AAR Company appear below:
AAR Company
Position December 31
Current Assets:
Cash and Marketable Securities $21000
Accounts Receivable, Net $160000
Inventory $300000
Prepaid Expenses $9000
Total Current Assets $490000
Noncurrent Assets:
Plant & Equipment, Net $810000
Total Assets $1300000
Accounts Payable $75000
Accrued Liabilities $25000
Notes Payable, Short Term $100000
Total Current Liabilities $200000
Bonds Payable $300000
Total Liabilities $500000
Common Shares, $5 Par $100000
Retained Earnings $700000
Total Shareholders' Equity $800000
Total Liabilities & Shareholders' Equity $1300000
AAR Company Income
76
AAR Company Income
in thousands)
Gross Margin $330000
Net Income $105000
AAR Company paid dividends of $3.15 per share during the year. The market price of the company's common
shares at December 31 was $63 per share. Total assets at the beginning of the year were $1,100,000, and total
shareholders' equity was $725,000. The balance of accounts receivable at the beginning of the year was
$150,000. The balance in inventory at the beginning of the year was $250,000.
Required:
Calculate the following:

a) Current ratio.
b) Acid-test (quick) ratio.
c) Average collection period (age of receivables).
d) Inventory turnover.
e) Times interest earned.
f) Debt-to-equity ratio.
g) Dividend payout ratio.
h) Price-earnings ratio.
i) Return on total assets.
j) Return on common shareholders' equity.
k) Was financial leverage positive or negative for the year? Explain.
Answer: a) Current ratio = Current assets/Current liabilities
= $490,000/$200,000
= 2.45 to 1
b) Acid-test ratio = Quick assets*/Current liabilities

= $181,000/$200,000
= 0.91 to 1

= $21,000 + $160,000
= $181,000
77
Answer: c) Accounts receivable turnover = Sales on account/Average accounts receivable*
= $2,100,000/$155,000
= 13.55 times
* Average accounts receivable = ($160,000 + $150,000)/2

= $155,000
Average collection period = 365 days/Accounts receivable turnover

= 365/13.55
= 26.94 days
d) Inventory turnover = Cost of goods sold/Average inventory*

= $1,770,000/$275,000
= 6.4 times
* Average inventory = ($300,000 + $250,000)/2

= $275,000
e) Times interest earned = Net operating income/Interest expense

= $200,000/$50,000
= 4.00 times
f) Debt-to-equity ratio = Liabilities/Shareholders' equity

= $500,000/$800,000
= 0.625 to 1
g) Dividend payout ratio = Dividends per share/Earnings per share.

= $3.15/($105,000/20,000 shares)
= $3.15/$5.25
= 60%
h) Dividend yield ratio = Dividends paid per share/Market price per share
= $3.15/$63.00
= 5%
i) Price-earnings ratio = Market price per share/Earnings per share

= $63/$5.25
= 12.0
j) Return on total assets = ((Net income + (Interest expense × (1 - Tax rate))

= (($105,000 + (50,000 × (1 - 0.30))
/(($1,100,000 + $1,300,000)/2))
= $140,000/$1,200,000
= 11.67%
78
Answer:
k) Return on common shareholders' equity = (Net income - Preferred dividends)
/Average common shareholders' equity
= $105,000/[($725,000 + $800,000)/2]
= 13.8%
l.) Financial leverage was positive, since the rate of return to the common shareholders (13.8%) was
greater than the rate of return on total assets (11.67%).
long-term creditor.
193) Financial statements for Qiang Company appear below:
Qiang Company Statement of Financial

Position December 31, Year 2 and Year 1
Year 2 Year 1
Current Assets:
Inventory $130 $130
Noncurrent Assets:
Common Shares
Equity
Qiang Company Income

December 31, Year 2 (dollars in
thousands)
Gross Margin $450
Net Income $161
Total dividends paid during Year 2 were $61,000, of which $12,000 were for preferred shares. The market
price of a common share on December 31, Year 2 was $50.
The preferred shares are convertible to common shares on the basis of four common shares for each preferred
share.
Required:

a) Basic earnings per common share.
b) Fully diluted earnings per common share.
c) Price-earnings ratio (use basic earnings per share).
d) Dividend yield ratio.
e) Return on total assets.
f) Return on common shareholders' equity.
g) Book value per share.
80
Answer: a) Basic earnings per share = (Net Income - Preferred Dividends)
/Average number of common shares outstanding*
= ($161 - $12)/36
= $4.14

= $180/$5
= 36
b) Fully diluted earnings per share = Net Income

/(Number of common shares outstanding
+ Common shares to be issued on assumed
conversion of preferred shares*)
= $161/(36 + 96*)
= $161/132
= $1.22
* Number of common shares to be issued on assumed conversion of preferred shares

= ($120/$5) × 4
= 24 × 4
= 96
c) Price-earnings ratio = Market price per share/Basic earnings per share*

= $50/$4.14
= 12.1
* See part a) above
d) Dividend yield ratio = Dividends per share*/Market price per share

= $1.36/$50.00
= 2.72%
* Dividends per share = Common dividends/Common shares**

= $49/36
= $1.36
e) Return on total assets = Adjusted net income*/Average total assets**

= $189/$2,365
= 7.99%

= $161 + 40 × (1 - 0.30)
= $189
81
Answer:
= $2,365
f) Return on common shareholders' equity = (Net income - Preferred dividends)

= ($161 - $12)/$1,530
= 9.74%
= $1,530
g) Book value per share = Common shareholders' equity

= $1,580/36
= $43.89
* See part a) above

Topic: 14-08 Earnings per Share, 14-09 Price—Earnings Ratio, 14-10 Dividend Payout and Yield Ratios, 14-13 Return on
Total Assets
financial ratios that would be useful to a common shareholder.
194) Financial statements for Qualle Company appear below:
Qualle Company Statement of

Year 2 Year 1
Current Assets:
Inventory $170 $170
Noncurrent Assets:
Total Liabilities $890 82 $970
Common Shares
Equity
Qualle Company Income

in thousands)
Gross Margin $690
Net Income $259
Total dividends paid during Year 2 were $149,000, of which $10,000 were preferred dividends. The market
Required:

a) Earnings per share.
b) Price-earnings ratio.
c) Dividend yield ratio.
d) Return on total assets.
e) Return on common shareholders' equity.
f) Book value per share.
Answer: a) Earnings per share = (Net Income - Preferred Dividends)
= ($259 - $10)/16
= $15.56

83
Answer: = $160/$10
= 16
b) Price-earnings ratio = Market price per share/Earnings per share*

= $280/$15.56
= 18.0
* See part a) above
c) Dividend yield ratio = Dividends per share*/Market price per share

= $8.69/$280.00
= 3.10%

= $139/16
= $8.69
d) Return on total assets = Adjusted net income*/Average total assets**

= $294/$2,315
= 12.70%
*Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]

= $259 + 50 × (1 - 0.30)
= $294
**Average total assets = ($2,330 + $2,300)/2

= $2,315
e) Return on common shareholders' equity = (Net income - Preferred dividends)

= ($259 - $10)/$1,285
= 19.38%

= $1,285
f) Book value per share = Common shareholders' equity

= $1,340/16
= $83.75
* See part a) above
84
Answer:
Total Assets, 14-16 Book Value per Share
195) Financial statements for Quade Company appear below:
Quade Company Statement of

Year 2 Year 1
Current Assets:
Inventory $120 $140
Noncurrent Assets:
Common Shares
Equity
Quade Company Income

in thousands)
Sales (All on Account) $2400 85
Gross Margin $720
Net Income $280
Total dividends paid during Year 2 were $210,000, of which $18,000 were preferred dividends. The market
Required:

a) Earnings per share.
b) Price-earnings ratio.
c) Dividend yield ratio.
d) Return on total assets.
e) Return on common shareholders' equity.
f) Book value per share.
Answer: a) Earnings per share = (Net Income - Preferred Dividends)
= ($280 - $18)/16
= $16.38

= $160/$10
= 16
b) Price-earnings ratio = Market price per share/Earnings per share*

= $230/$16.38
= 14.0
* See part a) above
c) Dividend yield ratio = Dividends per share*/Market price per share

= $12.00/$230.00
= 5.22%

= $192/16
= $12.00
86
Answer: ** See part a) above
d) Return on total assets = Adjusted net income*/Average total assets**

= $308/$2,000
= 15.40%

= $280 + 40 × (1 - 0.30)
= $308

= $2,000
e) Return on common shareholders' equity = (Net income - Preferred dividends)

= ($280 - $18)/$1,065
= 24.60%

= $1,065
f) Book value per share = Common shareholders' equity

= $1,100/16
= $68.75
* See part a) above

Total Assets, 14-16 Book Value per Share
196) Condensed financial statements of Miller Company at the beginning and at the end of the current year are
given below:
Miller Company. Balance Sheet

End of Current YearBeginning of Current
Year
Cash $10000 $8000
Marketable Securities 20000 22000
Accounts Receivable, Net 90000 110000
Inventories 150000 100000
Prepaid and equipment, net 280000 260000
Total Assets $550000 $500000
Accounts Payable 80000 $60000
Accrued Short Term liabilities 20000 87 25000
Accrued Short Term liabilities 20000 25000
Bonds Payable 75000 75000
Preferred Shares, 10%, $100 Par50000 50000
Common Shares, $10 Par 100000 100000
Additional Paid-In Capital - 50000 50000
Common Shares
Retained Earnings 175000 140000
Total Liabilities & Equity 550000 500000
Miller Company Condensed

Income Statement For the
Current Year
Gross Margin $300000
Net Income $50000
The company paid total dividends of $15,000 during the year, of which $5,000 were to preferred shareholders.
The market price of a common share at the end of the year was $30.
Required:
On the basis of the information given above, fill in the blanks with the appropriate figures.
Example: The current ratio at the end of the current year would be computed by dividing $270,000 by $100,000
a) The acid-test (quick) ratio at the end of the current year would be computed by dividing ________ by
________ .
b) The inventory turnover for the year would be computed by dividing ________ by ________ .
c) The debt-to-equity ratio at the end of the current year would be computed by dividing ________ by
________
d) The earnings per common share would be computed by dividing ________ by ________ .
e) The accounts receivable turnover for the year would be computed by dividing ________ by ________ .
f) The times interest earned for the year would be computed by dividing _______________ by ________ .
g) The return on common shareholders' equity for the year would be computed by dividing ________ by
________ .
h) The dividend yield would be computed by dividing ________ by ________ .
88
Answer: a) $120,000; $100,000.
b) $350,000; $125,000.
c) $175,000; $375,000.
d) $45,000; 10,000 shares.
e) $650,000; $100,000.
f) $100,000; $10,000.
g) $45,000; $307,500.
h) $1; $30.
Topic: 14-08 Earnings per Share, 14-21 Accounts Receivable Turnover, 14-22 Inventory Turnover, 14-24 Times Interest
Earned Ratio, 14-25 Debt-to-Equity Ratio
long-term creditor.
197) Shelzo Inc., a manufacturer of construction equipment is considering the purchase of one of its
suppliers, Raritron Industries. The purchase has been given preliminary approval by Shelzo's board
of directors, and several discussions have taken place between the management of both companies.
Raritron has submitted financial data for the past several years. Shelzo's controller has analyzed
Raritron's financial statements and prepared the following ratio analysis comparing Raritron's performance
with the industry averages.
Year 3 Year 2 Year 1 Average

Return on common 13.03 13.02 12.98 12.96
shareholders' equity
Average sale period 51.16 47.29 42.15 38.63
Times interest earned 3.87 3.46 3.28 3.56
Price-earnings ratio 10.96 11.23 11.39 11.54
Debt-to-equity ratio 0.50 0.46 0.4 80.57
Accounts receivable turnover 6.98 7.25 7.83 7.78
Current ratio 1.65 1.95 1.70 2.30
Dividend yield ratio 2.08 2.06 2.12 2.25
Required:
Using the information provided above for Raritron Industries:

a)
(1.) Identify the two ratios from the above list that would be of most interest to short-term creditors.
(2.) Explain what these two ratios measure.
(3.) What do these two ratios indicate about Shelzo Inc.?
b)
(1.) Identify the three ratios from the above list that would be of most interest to shareholders.
(2.) Explain what these three ratios measure.
(3.) What do these three ratios indicate about Shelzo Inc.?
89
c)
(1.) Identify the two ratios from the above list that would be of most interest to long-term creditors.
(2.) Explain what these two ratios measure.
(3.) What do these two ratios indicate about Shelzo Inc.?
Answer: a)
(1.) Two ratios that would be of most interest to short-term creditors would be the average sale period
and the current ratio.
(2.) The average sale period relates the average amount of inventory to the cost of goods sold. This rati
measures the length of time it takes on average to sell inventory and is a gauge of how well the compan
manages its inventory. The current ratio is calculated by dividing current assets by current liabilities.
This ratio measures short-run solvency, i.e., the ability to meet current obligations.
(3.) For Shelzo Inc., the average sale period has been increasing and is well above the industry average
while the current ratio has been below the industry average. Both of these ratios indicate that there may
be problems with the company's liquidity position. This could be caused by poor inventory control.
b)
(1.) The three ratios that would be of most interest to common shareholders are the return on common
shareholders' equity, the price-earnings ratio, and the dividend yield ratio.
(2.) The return on common shareholders' equity is a measure of how effectively the company
has used the shareholders' investment in the company to generate profits. The price-earnings
ratio provides a measure of how the stock market perceives the company's future earnings
prospects. The higher the ratio, the more favourable the future looks for the company. The
dividend yield ratio tells what proportion of the company's profits is paid out as cash dividends to
common shareholders.
(3.) These three ratios are close to the industry averages and there are no discernible significant trends.
c)
(1.) The two ratios that would be of most interest to long-term creditors are times interest earned and
the debt-to-equity ratio.
(2.) Times interest earned is earnings before interest expense and taxes divided by interest expense.
This ratio measures debt-paying ability. If stable, the company will be able to refinance or obtain new
funds at reasonable rates. The debt-to-equity ratio measures the relative proportions of debt and equity
in the company's capital structure. The lower the level of the debt-to-equity ratio, the more security
long-term debtors have.
(3.) For Shelzo Inc., times interest earned has been improving and is currently above the industry
average, indicating that the company should be able to borrow additional funds if needed. The
company's debt-to-equity ratio is below the industry average, which also indicates the company
has the capacity to perhaps take on additional debt.
90
long-term creditor.
198) Financial statements for Lowe Company appear below:
Lowe Company Statement of

thousands)
Year 2 Year 1
Cash $45 $30
Accounts receivable, net $38 $40
Inventory $67 $60
Long term investments $162 $150
Land $128 $100
Building 98 50
Mortgage payable $100 -0-
Preferred Shares, 12% $100 $100
Common Shares 195 $170
Equity
Lowe Company Income

in thousands)
Gross Margin $71 91
Gross Margin $71
Operating Expenses (including$16
interest expense of $5,000)
Net Income $33
Total dividends paid during the year were $25,000, of which $12,000 was paid to the preferred shareholders.
Required:

a) Current ratio.
e) Return on total assets.
f) Times interest earned.
g) Debt-to-equity ratio.
= ($45 + $38 + $67)/($36 + $24)
= 2.5 to 1

= $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

= $39

= 365/3.72
= 98.1 days

= $74/$63.5
= 1.17 times
92
Answer:
= $63.5
e) Return on total assets = ((Net income + (Interest expense × (1 - tax rate))

= (($33 + ($5 × (1 - 0.40))/(($538 + $430)/2))
= $36/$484
= 7.4%
f) Times interest earned = Earnings before interest and taxes/Interest expense

= ($55 + $5)/$5
= 12.00 times
g) Debt-to-equity ratio = Liabilities/Shareholders' equity

= ($36 + $24 + $35 + $100)/($100 + $195 + $48)
= $195/$343
= 0.57 to 1
long-term creditor.
199) Several investors are in the process of organizing a new company. The investors feel that $800,000 would be
adequate to finance the new company's operations. Three methods are available to finance the new company:
(1.) All $800,000 could be obtained through the issuance of common shares.
(2.) Common shares could be issued to provide $400,000 with the other $400,000 obtained by issuing $100 par
value, l0% preferred shares.
(3.) Common shares could be issued to provide $40,000 with the other $400,000 obtained by issuing bonds wit
an interest rate of 10%.
The investors are confident that the company could earn $175,000 each year before interest and taxes. The tax
rate is 40%.
Required:
a) If the estimates are correct, compute the net income available to common shareholders under each of the
93
three financing methods proposed above.
b) Using the income data computed in part a) above, compute the return on common shareholders' equity under
each of the three methods.
c) Why do methods 2 and 3 provided a greater return on common equity than does method 1? Why does
method 3 provide a greater return on common equity than method 2?
Answer: a) Net income available to common shareholders:
Method A Method B Method C

Income before interest and $175,000 $175,000 $175,000
taxes
Deduct interest expense: 0.10 ×
- - 40,000
$400,00
Income before taxes $175,000 $175,000 $135,000
Deduct income taxes (40%) 70,000 70,000 54,000
Net income $105,000 $105,000 $81,000
Deduct preferred dividends: - 40,000 U
0.10 × $400,000
Net income to common $105,000 $65,000 $81,000
shareholders
b) Return on common equity:
Method A Method B Method C

Net income to common
shareholders $105,000 $65,000 $81,000
Common shareholders'
investment $800,000 $400,000 $400,000
Return on common equity 13.10% 16.25% 20.25%
c) Methods 2 and 3 provide a greater return on common equity than Method 1 due to the effect
of positive leverage. Methods 2 and 3 each contain sources of funds that require a fixed
annual return on the funds provided. This fixed annual return is less than what is being earned
on the assets of the company, with the difference going to common shareholders.
Method 3 uses debt and provides more leverage than Method 2, in which preferred shares are issued.
The difference is due to the deductibility for tax purposes of the interest on debt, whereas dividends on
preferred shares are not deductible for tax purposes.
Topic: 14-05 Dollar and Percentage Changes on Statements, 14-06 Common-Size Statements, 14-08 Earnings per Share
94
200) Financial statements for Raridan Company appear below:
Raridan Company Statement of

thousands)
Year 2 Year 1
Current Assets:
Inventory $100 $110
Noncurrent Assets:
Common Shares
Equity
Raridan Company Income

in thousands)
Gross Margin $570
Net Operating Income $350 95
Net Income $224
Required:

a) Current ratio.
= $500/$270
= 1.85 to 1

= $330/$270
= 1.22 to 1

= $140 + $190
= $330

= $1,900/$180
= 10.56 times

= $180

= 365/10.56
= 34.6 days

= $1,330/$105
= 12.67 times

= $105
96
Answer: e) Times interest earned = Net operating income/Interest expense
= $350/$30
= 11.67 times

= $550/$1,490
= 0.37 to 1
Topic: 14-20 Acid-Test (Quick) Ratio, 14-21 Accounts Receivable Turnover, 14-22 Inventory Turnover, 14-24 Times
Interest Earned Ratio, 14-25 Debt-to-Equity Ratio
financial ratios that would be useful to a short-term creditor., 14-04 Compute and interpret financial ratios that would
be useful to a long-term creditor.
201) Financial statements for Rarig Company appear below:
Rarig Company Statement of

thousands)
Year 2 Year 1
Current Assets:
Inventory $190 $180
Noncurrent Assets:
Additional Paid-In Capital - Common $110 $110
Shares
Total Liabilities & Shareholders' Equity $2090 $2020
97
Total Liabilities & Shareholders' Equity $2090 $2020
Rarig Company Income

in thousands)
Gross Margin $540
Net Income $196
Required:

a) Current ratio.
= $590/$310
= 1.90 to 1

= $370/$310
= 1.19 to 1

= $210 + $160
= $370

= $1,800/$155
= 11.61 times

= $155
98
Answer: Average collection period = 365 days/Accounts receivable turnover
= 365/11.61
= 31.4 days

= $1,260/$185
= 6.81 times

= $185

= $330/$50
= 6.60 times

= $770/$1,320
= 0.58 to 1
long-term creditor.
202) Financial statements for Rarity Company appear below:
Rarity Company Statement of

thousands)
Year 2 Year 1
Current Assets:
Inventory $90 $110
Noncurrent Assets:
Plant & Equipment, Net $1440 99 $1400
Common Shares
Equity
Rarity Company Income

in thousands)
Gross Margin $330
Net Income $105
Required:
a) Current ratio.
100
= $500/$480
= 1.04 to 1

= $340/$480
= 0.71 to 1

= $210 + $130
= $340

= $1,100/$125
= 8.80 times

= $125

= 365/8.80
= 41.5 days

= $770/$100
= 7.70 times

= $100

= $200/$50
= 4.00 times

= $960/$980
= 0.98 to 1
Topic: 14-19 Current Ratio, 14-20 Acid-Test (Quick) Ratio, 14-21 Accounts Receivable Turnover, 14-22 Inventory
Turnover, 14-24 Times Interest Earned Ratio, 14-25 Debt-to-Equity Ratio
financial ratios that would be useful to a short-term creditor., 14-04 Compute and interpret financial ratios that would
be useful to a long-term creditor.
101
203) Financial statements for Sarosa Company appear below:
Sarosa Company Statement of

Year 2 Year 1
Current Assets:
Inventory $150 $150
Noncurrent Assets:
Common Shares
Equity
Sarosa Company Income

in thousands)
Gross Margin $570
Interest Expense $40 102
Net Income $217
Required:
a) Calculate Sarosa Company's return on total assets for Year 2.

b) Calculate Sarosa Company's return on common shareholders' equity for Year 2.
c) Financial leverage was positive for Year 2. Why?
d) Assume all current liabilities are interest free and that the interest expense of $40 is for the bonds payable.
(i) Calculate the dollar amount of the financial leverage (in $1,000)
(ii) Allocate the dollar amount of the financial leverage to the following sources of financing: Preferred
Shares, Bonds Payable, and Current Liabilities (rounded to the nearest $1,000)
Answer: a) Return on total assets = Adjusted net income*/Average total assets**
= $245/$2,485
= 9.86%

= $217 + 40 × (1 - 0.30)
= $217 + $28
= $245

= $2,485
b) Return on common shareholders' equity = (Net income - Preferred dividends)

= [($217 - ($100 × 0.10)]/$1,625
= 12.74%
* Average common shareholders' equity = [($1,810 - $100) + ($1,640 - $100)]/2

= ($1,710 + $1,540)/2
= $1,625
c) Financial leverage is positive because return on common shareholders' equity is greater than return
on total assets.
d)
(i) Dollar amount of financial leverage = (12.74% - 9.86%) × $1,625
= 2.88% × $1,625
= $47
(ii) Allocations:
Preferred shares = (9.86% - 10%) × $100

103
Answer: = -0.14% × $100
= 0 (rounded)
Bonds payable = (9.86% × [($370 + 400)/2]) - $40 × (1 - 30%)

= (9.86% × $385) - $28
= $38 - $28
= 10
Current liabilities = (9.86% - 0%) × [($340 + $410)/2]

= $37 (rounded)
Note: The dollar amount of return on common shareholders' equity is $207 (that is, net income
of $217 less $10 dividends to preferred shareholders) is made up of $160 (assuming zero
financial leverage calculated as 9.86% × $1,625) and net positive financial leverage of $47
Topic: 14-13 Return on Total Assets, 14-14 Return on Common Shareholders' Equity, 14-15 Financial Leverage
104

Financial Management

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Financial Management

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Exam

1) How is horizontal analysis of financial statements accomplished? 1)

8) Which of the following is NOT a potential source of financial leverage? 8)

Accounts Prepaid Inventory

A) Option A B) Option B C) Option C D) Option D

Current Ratio 2.0

What were Sheridan's sales for the year?

Earnings per Share $10

What is the price-earnings ratio?

Earnings per Share $15

What is the price-earnings ratio?

Number of Shares Outstanding

The dividend yield ratio is closest to which of the following?

Price Originally Issued $40

Total Assets $150,000

What is the book value per common share?

Current Liabilities $600,000

What were Ben Company's current liabilities?

A) 23.1%. B) 22.0%. C) 21.2%. D) 24.0%.

Larosa Company Income

Earnings before Interest and Taxes $35 million

105) What is the expected dividend per common share? 105)

Orange Company Income

Orantes Company Statement

Orantes Company Income

Oratz Company Statement of

Oratz Company Income

Current Year Prior Year

Lisa Inc. Statement of

Marcell Company Income

March Company Income

Marcial Company Statement of

Marcial Company Income

Accounts Receivable $200000

159) What is the current ratio for CPZ Enterprises? 159)

160) What is the company's acid-test (quick) ratio? 160)

Current Ratio Acid-Test Ratio

A) Option A B) Option B C) Option C D) Option D

Narita Company Statement of

Narita Company Income

Narlock Company Statement of

Narlock Company Income

Narumi Company Statement

Narumi Company Income

Current Year Prior Year

173) In determining whether a company's financial condition is improving or deteriorating 173)

Average for All Companies In

CE Ltd's latest financial statements are as follows:

CE Ltd. Income Statement For

Net income = £110

Return on total assets:

Net income = £110

Gross margin percentage:

Gross margin = £180

Current assets = £5 + £120 + £96 = £221

Average sale period:

Average collection period:

Sales on account = £900

Springville Company Statement

Springville Company Income

Calculate the following for Year 2:

c) Price-earnings ratio = Market price per share/Earnings per share

d) Accounts receivable turnover = Sales on account/Average accounts receivable balance