financial statement analysis test bank part 1

Earnings per share is computed by dividing net income after deducting preferred dividends by the average number of common shares outstanding.. An increase in the number of shares of comm

True/False Questions

1 Common-size statements are financial statements of companies of similar size

2 One limitation of vertical analysis is that it cannot be used to compare two companies that are significantly different in size

3 The gross margin percentage is computed by dividing the gross margin by total assets

4 The sale of used equipment at book value for cash will increase earnings per share

5 Earnings per share is computed by dividing net income (after deducting preferred dividends) by the average number of common shares outstanding

6 The dividend payout ratio divided by the dividend yield ratio equals the price-earnings ratio

7 An increase in the number of shares of common stock outstanding will decrease a company's price-earnings ratio if the market price per share remains unchanged

8 A company's financial leverage is negative when its return on total assets is less than its return on common stockholders' equity

9 When computing return on common stockholders' equity, retained earnings should be included as part of common stockholders' equity

10 When a retailing company purchases inventory, the book value per share of the

company increases

11 If a company's acid-test ratio increases, its current ratio will also increase

12 Assuming a current ratio greater than 1, acquiring land by issuing more of the

company's common stock will increase the current ratio

13 If a company successfully implements lean production, its inventory turnover ratio should decrease

14 Short-term borrowing is not a source of working capital

15 Working capital is computed by subtracting long-term liabilities from long-term assets

16 Common size financial statements help an analyst to:

A) Evaluate financial statements of companies within a given industry of the approximate same size

B) Determine which companies in a similar industry are at approximately the same stage of development

C) Compare the mix of assets, liabilities, capital, revenue, and expenses within a company over a period of time or between companies within a given industry without respect to size

D) Ascertain the relative potential of companies of similar size in different

industries

17 Which of the following ratios would be least useful in determining a company's ability

to pay its expenses and liabilities?

A) current ratio

B) acid-test ratio

C) price-earnings ratio

D) times interest earned ratio

18 Most stockholders would ordinarily be least concerned with which of the following ratios:

A) earnings per share

B) dividend yield ratio

C) price-earnings ratio

D) acid-test ratio

19 What effect will the issuance of common stock for cash at year-end have on the following ratios?

Return on Total Assets Debt-to-Equity Ratio

20 The market price of Friden Company's common stock increased from $15 to $18 Earnings per share of common stock remained unchanged The company's price-earnings ratio would:

A) increase

B) decrease

C) remain unchanged

D) impossible to determine

21 If a company is profitable and is effectively using leverage, which

one of the following ratios is likely to be the largest?

A) Return on total assets

B) Return on total liabilities

C) Return on common stockholders' equity

D) Cannot be determined

22 Clark Company issued bonds with an interest rate of 10% The company's return on assets is 12% The company's return on common stockholders' equity would most likely:

A) increase

B) decrease

C) remain unchanged

D) cannot be determined

23 Which of the following transactions could generate positive financial leverage for a corporation?

A) acquiring assets through the issuance of long-term debt

B) acquiring assets through the use of accounts payable

C) acquiring assets through the issuance of common stock

D) both A and B above

24 Book value per common share is the amount of stockholders' equity per outstanding share of common stock Which one of the following statements about book value per common share is most correct?

A) Market price per common share usually approximates book value per common share

B) Book value per common share is based on past transactions whereas the market price of a share of stock mainly reflects what investors expect to happen in the future

C) A market price per common share that is greater than book value per common share is an indication of an overvalued stock

D) Book value per common share is the amount that would be paid to stockholders

if the company were sold to another company

25 The ratio of total cash, marketable securities, accounts receivable, and short-term notes to current liabilities is:

A) the debt-to-equity ratio

B) the current ratio

C) the acid-test ratio

D) working capital

26 A company has just converted a long-term note receivable into a short-term note receivable The company's acid-test and current ratios are both greater than 1 This transaction will:

A) increase the current ratio and decrease the acid-test ratio

B) increase the current ratio and increase the acid-test ratio

C) decrease the current ratio and increase the acid-test ratio

D) decrease the current ratio and decrease the acid-test ratio

27 Broca Corporation has a current ratio of 2.5 Which of the following transactions will increase Broca's current ratio?

A) the purchase of inventory for cash

B) the collection of an account receivable

C) the payment of an account payable

D) none of the above

28 Allen Company's average collection period for accounts receivable was 25 days in year 1, but increased to 40 days in year 2 Which of the following would most likely

be the cause of this change:

A) a decrease in accounts receivable relative to sales in year 2

B) an increase in credit sales in year 2 as compared to year 1

C) a relaxation of credit policies in year 2

D) a decrease in accounts receivable in year 2 as compared to year 1

29 Wolbers Company wrote off $100,000 in obsolete inventory The company's inventory turnover ratio would:

A) increase

B) decrease

C) remain unchanged

D) impossible to determine

30 Gottlob Corporation's most recent income statement appears below:

Sales (all on account) $824,000

Cost of goods sold 477,000

Gross margin 347,000

Selling and administrative expense 208,000

Net operating income 139,000

Interest expense 37,000

Net income before taxes 102,000

Income taxes 30,000

Net income $ 72,000

The gross margin percentage is closest to:

A) 20.7%

B) 72.7%

C) 42.1%

D) 481.9%

31 Crandall Company's net income last year was $60,000 The company paid preferred dividends of $10,000 and its average common stockholders' equity was $480,000 The company's return on common stockholders' equity for the year was closest to:

A) 12.5%

B) 10.4%

C) 2.1%

D) 14.6%

32 Ardor Company's net income last year was $500,000 The company has 150,000 shares of common stock and 30,000 shares of preferred stock outstanding There was

no change in the number of common or preferred shares outstanding during the year The company declared and paid dividends last year of $1.00 per share on the common stock and $0.70 per share on the preferred stock The earnings per share of common stock is closest to:

A) $3.33

B) $3.19

C) $2.33

D) $3.47

33 The following information relates to Konbu Corporation for last year:

Price earnings ratio 15

Dividend payout ratio 30%

Earnings per share $5

What is Konbu's dividend yield ratio for last year?

A) 1.5%

B) 2.0%

C) 4.5%

D) 10.0%

34 Richmond Company has 100,000 shares of $10 par value common stock issued and outstanding Total stockholders' equity is $2,800,000 and net income for the year is

$800,000 During the year Richmond paid $3.00 per share in dividends on its common stock The market value of Richmond's common stock is $24 What is the price-earnings ratio?

A) 3.0

B) 3.5

C) 4.8

D) 8.0

35 Hurst Company has 20,000 shares of common stock outstanding These shares were originally issued at a price of $15 per share The current book value is $25.00 per share and the current market value is $30.00 per share The dividends on common stock for the year totaled $45,000 The dividend yield ratio is:

A) 9%

B) 7.5%

C) 15%

D) 10%

36 Bramble Company's net income last year was $65,000 and its interest expense was

$15,000 Total assets at the beginning of the year were $620,000 and total assets at the end of the year were $650,000 The company's income tax rate was 40% The company's return on total assets for the year was closest to:

A) 11.7%

B) 10.2%

C) 12.6%

D) 11.2%

37 Dahl Company can borrow funds at 15% interest Since the company's tax rate is 40%, its after-tax cost of interest is only 9% Thus, the company reasons that if it can earn

$70,000 per year before interest and taxes on a new investment of $500,000, then it will be better off by $25,000 per year

A) The company's reasoning is correct

B) The company's reasoning is not correct, since the after-tax cost of interest would

be 6 percent, rather than 9%

C) The company's reasoning is not correct, since interest is not tax-deductible D) The company's reasoning is not correct, since it would be worse off by $3,000 per year after taxes

38 Bucatini Corporation is contemplating the expansion of operations This expansion will generate a 11% return on the funds invested To finance this operation, Bucatini can either issue 12% bonds, issue 12% preferred stock, or issue common stock

Bucatini currently has a return on common stockholders' equity of 16% Bucatini's tax rate is 30% In which of the financing options above is positive financial leverage being generated?

A) none of the options generate positive financial leverage

B) the bonds

C) the common stock

D) the preferred stock

39 Consolo Corporation's net income for the most recent year was $809,000 A total of 100,000 shares of common stock and 200,000 shares of preferred stock were

outstanding throughout the year Dividends on common stock were $2.05 per share and dividends on preferred stock were $1.80 per share The earnings per share of common stock is closest to:

A) $2.44

B) $8.09

C) $4.49

D) $6.04

40 Bary Corporation's net income last year was $2,604,000 The dividend on common stock was $2.50 per share and the dividend on preferred stock was $2.40 per share The market price of common stock at the end of the year was $73.50 per share

Throughout the year, 300,000 shares of common stock and 100,000 shares of preferred stock were outstanding The price-earnings ratio is closest to:

A) 9.33

B) 11.89

C) 13.66

D) 8.47

41 Arntson Corporation's net income last year was $7,975,000 The dividend on common stock was $8.20 per share and the dividend on preferred stock was $3.50 per share The market price of common stock at the end of the year was $59.10 per share

Throughout the year, 500,000 shares of common stock and 200,000 shares of preferred stock were outstanding The dividend payout ratio is closest to:

A) 1.06

B) 0.51

C) 0.56

D) 1.29

42 Last year, Soley Corporation's dividend on common stock was $11.60 per share and the dividend on preferred stock was $1.10 per share The market price of common stock at the end of the year was $54.80 per share The dividend yield ratio is closest to: A) 0.02

B) 0.21

C) 0.23

D) 0.91

43 Inglish Corporation's most recent income statement appears below:

Sales (all on account) $610,000

Cost of goods sold 350,000

Gross margin 260,000

Selling and administrative expense 110,000

Net operating income 150,000

Interest expense 30,000

Net income before taxes 120,000

Income taxes (30%) 36,000

Net income $ 84,000

The beginning balance of total assets was $560,000 and the ending balance was

$580,000 The return on total assets is closest to:

A) 18.4%

B) 14.7%

C) 26.3%

D) 21.1%

44 Excerpts from Bellis Corporation's most recent balance sheet appear below:

Year 2 Year 1 Preferred stock $ 100,000 $ 100,000

Common stock 300,000 300,000

Additional paid-in capital–common stock 370,000 370,000

Retained earnings 480,000 390,000

Total stockholders’ equity $1,250,000 $1,160,000

Net income for Year 2 was $160,000 Dividends on common stock were $47,000 in total and dividends on preferred stock were $23,000 in total The return on common stockholders' equity for Year 2 is closest to:

A) 9.4%

B) 13.3%

C) 12.4%

D) 14.5%

45 Data from Baca Corporation's most recent balance sheet appear below:

Preferred stock $ 100,000

Common stock 400,000

Additional paid-in capital–common stock 360,000

Retained earnings 580,000

Total stockholders’ equity $1,440,000

A total of 400,000 shares of common stock and 20,000 shares of preferred stock were outstanding at the end of the year The book value per share is closest to:

A) $3.35

B) $5.00

C) $1.90

D) $3.60

46 Dravis Company's working capital is $10,000 and its current liabilities are $84,000 The company's current ratio is closest to:

A) 0.88

B) 0.12

C) 9.40

D) 1.12

47 Erascible Company has $13,000 in cash, $7,000 in marketable securities, $27,000 in

company's current assets consist of cash, marketable securities, accounts receivable, and inventory The company's acid-test ratio is closest to:

A) 1.57

B) 0.90

C) 1.33

D) 2.23

48 Frame Company had $160,000 in sales on account last year The beginning accounts receivable balance was $10,000 and the ending accounts receivable balance was

$16,000 The company's accounts receivable turnover was closest to:

A) 12.31

B) 6.15

C) 16.00

D) 10.00

49 Graber Company had $130,000 in sales on account last year The beginning accounts receivable balance was $18,000 and the ending accounts receivable balance was

$12,000 The company's average collection period was closest to:

A) 33.69 days

B) 42.12 days

C) 84.23 days

D) 50.54 days

50 Harold Company, a retailer, had cost of goods sold of $260,000 last year The

beginning inventory balance was $20,000 and the ending inventory balance was

$26,000 The company's inventory turnover was closest to:

A) 5.65

B) 10.00

C) 13.00

D) 11.30

51 Ira Company, a retailer, had cost of goods sold of $160,000 last year The beginning inventory balance was $26,000 and the ending inventory balance was $24,000 The company's average sale period was closest to:

A) 114.06 days

B) 54.75 days

C) 59.31 days

D) 57.03 days

52 Raatz Corporation's total current assets are $370,000, its noncurrent assets are

$660,000, its total current liabilities are $220,000, its long-term liabilities are

$410,000, and its stockholders' equity is $400,000 Working capital is:

A) $370,000