Chapter 2: Financial Statements and Analysis

48GitmanPrinciplesofFinance,EleventhEdition
Chapter2
FinancialStatementsandAnalysis
.1
Learning Goals
1.
Reviewthecontentsofthestockholdersreportandtheproceduresforconsolidatinginternational
financialstatements.
2.
Understandwhousesfinancialratios,andhow.
3.
Useratiostoanalyzeafirmsliquidityandactivity.
4.
Discusstherelationshipbetweendebtandfinancialleverageandtheratiosusedtoanalyzeafirms
debt.
5.
Useratiostoanalyzeafirmsprofitabilityandmarketvalue.
6.
UseasummaryoffinancialratiosandtheDuPontSystemofanalysistoperformacompleteratio
analysis.
.2
True/False
1.
TheFinancialAccountingStandardsBoard(FASB)isthefederalregulatorybodythatgovernsthe
saleandlistingofsecurities.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:1
Topic:AccountingStandardsandRegulation
2.
GAAPistheaccountingprofessionsrulesettingbody.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:1
3.
GenerallyacceptedaccountingprinciplesareauthorizedbytheFinancialAccountingStandards
Board(FASB).
Answer: TRUE
LevelofDifficulty:1
LearningGoal:1
4.
Publiclyownedcorporationsarethosewhicharefinancedbytheproceedsfromthetreasury
securities.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:1
5.
PubliclyownedcorporationsarerequiredbytheSecuritiesandExchangeCommission(SEC)and
individualstatesecuritiescommissionstoprovidetheirstockholderswithanannualstockholders
report.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:1
6.
Thepresidentsletter,asthefirstcomponentofthestockholdersreport,istheprimary
communicationfrommanagementtothefirmsemployees.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:1
Topic:StockholdersReport
7.
Commonstockdividendspaidtostockholdersareequaltotheearningsavailableforcommon
stockholdersdividedbythenumberofsharesofcommonstockoutstanding.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:1
Topic:Dividends
8.
Theincomestatementisafinancialsummaryofthefirmsoperatingresultsduringaspecified
periodwhilethebalancesheetisasummarystatementofthefirmsfinancialpositionatagiven
pointintime.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:1
Topic:IncomeStatement
9.
Theparvalueofcommonstockisanarbitrarilyassignedpersharevalueusedprimarilyfor
accountingpurposes.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:1
Topic:BalanceSheet
Chapter2FinancialStatementsandAnalysis50
10.
Paidincapitalinexcessofparrepresentsthefirmsbookvaluereceivedfromtheoriginalsaleof
commonstock.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:1
Topic:BalanceSheet
11.
Earningspersharerepresentsamountearnedduringtheperiodoneachoutstandingshareof
commonstock.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:1
Topic:Earnings
12.
Netfixedassetsrepresentthedifferencebetweengrossfixedassetsandthetotalexpenserecorded
forthedepreciationoffixedassets.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:1
Topic:BalanceSheet
13.
Earningspershareresultsfromdividingearningsavailableforcommonstockholdersbythenumber
ofsharesofcommonstockauthorized.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:1
Topic:Earnings
14.
Retainedearningsrepresentthecumulativetotalofallearningsretainedandreinvestedinthefirm
sinceitsinception.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:1
Topic:BalanceSheet
15.
Thebalancesheetisastatementwhichbalancesthefirmsassets(whatitowns)againstitsdebt
(whatitowes).
Answer: FALSE
LevelofDifficulty:2
LearningGoal:1
Topic:BalanceSheet
16.
Theamountpaidinbytheoriginalpurchasersofcommonstockisshownbytwoentriesinthe
firmsbalancesheetcommonstockandpaidincapitalinexcessofparoncommonstock.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:1
Topic:BalanceSheet
17.
Theoriginalpricepersharereceivedbythefirmonasingleissueofcommonstockisequaltothe
sumofthecommonstockandpaidincapitalinexcessofparaccountsdividedbythenumberof
sharesoutstanding.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:1
Topic:BalanceSheet
18.
The statement of cash flows reconciles the net income earned during a given year, and any
cash dividends paid, with the change in retained earnings between the start and end of that year.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:1
Topic:StatementofCashFlows
19.
Thecumulativetranslationadjustmentisanequityreserveaccountontheparentcompanysbooks
inwhichtranslationgainsandlossesareaccumulated.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:1
Topic:InternationalAccounting
20.
Thestatementofcashflowsprovidesinsightintothefirmsassetsandliabilitiesandreconcilesthem
withchangesinitscashandmarketablesecuritiesduringtheperiodofconcern.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:1
21.
AU.S.parentcompanysforeignequityaccountsaretranslatedintodollarsusingtheexchangerate
thatprevailedwhentheparentsequityinvestmentwasmade(thehistoricalrate).
Answer: TRUE
LevelofDifficulty:2
LearningGoal:1
22.
AU.S.parentcompanysforeignretainedearningsareadjustedtoreflectgainsandlossesresulting
fromcurrencymovementsaswellaseachyearsoperatingprofitsorlosses.
Answer: FALSE
LevelofDifficulty:3
LearningGoal:1
23.
TheFinancialAccountingStandardsBoard(FASB)StandardNo.52mandatesthatU.S.based
companiestranslatetheirforeigncurrencydenominatedassetsandliabilitiesintodollarsusingthe
currentrate(translation)method.
Answer: TRUE
LevelofDifficulty:3
LearningGoal:1
24.
Timeseriesanalysisistheevaluationofthefirmsfinancialperformanceincomparisontoother
firm(s)atthesamepointintime.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:2
Topic:RatioAnalysisBasics
25.
Asarule,thenecessaryinputstoaneffectivefinancialanalysisinclude,atminimum,theincome
statementandthestatementofcashflow.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:2
26.
Crosssectionalratioanalysisinvolvescomparingthefirmsratiostothoseoffirmsinother
industriesatthesamepointintime.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:2
27.
Benchmarkingisatypeofcrosssectionalanalysisinwhichthefirmsratiovaluesarecomparedto
thoseoffirmsinotherindustries,primarilytoidentifyareasforimprovement.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:2
28.
Timeseriesanalysisevaluatesperformanceoffirmsatthesamepointintimeusingfinancialratios.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:2
29.
Thefirmscreditorsareprimarilyinterestedintheshorttermliquidityofthecompanyanditsability
tomakeinterestandprincipalpayments.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:2
Topic:LiquidityAnalysis
30.
Benchmarkingisatypeoftimeseriesanalysisinwhichthefirmsratiovaluesarecomparedto
thoseofakeycompetitororgroupofcompetitors,primarilytoisolateareasofopportunityfor
improvement.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:2
31.
Ratioanalysismerelydirectstheanalysttopotentialareasofconcern;itdoesnotprovideconclusive
evidenceastotheexistenceofaproblem.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:2
32.
Inacrosssectionalcomparisonoffirmsoperatinginseverallinesofbusiness,theindustryaverage
ratiosofanyofthefirmsproductlinesmaybeusedtoanalyzethemultiproductfirmsfinancial
performance.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:2
33.
Duetoinflationaryeffects,inventorycostsanddepreciationwriteoffscandifferfromtheirtrue
values,therebydistortingprofits.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:2
34.
Ifananalysisisconcernedonlywithcertainspecificaspectsofafirmsfinancialposition,oneor
tworatiosmayprovidesufficientinformationfromwhichtomakeareasonablejudgment.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:2
35.
Inratioanalysis,thefinancialstatementsbeingusedforcomparisonshouldbedatedatthesame
pointintimeduringtheyear.Ifnot,theeffectofseasonalitymayproduceerroneousconclusions
anddecisions.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:2
36.
Theuseoftheauditedfinancialstatementsforratioanalysismaynotbepreferablebecausethere
maybenoreasontobelievethatthedatacontainedinthemreflectthefirmstruefinancial
condition.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:2
37.
Bothpresentandprospectiveshareholdersareinterestedinthefirmscurrentandfuturelevelofrisk
andreturn.Thesetwodimensionsdirectlyaffectshareprice.
Answer: TRUE
LevelofDifficulty:3
LearningGoal:2
38.
Thecomparisonofaparticularratiotothestandard(industryaverage)ismadeinordertoisolate
anydeviationsfromthenorm.Inthecaseofratiosforwhichhighervaluesarepreferred,aslongas
thefirmthatisbeinganalyzedhasavalueinexcessoftheindustryaverageitcanbeviewed
favorably.
Answer: FALSE
LevelofDifficulty:3
LearningGoal:2
39.
Theuseofdifferingaccountingtreatmentsespeciallyrelativetoinventoryanddepreciationcan
distorttheresultsofratioanalysis,regardlessofwhethercrosssectionalortimeseriesanalysisis
used.
Answer: TRUE
LevelofDifficulty:3
LearningGoal:2
40.
Inflationaryeffectstypicallyhaveagreaterimpactthelargerthedifferencesintheageoftheassets
ofthefirmsbeingcompared.Withoutadjustment,inflationtendstocauseolderfirms(witholder
fixedassets)toappearmoreefficientandprofitablethannewerfirms(withnewerfixedassets).
Answer: TRUE
LevelofDifficulty:3
LearningGoal:2
41.
Presentandprospectiveshareholdersandlenderspaycloseattentiontothefirmsdegreeof
indebtednessandabilitytorepaydebt.Shareholdersareconcernedsincetheclaimsofcreditorsmust
besatisfiedpriortothedistributionofearningstothem.Lendersareconcernedsincethemore
indebtedthefirm,thehighertheprobabilitythatthefirmwillbeunabletosatisfytheclaimsofall
itscreditors.
Answer: TRUE
LevelofDifficulty:4
LearningGoal:2
Topic:LeverageAnalysis
42.
Theliquidityofabusinessfirmreferstothesolvencyofthefirmsoverallfinancialposition.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:3
43.
Theliquidityofabusinessfirmismeasuredbyitsabilitytosatisfyitslongtermobligationsasthey
comedue.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:3
44.
Thecurrentratioprovidesabettermeasureofoverallliquidityonlywhenafirmsinventorycannot
easilybeconvertedintocash.Ifinventoryisliquid,thequickratioisapreferredmeasureofoverall
liquidity.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:3
45.
Sincethedifferencesinthecompositionofafirmscurrentassetsandliabilitiescansignificantly
affectthefirmstrueliquidity,itisimportanttolookbeyondmeasuresofoverallliquidityto
assesstheactivity(liquidity)ofspecificcurrentaccounts.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:3
46.
Theaverageageofinventoryisviewedastheaveragelengthoftimeinventoryisheldbythefirmor
astheaveragenumberofdayssalesininventory.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:3
Topic:ActivityAnalysis
47.
Totalassetturnovercommonlymeasurestheliquidityofafirmstotalassets.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:3
48.
Themagnificationofriskandreturnintroducedthroughtheuseoffixedcostfinancingsuchasdebt
andpreferredstockiscalledfinancialleverage.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:4
49.
Thelessfixedcostdebt(financialleverage)afirmuses,thegreaterwillbeitsriskandreturn.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:4
50.
Thehigherthevalueofthetimesinterestearnedratio,thehighertheproportionofthefirmsinterest
earningscomparedtoitscontractualinterestpayments.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:4
51.
Ingeneral,themoredebt(otherpeoplesmoney)afirmusesinrelationtoitsassets,thesmallerits
financialleverage.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:4
52.
Thelowerthefixedpaymentcoverageratio,theloweristhefirmsfinancialleverage.
Answer: FALSE
LevelofDifficulty:3
LearningGoal:4
53.
Thehigherthedebtratio,themorefinancialleverageafirmhasand,thus,thegreaterwillbeitsrisk
andreturn.
Answer: TRUE
LevelofDifficulty:3
LearningGoal:4
54.
Typically,highercoverageratiosarepreferred,buttoohigharatiomayindicateunderutilizationof
fixedpaymentobligations,whichmayresultinunnecessarilylowriskandreturn.
Answer: TRUE
LevelofDifficulty:4
LearningGoal:4
55.
Earningspersharerepresentthedollaramountearnedanddistributedtoshareholders.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:5
Topic:ProfitabilityAnalysis
56.
Grossprofitmarginmeasuresthepercentageofeachsalesdollarleftafterthefirmhaspaidforits
goodsandoperatingexpenses.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:5
57.
Netprofitmarginmeasuresthepercentageofeachsalesdollarremainingafterallcostsand
expenses,includinginterestandtaxes,havebeendeducted.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:5
58.
Returnontotalassets(ROA)measurestheoveralleffectivenessofmanagementingeneratingprofits
withtheownersinvestmentinthefirm.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:5
59.
Theprice/earnings(P/E)ratiorepresentsthedegreeofconfidencethatinvestorshaveinthefirms
futureperformance.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:5
Topic:MarketValueAnalysis
60.
Thefinancialleveragemultiplieristheratioofthefirmstotalassetstostockholdersequity.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:6
61.
TheDuPontformulaallowsthefirmtobreakdownitsreturnintothenetprofitmargin,which
measuresthefirmsprofitabilityonsales,anditstotalassetturnover,whichindicateshow
efficientlythefirmhasuseditsassetstogeneratesales.
Answer: TRUE
LevelofDifficulty:3
LearningGoal:6
Topic:DupontSystemAnalysis
62.
TheDuPontsystemallowsthefirmtobreakitsreturnonequityintoaprofitonsalescomponent,an
efficiencyofassetusecomponent,andauseofleveragecomponent.
Answer: TRUE
LevelofDifficulty:4
LearningGoal:6
63.
TheMcCainFeingoldActof2002waspassedtoeliminatemanyofthedisclosureandconflictof
interestproblemsofcorporations.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:1
64.
TheSarbanesOxleyActof2002waspassedtoeliminatemanyofthedisclosureandconflictof
interestproblemsofcorporations.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:1
65.
TheSarbanesOxleyActof2002establishedthePublicCompanyAccountingOversightBoard
(PCAOB)whichisanotforprofitcorporationthatoverseesauditorsofpubliccorporations.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:1
66.
TheSarbanesOxleyActof2002establishedthePrivateCompanyAccountingOversightBoard
(PCAOB)whichisaforprofitcorporationthatoverseesCEOsofpubliccorporations.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:1
67.
Theaverageageofinventorycanbecalculatedasinventorydividedby365.
Answer: FALSE
LevelofDifficulty:3
LearningGoal:3
68.
Theaverageageofinventorycanbecalculatedasinventoryturnoverdividedby365.
Answer: FALSE
LevelofDifficulty:3
LearningGoal:3
69.
Theaverageageofinventorycanbecalculatedas365dividedbyinventoryturnover.
Answer: TRUE
LevelofDifficulty:3
LearningGoal:3
70.
Theaveragepaymentperiodcanbecalculatedasaccountspayabledividedbyaveragesalesperday.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:3
71.
Theaveragepaymentperiodcanbecalculatedasaccountspayabledividedbyaveragepurchasesper
day.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:3
.3
Multiple Choice Questions
1.
Oneofthemostinfluentialdocumentsissuedbyapubliclyheldcorporationisthe
(a) lettertostockholders.
(b) annualreport.
(c) cashflowstatement.
(d) incomestatement.
Answer: B
LevelofDifficulty:1
LearningGoal:1
2.
Therulesettingbody,whichauthorizesgenerallyacceptedaccountingprinciplesis
(a) GAAP.
(b) FASB.
(c) SEC.
(d) FederalReserveSystem.
Answer: B
LevelofDifficulty:1
LearningGoal:1
3.
Accountingpracticesandproceduresusedtopreparefinancialstatementsarecalled
(a) SEC.
(b) FASB.
(c) GAAP.
(d) IRB.
Answer: C
LevelofDifficulty:1
LearningGoal:1
4.
Thefederalregulatorybodygoverningthesaleandlistingofsecuritiesiscalledthe
(a) IRS.
(b) FASB.
(c) GAAP.
(d) SEC.
Answer: D
LevelofDifficulty:1
LearningGoal:1
5.
Thestockholdersannualreportmustinclude
(a) Astatementofcashflows.
(b) Anincomestatement.
(c) Abalancesheet.
(d) Astatementofretainedearnings.
(e) Alloftheabove.
Answer: E
LevelofDifficulty:1
LearningGoal:1
6.
ThestockholdersreportmayincludeallofthefollowingEXCEPT
(a) acashbudget.
(b) anincomestatement.
(c) astatementofcashflows.
(d) astatementofretainedearnings.
Answer: A
LevelofDifficulty:1
LearningGoal:1
7.
Totalassetslessnetfixedassetsequals
(a) grossassets.
(b) currentassets.
(c) depreciation.
(d) liabilitiesandequity.
Answer: B
LevelofDifficulty:1
LearningGoal:1
Topic:BalanceSheet
8.
The_________providesafinancialsummaryofthefirmsoperatingresultsduringaspecified
period.
(a) incomestatement
(b) balancesheet
(c) statementofcashflows
(d) statementofretainedearnings
Answer: A
LevelofDifficulty:1
LearningGoal:1
9.
Grossprofitsaredefinedas
(a) operatingprofitsminusdepreciation.
(b) operatingprofitsminuscostofgoodssold.
(c) salesrevenueminusoperatingexpenses.
(d) salesrevenueminuscostofgoodssold.
Answer: D
LevelofDifficulty:1
LearningGoal:1
10.
Operatingprofitsaredefinedas
(a) grossprofitsminusoperatingexpenses.
(b) salesrevenueminuscostofgoodssold.
(c) earningsbeforedepreciationandtaxes.
(d) salesrevenueminusdepreciationexpense.
Answer: A
LevelofDifficulty:1
LearningGoal:1
11.
Netprofitsaftertaxesaredefinedas
(a) grossprofitsminusoperatingexpenses.
(b) salesrevenueminuscostofgoodssold.
(c) EBITminusinterest.
(d) EBITminusinterestandtaxes.
Answer: D
LevelofDifficulty:1
LearningGoal:1
12.
Operatingprofitsaredefinedas
(a) salesrevenueminuscostofgoodssold.
(b) earningsbeforeinterestandtaxes.
(c) earningsbeforedepreciationandtaxes.
(d) earningsaftertax.
Answer: B
LevelofDifficulty:1
LearningGoal:1
13.
Earningsavailabletocommonshareholdersaredefinedasnetprofits
(a) aftertaxes.
(b) aftertaxesminuspreferreddividends.
(c) aftertaxesminuscommondividends.
(d) beforetaxes.
Answer: B
LevelofDifficulty:1
LearningGoal:1
14.
AllofthefollowingareexamplesofcurrentassetsEXCEPT
(a) accountsreceivable.
(b) cash.
(c) accruals.
(d) inventory.
Answer: C
LevelofDifficulty:1
LearningGoal:1
Topic:BalanceSheet
15.
AllofthefollowingareexamplesoffixedassetsEXCEPT
(a) automobiles.
(b) buildings.
(c) marketablesecurities.
(d) equipment.
Answer: C
LevelofDifficulty:1
LearningGoal:1
Topic:BalanceSheet
16.
AllofthefollowingareexamplesofcurrentliabilitiesEXCEPT
(a) accountsreceivable.
(b) accountspayable.
(c) accruals.
(d) notespayable.
Answer: A
LevelofDifficulty:1
LearningGoal:1
Topic:BalanceSheet
17.
Thenetvalueoffixedassetsisalsocalledits
(a) marketvalue.
(b) parvalue.
(c) bookvalue.
(d) price.
Answer: C
LevelofDifficulty:1
LearningGoal:1
Topic:BalanceSheet
18.
The_________representsasummarystatementofthefirmsfinancialpositionatagivenpointin
time.
(a) incomestatement
(b) balancesheet
Answer: B
LevelofDifficulty:1
LearningGoal:1
Topic:BalanceSheet
19.
The_________summarizesthefirmsfundsflowoveragivenperiodoftime.
(a) incomestatement
(b) balancesheet
Answer: C
LevelofDifficulty:1
LearningGoal:1
20.
Thestatementofcashflowsmayalsobecalledthe
(a) sourcesandusesstatement.
(b) statementofretainedearnings.
(c) bankstatement.
(d) fundsstatement.
Answer: A
LevelofDifficulty:1
LearningGoal:1
21.
FASBStandardNo.52mandatesthatU.S.basedcompaniesmusttranslatetheirforeigncurrency
denominatedassetsandliabilitiesintodollarsusingthe
(a) Historicalrate.
(b) Currentrate.
(c) Averagerate.
(d) Noneoftheabove.
Answer: B
LevelofDifficulty:2
LearningGoal:1
22.
Retainedearningsonthebalancesheetrepresents
(a) netprofitsaftertaxes.
(b) cash.
(c) netprofitsaftertaxesminuspreferreddividends.
(d) thecumulativetotalofearningsreinvestedinthefirm.
Answer: D
LevelofDifficulty:2
LearningGoal:1
Topic:BalanceSheet
23.
ThestatementofretainedearningsreportsallofthefollowingEXCEPT
(a) netprofitsaftertaxes.
(b) interest.
(c) commonstockdividends.
(d) preferredstockdividends.
Answer: B
LevelofDifficulty:2
LearningGoal:1
Topic:StatementofRetainedEarnings
24.
Whenpreparingastatementofcashflows,retainedearningsadjustmentsarerequiredsothatwhich
ofthefollowingareseparatedonthestatement?
(a) Revenueandcost.
(b) Assetsandliabilities.
(c) Depreciationandpurchases.
(d) Netprofitsanddividends.
Answer: D
LevelofDifficulty:2
LearningGoal:1
25.
Afirmhadthefollowingaccountsandfinancialdatafor2005.
SalesRevenue
AccountsReceivable
Interestexpense
Totaloper.expenses
Accountspayable
$3,060
500
126
600
240
Costofgoodssold
Preferredstockdividends
Taxrate
Numberofsharesofcommon
stocksoutstanding
$1,800
18
40%
1,000
Thefirmsearningsavailabletocommonshareholdersfor2005were_________.
(a) $224
(b) $195
(c) $302
(d) $516
Answer: C
LevelofDifficulty:2
LearningGoal:1
26.
Afirmhadthefollowingaccountsandfinancialdatafor2005:
Salesrevenue
Accountsreceivable
Interestexpense
Totaloperatingexpenses
Accountspayable
$3,060
500
126
600
240
Costofgoodssold
Taxrate
Numberofcommonshares
outstanding
$1,800
18
40%
1,000
Thefirmsearningspershare,roundedtothenearestcent,for2005was______.
(a) $0.53
(b) $0.51
(c) $0.32
(d) $0.30
Answer: D
LevelofDifficulty:2
LearningGoal:1
27.
Afirmhadthefollowingaccountsandfinancialdatafor2005.
Salesrevenue
Accountsreceivable
Interestexpense
Totaloperatingexpenses
Accountspayable
$3,060
500
126
600
240
Costofgoodssold
Taxrate
Numberofcommonshares
outstanding
$1,800
18
40%
1,000
Thefirmsnetprofitaftertaxesfor2005was______.
(a) $206
(b) $213
(c) $320
(d) $206
Answer: C
LevelofDifficulty:2
LearningGoal:1
28.
Onthebalancesheetnetfixedassetsrepresent
(a) grossfixedassetsatcostminusdepreciationexpense.
(b) grossfixedassetsatmarketvalueminusdepreciationexpense.
(c) grossfixedassetsatcostminusaccumulateddepreciation.
(d) grossfixedassetsatmarketvalueminusaccumulateddeprecation.
Answer: C
LevelofDifficulty:2
LearningGoal:1
Topic:BalanceSheet
29.
Paidincapitalinexcessofparrepresentstheamountofproceeds
(a) fromtheoriginalsaleofstock.
(b) inexcessoftheparvaluefromtheoriginalsaleofcommonstock.
(c) atthecurrentmarketvalueofcommonstock.
(d) atthecurrentbookvalueofcommonstock.
Answer: B
LevelofDifficulty:2
LearningGoal:1
Topic:BalanceSheet
30.
FirmABChadoperatingprofitsof$100,000,taxesof$17,000,interestexpenseof$34,000and
preferreddividendsof$5,000.Whatwasthefirmsnetprofitaftertaxes?
(a) $66,000
(b) $49,000
(c) $44,000
(d) $83,000
Answer: B
LevelofDifficulty:3
LearningGoal:1
31.
CandyCorporationhadpretaxprofitsof$1.2million,anaveragetaxrateof34percent,anditpaid
preferredstockdividendsof$50,000.Therewere100,000sharesoutstandingandnointerest
expense.WhatwereCandyCorporationsearningspershare?
(a) $3.91
(b) $4.52
(c) $7.42
(d) $7.59
Answer: C
LevelofDifficulty:3
LearningGoal:1
32.
Afirmhadyearend2004and2005retainedearningsbalancesof$670,000and$560,000,
respectively.Thefirmpaid$10,000individendsin2005.Thefirmsnetprofitaftertaxesin2002
was_________.
(a) $100,000
(b) $110,000
(c) $100,000
(d) $110,000
Answer: A
LevelofDifficulty:3
LearningGoal:1
33.
Acorporationhadyearend2004and2005retainedearningsbalancesof$320,000and$400,000,
respectively.Thefirmreportednetprofitsaftertaxesof$100,000in2005.Thefirmpaiddividends
in2005of_________.
(a) $0
(b) $20,000
(c) $80,000
(d) $100,000
Answer: B
LevelofDifficulty:3
LearningGoal:1
34.
Acorporationhadayearend2004retainedearningsbalanceof$220,000.Thefirmreportednet
profitsaftertaxesof$50,000in2005andpaiddividendsin2005of$30,000.Thefirmsretained
earningsbalanceatyearend2005was_________.
(a) $240,000
(b) $250,000
(c) $270,000
(d) $300,000
Answer: A
LevelofDifficulty:3
LearningGoal:1
35.
Afirmhadyearend2004and2005retainedearningsbalanceof$670,000and$560,000,
respectively.Thefirmreportednetprofitsaftertaxesof$100,000in2005.Thefirmpaiddividends
in2005of_________.
(a) $10,000
(b) $100,000
(c) $110,000
(d) $210,000
Answer: D
LevelofDifficulty:3
LearningGoal:1
36.
Ratiosprovidea_________measureofacompanysperformanceandcondition.
(a) definitive
(b) gross
(c) relative
(d) qualitative
Answer: C
LevelofDifficulty:1
LearningGoal:2
37.
_________analysisinvolvesthecomparisonofdifferentfirmsfinancialratiosatthesamepointin
time.
(a) Timeseries
(b) Crosssectional
(c) Marginal
(d) Quantitative
Answer: B
LevelofDifficulty:1
LearningGoal:2
38.
_________analysisinvolvescomparisonofcurrenttopastperformanceandtheevaluationof
developingtrends.
(a) Timeseries
(b) Crosssectional
(c) Marginal
(d) Quantitative
Answer: A
LevelofDifficulty:1
LearningGoal:2
39.
Theprimaryconcernofcreditorswhenassessingthestrengthofafirmisthefirms
(a) profitability.
(b) leverage.
(c) shorttermliquidity.
(d) shareprice.
Answer: C
LevelofDifficulty:1
LearningGoal:2
40.
Presentandprospectiveshareholdersaremainlyconcernedwithafirms
(a) riskandreturn.
(b) profitability.
(c) leverage.
(d) liquidity.
Answer: A
LevelofDifficulty:1
LearningGoal:2
41.
Toanalyzethefirmsfinancialperformance,thefollowingtypesofratioanalysesEXCEPT
_________maybeused.
(a) timeseriesanalysis
(b) crosssectionanalysis
(c) combinedanalysis
(d) marginalanalysis
Answer: D
LevelofDifficulty:1
LearningGoal:2
42.
Timeseriesanalysisisoftenusedto
(a) assessdevelopingtrends.
(b) correcterrorsofjudgment.
(c) reflectperformancerelativetosomenorm.
(d) standardizeresults.
Answer: A
LevelofDifficulty:1
LearningGoal:2
43.
Inratioanalysis,acomparisontoastandardindustryratioismadetoisolate_________deviations
fromthenorm.
(a) positive
(b) negative
(c) any
(d) standard
Answer: C
LevelofDifficulty:1
LearningGoal:2
44.
_________evidenceoftheexistenceofaproblemoroutstandingmanagementperformanceis
providedbyratioanalysis.
(a) Conclusive
(b) Inconclusive
(c) Complete
(d) Definitive
Answer: B
LevelofDifficulty:2
LearningGoal:2
45.
Theanalystshouldbecarefulwhenconductingratioanalysistoensurethat
(a) theoverallperformanceofthefirmisnotjudgedonasingleratio.
(b) thedatesofthefinancialstatementsbeingcomparedarethesame.
(c) auditedstatementsareused.
(d) thesameaccountingprocedureswereused.
(e) alloftheabove.
Answer: E
LevelofDifficulty:2
LearningGoal:2
46.
Theanalystshouldbecarefulwhenevaluatingaratioanalysisthat
(a) Theoverallperformanceofthefirmmaybejudgedonasingleratio.
(b) Thedatesofthefinancialstatementsbeingcomparedarethesametime.
(c) Preauditedstatementsareused.
(d) Alloftheabove.
Answer: B
LevelofDifficulty:2
LearningGoal:2
47.
_________iswherethefirmsratiovaluesarecomparedtothoseofakeycompetitororgroupof
competitors,primarilytoidentifyareasforimprovement.
(a) Timeseriesanalysis
(b) Benchmarking
(c) Combinedanalysis
(d) Noneoftheabove.
Answer: B
LevelofDifficulty:3
LearningGoal:2
48.
Crosssectionalratioanalysisisusedto
(a) correctexpectedproblemsinoperations.
(b) isolatethecausesofproblems.
(c) provideconclusiveevidenceoftheexistenceofaproblem.
(d) reflectthesymptomsofapossibleproblem.
Answer: D
LevelofDifficulty:3
LearningGoal:2
49.
Inthenearterm,theimportantratiosthatprovidetheinformationcriticaltotheshortrunoperation
ofthefirmare
(a) liquidity,activity,andprofitability.
(b) liquidity,activity,andcommonstock.
(c) liquidity,activity,anddebt.
(d) activity,debt,andprofitability.
Answer: A
LevelofDifficulty:3
LearningGoal:2
50.
Onewaytonegatetheeffectofinflationonratioanalysisistovaluethefixedassetsat
(a) bookvalue.
(b) liquidationvalue.
(c) replacementvalue.
(d) depreciation.
Answer: C
LevelofDifficulty:3
LearningGoal:2
51.
Inflationcandistort
(a) inventorycosts.
(b) accumulateddepreciation.
(c) interestwriteoffs.
(d) salariesandwages.
Answer: A
LevelofDifficulty:3
LearningGoal:2
52.
Withoutadjustment,inflationmaytendtocause_________firmstoappearmoreefficientand
profitablethan_________firms,allelsebeingthesame.
(a) large;smaller
(b) older;newer
(c) smaller;larger
(d) newer;older
Answer: B
LevelofDifficulty:3
LearningGoal:2
53.
Thefollowinggroupsofratiosprimarilymeasurerisk.
(a) liquidity,activity,andprofitability
(b) liquidity,activity,andcommonstock
(c) liquidity,activity,anddebt
(d) activity,debt,andprofitability
Answer: C
LevelofDifficulty:3
LearningGoal:2
54.
The_________ratiosareprimarilymeasuresofreturn.
(a) liquidity
(b) activity
(c) debt
(d) profitability
Answer: D
LevelofDifficulty:3
LearningGoal:2
55.
The_________ofabusinessfirmismeasuredbyitsabilitytosatisfyitsshorttermobligationsas
theycomedue.
(a) activity
(b) liquidity
(c) debt
(d) profitability
Answer: B
LevelofDifficulty:1
LearningGoal:3
56.
_________ratiosareameasureofthespeedwithwhichvariousaccountsareconvertedintosalesor
cash.
(a) Activity
(b) Liquidity
(c) Debt
(d) Profitability
Answer: A
LevelofDifficulty:1
LearningGoal:3
57.
The_________isusefulinevaluatingcreditandcollectionpolicies.
(a) averagepaymentperiod
(b) currentratio
(c) averagecollectionperiod
(d) currentassetturnover
Answer: C
LevelofDifficulty:1
LearningGoal:3
58.
The_________measurestheactivity,orliquidity,ofafirmsinventory.
(a) averagecollectionperiod
(b) inventoryturnover
(c) quickratio
(d) currentratio
Answer: B
LevelofDifficulty:2
LearningGoal:3
59.
Thetwobasicmeasuresofliquidityare
(a) inventoryturnoverandcurrentratio.
(b) currentratioandquickratio.
(c) grossprofitmarginandROE.
(d) currentratioandtotalassetturnover.
Answer: B
LevelofDifficulty:2
LearningGoal:3
60.
The_________isameasureofliquiditywhichexcludes_________,generallytheleastliquidasset.
(a) currentratio;accountsreceivable
(b) quickratio;accountsreceivable
(c) currentratio;inventory
(d) quickratio;inventory
Answer: D
LevelofDifficulty:2
LearningGoal:3
61.
The_________ratiomayindicatethefirmisexperiencingstockoutsandlostsales.
(d) quick
Answer: B
LevelofDifficulty:2
LearningGoal:3
62.
The_________ratiomayindicatepoorcollectionsproceduresoralaxcreditpolicy.
(d) quick
Answer: C
LevelofDifficulty:2
LearningGoal:3
63.
ABCCorp.extendscredittermsof45daystoitscustomers.Itscreditcollectionwouldbe
consideredpoorifitsaveragecollectionperiodwas
(a) 30days.
(b) 36days.
(c) 47days.
(d) 57days.
Answer: D
LevelofDifficulty:2
LearningGoal:3
64.
Whichofthefollowingratiosisdifficultforcreditorsofafirmtoanalyzebecausethedataare
usuallynotavailableinpublishedfinancialstatements?
(a) operatingleverage
(b) averagepaymentperiod
(c) quickratio
(d) averageageofinventory
Answer: A
LevelofDifficulty:2
LearningGoal:3
65.
_________areespeciallyinterestedintheaveragepaymentperiod,sinceitprovidesthemwitha
senseofthebillpayingpatternsofthefirm.
(a) Customers
(b) Stockholders
(c) Lendersandsuppliers
(d) Borrowersandbuyers
Answer: C
LevelofDifficulty:2
LearningGoal:3
66.
Afirmhasacurrentratioof1;inordertoimproveitsliquidityratios,thisfirmmight
(a) improveitscollectionpractices,therebyincreasingcashandincreasingitscurrentandquick
ratios.
(b) improveitscollectionpracticesandpayaccountspayable,therebydecreasingcurrentliabilities
andincreasingthecurrentandquickratios.
(c) decreasecurrentliabilitiesbyutilizingmorelongtermdebt,therebyincreasingthecurrentand
quickratios.
(d) increaseinventory,therebyincreasingcurrentassetsandthecurrentandquickratios.
Answer: C
LevelofDifficulty:3
LearningGoal:3
67.
Asafirmscashflowsbecomemorepredictable,
(a) thecurrentratiowillexpand.
(b) thereturnonequitywillincrease.
(c) currentliabilitieswilldecrease.
(d) currentassetswilldecrease.
Answer: D
LevelofDifficulty:3
LearningGoal:3
68.
Iftheinventoryturnoverisdividedinto360,itbecomesameasureof
(a) salesefficiency.
(b) theaverageageoftheinventory.
(c) salesturnover.
(d) theaveragecollectionperiod.
Answer: B
LevelofDifficulty:3
LearningGoal:3
69.
The_________isusefulinevaluatingcreditandcollectionpolicies.
(b) currentratio
(d) currentassetturnover
Answer: C
LevelofDifficulty:3
LearningGoal:3
70.
Thetwocategoriesofratiosthatshouldbeutilizedtoassessafirmstrueliquidityarethe
(a) currentandquickratios.
(b) liquidityandprofitabilityratios.
(c) liquidityanddebtratios.
(d) liquidityandactivityratios.
Answer: D
LevelofDifficulty:3
LearningGoal:3
71.
Afirmwithatotalassetturnoverthatislowerthanindustrystandardbutwithacurrentratiowhich
meetsindustrystandardmusthaveexcessive
(a) fixedassets.
(b) inventory.
(c) accountsreceivable.
(d) debt.
Answer: A
LevelofDifficulty:3
LearningGoal:3
72.
Thefollowinggroupsofratiosprovidetheinformationcriticaltotheshortrunoperationofthefirm.
(a) liquidity,activity,andprofitability
(b) liquidity,activity,andcommonstock
(c) liquidity,activity,anddebt
(d) activity,debt,andprofitability
Answer: A
LevelofDifficulty:3
LearningGoal:3
73.
The_________ratiosprovidetheinformationcriticaltothelongrunoperationofthefirm.
(a) liquidity
(b) activity
(c) debt
(d) profitability
Answer: C
LevelofDifficulty:3
LearningGoal:3
74.
Afirmwithatotalassetturnoverlowerthanindustrystandardmayhave
(a) excessivedebt.
(b) excessivecostofgoodssold.
(c) insufficientsales.
(d) insufficientfixedassets.
Answer: C
LevelofDifficulty:3
LearningGoal:3
75.
The_________ratiomeasurestheproportionoftotalassetsfinancedbythefirmscreditors.
(a) totalassetturnover
(b) fixedassetturnover
(c) current
(d) debt
Answer: D
LevelofDifficulty:1
LearningGoal:4
76.
The_________ratiomeasuresthefirmsabilitytopaycontractualinterestpayments.
(a) timesinterestearned
(b) fixedpaymentcoverage
(c) debt
(d) averagepaymentperiod
Answer: A
LevelofDifficulty:1
LearningGoal:4
77.
The_________ratiomayindicatethatthefirmwillnotbeabletomeetinterestobligationsdueon
outstandingdebt.
(a) debt
(b) netprofitmargin
(c) returnontotalassets
(d) timesinterestearned
Answer: D
LevelofDifficulty:2
LearningGoal:4
78.
Thehigherthevalueof_________ratio,thebetterablethefirmistofulfillitsinterestobligations.
(a) debt
(b) averagecollectionperiod
(c) timesinterestearned
(d) averagepaymentperiod
Answer: C
LevelofDifficulty:2
LearningGoal:4
Table2.1
Cash
AccountsReceivable
Inventory
TotalCurrentAssets
NetFixedAssets
TotalAssets
BalanceSheet
ColeEaganEnterprises
December31,2005
$4,500
AccountsPayable
NotesPayable
Accruals
TotalCurrentLiabilities
LongTermDebt
StockholdersEquity
TotalLiabilities&S.E.
Information(2005values)
1. Salestotaled$110,000
2. Thegrossprofitmarginwas25percent.
3. Inventoryturnoverwas3.0.
4. Thereare360daysintheyear.
5. Theaveragecollectionperiodwas65days.
6. Thecurrentratiowas2.40.
7. Thetotalassetturnoverwas1.13.
8. Thedebtratiowas53.8percent.
79.
InventoryforCEEin2005was_________.(SeeTable2.1)
(a) $36,667
(b) $32,448
(c) $27,500
(d) $9,167
Answer: C
LevelofDifficulty:3
LearningGoal:4
Topic:BalanceSheetandActivityAnalysis
$10,000
1,000
80.
NotespayableforCEEin2005was_________.(SeeTable2.1)
(a) $113,466
(b) $52,372
(c) $41,372
(d) $10,608
Answer: D
LevelofDifficulty:3
LearningGoal:4
81.
AccountsreceivableforCEEin2005was_________.(SeeTable2.1)
(a) $14,056
(b) $19,861
(c) $14,895
(d) $18,333
Answer: B
LevelofDifficulty:3
LearningGoal:4
82.
NetfixedassetsforCEEin2005were_________.(SeeTable2.1)
(a) $45,484
(b) $48,975
(c) $54,511
(d) $69,341
Answer: A
LevelofDifficulty:3
LearningGoal:4
83.
TotalassetsforCEEin2005were_________.(SeeTable2.1)
(a) $45,895
(b) $124,300
(c) $58,603
(d) $97,345
Answer: D
LevelofDifficulty:3
LearningGoal:4
84.
LongtermdebtforCEEin2005was_________.(SeeTable2.1)
(a) $30,737
(b) $52,372
(c) $10,608
(d) $41,372
Answer: A
LevelofDifficulty:3
LearningGoal:4
85.
_________isatermusedtodescribethemagnificationofriskandreturnintroducedthroughtheuse
offixedcostfinancingsuchaspreferredstockandlongtermdebt.
(a) Financialleverage
(b) Operatingleverage
(c) Fixedpaymentcoverage
(d) Theacidtest
Answer: A
LevelofDifficulty:3
LearningGoal:4
86.
Whenassessingthefixedpaymentcoverageratio,
(a) theloweritsvaluethemoreriskyisthefirm.
(b) theloweritsvalue,theloweristhefirmsfinancialleverage.
(c) preferredstockdividendpaymentscanbedisregarded.
(d) thehigheritsvalue,thehigheristhefirmsliquidity.
Answer: A
LevelofDifficulty:4
LearningGoal:4
87.
The_________isapopularapproachforevaluatingprofitabilityinrelationtosalesbyexpressing
eachitemontheincomestatementasapercentofsales.
(a) retainedearningsstatement
(b) sourceandusestatement
(c) commonsizeincomestatement
(d) profitandlossstatement
Answer: C
LevelofDifficulty:1
LearningGoal:5
Topic:CommonSizeAnalysis
88.
The_________indicatesthepercentageofeachsalesdollarremainingafterthefirmhaspaidforits
goods.
(a) netprofitmargin
(b) operatingprofitmargin
(c) grossprofitmargin
(d) earningsavailabletocommonshareholders
Answer: C
LevelofDifficulty:1
LearningGoal:5
89.
The_________measuresthepercentageofprofitearnedoneachsalesdollarbeforeinterestand
taxes.
(a) netprofitmargin
Answer: B
LevelofDifficulty:1
LearningGoal:5
90.
The_________measuresthepercentageofeachsalesdollarremainingafterALLexpenses,
includingtaxes,havebeendeducted.
(a) netprofitmargin
Answer: A
LevelofDifficulty:1
LearningGoal:5
91.
The_________measurestheoveralleffectivenessofmanagementingeneratingprofitswithits
availableassets.
(a) netprofitmargin
(b) price/earningsratio
(c) returnonequity
(d) returnontotalassets
Answer: D
LevelofDifficulty:1
LearningGoal:5
92.
The_________measuresthereturnonowners(bothpreferredandcommonstockholders)
investmentinthefirm.
(a) netprofitmargin
(b) price/earningsratio
(c) returnonequity
Answer: C
LevelofDifficulty:1
LearningGoal:5
93.
The_________ratioiscommonlyusedtoassesstheownersappraisalofthesharevalue.
(a) debt
(b) price/earnings
(c) returnonequity
Answer: B
LevelofDifficulty:1
LearningGoal:5
Topic:MarketValueAnalysis
94.
Twofrequentlycitedratiosofprofitabilitythatcanbereaddirectlyfromthecommonsizeincome
statementare
(a) theearningspershareandthereturnontotalassets.
(b) thegrossprofitmarginandtheearningspershare.
(c) thegrossprofitmarginandthereturnontotalassets.
(d) thegrossprofitmarginandthenetprofitmargin.
Answer: D
LevelofDifficulty:1
LearningGoal:5
95.
Afirmwithagrossprofitmarginwhichmeetsindustrystandardandanetprofitmarginwhichis
belowindustrystandardmusthaveexcessive
(a) generalandadministrativeexpenses.
(b) costofgoodssold.
(c) dividendpayments.
(d) principalpayments.
Answer: A
LevelofDifficulty:3
LearningGoal:5
96.
Afirmwithsalesof$1,000,000,netprofitsaftertaxesof$30,000,totalassetsof$1,500,000,and
totalliabilitiesof$750,000hasareturnonequityof
(a) 20percent.
(b) 15percent.
(c) 3percent.
(d) 4percent.
Answer: D
LevelofDifficulty:3
LearningGoal:5
97.
TheDuPontsystemmergestheincomestatementandbalancesheetintotwosummarymeasuresof
profitability:
(a) netprofitmarginandreturnontotalassets.
(b) netprofitmarginandreturnonequity.
(c) returnontotalassetsandreturnonequity.
(d) netprofitmarginandprice/earningratio.
Answer: C
LevelofDifficulty:1
LearningGoal:6
98.
_________isusedbyfinancialmanagersasastructurefordissectingthefirmsfinancialstatements
toassessitsfinancialcondition.
(a) Statementofcashflows
(b) TheDuPontsystemofanalysis
(c) Acommonsizeincomestatement
(d) Crosssectionalanalysis
Answer: B
LevelofDifficulty:2
LearningGoal:6
99.
IntheDuPontsystem,thereturnontotalassets(asset)isequalto
(a)
(b)
(c)
(d)
(returnonequity)(financialleveragemultiplier).
(returnonequity)(totalassetturnover).
(netprofitmargin)(fixedassetturnover).
(netprofitmargin)(totalassetturnover).
Answer: D
LevelofDifficulty:2
LearningGoal:6
100. ThemodifiedDuPontformularelatesthefirmsreturnontotalassets(ROA)tothe
(a) returnonequity(ROE).
(b) financialleveragemultiplier.
(c) netprofitmargin.
(d) totalassetturnover.
Answer: A
LevelofDifficulty:2
LearningGoal:6
101. IntheDuPontsystem,thereturnonequityisequalto
(a)
(b)
(c)
(d)
(netprofitmargin)(totalassetturnover).
(stockholdersequity)(financialleveragemultiplier).
(returnontotalassets)(financialleveragemultiplier).
(returnontotalassets)(totalassetturnover).
Answer: C
LevelofDifficulty:2
LearningGoal:6
102. Afirmwithasubstandardnetprofitmargincanimproveitsreturnontotalassetsby
(a) increasingitsdebtratio.
(b) increasingitstotalassetturnover.
(c) decreasingitsfixedassetturnover.
(d) decreasingitstotalassetturnover.
Answer: B
LevelofDifficulty:3
LearningGoal:6
103. Adecreaseintotalassetturnoverwillresultin_________inthereturnonequity.
(a) anincrease
(b) adecrease
(c) nochange
(d) anundeterminedchange
Answer: B
LevelofDifficulty:3
LearningGoal:6
104. Afirmwithasubstandardreturnontotalassetscanimproveitsreturnonequity,allelseremaining
thesame,by
(a) increasingitsdebtratio.
(b) increasingitstotalassetturnover.
(c) decreasingitsdebtratio.
(d) decreasingitstotalassetturnover.
Answer: A
LevelofDifficulty:3
LearningGoal:6
105. ThethreesummaryratiosbasictotheDuPontsystemofanalysisare
(a) netprofitmargin,totalassetturnover,andreturnoninvestment.
(b) netprofitmargin,totalassetturnover,andreturnonequity.
(c) netprofitmargin,totalassetturnover,andequitymultiplier.
(d) netprofitmargin,financialleveragemultiplier,andreturnonequity.
Answer: C
LevelofDifficulty:3
LearningGoal:6
106. Thefinancialleveragemultiplierisanindicatorofacorporationutilizing
(a) operatingleverage.
(b) longtermdebt.
(c) totaldebt.
(d) totalassets.
Answer: C
LevelofDifficulty:3
LearningGoal:6
107. Thefinancialleveragemultiplierisanindicatorofacorporationutilizing
(a) operatingleverage.
(b) financialleverage.
(c) longtermdebt.
(d) currentliabilities.
Answer: B
LevelofDifficulty:3
LearningGoal:6
108. Anincreaseinfinancialleveragewillresultin_________inthereturnonequity.
(a) anincrease
(b) adecrease
(c) nochange
(d) anundeterminedchange
Answer: A
LevelofDifficulty:3
LearningGoal:6
109. Afirmwithatotalassetturnoverlowerthantheindustrystandardandacurrentratiowhichmeets
theindustrystandardmayhave
(a) excessivefixedassets.
(b) excessiveinventory.
(c) excessiveaccountsreceivable.
(d) excessivedebt.
Answer: A
LevelofDifficulty:3
LearningGoal:6
110. Afirmwithatotalassetturnoverlowerthantheindustrystandardmayhave
(a) excessivedebt.
(b) excessivecostofgoodssold.
(c) insufficientsales.
(d) insufficientfixedassets.
Answer: C
LevelofDifficulty:3
LearningGoal:6
Table2.2
DanaDairyProductsKeyRatios
Industry
Actual
Average
2004
CurrentRatio
1.3
1.0
QuickRatio
0.8
0.75
AveragecollectionPeriod
23days
30days
InventoryTurnover
21.7
19
DebtRatio
64.7%
50%
TimesInterestEarned
4.8
5.5
GrossProfitMargin
13.6%
12.0%
NetProfitMargin
1.0%
0.5%
Returnontotalassets
2.9%
2.0%
ReturnonEquity
8.2%
4.0%
IncomeStatement
DanaDairyProducts
FortheYearEndedDecember31,2005
SalesRevenue
$100,000
Less:CostofGoodsSold
87,000
GrossProfits
$13,000
Less:OperatingExpenses
11,000
OperatingProfits
$2,000
Less:InterestExpense
500
NetProfitsBeforeTaxes
$1,500
Less:Taxes(40%)
600
NetProfitsAfterTaxes
$900
Actual
2005
BalanceSheet
DanaDairyProducts
December31,2005
Assets
Cash
AccountsReceivable
Inventories
TotalCurrentAssets
GrossFixedAssets
Less:AccumulatedDepreciation
NetFixedAssets
TotalAssets
$1,000
8,900
4,350
$14,250
$35,000
13,250
21,750
$36,000
Liabilities&StockholdersEquity
AccountsPayable
Accruals
TotalCurrentLiabilities
LongtermDebt
TotalLiabilities
CommonStock
RetainedEarnings
TotalStockholdersEquity
TotalLiabilities&StockholdersEquity
$9,000
6,675
$15,675
4,125
$19,800
1,000
15,200
$16,200
$36,000
111. ThecurrentratioforDanaDairyProductsin2005was_________.(SeeTable2.2)
(a) 1.58
(b) 0.63
(c) 1.10
(d) 0.91
Answer: D
LevelofDifficulty:3
LearningGoal:6
112. Since2004,theliquidityofDanaDairyProducts_________.(SeeTable2.2)
(a) hasdeteriorated
(b) remainedthesame
(c) hasimproved
(d) cannotbedetermined
Answer: A
LevelofDifficulty:3
LearningGoal:6
113. ThenetworkingcapitalforDanaDairyProductsin2005was_________.(SeeTable2.2)
(a) $10,325
(b) $1,425
(c) $1,425
(d) $14,250
Answer: C
LevelofDifficulty:3
LearningGoal:6
114. TheinventoryturnoverforDanaDairyProductsin2005was_________.(SeeTable2.2)
(a) 43
(b) 5
(c) 20
(d) 25
Answer: C
LevelofDifficulty:3
LearningGoal:6
115. TheinventorymanagementatDanaDairyProducts_________since2004.(SeeTable2.2)
(a) hasdeteriorated
(b) remainedthesame
(c) hasimprovedslightly
Answer: C
LevelofDifficulty:3
LearningGoal:6
116. TheaveragecollectionperiodforDanaDairyProductsin2005was(SeeTable2.2)
(a) 32.5days.
(b) 11.8days.
(c) 25.3days.
(d) 35.9days.
Answer: A
LevelofDifficulty:3
LearningGoal:6
117. IfDanaDairyProductshascredittermswhichspecifythataccountsreceivableshouldbepaidin
25days,theaveragecollectionperiod_________since2004.(SeeTable2.2)
(a) hasdeteriorated
(b) remainedthesame
(c) hasimproved
Answer: A
LevelofDifficulty:3
LearningGoal:6
118. DanaDairyProductshada_________degreeoffinancialleveragethantheindustrystandard,
resultingin_________.(SeeTable2.2)
(a) lower;lowerreturnontotalassets
(b) lower;lowerreturnonequity
(c) higher;higherreturnonequity
(d) higher;higherreturnontotalassets
Answer: B
LevelofDifficulty:3
LearningGoal:6
119. ThedebtratioforDanaDairyProductsin2005was(SeeTable2.2)
(a) 50percent.
(b) 11percent.
(c) 55percent.
(d) 44percent.
Answer: C
LevelofDifficulty:3
LearningGoal:6
120. DanaDairyProductsgrossprofitmarginwasinferiortotheindustrystandard.Thismayhave
resultedfrom(SeeTable2.2)
(a) ahighsalesprice.
(b) thehighcostofgoodssold.
(c) excessivesellingandadministrativeexpenses.
(d) excessiveinterestexpense.
Answer: B
LevelofDifficulty:3
LearningGoal:6
121. ThegrossprofitmarginandnetprofitmarginforDanaDairyProductsin2005were(See
Table2.2)
(a) 13percentand0.9percent,respectively.
(b) 13percentand1.5percent,respectively.
(c) 2percentand0.9percent,respectively.
(d) 2percentand1.5percent,respectively.
Answer: A
LevelofDifficulty:3
LearningGoal:6
122. ThereturnontotalassetsforDanaDairyProductsfor2005was(SeeTable2.2)
(a) 0.9percent.
(b) 5.5percent.
(c) 25percent.
(d) 2.5percent.
Answer: D
LevelofDifficulty:3
LearningGoal:6
123. ThereturnonequityforDanaDairyProductsfor2005was(SeeTable2.2)
(a) 0.6percent.
(b) 5.6percent.
(c) 0.9percent.
(d) 50percent.
Answer: B
LevelofDifficulty:3
LearningGoal:6
124. UsingthemodifiedDuPontformulaallowstheanalysttobreakDanaDairyProductsreturnon
equityinto3components:thenetprofitmargin,thetotalassetturnover,andameasureofleverage
(thefinancialleveragemultiplier).Whichofthefollowingmathematicalexpressionsrepresentsthe
modifiedDuPontformularelativetoDanaDairyProducts2005performance?(SeeTable2.2)
(a)
(b)
(c)
(d)
5.6(ROE)2.5(ROA)2.24(Financialleveragemultiplier)
Answer: A
LevelofDifficulty:3
LearningGoal:6
Topic:DuPontSystemAnalysis
125. Asthefinancialleveragemultiplierincreasesthismayresultin
(a) anincreaseinthenetprofitmarginandreturnoninvestment,duetothedecreaseininterest
expenseasdebtdecreases.
(b) anincreaseinthenetprofitmarginandreturnoninvestment,duetotheincreaseininterest
expenseasdebtincreases.
(c) adecreaseinthenetprofitmarginandreturnoninvestment,duetotheincreaseininterest
expenseasdebtincreases.
(d) adecreaseinthenetprofitmarginandreturnoninvestment,duetothedecreaseininterest
expenseasdebtdecreases.
Answer: C
LevelofDifficulty:4
LearningGoal:6
Topic:DuPontSystemAnalysis
126. The2002lawthatestablishedthePublicCompanyAccountingOversightBoard(PCAOB)was
called
(a) TheMcCainFeingoldAct.
(b) TheHarkinsOxleyAct.
(c) TheSarbanesHarkinsAct.
(d) TheSarbanesOxleyAct.
Answer: D
LevelofDifficulty:2
LearningGoal:1
127. The2002SarbanesOxleyActwasdesignedto
(a) limitthecompensationthatcouldbepaidtocorporateCEOs
(b) eliminatethemanydisclosureandconflictofinterestproblemsofcorporations
(c) provideuniforminternationalaccountingstandards
(d) twooftheabove
Answer: B
LevelofDifficulty:3
LearningGoal:1
128. ThePublicCompanyAccountingOversightBoard(PCAOB)
(a) isanotforprofitcorporationthatoverseesauditorsofpubliccorporations.
(b) isanotforprofitcorporationthatoverseesmanagersofpubliccorporations.
(c) isaforprofitcorporationthatoverseesauditorsofpubliccorporations.
(d) isaforprofitcorporationthatoverseesmanagersofpubliccorporations.
Answer: A
LevelofDifficulty:3
LearningGoal:1
129. IfNicoCorporationhascostofgoodssoldof$300,000andinventoryof$30,000,thentheinventory
turnoveris_________andtheaverageageofinventoryis_________.
(a) 36.5;10
(b) 10;36.5
(c) 36.0;10
(d) 10;36.0
Answer: B
LevelofDifficulty:3
LearningGoal:3
130. IfNicoCorporationhasannualpurchasesof$300,000andaccountspayableof$30,000,then
averagepurchasesperdayare_________andtheaveragepaymentperiodis_________.
(a) 36.5;821.9
(b) 36.0;833.3
(c) 821.9;36.5
(d) 833.3;36.0
Answer: C
LevelofDifficulty:3
LearningGoal:3
.4
Essay Questions
1.
AgSilverMining,Inc.has$500,000ofearningsbeforeinterestandtaxesattheyearend.Interest
expensesfortheyearwere$10,000.Thefirmexpectstodistribute$100,000individends.Calculate
theearningsaftertaxesforthefirmassuminga40percenttaxonordinaryincome.
Answer:
Earningsbeforeinterestandtaxes
Less:Interest
Earningsbeforetaxes
Less:Taxes(40%)
Earningsaftertaxes
LevelofDifficulty:2
LearningGoal:1
$500,000
10,000
$490,000
196,000
$294,000
2.
Attheendof2005,theLongLifeLightBulbCompanyannouncedithadproducedagrossprofitof
$1million.Thecompanyhasalsoestablishedthatoverthecourseofthisyearithasincurred
$345,000inoperatingexpensesand$125,000ininterestexpenses.Thecompanyissubjecttoa30
percenttaxrateandhasdeclared$57,000totalpreferredstockdividends.
(a) Howmuchistheearningsavailableforcommonstockholders?
(b) Computetheincreasedretainedearningsfor2005ifthecompanyweretodeclarea$4.25
commonstockdividend.Thecompanyhas15,000sharesofcommonstockoutstanding.
Answers:
(a)GrossProfits
Less:Operatingexpenses
OperatingProfits
Less:Interest
NetProfitsbeforetaxes
Less:Taxes(30%)
Less:PreferredStockDividend
EarningsAvailableforCommonStock
$1,000,000
(345,000)
$655,000
(125,000)
$530,000
(159,000)
$371,000
(57,000)
$314,000
(b)EarningsAvailableforCommonStock
Dividend(4.25)(15,000shares)
IncreasedRetainedEarnings
$314,000
(63,750)
$250,250
LevelofDifficulty:3
LearningGoal:1
3.
ReliableAutoPartshas5,000sharesofcommonstockoutstanding.Thecompanyalsohasthe
followingamountsinrevenueandexpenseaccounts.
Salesrevenue
Generalandadministrativeexpense
Interestexpense
Depreciationexpense
Sellingexpense
Costofgoodssold
$85,000
7,500
3,500
5,000
500
4,000
50,000
Calculate
(a) grossprofits.
(b) operatingprofits.
(c) netprofitsbeforetaxes.
(d) netprofitsaftertaxes(assumea40percenttaxrate).
(e) cashflowfromoperations.
(f) earningsavailabletocommonstockholders.
(g) earningspershare.
Answers:
(a)Salesrevenue
costofgoodssold
Grossprofits
$85,000
50,000
$35,000
(b)Grossprofits
operatingexpenses
Sellingexpense
General&adm.expense
Depreciationexpense
$35,000
4,000
7,500
5,000
Operatingprofits
$16,500
$18,500
(c)Operatingprofits
interestexpense
Netprofitsbeforetaxes
$18,500
3,500
$15,000
(d)Netprofitsbeforetaxes
taxes(40%)
Netprofitsaftertaxes
$15,000
6,000
$9,000
(e)Netprofitsaftertaxes
depreciationexpense
Cashflowfromoperations
$9,000
5,000
$14,000
(f)Netprofitsaftertaxes
preferreddividends
earningsavailableforC.S.
$9,000
500
$8,500
(g)EarningsavailableforC.S.
______________________=
#ofcommonsharesoutstanding
LevelofDifficulty:3
LearningGoal:1
$8,500
$1.70/share
5,000
4.
ColonialFurnituresnetprofitsbeforetaxesfor2002totaled$354,000.Thecompanystotal
retainedearningswere$338,000for2004yearendand$389,000for2005yearend.Colonialis
subjecttoa26percenttaxrate.HowlargewasthecashdividenddeclaredbyColonialFurniturein
2005?
Answer:
Less:Taxes(26%)
RetainedEarnings(2004)
NetProfitsAfterTaxes(2005)
Dividends
Dividends$210,960
$354,000
92,040
$261,960
$338,000
261,960
X
$389,000
LevelofDifficulty:3
LearningGoal:1
5.
OnDecember31,2004,theBradshawCorporationhad$485,000asanendingbalanceforits
retainedearningsaccount.During2005,thecorporationdeclareda$3.50/sharedividendtoits
stockholders.TheBradshawCorporationhas35,000sharesofcommonstockoutstanding.Whenthe
bookswereclosedfor2005yearend,thecorporationhadafinalretainedearningsbalanceof
$565,000.WhatwasthenetprofitearnedbyBradshawCorporationduring2005?
Answer:
Dividends($3.50/share)(35,000shares)
Dividends
NetProfitsAfterTaxes$202,500
LevelofDifficulty:3
LearningGoal:1
$122,500
$485,000
X
122,500
$565,000
6.
TheSunshineCompanyhadaretainedearningsbalanceof$850,000atthebeginningof2005.By
theendof2005,thecompanysretainedearningsbalancewas$950,000.During2005,thecompany
earned$245,000asnetprofitsafterpayingitstaxes.Thecompanywasthenabletopayitspreferred
stockholders$45,000.Computethecommonstockdividendpersharein2005assuming10,000
sharesofcommonstockoutstanding.
Answer:
PreferredStockDividend
CommonStockDividend
$850,000
245,000
(45,000)
X
$950,000
Totalcommonstockdividend$100,000
Commonstockdividendpershare
100,000/10,000$10
LevelofDifficulty:3
LearningGoal:1
7.
Discussthelimitationsofratioanalysisandthecautionswhichmustbetakenwhenreviewinga
crosssectionalandtimeseriesanalysis.
Answer: Insummarizingalargenumberofratios,allaspectsofthefirmsactivitiescanbe
assessed.However,limitationsofratioanalysismustberecognized.Acomparisonof
currentandpastratiosmayrevealmismanagement.But,theratiodoesnotgivedefinitive
causetotheproblem.Additionalinvestigationisnecessarytoconfirmthepossible
problem.Theanalystmustbecautiousofthefollowingpoints:1)asingleratiodoesnot
providesufficientinformationtojudgetheoverallperformanceofthefirm,2)thedatesof
thefinancialstatementsshouldbethesame,3)auditedstatementsshouldbeused,4)
similaraccountingtreatmentofcomparativedataisessential,and5)inflationanddiffering
assetagescandistortratiocomparisons.
LevelofDifficulty:3
LearningGoal:2
8.
Ratio
(%ofSales)
Costofgoodssold
Grossprofits
Sellingexpense
Gen.&admin.expense
Depreciationexpense
Totaloperatingexpense
Operatingprofits
Interestexpense
Taxes
KeyFinancialData
Dreamscape,Inc.
FortheYearEnded
December31,2004
74.5%
25.5
8.0
5.1
2.4
15.5
10.0
1.4
8.6
2.4
5.2
IndustryAverage
FortheYearEnded
December31,2005
70.0%
30.0
7.0
4.9
2.0
13.9
16.1
1.0
15.1
6.0
9.1
IncomeStatement,Dreamscape,Inc.
Salesrevenue
Less:Costofgoodssold
Grossprofits
SellingExpense
Gen.&admin.expense
Depreciationexpense
Operatingprofits
Less:Interestexpense
Less:Taxes
$1,000,000
750,000
$250,000
$70,000
48,000
20,000
$138,000
$112,000
$20,000
$92,000
$36,800
$55,200
PrepareacommonsizeincomestatementforDreamscape,Inc.fortheyearendedDecember31,
2005.Evaluatethecompanysperformanceagainstindustryaverageratiosandagainstlastyears
results.
Answer:
CommonSizeIncomeStatement
Dreamscape,Inc.
Salesrevenue
Less:Costofgoodssold
Grossprofits
SellingExpense
Gen.&admin.expense
Depreciationexpense
Operatingprofits
Less:Interestexpense
Less:Taxes
100%
75%
25%
7.0%
4.8%
2.0%
13.8%
11.2%
2.0%
9.2%
3.68%
5.52%
Dreamscape,Inc.performssignificantlybelowindustryaverage.Allprofitabilityratios
(grossprofitmargin,operatingprofitmargin,andnetprofitmargin)trailtheindustry
norms.In2004expensesasapercentofsaleswerehigh.
Dreamscape,Inc.improvedthemanagementofoperatingexpensesin2005meeting
industryaverages.However,costofgoodssoldasapercentofsalesincreasedandisafull
5percentabovetheindustryaverage,furtherreducingthegrossprofitmargin.Interest
expenseistwotimestheaverageindicatinghighcostofdebtorahighdebtlevel.Thefirm
mustconcentrateonreducingthecostofgoodssoldandinterestexpensetoimprove
performance.
LevelofDifficulty:4
LearningGoal:6
Topic:CommonSizeStatementAnalysis
9.
InanefforttoanalyzeClockworkCompanyfinances,Jimrealizedthathewasmissingthe
companysnetprofitsaftertaxesforthecurrentyear.Findthecompanysnetprofitsaftertaxes
usingthefollowinginformation.
Returnontotalassets2%
TotalAssetTurnover0.5
CostofGoodsSold$105,000
GrossProfitMargin0.30
Answer: SalesCGS/(1GPM)105,000/(10.30)$150,000
TotalAssetsSales/(TotalAssetTurnover)
150,000/0.50$300,000
NetProfitsAfterTaxes(ROA)(TotalAssets)
(0.02)(300,000)$6,000
LevelofDifficulty:4
LearningGoal:6
Topic:RatioandFinancialStatementAnalysis
10.
ConstructtheDuPontsystemofanalysisusingthefollowingfinancialdataforKeyWahlIndustries
anddeterminewhichareasofthefirmneedfurtheranalysis.
KeyFinancialData
KeyWahlIndustries:
Sales
$4,500,000
337,500
Totalassets
6,750,000
Totalliabilities
3,375,000
IndustryAverages:
Totalassetturnover
0.71
Debtratio
33.00%
Financialleveragemultiplier
1.50
Returnontotalassets
6.75%
Returnonequity
10.00%
Netprofitmargin
9.50%
Answer: RatiosforKeyWahlIndustries
4,500,000
0.67
6,750,000
3,375,000
Debtratio
50%
6,750,000
1
Financialleveragemultiplier
2
1 0.5
337,500
ROA
5%
6,750,000
Totalassetturnover
ROEROAFinancialleveragemultiplier10%
Netprofitmargin
337,500
7.5%
4,500,000
DuPontSystemofAnalysis:KeyWahlIndustriesperformsequallytoindustryaverages
accordingtothereturnonequity.However,whendissectingthefinancialdatafurtherinto
thethreekeycomponentsoftheDuPontsystem(aprofitonsale,efficiencyofassetuse,
andauseofleveragecomponent),someareasofimprovementmaybehighlighted.Key
WahlIndustrieshasalowernetprofitmarginandreturnontotalassetsthanindustry
averages.Nevertheless,thefirmmakesupforthelowprofitmarginthroughexcessiveuse
ofleverage(a50percentdebtratioversus33percentfortheindustry).Financialrisk
couldbereducedresultinginthesamereturnonequitybyincreasingthenetprofitmargin
andreducingdebt.
LevelofDifficulty:4
LearningGoal:6
11.
Giventhefollowingbalancesheet,incomestatement,historicalratiosandindustryaverages,
calculatethePulp,Paper,andPaperboard,Inc.financialratiosforthemostrecentyear.Analyzeits
overallfinancialsituationforthemostrecentyear.Analyzeitsoverallfinancialsituationfrombotha
crosssectionalandtimeseriesviewpoint.Breakyouranalysisintoanevaluationofthefirms
liquidity,activity,debt,andprofitability.
IncomeStatement
Pulp,PaperandPaperboard,Inc.
SalesRevenue
$2,080,976
Less:CostofGoodsSold
1,701,000
GrossProfits
$379,976
Less:OperatingExpenses
273,846
OperatingProfits
$106,130
Less:InterestExpense
19,296
$86,834
Less:Taxes(40%)
34,810
$52,024
BalanceSheet
December31,2005
Assets
Cash
$95,000
Accountsreceivable
237,000
Inventories
243,000
Totalcurrentassets
$575,000
Grossfixedassets
500,000
Less:Accumulateddepreciation
75,000
Netfixedassets
$425,000
Totalassets
$1,000,000
Liabilitiesandstockholdersequity
Currentliabilities
Accountspayable
$89,000
Notespayable
169,000
Accruals
87,000
Totalcurrentliabilities
$345,000
Longtermdebt
188,000
Totalliabilities
$533,000
Stockholdersequity
Commonstock
255,000
Retainedearnings
212,000
Totalstockholdersequity
$467,000
Totalliabilitiesandstockholdersequity
$1,000,000
HistoricalandIndustryAverageRatios
Ratio
CurrentRatio
QuickRatio
InventoryTurnover
AverageCollectionPeriod
TotalAssetTurnover
DebtRatio
TimesInterestEarned
GrossProfitMargin
OperatingProfitMargin
NetProfitMargin
Returnontotalassets
ReturnonEquity
2003
1.6
0.9
8.1
33days
2.3
60%
2.5
21%
4.7%
1.8%
4.1%
10.3%
2004
1.7
1.0
9.3
37days
2.2
56%
3.5
19.7%
4.8%
1.6%
3.5%
7.9%
2005
Industry
2005
1.6
0.9
8.4
39days
2.2
58%
2.3
20.4%
4.7%
1.4%
3.08%
7.3%
Answer:
HistoricalandIndustryAverageRatios
Ratio
CurrentRatio
QuickRatio
InventoryTurnover
AverageCollectionPeriod
TotalAssetTurnover
DebtRatio
TimesInterestEarned
GrossProfitMargin
OperatingProfitMargin
NetProfitMargin
Returnontotalassets
ReturnonEquity
2003
1.6
0.9
8.1
33days
2.3
60%
2.5
21%
4.7%
1.8%
4.1%
0.3%
2004
1.7
1.0
9.3
37days
2.2
56%
3.5
19.7%
4.8%
1.6%
3.5%
7.9%
2005
1.67
0.96
7.0
41days
2.1
53%
5.5%
18.0%
5.1%
2.5%
5.2%
11.1%
Industry
2005
1.6
0.9
8.4
39days
2.2
58%
2.3
20.4%
4.7%
1.4%
3.08%
7.3%
LIQUIDITY:Theliquidityof3Pisontargetwiththeindustrystandardin2005andshows
notrendsince2000.
ACTIVITY:Inventoryandaccountsreceivablemanagementhasdeterioratedsince2004
andisinferiorwhencomparedtotheindustrystandard.Thelowinventoryturnovermay
becausedbyoverstockingand/orobsoleteinventories.Thehighaveragecollectionperiod
mayhaveresultedfrompoorcollectionsprocedures.Furtherinvestigationisnecessaryto
determinethecauseofthevariances.
DEBT:3Phaslessdebtthantheindustryaverage.Thetrendsince2003hasbeentoward
reducingthedebtratio.Thefirm,therefore,issubjecttolessfinancialriskthanthe
averagefirmintheindustry.
PROFITABILITY:Althoughthegrossprofitmarginisinferiortotheindustryaverage,
theoperatingandnetprofitmarginfarexceedthestandards,boostingreturnontotalassets
andreturnonequity.Thetrendinthegrossprofitmarginisunfavorableandmayeitherbe
causedbyaslideinproductpricesoranescalationincostofsales.Thecauseofthepoor
grossprofitmarginshouldbeinvestigated.
Overall,thefirmneedstofocusattentiononinventoryandaccountsreceivable
managementandthecauseofthepoorgrossprofitmargin.Ingeneral,thefirmisingood
financialcondition.
LevelofDifficulty:4
LearningGoal:6
Topic:CompleteRatioAnalysis
12.
CompletethebalancesheetforGeneralAviation,Inc.basedonthefollowingfinancialdata.
BalanceSheet
GeneralAviation,Inc.
December31,2005
Assets
Cash
Marketablesecurities
Accountsreceivable
Inventories
Totalcurrentassets
Grossfixedassets
Netfixedassets
Totalassets
LiabilitiesandStockholdersEquity
Accountspayable
Notespayable
Accruals
Longtermdebts
Totalliabilities
Stockholdersequity
Preferredstock
Commonstockatpar
Paidincapitalinexcessofpar
Retainedearnings
$8,005
$50,000
$28,800
$18,800
2,451
30,000
6,400
90,800
KeyFinancialData(2005)
1. Salestotaled$720,000.
2. Thegrossprofitmarginwas38.7percent.
3. Inventoryturned6times.
4. Thereare360daysinayear.
5. Theaveragecollectionperiodwas31days.
6. Thecurrentratiowas2.35.
7. Thetotalassetturnoverwas2.81.
8. Thedebtratiowas49.4percent.
9. Totalcurrentassetsequal$159,565.
Answer:
BalanceSheet
GeneralAviation,Inc.
December31,2005
Assets
Cash
Marketablesecurities
Accountsreceivable
Inventories
Totalcurrentassets
Grossfixedassets
146,663
$50,000
Netfixedassets
Totalassets
LiabilitiesandStockholdersEquity
Currentliabilities
Accountspayable
Notespayable
Accruals
Longtermdebts
Totalliabilities
Stockholdersequity
Preferredstock
Commonstockatpar
Paidincapitalinexcessofpar
Retainedearnings
LevelofDifficulty:4
LearningGoal:6
Topic:RatioandFinancialStatementAnalysis
$8,005
16,000
62,000
73,560
$159,565
$96,663
$256,228
$28,800
20,300
$18,800
$67,900
58,677
$126,577
2,451
30,000
6,400
90,800
$129,651
$256,228

Chapter 2: Financial Statements and Analysis

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 2: Financial Statements and Analysis

Uploaded by

Copyright:

Available Formats

48GitmanPrinciplesofFinance,EleventhEdition

Multiple Choice Questions

You might also like