Chapter 16 "How Well Am I Doing?" - Financial Statement Analysis

Chapter 16 “How Well Am I Doing?
”--Financial Statement Analysis
True/False Questions
1. Common-size statements are financial statements of companies of similar size.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy
2. One limitation of vertical analysis is that it cannot be used to compare two companies
that are significantly different in size.

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

AICPA FN: Reporting LO: 1 Level: Medium
4. The sale of used equipment at book value for cash will increase earnings per share.
Ans: False AACSB: Analytic AICPA BB: Critical Thinking

5. Earnings per share is computed by dividing net income (after deducting preferred
dividends) by the average number of common shares outstanding.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking

6. The dividend payout ratio divided by the dividend yield ratio equals the price-earnings
ratio.
Ans: True AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Hard
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.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 16-5

Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
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.
Ans: True AACSB: Analytic AICPA BB: Critical Thinking

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.

16-6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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

assets.

Multiple Choice Questions
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.
Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy Source: CMA, adapted
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
Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2,3,4 Level: Medium
18. Most stockholders would ordinarily be least concerned with which of the following
ratios:
A) earnings per share.
B) dividend yield ratio.
C) price-earnings ratio.
D) acid-test ratio.
Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2,3 Level: Easy

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

A) Increase Increase
B) Increase Decrease
C) Decrease Increase
D) Decrease Decrease
Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2,4 Level: Medium
20. The market price of Friden Company's common stock increased from $15 to $18.
Earnings per share of common stock remained unchanged. The company's price-
earnings ratio would:
A) increase.
B) decrease.
C) remain unchanged.
D) impossible to determine.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking

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.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking

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.
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.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Easy Source: CMA, adapted
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.

AICPA FN: Reporting LO: 3,4 Level: Easy

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.
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%

Solution:
Gross margin percentage = Gross margin ÷ Sales = $347,000 ÷ $824,000 = 42.1%
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%

Solution:
Return on common stockholders' equity = (Net income − Preferred dividends)

÷ Average common stockholders' equity
= ($60,000 − $10,000) ÷ $480,000 = 10.4%

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

Solution:
Earnings per share = (Net Income − Preferred Dividends)

÷ Average number of common shares outstanding
= ($500,000 − $21,000) ÷ [(150,000 shares + 150,000 shares) ÷ 2]
= $3.19 per share
33. The following information relates to Konbu Corporation for last year:
Price earnings ratio............ 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%


Solution:
Dividend yield ratio = Dividends per share* ÷ Market price per share **
= $0.06 ÷ $3 = 2.0%
* Dividends per share = Dividend payout ratio ÷ Earnings per share
= 30% ÷ $5 = $0.06 per share
** Market price per share = Price earnings ratio ÷ Earnings per share
= 15 ÷ $5 = $3 per share
34. Richmond Company has 100,000 shares of $10 par value common stock issued and
outstanding. Total stockholders' equity is $2,800,000 and net income for the year is
$800,000. During the year Richmond paid $3.00 per share in dividends on its common
stock. The market value of Richmond's common stock is $24. What is the price-
earnings ratio?
A) 3.0
B) 3.5
C) 4.8
D) 8.0

AICPA FN: Reporting LO: 2 Level: Medium Source: CPA, adapted
Solution:
Price-earnings ratio = Market price per share ÷ Earnings per share*

= $24 ÷ $8 = 3.0
* Earnings per share = (Net income - Preferred dividends) ÷ Average # of common
shares outstanding
= ($800,000 - $0) ÷ [(100,000 shares + 100,000 shares) ÷ 2] = $8 per share
35. Hurst Company has 20,000 shares of common stock outstanding. These shares were
originally issued at a price of $15 per share. The current book value is $25.00 per
share and the current market value is $30.00 per share. The dividends on common
stock for the year totaled $45,000. The dividend yield ratio is:
A) 9%
B) 7.5%
C) 15%
D) 10%


Solution:
Dividend yield ratio = Dividends per share ÷ Market price per share
= ($45,000 ÷ 20,000) ÷ $30.00 = 7.5%
36. Bramble Company's net income last year was $65,000 and its interest expense was
$15,000. Total assets at the beginning of the year were $620,000 and total assets at the
end of the year were $650,000. The company's income tax rate was 40%. The
company's return on total assets for the year was closest to:
A) 11.7%
B) 10.2%
C) 12.6%
D) 11.2%

Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**

= $74,000 ÷ $635,000 = 11.7%
*Adjusted net income = Net income + [Interest expense × (1-Tax rate)]
= $65,000 + 15,000 × (1 − 0.40) = $74,000
**Average total assets = ($620,000 + $650,000) ÷ 2 = $635,000
37. Dahl Company can borrow funds at 15% interest. Since the company's tax rate is 40%,
its after-tax cost of interest is only 9%. Thus, the company reasons that if it can earn
$70,000 per year before interest and taxes on a new investment of $500,000, then it
will be better off by $25,000 per year.
A) The company's reasoning is correct.
B) The company's reasoning is not correct, since the after-tax cost of interest would
be 6 percent, rather than 9%.
C) The company's reasoning is not correct, since interest is not tax-deductible.
D) The company's reasoning is not correct, since it would be worse off by $3,000
per year after taxes.


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

Solution:
Earnings per share = (Net Income - Preferred Dividends)

= [$809,000 − (200,000 × $1.80)] ÷ [(100,000 shares + 100,000 shares) ÷ 2] = $4.49

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

Solution:

= $73.50 ÷ $7.88 = 9.33
* Earnings per share = (Net income − Preferred dividends) ÷ Average number of
common shares outstanding
= [$2,604,000 − (100,000 × $2.40)] ÷ [(300,000 shares + 300,000 shares) ÷ 2] = $7.88
41. Arntson Corporation's net income last year was $7,975,000. The dividend on common
stock were outstanding. The dividend payout ratio is closest to:
A) 1.06
B) 0.51
C) 0.56
D) 1.29

Solution:
Dividend payout ratio = Dividends per share ÷ Earnings per share*

= $8.20 ÷ $14.55 = 0.56
* Earnings per share = (Net income − Preferred dividends) ÷ Average number of
common shares outstanding
= [$7,975,000 − (200,000 × $3.50)] ÷ [(500,000 shares + 500,000 shares) ÷ 2] =
$14.55

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

Solution:
Dividend yield ratio = Dividends per share (see above) ÷ Market price per share
= $11.60 ÷ $54.80 = 0.21
43. Inglish Corporation's most recent income statement appears below:

Gross margin.............................................. 260,000
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%


Solution:

= $105,000 ÷ $570,000 = 18.4%
*Adjusted net income
= Net income + [Interest expense × (1 − Tax rate)]
= $84,000 + [$30,000 × (1 − 0.30)] = $105,000
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%

Solution:

÷ Average common stockholders' equity*
= ($160,000 − $23,000) ÷ $1,105,000 = 12.4%
*Average common stockholders' equity = ($1,060,000 + $1,150,000) ÷ 2 = $1,105,000

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

Solution:
Book value per share= Common stockholders' equity ÷ Number of common shares
outstanding* = $1,340,000 ÷ 400,000 shares = $3.35 per share
46. Dravis Company's working capital is $10,000 and its current liabilities are $84,000.
The company's current ratio is closest to:
A) 0.88
B) 0.12
C) 9.40
D) 1.12

Solution:
Current ratio = Current assets ÷ Current liabilities = ($84,000 + $10,000) ÷ $84,000 =

1.12

47. Erascible Company has $13,000 in cash, $7,000 in marketable securities, $27,000 in
accounts receivable, $20,000 in inventories, and $30,000 in current liabilities. The
company's current assets consist of cash, marketable securities, accounts receivable,
and inventory. The company's acid-test ratio is closest to:
A) 1.57
B) 0.90
C) 1.33
D) 2.23

Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities = $47,000 ÷ $30,000 = 1.57

*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term
notes receivable = $13,000 + $7,000 + $27,000 = $47,000
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

Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* =

$160,000 ÷ $13,000 = 12.31
*Average accounts receivable = ($10,000 + $16,000) ÷ 2 = $13,000

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

Solution:
Average collection period = 365 days ÷ Accounts receivable turnover*

= 365 days ÷ 8.6667 = 42.12 days
* Accounts receivable turnover = Sales on account ÷ Average accounts receivable
balance
= $130,000 ÷ [($18,000 + $12,000) ÷ 2] = 8.6667
50. Harold Company, a retailer, had cost of goods sold of $260,000 last year. The
beginning inventory balance was $20,000 and the ending inventory balance was
$26,000. The company's inventory turnover was closest to:
A) 5.65
B) 10.00
C) 13.00
D) 11.30

Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory*

= $260,000 ÷ $23,000 = 11.30
*Average inventory = ($20,000 + $26,000) ÷ 2 = $23,000

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

Solution:
Average sale period = 365 days ÷ Inventory turnover*

= 365 days ÷ 6.4 = 57.03 days
* Inventory turnover = Cost of goods sold ÷ Average inventory
= $160,000 ÷ [($26,000 + $24,000) ÷ 2] = 6.4
52. Raatz Corporation's total current assets are $370,000, its noncurrent assets are
$660,000, its total current liabilities are $220,000, its long-term liabilities are
$410,000, and its stockholders' equity is $400,000. Working capital is:
A) $370,000
B) $150,000
C) $250,000
D) $400,000

Solution:
Working capital = Current assets − Current liabilities = $370,000 − $220,000

= $150,000

53. Stubbs Corporation's total current assets are $390,000, its noncurrent assets are
$290,000, and its stockholders' equity is $500,000. The current ratio is closest to:A)
0.62
A) 0.59
B) 1.70
C) 0.79

Solution:
Current ratio = Current assets ÷ Current liabilities = $390,000 ÷ $230,000 = 1.70
54. Data from Hollingworth Corporation's most recent balance sheet appear below:
Cash.................................... $12,000
Marketable securities......... $29,000
Accounts receivable........... $37,000
Inventory............................ $51,000
Prepaid expenses................ $20,000
Current liabilities............... $115,000
The company's acid-test ratio is closest to:

A) 0.85
B) 0.10
C) 0.68
D) 0.36

Solution:

* Quick assets = Cash + Marketable securities + Accounts receivable
= $12,000 + $29,000 + $37,000 = $78,000

55. Eachus Corporation has provided the following data:
This Year Last Year

Accounts receivable........... $135,000 $119,000
Inventory............................ $136,000 $155,000
Sales on account................. $698,000
Cost of goods sold.............. $429,000
The accounts receivable turnover for this year is closest to:

A) 0.88
B) 5.50
C) 5.17
D) 1.13

Solution:

$698,000 ÷ $127,000 = 5.50
56. Data from Millier Corporation's most recent balance sheet and income statement
appear below:
This Year Last Year

Inventory............................ $183,000 $190,000
Sales on account................. $758,000
The average collection period for this year is closest to:

A) 48.7 days
B) 70.6 days
C) 85.6 days
D) 54.4 days


Solution:

$758,000 ÷ $113,000 = 6.71

= 365 ÷ 6.71 = 54.4 days
*See above
57. Laware Corporation has provided the following data:
This Year Last Year

Inventory............................ $180,000 $170,000
Sales on account................. $714,000
The inventory turnover for this year is closest to:

A) 2.55
B) 0.94
C) 2.48
D) 1.06

Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $447,000 ÷ $175,000

= 2.55

58. Data from Buker Corporation's most recent balance sheet and income statement
appear below:
This Year Last Year

Inventory............................ $155,000 $153,000
Sales on account................. $662,000
The average sale period for this year is closest to:

A) 142.0 days
B) 3.6 days
C) 140.9 days
D) 3.7 days

Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $399,000 ÷ $154,000

= 2.59
Average sale period = 365 days ÷ Inventory turnover* = 365 ÷ 2.59

= 140.9 days
*See above
59. Last year Jar Company had a net income of $290,000, income tax expense of $66,000,
and interest expense of $20,000. The company's times interest earned was closest to:
A) 10.20
B) 14.50
C) 15.50
D) 18.80

Solution:
Times interest earned = Net operating income ÷ Interest expense

= ($290,000 + $66,000 + $20,000) ÷ $20,000 = 18.80

60. The times interest earned ratio of Whiting Company is 4.0. The interest expense for
the year is $15,000, and the company's tax rate is 30%. Whiting Company's after-tax
net income must be:
A) $60,000
B) $42,000
C) $31,500
D) $16,500

Solution:
Times interest earned = Earnings before interest expense and income taxes ÷ Interest
expense
4.0 = (Before-tax income + $15,000) ÷ $15,000
$60,000 = Earnings before income taxes + $15,000
Earnings before income taxes = $45,000
After-tax net income = Earnings before income taxes × (1 − Tax rate)
= $45,000 × (1 − 0.30) = $31,500
61. Karver Company has total assets of $180,000 and total liabilities of $130,000. The
company's debt-to-equity ratio is closest to:
A) 0.28
B) 0.72
C) 0.42
D) 2.60

Solution:
Debt-to-equity ratio = Liabilities ÷ Stockholders' equity

= $130,000 ÷ ($180,000 - $130,000) = 2.60

62. Brewster Company's debt-to-equity ratio is 0.8. Current liabilities total $100,000 and
long term liabilities total $200,000. Brewster Company's total assets must be:
A) $375,000
B) $450,000
C) $550,000
D) $675,000

Solution:

= ($100,000 + $200,000) ÷ Stockholders' equity = 0.8
Stockholders' equity = $300,000 ÷ 0.8 = $375,000
Total assets = Liabilities + Stockholders' equity = $300,000 + $375,000
= $675,000
63. Boyington Corporation has provided the following data from its most recent income
statement:
Net operating income......... $87,000

Interest expense.................. $49,000
Net income before taxes..... $38,000
Income taxes...................... $11,000
Net income......................... $27,000
The times interest earned ratio is closest to:

A) 0.55
B) 0.78
C) 2.54
D) 1.78

Solution:

= $87,000 ÷ $49,000 = 1.78

64. Wohlfarth Corporation has provided the following data from its most recent balance
sheet:
Total assets..................................... $760,000

Total liabilities................................ $570,000
Total stockholders’ equity.............. $190,000
The debt-to-equity ratio is closest to:

A) 4.00
B) 3.00
C) 0.75
D) 0.33

Solution:
Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $570,000 ÷ $190,000

= 3.00

Use the following to answer questions 65-81:
Gschwend Corporation's most recent balance sheet and income statement appear below:
Statement of Financial Position

December 31, Year 2 and Year 1
(in thousands of dollars)
Assets Year 2 Year 1
Current assets:
Cash.................................................................... $ 140 $ 130
Accounts receivable............................................ 160 140
Inventory............................................................. 170 150
Prepaid expenses................................................. 90 90
Total current assets................................................. 560 510
Plant and equipment, net........................................ 840 900
Total assets............................................................. $1,400 $1,410
Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable................................................ $ 150 $ 150
Accrued liabilities............................................... 60 60
Notes payable, short term................................... 60 60
Total current liabilities........................................... 270 270
Bonds payable........................................................ 230 270
Total liabilities........................................................ 500 540
Stockholders’ equity:
Preferred stock, $100 par value, 5%................... 200 200
Common stock, $1 par value.............................. 100 100
Additional paid-in capital–common stock.......... 100 100
Retained earnings................................................ 500 470
Total stockholders’ equity...................................... 900 870
Total liabilities & stockholders’ equity.................. $1,400 $1,410

Income Statement
For the Year Ended December 31, Year 2
Sales (all on account)............................................. $1,370
Cost of goods sold.................................................. 800
Gross margin.......................................................... 570
Selling and administrative expense........................ 439
Net operating income............................................. 131
Interest expense...................................................... 31
Net income before taxes......................................... 100
Income taxes (30%)............................................... 30
Net income............................................................. $ 70
Dividends on common stock during Year 2 totaled $30 thousand. Dividends on preferred
stock totaled $10 thousand. The market price of common stock at the end of Year 2 was $4.86
per share.
65. The gross margin percentage for Year 2 is closest to:

A) 814.3%
B) 71.3%
C) 41.6%
D) 12.3%

Solution:
Gross margin percentage = Gross margin ÷ Sales = $570 ÷ $1,370 = 41.6%
66. The earnings per share of common stock for Year 2 is closest to:
A) $0.60
B) $0.70
C) $1.00
D) $1.31


Solution:
Earnings per share = (Net Income - Preferred Dividends) ÷

Average number of common shares outstanding* = ($70 − $10) ÷ 100 = $0.60
*Number of common shares outstanding = Common stock ÷ Par value

= $100 ÷ $1 = 100
67. The price-earnings ratio for Year 2 is closest to:

A) 8.10
B) 3.71
C) 6.94
D) 4.86

Solution:


= $100 ÷ $1 = 100
Price-earnings ratio = Market price per share ÷ Earnings per share

= $4.86 ÷ $0.60 = 8.10
68. The dividend payout ratio for Year 2 is closest to:

A) 66.7%
B) 50.0%
C) 833.3%
D) 42.9%


Solution:


= $100 ÷ $1 = 100
Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $0.30 ÷ $0.60 = 50.0%
*Dividends per share = Common dividends ÷ Common shares
= $30 ÷ 100 shares = $0.30 per share
69. The dividend yield ratio for Year 2 is closest to:

A) 75.00%
B) 8.23%
C) 2.06%
D) 6.17%

Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷


= $100 ÷ $1 = 100

= $0.30 ÷ $0.60 = 50.0%
= $30 ÷ 100 shares = $0.30 per share
Dividend yield ratio = Dividends per share ÷ Market price per share = $0.30 ÷ $4.86 =
6.17%

70. The return on total assets for Year 2 is closest to:

A) 5.00%
B) 6.55%
C) 6.53%
D) 4.98%

Solution:

= $91.70 ÷ $1,405 = 6.53%
= $70 + [$31 × (1 − 0.30)] = $91.70
71. The return on common stockholders' equity for Year 2 is closest to:
A) 6.78%
B) 7.91%
C) 8.76%
D) 10.22%

Solution:
Return on common stockholders' equity

= (Net income - Preferred dividends) ÷ Average common stockholders' equity*
= ($70 − $10) ÷ $685 = 8.76%
*Average common stockholders' equity
= [($870 - $200) + ($900 − $200)] ÷ 2 = $685

72. The book value per share at the end of Year 2 is closest to:
A) $0.60
B) $7.00
C) $9.00
D) $14.00

Solution:
Book value per share = Common stockholders' equity

÷ Number of common shares outstanding* = $700 ÷ 100 shares = $7.00 per share
= $100 ÷ $1 per share = 100 shares
73. The working capital at the end of Year 2 is:

A) $840 thousand
B) $560 thousand
C) $290 thousand
D) $900 thousand

Solution:
Working capital = Current assets - Current liabilities = $560 thousand − $270 thousand
= $290 thousand
74. The current ratio at the end of Year 2 is closest to:

A) 0.36
B) 0.40
C) 0.89
D) 2.07

Solution:
Current ratio = Current assets ÷ Current liabilities = $560 ÷ $270 = 2.07

75. The acid-test ratio at the end of Year 2 is closest to:

A) 1.11
B) 1.12
C) 2.07
D) 1.44

Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities = $300 ÷ $270 = 1.11

notes receivable = $140 + $0 + $160 = $300
76. The accounts receivable turnover for Year 2 is closest to:

A) 1.14
B) 8.56
C) 0.88
D) 9.13

Solution:
$1,370 ÷ $150 = 9.13
*Average accounts receivable = ($140 + $160) ÷ 2 = $150
77. The average collection period for Year 2 is closest to:

A) 1.1 days
B) 42.6 days
C) 0.9 days
D) 40.0 days


Solution:

$1,370 ÷ $150 = 9.13
Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 9.13 = 40.0 days
78. The inventory turnover for Year 2 is closest to:

A) 4.71
B) 0.88
C) 5.00
D) 1.13

Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $800 ÷ $160 = 5.00
*Average inventory = ($150 + $170) ÷ 2 = $160
79. The average sale period for Year 2 is closest to:

A) 45.3 days
B) 77.5 days
C) 213.1 days
D) 73.0 days

Solution:
Average sale period = 365 days ÷ Inventory turnover (see above)

= 365 days ÷ 5.00 = 73.0 days

80. The times interest earned for Year 2 is closest to:

A) 4.23
B) 6.04
C) 2.26
D) 3.23

Solution:

= $131 ÷ $31 = 4.23
81. The debt-to-equity ratio at the end of Year 2 is closest to:

A) 0.71
B) 0.26
C) 0.56
D) 0.32

Solution:

= $500 ÷ $900 = 0.56

Orgeron Corporation's most recent balance sheet and income statement appear below:

Current assets:
Cash.............................................................. $ 260 $ 120
Accounts receivable...................................... 160 190
Inventory....................................................... 180 160
Prepaid expenses........................................... 60 70
Total current assets........................................... 660 540
Plant and equipment, net.................................. 680 750
Total assets....................................................... $1,340 $1,290

Accounts payable.......................................... $ 170 $ 150
Accrued liabilities......................................... 40 40
Notes payable, short term............................. 80 90
Total current liabilities..................................... 290 280
Bonds payable.................................................. 290 300
Total liabilities.................................................. 580 580
Preferred stock, $100 par value, 5%................ 100 100
Common stock, $2 par value........................ 200 200
Additional paid-in capital–common stock.... 100 100
Retained earnings.......................................... 360 310
Total stockholders’ equity................................ 760 710
Total liabilities & stockholders’ equity............ $1,340 $1,290

Income Statement
Sales (all on account)....................................... $1,260
Cost of goods sold............................................ 800
Gross margin.................................................... 460
Selling and administrative expense.................. 272
Net operating income....................................... 188
Interest expense................................................ 38
Net income before taxes................................... 150
Income taxes (30%)......................................... 45
Net income....................................................... $ 105
per share.
82. The gross margin percentage for Year 2 is closest to:

A) 57.5%
B) 22.8%
C) 438.1%
D) 36.5%

Solution:
Gross margin percentage = Gross margin ÷ Sales = $460 ÷ $1,260 = 36.5%
A) $1.05
B) $1.88
C) $1.50
D) $1.00


Solution:

÷ Average number of common shares outstanding*
= ($105 − $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share

A) 11.30
B) 10.76
C) 7.53
D) 6.01

Solution:
Earnings per share = (Net Income - Preferred Dividends)

= ($105 - $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share
= $11.30 ÷ $1.00 = 11.30


A) 47.6%
B) 55.0%
C) 50.0%
D) 500.0%

Solution:

= $0.50 ÷ $1.00 = 50.0%
= $50 ÷ 100 shares = $0.50 per share

A) 4.42%
B) 0.45%
C) 90.91%
D) 4.87%

Solution:

= $0.50 ÷ $1.00 = 50.0%
= $50 ÷ 100 shares = $0.50 per share
Dividend yield ratio = Dividends per share ÷ Market price per share = $0.50 ÷ $11.30
= 4.42%


A) 10.01%
B) 7.98%
C) 7.84%
D) 9.82%

Solution:

= $131.60 ÷ $1,315 = 10.01%
= $105 + [$38 × (1 − 0.30)] = $131.60
A) 15.75%
B) 16.54%
C) 13.61%
D) 14.29%

Solution:
Return on common stockholders' equity

= (Net income − Preferred dividends) ÷ Average common stockholders' equity*
= ($105 − $5) ÷ $635 = 15.75%
*Average common stockholders' equity = ($610 + $660) ÷ 2 = $635

A) $1.00
B) $7.60
C) $13.40
D) $6.60

Solution:
Book value per share = Common stockholders' equity

÷ Number of common shares outstanding* = $660 ÷ 100 shares = $6.60 per share
Payne Company's sales and current assets have been reported as follows over the last four
years:
Year 4 Year 3 Year 2 Year 1

Sales................................... $810,000 $720,000 $630,000 $600,000
Cash.................................... $ 36,000 $ 30,000 $ 25,000 $ 20,000

Accounts receivable........... 74,000 60,000 59,200 50,000
Inventory............................ 77,800 72,000 90,000 80,000
Prepaid expenses................ 46,200 38,000 10,800 30,000
Total current assets............. $234,000 $200,000 $185,000 $180,000

90. Suppose that Payne Company employs trend percentages to analyze performance with
Year 1 as the base year. Sales for Year 4 expressed as a trend percentage would be
closest to:
A) 128.6%
B) 74.1%
C) 112.5%
D) 135.0%

Solution:
Sales as trend percentage = Year 4 sales ÷ Year 1 sales

= ($810,000 ÷ $600,000) = 135.0%
91. Suppose that Payne Company employs trend percentages to analyze performance with
Year 2 as the base year. Inventory for Year 3 expressed as a trend percentage would be
closest to:
A) 125%
B) 80%
C) 90%
D) 36%

Solution:
Inventory as trend percentage = Year 3 inventory ÷ Year 2 inventory

= $72,000 ÷ $90,000 = 80%

92. Suppose that Payne Company employs common size statements to analyze changes in
the current assets. The increase in the Accounts Receivable account when comparing
Year 3 to Year 2 would be closest to:
A) 1.3% increase
B) 0.4% increase
C) 5.3% increase
D) 4.2% increase

Solution:
Increase in Accounts Receivable account = ($60,000 − $59,200) ÷ $59,200

= 1.3%

Financial statements for Orahood Company appear below:
Orahood Company
(dollars in thousands)
Year 2 Year 1
Current assets:
Cash and marketable securities........................ $ 200 $ 170
Accounts receivable, net.................................. 170 140
Inventory.......................................................... 120 120
Prepaid expenses.............................................. 20 30
Total current assets.............................................. 510 460
Noncurrent assets:
Plant & equipment, net.................................... 1,530 1,540
Total assets.......................................................... $2,040 $2,000
Accounts payable............................................. $ 170 $ 160
Accrued liabilities............................................ 60 50
Notes payable, short term................................ 270 290
Total current liabilities........................................ 500 500
Noncurrent liabilities:
Bonds payable.................................................. 290 300
Total liabilities................................................. 790 800
Preferred stock, $10 par, 10%.......................... 100 100
Common stock, $5 par..................................... 200 200
Additional paid-in capital–common stock....... 280 280
Retained earnings............................................. 670 620
Total stockholders’ equity................................... 1,250 1,200
Total liabilities & stockholders’ equity............... $2,040 $2,000

Orahood Company
Income Statement
Sales (all on account).......................................... $1,740

Cost of goods sold............................................... 1,210
Gross margin....................................................... 530
Selling and administrative expense..................... 210
Net operating income.......................................... 320
Interest expense................................................... 30
Net income before taxes...................................... 290
Income taxes (30%)............................................ 87
Net income.......................................................... $ 203
Dividends during Year 2 totaled $153 thousand, of which $10 thousand were preferred
dividends. The market price of a share of common stock on December 31, Year 2 was $80.
93. Orahood Company's earnings per share of common stock for Year 2 was closest to:
A) $7.25
B) $2.14
C) $4.83
D) $5.08

Solution:


94. Orahood Company's dividend yield ratio on December 31, Year 2 was closest to:
A) 4.2%
B) 4.5%
C) 2.1%
D) 4.8%

Solution:

Dividends per share = Common dividends ÷ Common shares
= $143 ÷ 40 shares = $3.58 per share
Dividend yield ratio = Dividends per share ÷ Market price per share = $3.58 ÷ $80 =
4.5%
95. Orahood Company's return on total assets for Year 2 was closest to:
A) 11.1%
B) 10.0%
C) 9.0%
D) 10.5%

Solution:

= $224 ÷ $2,020 = 11.1%
= $203 + [$30 × (1 − 0.30)] = $224

96. Orahood Company's current ratio at the end of Year 2 was closest to:
A) 0.63
B) 1.02
C) 0.55
D) 1.25

Solution:
97. Orahood Company's accounts receivable turnover for Year 2 was closest to:
A) 14.5
B) 10.1
C) 11.2
D) 7.8

Solution:

$1,740 ÷ $155 = 11.2
98. Orahood Company's average sale period for Year 2 was closest to:
A) 25.2 days
B) 46.8 days
C) 32.5 days
D) 36.2 days

Solution:

= 365 days ÷ 10.08 = 36.2 days
*Inventory turnover = Cost of goods sold ÷ Average inventory = $1,210 ÷ ($120 +
$120)/2 = 10.08

99. Orahood Company's times interest earned for Year 2 was closest to:
A) 9.7
B) 17.7
C) 6.8
D) 10.7

Solution:

= $320 ÷ $30 = 10.07

Financial statements for Matti Company appear below:
Matti Company
Balance Sheet
As of December 31
Year 2 Year 1
Current assets......................................................... $ 90,000 $ 70,000
Long term investments........................................... 110,000 110,000
Plant, property, and equipment (net)...................... 500,000 420,000
Total assets............................................................. $700,000 $600,000
Current liabilities................................................... $110,000 $80,000

Bonds payable........................................................ 140,000 100,000
Preferred stock (par value $100, 8%).................... 75,000 75,000
Common stock (par value $5)................................ 125,000 125,000
Additional paid-in capital–common stock............. 220,000 220,000
Retained earnings................................................... 30,000 0
Total liabilities and equities................................... $700,000 $600,000
Matti Company
Income Statement
Sales....................................................................... $800,000
Cost of goods sold.................................................. 450,000
Gross margin.......................................................... 350,000
Selling and administrative expense........................ 250,000
Net operating income............................................. 100,000
Interest expense...................................................... 10,000
Net income before taxes......................................... 90,000
Income taxes (30%)............................................... 27,000
Net Income............................................................. $ 63,000
Dividends were $33,000 for the year, of which $6,000 were for preferred stock.

100. The return on common stockholders' equity for Matti Company for Year 2 is closest
to:
A) 15.8%
B) 17.5%
C) 14.0%
D) 15.2%

Solution:
Return on common stockholders' equity = (Net income − Preferred dividends) ÷

Average common stockholders' equity* = ($63,000 - $6,000) ÷ $360,000 = 15.8%
*Average common stockholders' equity = ($375,000 + $345,000) ÷ 2 = $360,000
101. The return on total assets for Matti Company for Year 2 is closest to:
A) 10.8%
B) 10.0%
C) 9.0%
D) 10.2%

Solution:

= $70,000 ÷ $650,000 = 10.8%
*Adjusted net income = Net income + [Interest expense × (1 − Tax rate)]
= $63,000 + [$10,000 × (1 − 0.30)] = $70,000

102. The times interest earned for Matti Company for Year 2 is closest to:
A) 6.3
B) 7.3
C) 9.0
D) 10.0

Solution:

= $100,000 ÷ $10,000 = 10.00
103. The book value per share for Matti Company as of December 31, Year 2 is closest to:
A) $18.00
B) $13.80
C) $28.00
D) $15.00

Solution:
Book value per share = Common stockholders' equity ÷

Number of common shares outstanding* = $375,000 ÷ 25,000 = $15.00

= $125,000 ÷ $5 = 25,000

Financial statements for Lardy Company appear below:
Lardy Company
Year 2 Year 1
Current assets:
Cash and marketable securities........................... $ 180 $ 180
Accounts receivable, net..................................... 220 190
Inventory............................................................. 170 180
Noncurrent assets:
Plant & equipment, net....................................... 1,830 1,820
Total assets............................................................. $2,430 $2,390
Bonds payable..................................................... 360 400
Total liabilities.................................................... 710 750
Stockholders’ equity:..............................................
Preferred stock, $20 par, 10%............................. 120 120
Common stock, $10 par...................................... 140 140
Retained earnings................................................ 1,300 1,220
Total stockholders’ equity...................................... 1,720 1,640

Lardy Company
Income Statement

Gross margin.......................................................... 620
Income taxes (30%)............................................... 102
Net income............................................................. $ 238
dividends. The market price of a share of common stock on December 31, Year 2 was $210.
104. Lardy Company's earnings per share of common stock for Year 2 was closest to:
A) $16.14
B) $24.29
C) $17.00
D) $3.65

Solution:

Average number of common shares outstanding*
= ($238 − $12) ÷ 14 = $16.14

= $140 ÷ $10 =14

105. Lardy Company's price-earnings ratio on December 31, Year 2 was closest to:
A) 8.65
B) 13.01
C) 57.61
D) 12.35

Solution:

= ($238 − $12) ÷ 14 = $16.14

= $140 ÷ $10 =14

= $210 ÷ $16.14 = 13.01
106. Lardy Company's dividend payout ratio for Year 2 was closest to:
A) 38.4%
B) 23.5%
C) 66.4%
D) 64.6%


Solution:

= ($238 − $12) ÷ 14 = $16.14

= $140 ÷ $10 =14

= $10.43 ÷ $16.14 = 64.6%

= $146 ÷ 14 = $10.43
107. Lardy Company's dividend yield ratio on December 31, Year 2 was closest to:
A) 5.4%
B) 1.2%
C) 5.0%
D) 4.6%

Solution:

= ($238 − $12) ÷ 14 = $16.14

= $140 ÷ $10 =14

= $10.43 ÷ $16.14 = 64.6%

= $146 ÷ 14 = $10.43
= $10.43 ÷ $210 = 5.0%

108. Lardy Company's return on total assets for Year 2 was closest to:
A) 11.0%
B) 8.7%
C) 9.9%
D) 10.4%

Solution:

= $266 ÷ $2,410 = 11.0%

= $238 + 40 x (1 − .30) = $266
109. Lardy Company's return on common stockholders' equity for Year 2 was closest to:
A) 14.5%
B) 15.3%
C) 13.5%
D) 14.2%

Solution:

Average common stockholders' equity* = ($238 − $12) ÷ $1,560 = 14.5%

110. Lardy Company's book value per share at the end of Year 2 was closest to:
A) $21.43
B) $114.29
C) $10.00
D) $122.86

Solution:

Number of common shares outstanding* = $1,600 ÷ 14 = $114.29

= $140 ÷ $10 = 14
Information concerning the common stock of Hopkins Company follows:
Market price per share on December 31.... $36.00

Book value per share on December 31...... $27.00
Earnings per share for the year.................. $4.50
Par value per share..................................... $10.00
Dividend per share for the year.................. $1.80
111. Hopkins Company's dividend payout ratio is:

A) 60%
B) 40%
C) 5%
D) 18%

Solution:

= $1.80 ÷ $4.50 = 40%

112. Hopkins Company's price-earnings ratio is:

A) 8.0
B) 6.67
C) 6.0
D) 20.0

Solution:
Price-earnings ratio = Market price per share ÷ Earnings per share= $36.00 ÷ $4.50 =
8.0
113. Hopkins Company's dividend yield ratio is:

A) 18%
B) 12.5%
C) 6%
D) 5%

Solution:
= $1.80 ÷ $36.00 = 5%

Erichsen Corporation's most recent balance sheet and income statement appear below:

Year 2 Year 1
Assets
Current assets:
Cash.................................................................... $ 120 $ 150
Inventory............................................................. 220 200
Total assets............................................................. $1,380 $1,370

Bonds payable........................................................ 250 300

Income Statement
Gross margin.......................................................... 520
Income taxes (30%)............................................... 58
Net income............................................................. $ 135
per share.
A) $0.68
B) $0.65
C) $1.13
D) $0.97

Solution:

= ($135 − $5) ÷ 200 = $0.65

= $200 ÷ $1 = 200


A) 11.39
B) 16.25
C) 17.00
D) 9.78

Solution:

= ($135 − $5) ÷ 200 = $0.65

= $200 ÷ $1 = 200

= $11.05 ÷ $0.65 = 17.00

A) 61.5%
B) 769.2%
C) 59.3%
D) 65.4%

Solution:

= ($135 − $5) ÷ 200 = $0.65

= $200 ÷ $1 = 200
Dividend payout ratio = Dividends per share** ÷ Earnings per share

= $0.40 ÷ $0.65 = 61.5%
**Dividends per share = Common dividends ÷ Common shares

= $80 ÷ 200 = $0.40


A) 94.12%
B) 3.85%
C) 3.62%
D) 0.23%

Solution:

= ($135 − $5) ÷ 200 = $0.65

= $200 ÷ $1 = 200
Dividend payout ratio = Dividends per share** ÷ Earnings per share

= $0.40 ÷ $0.65 = 61.5%
**Dividends per share = Common dividends ÷ Common shares

= $80 ÷ 200 = $0.40
= $0.40 ÷ $11.05 = 3.62%

A) 11.50%
B) 9.78%
C) 11.46%
D) 9.82%


Solution:

= $158.10 ÷ $1,375 = 11.50%

= $135 + 33 x (1 − 0.30) = $158.10
A) 14.75%
B) 14.21%
C) 16.56%
D) 15.95%

Solution:

Average common stockholders' equity* = ($135 − $5) ÷ $815 = 15.95%
A) $4.70
B) $4.20
C) $0.65
D) $6.90

Solution:

Number of common shares outstanding* = $840 ÷ 200 = $4.20

= $200 ÷ $1 = 200

Excerpts from Jameel Corporation's most recent balance sheet and income statement appear
below:
Year 2 Year 1
Total assets............................................................. $1,540 $1,530
Total liabilities........................................................ $470 $490
Preferred stock, $100 par value, 5%................... $ 100 $ 100
Total stockholders’ equity...................................... $1,070 $1,040
Sales (all on account) $1,290

Cost of goods sold 790
Gross margin 500
Selling and administrative expense 334
Net operating income 166
Interest expense 30
Net income before taxes 136
Income taxes (30%) 41
Net income $ 95
per share.

A) $0.48
B) $0.68
C) $0.45
D) $0.83

Solution:

= ($95 − $5) ÷ 200 = $0.45

= $200 ÷ $1 = 200

A) 5.69
B) 8.60
C) 4.66
D) 8.06

Solution:

= ($95 − $5) ÷ 200 = $0.45

= $200 ÷ $1 = 200
Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $3.87 ÷ $0.45 = 8.60


A) 1111.1%
B) 63.2%
C) 66.7%
D) 72.2%

Solution:
Number of common shares outstanding = Common stock ÷ Par value

= $200 ÷ $1 = 200
Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)
= $0.30 ÷ $0.45 = 66.7%

= $60 ÷ 200 = $0.30

A) 92.31%
B) 7.75%
C) 0.65%
D) 8.40%

Solution:
Number of common shares outstanding = Common stock ÷ Par value

= $200 ÷ $1 = 200

= $60 ÷ 200 = $0.30
Dividend yield ratio = Dividends per share* ÷ Market price per share
= $0.30 ÷ $3.87 = 7.75%


A) 6.17%
B) 7.53%
C) 6.19%
D) 7.56%

Solution:

= $116 ÷ $1,535 = 7.56%

= $95 + [$30 × (1 − 0.30)] = $116
A) 9.42%
B) 8.53%
C) 9.00%
D) 9.95%

Solution:

Average common stockholders' equity* = ($95 − $5) ÷ $955 = 9.42%

A) $5.35
B) $4.85
C) $0.45
D) $7.70

Solution:

Number of common shares outstanding* = $970 ÷ 200 = $4.85

= $200 ÷ $1 = 200

Financial statements for Spencer Company appear below:
Spencer Company
Balance Sheet
December 31
Cash........................................................................ $ 200,000
Accounts receivable............................................... 240,000
Inventories.............................................................. 340,000
Prepaid expenses.................................................... 20,000
Plant and equipment (net)...................................... 400,000
Total assets............................................................. $1,200,000
Accounts payable................................................... $ 300,000

Taxes payable......................................................... 90,000
Interest payable...................................................... 10,000
Long-term bonds payable...................................... 200,000
Common stock $(14 par)....................................... 280,000
Retained earnings................................................... 320,000
Total liabilities & stockholders’ equities................ $1,200,000
Spencer Company
Income Statement
For the Year Ended December 31
Sales (all on account)............................................. $1,800,000

Cost of goods sold.................................................. 1,120,000
Gross margin.......................................................... 680,000
Selling and administrative expenses...................... 520,000
Net operating income............................................. 160,000
Interest expense...................................................... 20,000
Net income before taxes......................................... 140,000
Income taxes (30%)............................................... 42,000
Net income............................................................. $ 98,000

128. At December 31, Spencer Company's current ratio was closest to:
A) 1.10
B) 1.33
C) 2.00
D) 2.67

Solution:
Current ratio = Current assets ÷ Current liabilities

= ($1,200,000 − $400,000) ÷ ($300,000 + $90,000 + $10,000) = 2.00
129. At December 31, Spencer Company's acid-test ratio was closest to:
A) 1.10
B) 0.50
C) 0.90
D) 1.15

Solution:

notes receivable = $200,000 + $240,000 = $440,000
130. Suppose that the Inventory account had a balance of $300,000 at the beginning of the
year. Spencer Company's inventory turnover for the year was closest to:
A) 3.50
B) 6.00
C) 5.63
D) 3.23


Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,120,000 ÷

$320,000 = 3.50
131. Suppose that the balance of Accounts Receivable remained unchanged between the
beginning and end of the year. Spencer Company's average collection period for the
year was closest to:
A) 27 days
B) 28 days
C) 49 days
D) 75 days

Solution:

$1,800,000 ÷ $240,000 = 7.5

= 365 ÷ 7.5 = 49
132. Spencer Company's debt-to-equity ratio on December 31 was closest to:

A) 0.333
B) 0.500
C) 1.000
D) 0.375

Solution:

= ($300,000 + $90,000 + $10,000 + $200,000) ÷ ($280,000 + $320,000) = 1.000

Financial statements for Marbet Company appear below:
Marbet Company
Year 2 Year 1
Current assets:
Inventory............................................................. 110 130
Noncurrent assets:
Total assets............................................................. $2,400 $2,360
Bonds payable..................................................... 500 500
Total liabilities.................................................... 900 900
Preferred stock, $10 par, 8%............................... 120 120
Common stock, $5 par........................................ 200 200

Marbet Company
Income Statement

Gross margin.......................................................... 480
Income taxes (30%)............................................... 72
Net income............................................................. $ 168
133. Marbet Company's working capital (in thousands of dollars) at the end of Year 2 was
closest to:
A) $90
B) $1,500
C) $490
D) $600

Solution:
Working capital = Current assets − Current liabilities = $490 − $400 = $90
134. Marbet Company's current ratio at the end of Year 2 was closest to:
A) 0.37
B) 1.20
C) 1.23
D) 0.44

Solution:

135. Marbet Company's acid-test ratio at the end of Year 2 was closest to:
A) 0.85
B) 2.27
C) 0.31
D) 0.44

Solution:

notes receivable = $160 + $180 = $340
136. Marbet Company's accounts receivable turnover for Year 2 was closest to:
A) 9.3
B) 13.3
C) 6.6
D) 9.4

Solution:

$1,600 ÷ $170 = 9.4

137. Marbet Company's average collection period for Year 2 was closest to:
A) 27.4 days
B) 39.1 days
C) 55.4 days
D) 38.8 days

Solution:

$1,600 ÷ $170 = 9.4

= 365 ÷ 9.4 = 38.8 days
138. Marbet Company's inventory turnover for Year 2 was closest to:
A) 13.3
B) 6.6
C) 9.4
D) 9.3

Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,120 ÷ $120 = 9.3

139. Marbet Company's average sale period for Year 2 was closest to:
A) 38.8 days
B) 55.4 days
C) 39.1 days
D) 27.4 days

Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,120 ÷ $120 = 9.3
Average sale period = 365 days ÷ Inventory turnover = 365 ÷ 9.3

= 39.1 days
Selected financial data for Drew Company appear below:
Drew Company
Selected Financial Data
As of December 31
Year 2 Year 1
Cash........................................................................ $75,000 $35,000
Accounts receivable (net)...................................... $225,000 $200,000
Inventory................................................................ $270,000 $210,000
Short-term marketable securities........................... $40,000 $20,000
Land and building (net).......................................... $500,000 $500,000
Mortgage payable-current portion......................... $30,000 $25,000
Accounts payable and accrued liabilities............... $120,000 $110,000
Short-term notes payable....................................... $50,000 $70,000
Year Ended December 31

Year 2 Year 1
Sales (all on credit)................................................ $1,500,000 $1,300,000
Cost of goods sold.................................................. $900,000 $800,000

140. Drew Company's acid-test ratio as of December 31, Year 2, was closest to:
A) 3.6
B) 3.1
C) 2.0
D) 1.7

Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities

= $340,000 ÷ ($30,000 + $120,000 + $50,000) = 1.7

141. Drew Company's average sale period for Year 2 was closest to:
A) 97 days
B) 34 days
C) 58 days
D) 219 days

Solution:

= $900,000 ÷ $240,000 = 3.75
Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 3.75 = 97 days

142. Drew Company's average collection period for Year 2 was closest to:
A) 86 days
B) 52 days
C) 55 days
D) 304 days

Solution:

$1,500,000 ÷ $212,500 = 7.06
Average collection period = 365 days ÷ Accounts receivable turnover = 365 days ÷
7.06 = 52 days

Rosenfield Corporation's most recent balance sheet and income statement appear below:

Current assets:
Cash.................................................................... $ 10 $ 130
Inventory............................................................. 140 120
Total assets............................................................. $1,210 $1,230

Bonds payable........................................................ 70 110

Income Statement
Gross margin.......................................................... 410
Income taxes (30%)............................................... 54
Net income............................................................. $ 125

A) $320 thousand
B) $860 thousand
C) $890 thousand
D) $40 thousand

Solution:
Working capital = Current assets − Current liabilities = $320 thousand − $280

thousand = $40 thousand

A) 1.09
B) 1.14
C) 0.26
D) 0.29

Solution:


A) 0.91
B) 1.14
C) 0.57
D) 0.64

Solution:


A) 1.15
B) 8.53
C) 0.87
D) 9.14

Solution:

$1,280 ÷ $140 = 9.14

A) 1.2 days
B) 39.9 days
C) 0.9 days
D) 42.8 days


Solution:

$1,280 ÷ $140 = 9.14

= 365 days ÷ 9.14 = 39.9 days

A) 0.86
B) 6.21
C) 6.69
D) 1.17

Solution:

= $870 ÷ $130 = 6.69

A) 248.1 days
B) 54.6 days
C) 58.8 days
D) 39.9 days

Solution:

= $870 ÷ $130 = 6.69

= 365 days ÷ 6.69 = 54.6 days

Excerpts from Debnam Corporation's most recent balance sheet appear below:
Year 2 Year 1
Current assets:
Cash............................................ $150 $150
Accounts receivable.................... 130 110
Inventory..................................... 160 150
Prepaid expenses......................... 90 90
Total current assets......................... $530 $500
Total current liabilities................... $200 $210
Sales on account in Year 2 amounted to $1,170 and the cost of goods sold was $700.

A) $330 thousand
B) $530 thousand
C) $1,030 thousand
D) $860 thousand

Solution:


A) 0.38
B) 0.26
C) 2.65
D) 0.68

Solution:


A) 1.40
B) 1.85
C) 1.47
D) 2.65

Solution:


A) 9.00
B) 0.85
C) 1.18
D) 9.75

Solution:

$1,170 ÷ $120 = 9.75

A) 0.8 days
B) 37.4 days
C) 1.2 days
D) 40.6 days


Solution:

$1,170 ÷ $120 = 9.75
= 365 days ÷ 9.75 = 37.4 days

A) 1.07
B) 0.94
C) 4.38
D) 4.52

Solution:

A) 80.8 days
B) 49.9 days
C) 83.3 days
D) 218.4 days

Solution:
= 365 days ÷ 4.52 = 80.8 days

Excerpts from Jordison Corporation's most recent balance sheet appear below:
Year 2 Year 1
Current assets:
Cash............................................ $200 $160
Inventory..................................... 170 150

A) $320 thousand
B) $840 thousand
C) $1,000 thousand
D) $610 thousand

Solution:


A) 2.10
B) 0.42
C) 0.31
D) 0.74

Solution:


A) 1.36
B) 2.10
C) 1.24
D) 1.52

Solution:


A) 1.07
B) 0.94
C) 8.00
D) 7.75

Solution:

$1,240 ÷ $155 = 8.00

A) 1.13
B) 4.56
C) 4.29
D) 0.88

Solution:

Data from Carrel Corporation's most recent balance sheet appear below:
Year 2 Year 1
Current assets:
Cash............................................ $100 $160
Inventory..................................... 120 110

A) $930 thousand
B) $310 thousand
C) $950 thousand
D) $560 thousand

Solution:


A) 0.38
B) 0.96
C) 2.24
D) 0.36

Solution:


A) 1.40
B) 2.24
C) 1.76
D) 1.04

Solution:


A) 69.7 days
B) 0.8 days
C) 1.2 days
D) 63.4 days

Solution:

= 365 days ÷ 5.24 = 69.7 days
*Accounts receivable turnover = Net credit sales ÷ Average accounts receivable
= $1,440 ÷ [($300 + $250) ÷ 2] = 5.24


A) 30.4 days
B) 47.2 days
C) 49.2 days
D) 225.6 days

Solution:

= 365 days ÷ 7.73 = 47.2 days

Financial statements for Narasaki Company appear below:
Narasaki Company
Year 2 Year 1
Current assets:
Inventory............................................................. 130 130
Noncurrent assets:
Total assets............................................................. $1,930 $1,860
Bonds payable..................................................... 510 500
Common stock, $2 par........................................ 160 160

Narasaki Company
Income Statement
Gross margin.......................................................... 890
Income taxes (30%)............................................... 147
Net income............................................................. $ 343
167. Narasaki Company's times interest earned for Year 2 was closest to:
A) 17.8
B) 10.8
C) 9.8
D) 6.9

Solution:

= $540 ÷ $50 = 10.8
168. Narasaki Company's debt-to-equity ratio at the end of Year 2 was closest to:
A) 0.48
B) 0.34
C) 1.55
D) 0.82

Solution:

= $870 ÷ $1,060 = 0.82

Parmeter Corporation's most recent balance sheet and income statement appear below:

Year 2 Year 1
Assets
Current assets:
Cash................................................................. $ 80 $ 140
Accounts receivable......................................... 120 110
Inventory.......................................................... 130 110
Prepaid expenses.............................................. 100 90
Total current assets.............................................. 430 450
Plant and equipment, net..................................... 670 730
Total assets.......................................................... $1,100 $1,180

Accounts payable............................................. $ 170 $ 190
Accrued liabilities............................................ 40 50
Notes payable, short term................................ 80 90
Total current liabilities........................................ 290 330
Bonds payable..................................................... 70 120
Total liabilities..................................................... 360 450
Stockholders’ equity:...........................................
Preferred stock, $100 par value, 5%................ 100 100
Common stock, $2 par value........................... 200 200
Additional paid-in capital–common stock....... 120 120
Retained earnings............................................. 320 310
Total stockholders’ equity................................... 740 730
Total liabilities & stockholders’ equity............... $1,100 $1,180

Income Statement
Sales (all on account).......................................... $1,270
Cost of goods sold............................................... 790
Gross margin....................................................... 480
Selling and administrative expense..................... 369
Net operating income.......................................... 111
Interest expense................................................... 18
Net income before taxes...................................... 93
Income taxes (30%)............................................ 28
Net income.......................................................... $ 65

A) 5.17
B) 8.81
C) 6.17
D) 3.61

Solution:

= $111 ÷ $18 = 6.17

A) 0.20
B) 0.56
C) 0.09
D) 0.49

Solution:

= $360 ÷ $740 = 0.49

Data from Pruette Corporation's most recent balance sheet and the company's income
statement appear below:
Year 2 Year 1
Total assets..................................... $1,260 $1,230
Total liabilities................................ $580 $560
Total stockholders’ equity.............. $680 $670
Income Statement
Gross margin..........................................................
410
Interest expense......................................................30
Income taxes (30%)...............................................30
Net income.............................................................
$ 70

A) 6.19
B) 3.33
C) 4.33
D) 2.33

Solution:

= $130 ÷ $30 = 4.33


A) 0.34
B) 0.85
C) 1.21
D) 0.43

Solution:

= $580 ÷ $680 = 0.85

Essay Questions
173. Espinola Corporation's most recent balance sheet and income statement appear below:

Year 2 Year 1
Assets
Current assets:
Cash................................................................... $ 320 $ 180
Accounts receivable.......................................... 220 240
Inventory........................................................... 140 130
Prepaid expenses............................................... 20 20
Total current assets............................................... 700 570
Plant and equipment, net...................................... 860 920
Total assets............................................................ $1,560 $1,490

Accounts payable.............................................. $ 200 $ 170
Accrued liabilities.............................................. 80 80
Notes payable, short term.................................. 40 40
Total current liabilities.......................................... 320 290
Bonds payable...................................................... 210 220
Total liabilities...................................................... 530 510
Preferred stock, $100 par value, 5%.................. 100 100
Common stock, $1 par value............................. 100 100
Additional paid-in capital–common stock........ 150 150
Retained earnings.............................................. 680 630
Total stockholders’ equity..................................... 1,030 980
Total liabilities & stockholders’ equity................. $1,560 $1,490

Income Statement
Sales (all on account)............................................ $1,220
Cost of goods sold................................................ 790
Gross margin........................................................ 430
Selling and administrative expense...................... 268
Net operating income........................................... 162
Interest expense.................................................... 26
Net income before taxes....................................... 136
Income taxes (30%).............................................. 41
Net income............................................................ $ 95
Dividends on common stock during Year 2 totaled $40 thousand. Dividends on

preferred stock totaled $5 thousand. The market price of common stock at the end of
Year 2 was $12.87 per share.
Required:
Compute the following for Year 2:

a. Gross margin percentage.
b. Earnings per share (of common stock).
c. Price-earnings ratio.
d. Dividend payout ratio.
e. Dividend yield ratio.
f. Return on total assets.
g. Return on common stockholders' equity.
h. Book value per share.
i. Working capital.
j. Current ratio.
k. Acid-test ratio.
l. Accounts receivable turnover.
m. Average collection period.
n. Inventory turnover.
o. Average sale period.
p. Times interest earned.
q. Debt-to-equity ratio.

Ans:
a. Gross margin percentage = Gross margin ÷ Sales = $430 ÷ $1,220 = 35.2%
b. Earnings per share = (Net Income − Preferred Dividends)

*Number of common shares outstanding
= Common stock ÷ Par value = $100 ÷ $1 per share = 100 shares
c. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $12.87 ÷ $0.90 = 14.3
d. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see
above)
= $0.40 ÷ $0.90 = 44.4%
*Dividends per share = Common dividends ÷ Common shares (see above)
= $40 ÷ 100 shares = $0.40 per share
e. Dividend yield ratio = Dividends per share (see above) ÷ Market price per
share
= $0.40 ÷ $12.87 = 3.11%
f. Return on total assets = Adjusted net income* ÷ Average total assets**

= $113.2 ÷ $1,525 = 7.42%
= Net income + [Interest expense × (1−Tax rate)]
= $95 + 26 × (1-0.30) = $113.2
g. Return on common stockholders' equity = (Net income − Preferred dividends)

= ($95 − $5) ÷ $905 = 9.94%
h. Book value per share = Common stockholders' equity ÷ Number of common

shares outstanding* = $930 ÷ 100 shares = $9.30 per share
i. Working capital = Current assets − Current liabilities = $700 - $320 = $380

j. Current ratio = Current assets ÷ Current liabilities = $700 ÷ $320 = 2.19
k. Acid-test ratio = Quick assets* ÷ Current liabilities = $540 ÷ $320 = 1.69

*Quick assets = Cash + Marketable securities + Accounts receivable + Short-
term notes receivable = $320 + $0 + $220 = $540
l. Accounts receivable turnover = Sales on account ÷ Average accounts

receivable* = $1,220 ÷ $230 = 5.30
m. Average collection period = 365 days ÷ Accounts receivable turnover (see

above) = 365 days ÷ 5.30 = 68.9 days
n. Inventory turnover = Cost of goods sold ÷ Average inventory*

= $790 ÷ $135 = 5.85
o. Average sale period = 365 days ÷ Inventory turnover (see above)

= 365 days ÷ 5.85 = 62.4 days
p. Times interest earned = Net operating income ÷ Interest expense

= $162 ÷ $26 = 6.23
q. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity

= $530 ÷ $1,030 = 0.51
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

LO: 1,2,3,4 Level: Medium

174. Slaubaugh Corporation's most recent balance sheet and income statement appear
below:
Year 2 Year 1
Assets
Current assets:
Cash.................................................................... $ 100 $ 140
Inventory............................................................. 210 190
Total assets............................................................. $1,370 $1,380

Bonds payable........................................................ 70 100
Preferred stock, $100 par value, 10%................. 200 200

Income Statement
Gross margin.......................................................... 530
Income taxes (30%)............................................... 34
Net income............................................................. $ 80

Required:

a. Gross margin percentage.
b. Earnings per share (of common stock).
c. Price-earnings ratio.
d. Dividend payout ratio.
e. Dividend yield ratio.
f. Return on total assets.
g. Return on common stockholders' equity.
h. Book value per share.
Ans:
a. Gross margin percentage = Gross margin ÷ Sales = $530 ÷ $1,350 = 39.3%
b. Earnings per share = (Net Income - Preferred Dividends)

*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷
$1 per share = 200 shares
c. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $2.88 ÷ $0.30 = 9.6

d. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see
above)
= $0.10 ÷ $0.30 = 33.3%
= $20 ÷ 200 shares = $0.10 per share
e. Dividend yield ratio = Dividends per share (see above) ÷ Market price per
share
= $0.10 ÷ $2.88 = 3.47%
f. Return on total assets = Adjusted net income* ÷ Average total assets**

= $91.9 ÷ $1,375 = 6.68%
*Adjusted net income = Net income + [Interest expense × (1−Tax rate)]
= $80 + 17 × (1−0.30) = $91.9
g. Return on common stockholders' equity = (Net income − Preferred dividends)

= ($80 − $20) ÷ $760 = 7.89%
h. Book value per share = Common stockholders' equity

÷ Number of common shares outstanding*
= $780 ÷ 200 shares = $3.90 per share

LO: 1,2 Level: Medium

175. Philo Corporation's most recent income statement appears below:

Gross margin.............................................. 236,000
Income taxes.............................................. 30,000
Net income................................................. $ 65,000
Required:
Compute the gross margin percentage.
Ans:
Gross margin percentage = Gross margin ÷ Sales = $236,000 ÷ $561,000 = 42.1%

LO: 1 Level: Easy

176. Financial statements for Pratt Company appear below:
Pratt Company
Year 2 Year 1
Current assets:
Inventory............................................................. 150 150
Noncurrent assets:
Total assets............................................................. $2,040 $1,960
Bonds payable..................................................... 300 300
Common stock, $5 par........................................ 180 180

Pratt Company
Income Statement
Gross margin.......................................................... 600
Income taxes (30%)............................................... 99
Net income............................................................. $ 231
dividends. The market price of a share of common stock on December 31, Year 2 was
$80.
Required:

a. Earnings per share of common stock.
b. Price-earnings ratio.
c. Dividend payout ratio.
d. Dividend yield ratio.
e. Return on total assets.
f. Return on common stockholders' equity.
g. Book value per share.
h. Working capital.
i. Current ratio.
j. Acid-test ratio.
k. Accounts receivable turnover.
l. Average collection period.
m. Inventory turnover.
n. Average sale period.
o. Times interest earned.
p. Debt-to-equity ratio.

Ans:
a. Earnings per share = (Net Income − Preferred Dividends) ÷

= ($231 − $12) ÷ 36 = $6.08

= $180 ÷ $5 = 36
b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $80 ÷ $6.08 = 13.2
c. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see
above)
= $3.03 ÷ $6.08 = 49.8%
*Dividends per share = Common dividends ÷ Common shares**

= $109 ÷ 36 = $3.03
**See above
d. Dividend yield ratio = Dividends per share* ÷ Market price per share
= $3.03 ÷ $80.00 = 3.78% *See above
e. Return on total assets = Adjusted net income* ÷ Average total assets**

= $252 ÷ $2,000 = 12.60%

= $231 + 30 × (1 − 0.30) = $252
f. Return on common stockholders' equity = (Net income − Preferred dividends)

÷
g. Book value per share = Common stockholders' equity ÷

Number of common shares outstanding* = $1,180 ÷ 36 = $32.78

= $180 ÷ $5 = 36

h. Working capital = Current assets − Current liabilities = $550 − $440 = $110
i. Current ratio = Current assets ÷ Current liabilities = $550 ÷ $440 = 1.25
j. Acid-test ratio = Quick assets* ÷ Current liabilities = $330 ÷ $440 = 0.75

term notes receivable = $140 + $190 = $330
k. Accounts receivable turnover = Sales on account ÷ Average accounts

receivable* = $2,000 ÷ $185 = 10.81
l. Average collection period = 365 days ÷ Accounts receivable turnover*

= 365 ÷ 10.81 = 33.8 days *See above
m. Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,400 ÷

$150 = 9.33
n. Average sale period = 365 days ÷ Inventory turnover* = 365 ÷9.33

= 39.1 days *See above
o. Times interest earned = Net operating income ÷ Interest expense

= $360 ÷ $30 = 12.00
p. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $740 ÷ $1,300

= 0.57

LO: 2,3,4 Level: Medium

177. Financial statements for Qadri Company appear below:
Qadri Company
Year 2 Year 1
Current assets:
Inventory............................................................. 160 180
Noncurrent assets:
Total assets............................................................. $2,190 $2,180
Bonds payable..................................................... 280 300
Common stock, $10 par...................................... 220 220
Retained earnings................................................ 1,190 1,080

Qadri Company
Income Statement
Gross margin.......................................................... 690
Income taxes (30%)............................................... 117
Net income............................................................. $ 273
dividends. The market price of a share of common stock on December 31, Year 2 was
$150.
Required:

a. Earnings per share of common stock.
c. Dividend yield ratio.
d. Return on total assets.
e. Return on common stockholders' equity.
f. Book value per share.
Ans:
a. Earnings per share = (Net Income − Preferred Dividends) ÷


= $220 ÷ $10 = 22
= $150 ÷ $12.14 = 12.4

c. Dividend yield ratio = Dividends per share* ÷ Market price per share
= $7.14 ÷ $150.00 = 4.76%
*Dividends per share = Common dividends ÷ Common shares**

= $157 ÷ 22 = $7.14
**See above
d. Return on total assets = Adjusted net income* ÷ Average total assets**

= $294 ÷ $2,185 = 13.46%

= $273 + 30 × (1 − 0.30) = $294
e. Return on common stockholders' equity = (Net income − Preferred dividends)

÷
f. Book value per share = Common stockholders' equity ÷ Number of common

shares outstanding* = $1,520 ÷ 22 = $69.09

= $220 ÷ $10 = 22

LO: 2 Level: Medium

178. Maranville Corporation's most recent balance sheet and income statement appear
below:
Year 2 Year 1
Assets
Current assets:
Cash.................................................................... $ 170 $ 180
Inventory............................................................. 170 160
Total assets............................................................. $1,410 $1,410

Bonds payable........................................................ 90 100
Preferred stock, $100 par value, 10%................. 200 200

Income Statement
Gross margin.......................................................... 550
Income taxes (30%)............................................... 26
Net income............................................................. $ 60

Required:

a. Earnings per share (of common stock).
Ans:
a. Earnings per share = (Net Income − Preferred Dividends)

= $2.36 ÷ $0.20 = 11.8

above)
= $0.10 ÷ $0.20 = 50.0%
= $20 ÷ 200 shares = $0.10 per share
d. Dividend yield ratio = Dividends per share (see above) ÷ Market price per
share = $0.10 ÷ $2.36 = 4.24%

= $70.5 ÷ $1,410 = 5.00%
= Net income + [Interest expense × (1−Tax rate)]
= $60 + 15 × (1 − 0.30) = $70.5
f. Return on common stockholders' equity

= (Net income − Preferred dividends) ÷ Average common stockholders' equity*
= ($60 − $20) ÷ $870 = 4.60%
g. Book value per share = Common stockholders' equity

÷ Number of common shares outstanding* = $880 ÷ 200 shares = $4.40 per
share

LO: 2 Level: Medium

179. Isidro Corporation has provided the following financial data (in thousands of dollars):
Year 2 Year 1
Total assets............................................................. $1,520 $1,490
Preferred stock, $100 par value, 5%................... $200 $200
Common stock, $2 par value.............................. $400 $400
Additional paid-in capital–common stock.......... $160 $160
Retained earnings................................................ $380 $320
Net income for Year 2 was $110 thousand. Interest expense was $21 thousand. The tax
rate was 30%. Dividends on common stock during Year 2 totaled $40 thousand.
Dividends on preferred stock totaled $10 thousand. The market price of common stock
at the end of Year 2 was $9.15 per share.
Required:

a. Earnings per share (of common stock).
Ans:
a. Earnings per share = (Net Income − Preferred Dividends)

= $9.15 ÷ $0.50 = 18.3
above)
= $0.20 ÷ $0.50 = 40.0%
= $40 ÷ 200 shares = $0.20 per share

d. Dividend yield ratio = Dividends per share (see above) ÷ Market price per
share = $0.20 ÷ $9.15 = 2.19%

= $124.7 ÷ $1,505 = 8.29%
= $110 + 21 × (1 − 0.30) = $124.7
f. Return on common stockholders' equity = (Net income − Preferred dividends)

÷ Average common stockholders' equity* = ($110 − $10) ÷ $910 = 10.99%
g. Book value per share = Common stockholders' equity

÷ Number of common shares outstanding*
= $940 ÷ 200 shares = $4.70 per share

LO: 2 Level: Easy
180. Mikolajczyk Corporation's net income for the most recent year was $1,379,000. A
total of 100,000 shares of common stock and 200,000 shares of preferred stock were
outstanding throughout the year. Dividends on common stock were $1.15 per share
and dividends on preferred stock were $1.30 per share.
Required:
Compute the earnings per share of common stock. Show your work!
Ans:

= ($1,379,000 − $260,000) ÷ 100,000 shares = $11.19 per share

LO: 2 Level: Easy

181. Hoa Corporation's net income last year was $7,460,000. The dividend on common
stock were outstanding.
Required:
Compute the price-earnings ratio. Show your work!
Ans:

= $78.90 ÷ $14.06 = 5.61
*Earnings per share
= (Net Income - Preferred Dividends) ÷ Average number of common shares
outstanding = ($7,460,000 - $430,000) ÷ 500,000 shares = $14.06 per share

LO: 2 Level: Easy
182. Dupas Corporation's net income last year was $7,330,000. The dividend on common
stock were outstanding.
Required:
Compute the dividend payout ratio. Show your work!
Ans:
Dividend payout ratio = Dividends per share ÷ Earnings per share*

= $12.70 ÷ $13.98 = 0.91
*Earnings per share = (Net Income − Preferred Dividends)
= ($7,330,000 − $340,000) ÷ 500,000 shares = $13.98 per share

LO: 2 Level: Easy

183. Last year, Sheline Corporation's dividend on common stock was $13.00 per share and
the dividend on preferred stock was $2.10 per share. The market price of common
stock at the end of the year was $68.60 per share.
Required:
Compute the dividend yield ratio. Show your work!
Ans:
= $13.00 ÷ $68.60 = 0.19

LO: 2 Level: Easy
184. Allaman Corporation's most recent income statement appears below:

Gross margin.............................................. 310,000
Income taxes (30%)................................... 51,000
Net income................................................. $119,000
The beginning balance of total assets was $930,000 and the ending balance was
$970,000.
Required:
Compute the return on total assets. Show your work!

Ans:

= $147,000 ÷ $950,000 = 15.5%
= $119,000 + 40,000 × (1 − 0.30) = $147,000

LO: 2 Level: Easy
185. Excerpts from Orr Corporation's most recent balance sheet appear below:
Year 2 Year 1
Preferred stock....................................................... $ 200,000 $ 200,000
Common stock....................................................... 400,000 400,000
Additional paid-in capital–common stock............. 390,000 390,000
Retained earnings................................................... 420,000 350,000
Total stockholders’ equity...................................... $1,410,000 $1,340,000
Net income for Year 2 was $147,000. Dividends on common stock were $50,000 in
total and dividends on preferred stock were $27,000 in total.
Required:
Compute the return on common stockholders' equity. Show your work!
Ans:

÷ Average common stockholders' equity* = ($147,000 − $27,000) ÷ $1,175,000 =
10.2%
*Average common stockholders' equity = ($1,210,000 + $1,140,000) ÷ 2 = $1,175,000

LO: 2 Level: Easy

186. Data from Speir Corporation's most recent balance sheet appear below:
Preferred stock....................................................... $ 200,000

Common stock....................................................... 300,000
Additional paid-in capital–common stock............. 380,000
Retained earnings................................................... 490,000
Total stockholders’ equity...................................... $1,370,000
A total of 150,000 shares of common stock and 20,000 shares of preferred stock were
outstanding at the end of the year.
Required:
Compute the book value per share. Show your work!
Ans:
Book value per share = Common stockholders' equity ÷ Number of common shares
outstanding = $1,170,000 ÷ 150,000 shares = $7.80 per share

LO: 2 Level: Easy

187. Financial statements for Rarick Company appear below:
Rarick Company
Year 2 Year 1
Current assets:
Inventory............................................................. 100 100
Noncurrent assets:
Total assets............................................................. $2,240 $2,170
Bonds payable..................................................... 310 300
Preferred stock, $10 par, 10%............................. 100 100
Common stock, $5 par........................................ 240 240

Rarick Company
Income Statement
Gross margin.......................................................... 720
Income taxes (30%)............................................... 123
Net income............................................................. $ 287
Required:

a. Current ratio.
b. Acid-test ratio.
c. Average collection period.
d. Inventory turnover.
e. Times interest earned.
f. Debt-to-equity ratio.
Ans:
a. Current ratio = Current assets ÷ Current liabilities = $410 ÷ $430 = 0.95
b. Acid-test ratio = Quick assets* ÷ Current liabilities = $300 ÷ $430 = 0.70

term notes receivable = $120 + $180 = $300
c. Accounts receivable turnover = Sales on account ÷ Average accounts

receivable* = $2,400 ÷ $165 = 14.55

= 365 ÷ 14.55 = 25.1 days

d. Inventory turnover = Cost of goods sold ÷ Average inventory*

= $1,680 ÷ $100 = 16.80
e. Times interest earned = Net operating income ÷ Interest expense

= $440 ÷ $30 = 14.67
f. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity

= $740 ÷ $1,500 = 0.49

LO: 3,4 Level: Medium

188. Carleton Corporation's most recent balance sheet and income statement appear below:

Year 2 Year 1
Assets
Current assets:
Cash.................................................................... $ 30 $ 110
Inventory............................................................. 190 170
Total assets............................................................. $1,310 $1,350

Bonds payable........................................................ 190 240

Income Statement
Gross margin.......................................................... 490
Income taxes (30%)............................................... 19
Net income............................................................. $ 45
Required:

a. Working capital.
b. Current ratio.
c. Acid-test ratio.
d. Accounts receivable turnover.
e. Average collection period.
f. Inventory turnover.
g. Average sale period.
Ans:
a. Working capital = Current assets − Current liabilities = $500 thousand − $210

b. Current ratio = Current assets ÷ Current liabilities = $500 ÷ $210 = 2.38
c. Acid-test ratio = Quick assets* ÷ Current liabilities = $240 ÷ $210 = 1.14

d. Accounts receivable turnover = Sales on account ÷ Average accounts

receivable* = $1,260 ÷ $235 = 5.36
e. Average collection period = 365 days ÷ Accounts receivable turnover (see

above) = 365 days ÷ 5.36 = 68.1 days

f. Inventory turnover = Cost of goods sold ÷ Average inventory*

= $770 ÷ $180 = 4.28
g. Average sale period = 365 days ÷ Inventory turnover (see above)

= 365 days ÷ 4.28 = 85.3 days

LO: 3 Level: Medium
189. Excerpts from Beaty Corporation's most recent balance sheet (in thousands of dollars)
appear below:
Year 2 Year 1
Current assets:
Cash............................................ $ 70 $140
Inventory..................................... 150 140
Accounts payable........................ $150 $170
Accrued liabilities....................... 90 90
Notes payable, short term........... 80 80
Sales on account during the year totaled $1,320 thousand. Cost of goods sold was
$730 thousand.
Required:

a. Working capital.
b. Current ratio.
c. Acid-test ratio.
d. Accounts receivable turnover.
e. Average collection period.
f. Inventory turnover.
g. Average sale period.

Ans:
a. Working capital = Current assets − Current liabilities = $490 thousand − $320

b. Current ratio = Current assets ÷ Current liabilities = $490 ÷ $320 = 1.53
c. Acid-test ratio = Quick assets* ÷ Current liabilities = $320 ÷ $320 = 1.00

d. Accounts receivable turnover = Sales on account ÷ Average accounts

receivable* = $1,320 ÷ $265 = 4.98
e. Average collection period = 365 days ÷ Accounts receivable turnover (see

above) = 365 days ÷ 4.98 = 73.3 days
f. Inventory turnover = Cost of goods sold ÷ Average inventory* = $730 ÷ $145

= 5.03
g. Average sale period = 365 days ÷ Inventory turnover (see above)

= 365 days ÷ 5.03 = 72.6 days

LO: 3 Level: Easy
190. Romaine Corporation's total current assets are $300,000, its noncurrent assets are
$360,000, and its stockholders' equity is $240,000.
Required:
Compute the company's working capital. Show your work!
Ans:
Working capital = Current assets − Current liabilities = $300,000 − $270,000 =

$30,000

LO: 3 Level: Easy

191. Wayment Corporation's total current assets are $310,000, its noncurrent assets are
$460,000, and its stockholders' equity is $260,000.
Required:
Compute the company's current ratio. Show your work!
Ans:
Current ratio = Current assets ÷ Current liabilities = $310,000 ÷ $270,000 = 1.15

LO: 3 Level: Easy
192. Data from Furnia Corporation's most recent balance sheet appear below:
Cash.................................... $13,000
Marketable securities......... $21,000
Accounts receivables......... $32,000
Inventory............................ $52,000
Prepaid expenses................ $16,000
Current liabilities............... $118,000
Required:
Compute the company's acid-test ratio. Show your work!
Ans:

LO: 3 Level: Easy

193. Cozzolino Corporation has provided the following data:
This Year Last Year

Inventory............................ $141,000 $165,000
Sales on account................. $687,000
Required:
Compute the accounts receivable turnover for this year. Show your work!
Ans:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable*

= $687,000 ÷ $120,500 = 5.70

LO: 3 Level: Easy
194. Data from Ringwald Corporation's most recent balance sheet and income statement
appear below:
This Year Last Year

Inventory............................ $164,000 $173,000
Sales on account................. $727,000
Required:
Compute the average collection period for this year:

Ans:

= 365 days ÷ 6.58 = 55.5 days
*Accounts receivable turnover = Sales on account ÷ Average accounts receivable** =
$727,000 ÷ $110,500 = 6.58
**Average accounts receivable = ($118,000 + $103,000) ÷ 2 = $110,500

LO: 3 Level: Easy
195. Hsieh Corporation has provided the following data:
This Year Last Year

Inventory............................ $150,000 $157,000
Sales on account................. $879,000
Required:
Compute the inventory turnover for this year:
Ans:

= $575,000 ÷ $153,500 = 3.75

LO: 3 Level: Easy

196. Data from Buttler Corporation's most recent balance sheet and income statement
appear below:
This Year Last Year

Inventory............................ $151,000 $171,000
Sales on account................. $864,000
Required:
Compute the average sale period for this year:
Ans:

= 365 days ÷ 4.19 = 87.1 days
*Inventory turnover = Cost of goods sold ÷ Average inventory*
= $675,000 ÷ $161,000 = 4.19
**Average inventory = ($151,000 + $171,000) ÷ 2 = $161,000

LO: 3 Level: Easy

197. Erke Corporation's most recent balance sheet and income statement appear below:

Year 2 Year 1
Assets
Current assets:
Cash.................................................................... $ 130 $ 160
Inventory............................................................. 90 100
Total assets............................................................. $1,250 $1,230

Bonds payable........................................................ 130 150

Income Statement
Gross margin.......................................................... 440
Income taxes (30%)............................................... 19
Net income............................................................. $ 45
Required:

a. Times interest earned.
b. Debt-to-equity ratio.
Ans:
a. Times interest earned = Net operating income ÷ Interest expense

= $82 ÷ $18 = 4.56
b. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity

= $430 ÷ $820 = 0.52

LO: 4 Level: Medium
198. Froemming Corporation's net operating income last year was $193,000; its interest
expense was $22,000; its total stockholders' equity was $950,000; and its total
liabilities were $400,000.
Required:

a. Times interest earned.
b. Debt-to-equity ratio.

Ans:
a. Times interest earned = Net operating income ÷ Interest expense

= $193,000 ÷ $22,000 = 8.77
b. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity
= $400,000 ÷ $950,000 = 0.42

LO: 4 Level: Easy
199. Brandy Corporation has provided the following data from its most recent income
statement:
Net operating income..................... $51,000

Interest expense.............................. $37,000
Net income before taxes................. $14,000
Income taxes.................................. $4,000
Net income..................................... $10,000
Required:
Compute the times interest earned ratio. Show your work!
Ans:

= $51,000 ÷ $37,000 = 1.38

LO: 4 Level: Easy

200. Molony Corporation has provided the following data from its most recent balance
sheet:
Total assets..................................... $740,000

Total liabilities................................ $610,000
Total stockholders’ equity.............. $130,000
Required:
Compute the debt-to-equity ratio. Show your work!
Ans:

= $610,000 ÷ $130,000 = 4.69

LO: 4 Level: Easy

Chapter 16 "How Well Am I Doing?" - Financial Statement Analysis

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Chapter 16 "How Well Am I Doing?" - Financial Statement Analysis

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Chapter 16 “How Well Am I Doing?

”--Financial Statement Analysis

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

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking

Ans: False AACSB: Analytic AICPA BB: Critical Thinking

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking

Ans: True AACSB: Analytic AICPA BB: Critical Thinking

7. An increase in the number of shares of common stock outstanding will decrease a

Ans: False AACSB: Analytic AICPA BB: Critical Thinking

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 16-5

Ans: False AACSB: Analytic AICPA BB: Critical Thinking

9. When computing return on common stockholders' equity, retained earnings should be

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking

Ans: False AACSB: Analytic AICPA BB: Critical Thinking

Ans: True AACSB: Analytic AICPA BB: Critical Thinking

Ans: False AACSB: Analytic AICPA BB: Critical Thinking

Ans: False AACSB: Analytic AICPA BB: Critical Thinking

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

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking

16-6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking

Multiple Choice Questions

16. Common size financial statements help an analyst to:

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking

Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 16-7

Return on Total Assets Debt-to-Equity Ratio

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

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

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

16-8 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 16-9

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

16-10 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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

Sales (all on account)................................. $824,000

The gross margin percentage is closest to:

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

Gross margin percentage = Gross margin ÷ Sales = $347,000 ÷ $824,000 = 42.1%

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

Return on common stockholders' equity = (Net income − Preferred dividends)

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 16-11

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

Earnings per share = (Net Income − Preferred Dividends)

Price earnings ratio............ 15

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

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

16-12 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

Price-earnings ratio = Market price per share ÷ Earnings per share*

Ans: B AACSB: Analytic AICPA BB: Critical Thinking