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Exam 13: Analyzing Financial Statements

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Question 21

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Time series analysis is a comparison of information for a specific company over a period of time to determine changes in operations.

A) True
B) False

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Question 22

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The dividend yield ratio decreases when earnings per share increases.

A) True
B) False

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Question 23

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A higher current ratio is preferable for companies that do not have predictable cash flows.

Earnings per share (EPS) is affected by treasury stock transactions.

Which of the following transactions does not affect earnings per share?

The 2014 financial statements of Companies Y and Z showed the following: $\begin{array}{lcc}&\text { Company }\\\text { Item }&Y&Z\\\text { Net sales revenue } & \$ 150,000 & \$ 200,000 \\\text { Profit margin } & 6 \% & 5 \% \\\text { Total average assets } & \$ 40,000 & \$ 80,000 \\\text { Financial leverage percentage } & -5 \% & +6.5 \% \\\text { Interest expense (net of tax) } & \$ 1,000 & \$ 800\end{array}$ Required: Part A: For each company, calculate the items listed in the following tabulation. $\begin{array}{lcc}&\text { Company }\\\text { Item }&Y&Z\\1.\text { Net income } & \$ & \$ \\2.\text { Return on assets } & \% & \% \\3.\text { Return on equity } & \% & \% \\4.\text { Average stockholders' equity } & \$ & \$\end{array}$ Part B: Assuming both Company Y and Company Z are in the same industry, which company (Y or Z) appears to be the better investment and why?

Return on equity (ROE) provides insight with respect to a company's use of its assets.

The cash coverage ratio measures a firm's ability to pay its current liabilities with its cash flows from operating activities.

The price/earnings ratio is affected by the amount of risk that investors are willing to take.

Carolina Company computed the following ratios for a two-year period: $\begin{array}{lcc}\text { Ratio }&2013&2014\\1.\text { Current ratio } & 1.3 & .6 \\2.\text { Return on equity } & 25 \% & 16 \% \\3.\text { Quality of income } & 1.7 & .5 \\4.\text { Cash coverage ratio } & 346 & 122 \\5.\text { Profit margin } & 6 \% & 4 \%\end{array}$ Required: A. Comment on the trend of each of the ratios from 2013 to 2014. State concerns or possible implications brought to light by each ratio. B. State an overall opinion of the company's near future with suggestions for improvement.

The following financial data are available for Murphy Company: $\begin{array} { l r } \text { Operating income } & \$ 236,500 \\\text { Net income } & 196,300 \\\text { Earnings per share } & 2.45 \\\text { Dividends paid per share } & 1.25 \\\text { Average common stockholders' equity } & 985,000 \\\text { Average total assets } & 1,870,000 \\\text { Current market price per share } & 24.50 \\\text { Book value per share } & 12.30\end{array}$ Required: Calculate each of the following ratios. Round your answers to two decimal places. A. Return on equity B. Price/earnings ratio C. Dividend yield

A high price/earnings ratio usually indicates the market is optimistic about the company's future earnings potential.

Potaw Company reported the following data at the end of 2014: $\begin{array}{lr}\text { Sales revenue ( } 75 \% \text { on credit) }&\$300,000\\\text { Expenses ( } 26 \% \text { on credit) }&60,000\\\text { Accounts receivable, net at December } 31,2014 \text { (a decrease }\\\text { of } \$ 4,000 \text { during 2014) } & 8,000 \\\text { Total assets } & 200,000 \\\text { Stockholders' equity } & 150,000\end{array}$ What was the accounts receivable turnover ratio?

A negative financial leverage percentage occurs when a company has more debt than stockholders' equity.

The records of Marshall Company include the following: $\begin{array} { l r } \text { Average total assets } & \$ 3,500,000 \\\text { Average total liabilities } & 1,220,000 \\\text { Total revenue } & 4,580,000 \\\text { Total expense (including income tax) } & 4,100,000 \\\text { Interest expense (included in total expenses) } & 90,000 \\\text { Income tax rate } 40 \% &\end{array}$ The financial leverage percentage is closest to:

Complete the following income statement for the dollar amounts and the component percentages: $\begin{array}{lrr}&\text { Dollar \$ }&\text {Component }\\&\text { Amount } &\text { Percentages \% }\\\hline\text { Sales revenue } & \\\text { Cost of goods sold } & & 40 \% \\\text { Gross profit } & \$ 120,000 & \\\text { Operating expenses } & \\\text { Interest expense } & & 2 \% \\\text { Income before income tax } & \\\text { Income tax expense (rate } 20 \%) & \\\text { Net income } & & 6 \%\end{array}$

Which of the following statements is correct?

Which of the following statements is correct?

Many companies use high levels of debt to finance their assets because of financial leverage benefits provided to investors when return on assets exceeds the after tax cost of interest.

The Apple Pie Company had net income of $47,500 and earnings per share of $3.17. Apple Pie declared dividends of $2 per share of common stock during 2014. On December 31, 2014, the stock had a market price of $18.50 per share. Apple Pie's price/earnings ratio is closest to: