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Exam 13: Financial Statement Analysis

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Question 41

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As of December 31,Year 1,Gant Corporation had a current ratio of 1.29,quick ratio of 1.05,and working capital of $18,000.The company uses a perpetual inventory system and sells merchandise for more than it cost.On January 1,Year 2,Gant paid $3,600 on accounts payable.Which of the following statements is incorrect?

A) Gant's quick ratio will increase and its current ratio will decrease.
B) Gant's quick ratio will increase.
C) Gant's working capital will remain the same.
D) Gant's current ratio will increase.

E) None of the above
F) B) and C)

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Question 42

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The following balance sheet information was provided by O'Connor Company: $\begin{array} { l r r } \text { Assets } & \text { Year 2 } & \text { Year } 1 \\\text { Cash } & \$ 4,000 & \$ 2,000 \\\text { Accounts receivable } &15,000 & 12,000\\\text { Inventory } & \$ 35,000 & \$ 38,000 \end{array}$ Assuming that net credit sales for Year 2 totaled $270,000,what is the company's most recent accounts receivable turnover?

A) 18 times
B) 20 times
C) 22.5 times
D) 7.7 times

E) B) and D)
F) B) and C)

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Question 43

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Various ratios are computed to assess different aspects of a company's financial condition and (or)strength. Required: In the table below,indicate which aspect of financial condition each specified ratio is designed to assess:

The accounting concept or principle that is perhaps the greatest single culprit in distorting the results of financial statement analysis is the:

If the company purchased a $60,000 piece of equipment by paying $30,000 and having the rest financed with a short-term note from the bank,then immediately after this transaction what is the expected impact on the components of the current ratio?

Which ratio would you use to examine a company's ability to pay its debts in the short term?

Common methods of financial statement analysis include all of the following except:

Darden Company has cash of $40,000,accounts receivable of $60,000,inventory of $32,000,and equipment of $100,000.Assuming current liabilities of $48,000,this company's working capital is:

Solvency ratios are used to analyze the long-term debt-paying ability and the composition of the financing structure of the firm.

Comparative income statements for Pearle Company are provided below: $\begin{array}{c}\text {Pearle Company}\\ \text {Comparative Income Statement}\\\text { Years Ended December 31,}\\\\\begin{array}{lrr}&\text { Year } 2 &\text { Year } 1\\\text { Sales } & \$ 595,000 & \$ 532,200 \\\text { Less cost of goods sold } & 386,200 & 357,650 \\\text { Gross margin } & 208,800 & 174,550 \\\text { Less operating expenses } & 108,950 & 99,770 \\\text { Income before taxes } & 99,850 & 74,780 \\\text { Income taxes } & 39,940 & 29,912 \\\text { Net income } & \$ 59,910 & \$ 44,868\end{array}\end{array}$ Required: Perform a horizontal analysis of Pearle Company's income statement by computing horizontal percentages for each item.Round your answer to one decimal place (i.e.,22.5%).

Selected financial information for Martin Company for Year 2 follows: $\begin{array}{lr}\text { Sales } & \$ 498,000 \\\text { Cost of goods sold } & 320,000 \\\text { Merchandise inventory } & \\\text { Beginning of year } &72,000 \\\text { End of year } & 80,000\end{array}$ Required: How many times did Martin's merchandise inventory turnover during Year 2? (Round your answer to one decimal place.)

The following information applies to Acorn Construction Company (ACC): $\begin{array}{lrr}&\text { Year } 2 & \text { Year } 1\\\text { Net sales } & \$ 880,000& \$ 600,000 \\\text { Income before interest and taxes } & 127,500& 84,000 \\\text { Net income } & 59,000 & 52,000 \\\text { Interest expense } & 24,500 & 15,000 \\\text { Stockholder's' equity, December 31 } & 810,300& 725,000 \\\text { Common stock } & 750,300 & 700,000 \\\text { Preferred stock dividends } & 24,000 & 24,000\end{array}$ Information on the number of shares outstanding is provided below: $\begin{array} { | l | l |} \hline \text { Ave. \# of shares outstanding Year 1 } & 38,000 \\\hline \text { Ave. \# of shares outstanding Year 2 } & 33,000 \\\hline\end{array}$ Required: Compute the following ratios for ACC for Year 2 and Year 1: (a)Number of times interest is earned (b)Earnings per share (c)Price-earnings ratio (Market prices: Year 2 $17.50 per share,Year 1 $15.00 per share) (d)Return on equity (e)Net margin.

The Miller Company reported gross sales of $850,000,sales returns and allowances of $15,000,and sales discounts of $5,000.The company has average total assets of $500,000,of which $250,000 is property,plant,and equipment.What is the company's asset turnover ratio? (Round your answer to 2 decimal places.)

Comparative income statements for Chicago Company are provided below: $\begin{array}{c}\text { Chicago Company}\\\text { Comparative Income Statement}\\\text { Years Ended December 31,}\\\begin{array}{lrr}&\text { Year } 2 &\text { Year } 1\\\text { Sales } & \$ 288,000 & \$ 302,190 \\\text { Less cost of goods sold } & 101,350 & 115,400\\\text { Gross margin } & 186,650& 186,790 \\\text { Less operating expenses } & 89,970 & 99,770 \\\text { Income before taxes } & 96,680 & 87,020 \\\text { Income taxes } & 38,672 & 34,808 \\\text { Net income } & \$ 58,008 & \$ 52,212\end{array}\end{array}$ Required: Perform a horizontal analysis of Chicago Company's income statement by computing horizontal percentages for each item.Round your answer to one decimal place (i.e.,22.5%).

Which of the following statements about financial statement analysis is incorrect?

On December 31,Year 1,Houston Company's total current assets were $560,000 and its total current liabilities were $420,000.On January 1,Year 2,Houston issued a long-term note to a bank for $30,000 cash. Required: (a)Compute Houston's working capital before and after issuing the note payable. (b)Compute Houston's current ratio before and after issuing the note payable.(Round your answer to two decimal places.)

The drawback of studying absolute amounts reported in financial statements is the problem of differing materiality levels.

As of December 31,Year 1,Gant Corporation had a current ratio of 1.29,quick ratio of 1.05,and working capital of $18,000.The company uses a perpetual inventory system and sells merchandise for more than it cost.On January 1,Year 2,Gant purchased merchandise on account for $4,000.Which of the following statements is correct?

Which of the following statements regarding net margin is incorrect?

Which ratio measures the percentage of a company's assets that are financed by debt?