“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.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
3. The gross margin percentage is computed by dividing the gross margin by total assets.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking 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 AICPA FN: Reporting LO: 2 Level: Medium
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 AICPA FN: Reporting LO: 2 Level: Easy
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.
Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard
8. A company's financial leverage is negative when its return on total assets is less than its return on common stockholders' equity.
Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard
9. When computing return on common stockholders' equity, retained earnings should be included as part of common stockholders' equity.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard
10. When a retailing company purchases inventory, the book value per share of the company increases.
Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
11. If a company's acid-test ratio increases, its current ratio will also increase.
Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
12. Assuming a current ratio greater than 1, acquiring land by issuing more of the company's common stock will increase the current ratio.
Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
13. If a company successfully implements lean production, its inventory turnover ratio should decrease.
Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
14. Short-term borrowing is not a source of working capital.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
15. Working capital is computed by subtracting long-term liabilities from long-term assets.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
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 AICPA FN: Reporting LO: 2 Level: Easy
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 AICPA FN: Reporting LO: 2 Level: Medium
22. Clark Company issued bonds with an interest rate of 10%. The company's return on assets is 12%. The company's return on common stockholders' equity would most likely:
A) increase.
B) decrease.
C) remain unchanged.
D) cannot be determined.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard
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.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking 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.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Hard
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.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Hard
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.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Hard
29. Wolbers Company wrote off $100,000 in obsolete inventory. The company's inventory turnover ratio would:
A) increase.
B) decrease.
C) remain unchanged.
D) impossible to determine.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
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%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
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%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
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
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
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%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard
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
Ans: A AACSB: Analytic AICPA BB: Critical Thinking 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%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
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%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
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.
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard
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
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
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
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Earnings per share = (Net Income - Preferred Dividends)
÷ Average number of common shares outstanding
= [$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
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Price-earnings ratio = Market price per share ÷ Earnings per share*
= $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 was $8.20 per share and the dividend on preferred stock was $3.50 per share. The market price of common stock at the end of the year was $59.10 per share. Throughout the year, 500,000 shares of common stock and 200,000 shares of preferred stock were outstanding. The dividend payout ratio is closest to:
A) 1.06
B) 0.51
C) 0.56
D) 1.29
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
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
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
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:
| |Sales (all on account) |$610,000 |
| |Cost of goods sold | 350,000 |
| |Gross margin |260,000 |
| |Selling and administrative expense | 110,000 |
| |Net operating income |150,000 |
| |Interest expense | 30,000 |
| |Net income before taxes |120,000 |
| |Income taxes (30%) | 36,000 |
| |Net income |$ 84,000 |
The beginning balance of total assets was $560,000 and the ending balance was $580,000. The return on total assets is closest to:
A) 18.4%
B) 14.7%
C) 26.3%
D) 21.1%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**
= $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
**Average total assets = ($560,000 + $580,000) ÷ 2 = $570,000
44. Excerpts from Bellis Corporation's most recent balance sheet appear below:
| | |Year 2 |Year 1 |
| |Preferred stock |$ 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%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Return on common stockholders' equity = (Net income − Preferred dividends)
÷ 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
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
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
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
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
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
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
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
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
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
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 $630,000, its total current liabilities are $230,000, its long-term liabilities 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
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
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
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities = $78,000 ÷ $115,000 = 0.68
* 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
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $698,000 ÷ $127,000 = 5.50
*Average accounts receivable = ($135,000 + $119,000) ÷ 2 = $127,000
56. Data from Millier Corporation's most recent balance sheet and income statement appear below:
| | |This Year |Last Year |
| |Accounts receivable |$101,000 |$125,000 |
| |Inventory |$183,000 |$190,000 |
| |Sales on account |$758,000 | |
| |Cost of goods sold |$457,000 | |
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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $758,000 ÷ $113,000 = 6.71
*Average accounts receivable = ($101,000 + $125,000) ÷ 2 = $113,000
Average collection period = 365 days ÷ Accounts receivable turnover*
= 365 ÷ 6.71 = 54.4 days
*See above
57. Laware Corporation has provided the following data:
| | |This Year |Last Year |
| |Accounts receivable |$118,000 |$138,000 |
| |Inventory |$180,000 |$170,000 |
| |Sales on account |$714,000 | |
| |Cost of goods sold |$447,000 | |
The inventory turnover for this year is closest to:
A) 2.55
B) 0.94
C) 2.48
D) 1.06
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $447,000 ÷ $175,000 = 2.55
*Average inventory = ($170,000 + $180,000) ÷ 2 = $175,000
58. Data from Buker Corporation's most recent balance sheet and income statement appear below:
| | |This Year |Last Year |
| |Accounts receivable |$101,000 |$125,000 |
| |Inventory |$155,000 |$153,000 |
| |Sales on account |$662,000 | |
| |Cost of goods sold |$399,000 | |
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
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $399,000 ÷ $154,000 = 2.59
*Average inventory = ($153,000 + $155,000) ÷ 2 = $154,000
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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
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
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Hard
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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Hard
Solution:
Debt-to-equity ratio = Liabilities ÷ Stockholders' equity
= ($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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Solution:
Times interest earned = Net operating income ÷ Interest expense
= $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
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
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 |
| |(in thousands of dollars) |
| | |
| | |
| |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%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium
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
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
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
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
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
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%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
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
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%
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
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
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
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%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**
= $91.70 ÷ $1,405 = 6.53%
*Adjusted net income
= Net income + [Interest expense × (1 − Tax rate)]
= $70 + [$31 × (1 − 0.30)] = $91.70
**Average total assets = ($1,410 + $1,400) ÷ 2 = $1,405
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%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
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
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Book value per share = Common stockholders' equity
÷ Number of common shares outstanding* = $700 ÷ 100 shares = $7.00 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $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
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
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
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities = $300 ÷ $270 = 1.11
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term 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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,370 ÷ $150 = 9.13
*Average accounts receivable = ($140 + $160) ÷ 2 = $150
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
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $800 ÷ $160 = 5.00
*Average inventory = ($150 + $170) ÷ 2 = $160
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
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Solution:
Times interest earned = Net operating income ÷ Interest expense
= $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
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Solution:
Debt-to-equity ratio = Liabilities ÷ Stockholders' equity
= $500 ÷ $900 = 0.56
Use the following to answer questions 82-89:
Orgeron Corporation's most recent balance sheet and income statement appear below:
| |Statement of Financial Position |
| |December 31, Year 2 and Year 1 |
| |(in thousands of dollars) |
| | |
| | |
| |Assets |Year 2 |Year 1 |
| |Current assets: | | |
| |Cash |$ 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 |$1,290 |
| | | | |
| |Liabilities and Stockholders’ Equity | | |
| |Current liabilities: | | |
| |Accounts payable |$ 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 |
| |Stockholders’ equity: | | |
| |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 |
| |For the Year Ended December 31, Year 2 |
| |(in thousands of dollars) |
| | |
| | |
| |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 |
Dividends on common stock during Year 2 totaled $50 thousand. Dividends on preferred stock totaled $5 thousand. The market price of common stock at the end of Year 2 was $11.30 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%
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium
Solution:
Gross margin percentage = Gross margin ÷ Sales = $460 ÷ $1,260 = 36.5%
83. The earnings per share of common stock for Year 2 is closest to:
A) $1.05
B) $1.88
C) $1.50
D) $1.00
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends)
÷ Average number of common shares outstanding*
= ($105 − $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $2 per share = 100 shares
84. The price-earnings ratio for Year 2 is closest to:
A) 11.30
B) 10.76
C) 7.53
D) 6.01
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income - Preferred Dividends)
÷ Average number of common shares outstanding*
= ($105 - $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $2 per share = 100 shares
Price-earnings ratio = Market price per share ÷ Earnings per share
= $11.30 ÷ $1.00 = 11.30
85. The dividend payout ratio for Year 2 is closest to:
A) 47.6%
B) 55.0%
C) 50.0%
D) 500.0%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends)
÷ Average number of common shares outstanding*
= ($105 − $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $2 per share = 100 shares
Dividend payout ratio = Dividends per share* ÷ Earnings per share
= $0.50 ÷ $1.00 = 50.0%
*Dividends per share = Common dividends ÷ Common shares
= $50 ÷ 100 shares = $0.50 per share
86. The dividend yield ratio for Year 2 is closest to:
A) 4.42%
B) 0.45%
C) 90.91%
D) 4.87%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends)
÷ Average number of common shares outstanding*
= ($105 − $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $2 per share = 100 shares
Dividend payout ratio = Dividends per share* ÷ Earnings per share
= $0.50 ÷ $1.00 = 50.0%
*Dividends per share = Common dividends ÷ Common shares
= $50 ÷ 100 shares = $0.50 per share
Dividend yield ratio = Dividends per share ÷ Market price per share = $0.50 ÷ $11.30 = 4.42%
87. The return on total assets for Year 2 is closest to:
A) 10.01%
B) 7.98%
C) 7.84%
D) 9.82%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**
= $131.60 ÷ $1,315 = 10.01%
*Adjusted net income
= Net income + [Interest expense × (1 − Tax rate)]
= $105 + [$38 × (1 − 0.30)] = $131.60
**Average total assets = ($1,290 + $1,340) ÷ 2 = $1,315
88. The return on common stockholders' equity for Year 2 is closest to:
A) 15.75%
B) 16.54%
C) 13.61%
D) 14.29%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
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
89. The book value per share at the end of Year 2 is closest to:
A) $1.00
B) $7.60
C) $13.40
D) $6.60
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Book value per share = Common stockholders' equity
÷ Number of common shares outstanding* = $660 ÷ 100 shares = $6.60 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $2 per share = 100 shares
Use the following to answer questions 90-92:
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%
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
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%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
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
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Increase in Accounts Receivable account = ($60,000 − $59,200) ÷ $59,200
= 1.3%
Use the following to answer questions 93-99:
Financial statements for Orahood Company appear below:
| |Orahood Company |
| |Statement of Financial Position |
| |December 31, Year 2 and Year 1 |
| |(dollars in thousands) |
| | |
| | |
| | |
| | | | |
| | |Year 2 |Year 1 |
| |Current assets: | | |
| |Cash and marketable securities |$ 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 |$2,000 |
| | | | |
| |Current liabilities: | | |
| |Accounts payable |$ 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 |
| |Stockholders’ equity: | | |
| |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 |
| |For the Year Ended December 31, Year 2 |
| |(dollars in thousands) |
| | |
| | |
| | |
| | | |
| |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
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends)
÷ Average number of common shares outstanding*
= ($203 − $10) ÷ (40 shares + 40 shares)/2 = $4.83 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $5 per share = 40 shares
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%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends)
÷ Average number of common shares outstanding*
= ($203 − $10) ÷ (40 shares + 40 shares)/2 = $4.83 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $5 per share = 40 shares
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%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**
= $224 ÷ $2,020 = 11.1%
*Adjusted net income
= Net income + [Interest expense × (1 − Tax rate)]
= $203 + [$30 × (1 − 0.30)] = $224
**Average total assets = ($2,000 + $2,040) ÷ 2 = $2,020
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
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Current ratio = Current assets ÷ Current liabilities = $510 ÷ $500 = 1.02
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
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,740 ÷ $155 = 11.2
*Average accounts receivable = ($140 + $170) ÷ 2 = $155
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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Average sale period = 365 days ÷ Inventory turnover*
= 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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Solution:
Times interest earned = Net operating income ÷ Interest expense
= $320 ÷ $30 = 10.07
Use the following to answer questions 100-103:
Financial statements for Matti Company appear below:
| |Matti Company |
| |Balance Sheet |
| |As of December 31 |
| | |
| | |
| | |Year 2 |Year 1 |
| |Current assets |$ 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 |
| |For the Year Ended December 31, Year 2 |
| | |
| | |
| | | |
| |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%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
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%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**
= $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
**Average total assets = ($600,000 + $700,000) ÷ 2 = $650,000
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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Solution:
Times interest earned = Net operating income ÷ Interest expense
= $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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Book value per share = Common stockholders' equity ÷
Number of common shares outstanding* = $375,000 ÷ 25,000 = $15.00
*Number of common shares outstanding = Common stock ÷ Par value
= $125,000 ÷ $5 = 25,000
Use the following to answer questions 104-110:
Financial statements for Lardy Company appear below:
| |Lardy Company |
| |Statement of Financial Position |
| |December 31, Year 2 and Year 1 |
| |(dollars in thousands) |
| | |
| | |
| | |
| | | | |
| | |Year 2 |Year 1 |
| |Current assets: | | |
| |Cash and marketable securities |$ 180 |$ 180 |
| |Accounts receivable, net |220 |190 |
| |Inventory |170 |180 |
| |Prepaid expenses | 30 | 20 |
| |Total current assets |600 |570 |
| |Noncurrent assets: | | |
| |Plant & equipment, net | 1,830 | 1,820 |
| |Total assets |$2,430 |$2,390 |
| | | | |
| |Current liabilities: | | |
| |Accounts payable |$ 120 |$ 130 |
| |Accrued liabilities |90 |60 |
| |Notes payable, short term | 140 | 160 |
| |Total current liabilities |350 |350 |
| |Noncurrent liabilities: | | |
| |Bonds payable |360 |400 |
| |Total liabilities |710 |750 |
| |Stockholders’ equity: | | |
| |Preferred stock, $20 par, 10% |120 |120 |
| |Common stock, $10 par |140 |140 |
| |Additional paid-in capital–common stock |160 |160 |
| |Retained earnings |1,300 |1,220 |
| |Total stockholders’ equity | 1,720 | 1,640 |
| |Total liabilities & stockholders’ equity |$2,430 |$2,390 |
| |Lardy Company |
| |Income Statement |
| |For the Year Ended December 31, Year 2 |
| |(dollars in thousands) |
| | |
| | |
| | |
| | | |
| |Sales (all on account) |$2,060 |
| |Cost of goods sold | 1,440 |
| |Gross margin |620 |
| |Selling and administrative expense | 240 |
| |Net operating income |380 |
| |Interest expense | 40 |
| |Net income before taxes |340 |
| |Income taxes (30%) | 102 |
| |Net income |$ 238 |
Dividends during Year 2 totaled $158 thousand, of which $12 thousand were preferred 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
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷
Average number of common shares outstanding*
= ($238 − $12) ÷ 14 = $16.14
*Number of common shares outstanding = Common stock ÷ Par value
= $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
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷
Average number of common shares outstanding*
= ($238 − $12) ÷ 14 = $16.14
*Number of common shares outstanding = Common stock ÷ Par value
= $140 ÷ $10 =14
Price-earnings ratio = Market price per share ÷ Earnings per share
= $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%
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷
Average number of common shares outstanding*
= ($238 − $12) ÷ 14 = $16.14
*Number of common shares outstanding = Common stock ÷ Par value
= $140 ÷ $10 =14
Dividend payout ratio = Dividends per share* ÷ Earnings per share
= $10.43 ÷ $16.14 = 64.6%
*Dividends per share = Common dividends ÷ Common shares
= $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%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷
Average number of common shares outstanding*
= ($238 − $12) ÷ 14 = $16.14
*Number of common shares outstanding = Common stock ÷ Par value
= $140 ÷ $10 =14
Dividend payout ratio = Dividends per share* ÷ Earnings per share
= $10.43 ÷ $16.14 = 64.6%
*Dividends per share = Common dividends ÷ Common shares
= $146 ÷ 14 = $10.43
Dividend yield ratio = Dividends per share ÷ Market price per share
= $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%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**
= $266 ÷ $2,410 = 11.0%
*Adjusted net income = Net income + [Interest expense × (1 − Tax rate)]
= $238 + 40 x (1 − .30) = $266
**Average total assets = ($2,390 + $2,430) ÷ 2 = $2,410
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%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Return on common stockholders' equity = (Net income − Preferred dividends) ÷
Average common stockholders' equity* = ($238 − $12) ÷ $1,560 = 14.5%
*Average common stockholders' equity = ($1,520 + $1,600) ÷ 2 = $1,560
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
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Book value per share = Common stockholders' equity ÷
Number of common shares outstanding* = $1,600 ÷ 14 = $114.29
*Number of common shares outstanding = Common stock ÷ Par value
= $140 ÷ $10 = 14
Use the following to answer questions 111-113:
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%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Dividend payout ratio = Dividends per share* ÷ Earnings per share
= $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
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
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%
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Dividend yield ratio = Dividends per share ÷ Market price per share
= $1.80 ÷ $36.00 = 5%
Use the following to answer questions 114-120:
Erichsen Corporation's most recent balance sheet and income statement appear below:
| |Statement of Financial Position |
| |December 31, Year 2 and Year 1 |
| |(in thousands of dollars) |
| | |
| | |
| | |Year 2 |Year 1 |
| |Assets | | |
| |Current assets: | | |
| |Cash |$ 120 |$ 150 |
| |Accounts receivable |200 |180 |
| |Inventory |220 |200 |
| |Prepaid expenses | 10 | 10 |
| |Total current assets |550 |540 |
| |Plant and equipment, net | 830 | 830 |
| |Total assets |$1,380 |$1,370 |
| | | | |
| |Liabilities and Stockholders’ Equity | | |
| |Current liabilities: | | |
| |Accounts payable |$ 110 |$ 100 |
| |Accrued liabilities |30 |30 |
| |Notes payable, short term | 50 | 50 |
| |Total current liabilities |190 |180 |
| |Bonds payable | 250 | 300 |
| |Total liabilities | 440 | 480 |
| |Stockholders’ equity: | | |
| |Preferred stock, $100 par value, 5% |100 |100 |
| |Common stock, $1 par value |200 |200 |
| |Additional paid-in capital–common stock |160 |160 |
| |Retained earnings | 480 | 430 |
| |Total stockholders’ equity | 940 | 890 |
| |Total liabilities & stockholders’ equity |$1,380 |$1,370 |
| |Income Statement |
| |For the Year Ended December 31, Year 2 |
| |(in thousands of dollars) |
| | |
| | |
| |Sales (all on account) |$1,290 |
| |Cost of goods sold | 770 |
| |Gross margin |520 |
| |Selling and administrative expense | 294 |
| |Net operating income |226 |
| |Interest expense | 33 |
| |Net income before taxes |193 |
| |Income taxes (30%) | 58 |
| |Net income |$ 135 |
Dividends on common stock during Year 2 totaled $80 thousand. Dividends on preferred stock totaled $5 thousand. The market price of common stock at the end of Year 2 was $11.05 per share.
114. The earnings per share of common stock for Year 2 is closest to:
A) $0.68
B) $0.65
C) $1.13
D) $0.97
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷
Average number of common shares outstanding*
= ($135 − $5) ÷ 200 = $0.65
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $1 = 200
115. The price-earnings ratio for Year 2 is closest to:
A) 11.39
B) 16.25
C) 17.00
D) 9.78
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷
Average number of common shares outstanding*
= ($135 − $5) ÷ 200 = $0.65
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $1 = 200
Price-earnings ratio = Market price per share ÷ Earnings per share
= $11.05 ÷ $0.65 = 17.00
116. The dividend payout ratio for Year 2 is closest to:
A) 61.5%
B) 769.2%
C) 59.3%
D) 65.4%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷
Average number of common shares outstanding*
= ($135 − $5) ÷ 200 = $0.65
*Number of common shares outstanding = Common stock ÷ Par value
= $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
117. The dividend yield ratio for Year 2 is closest to:
A) 94.12%
B) 3.85%
C) 3.62%
D) 0.23%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷
Average number of common shares outstanding*
= ($135 − $5) ÷ 200 = $0.65
*Number of common shares outstanding = Common stock ÷ Par value
= $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
Dividend yield ratio = Dividends per share ÷ Market price per share
= $0.40 ÷ $11.05 = 3.62%
118. The return on total assets for Year 2 is closest to:
A) 11.50%
B) 9.78%
C) 11.46%
D) 9.82%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**
= $158.10 ÷ $1,375 = 11.50%
*Adjusted net income = Net income + [Interest expense × (1 − Tax rate)]
= $135 + 33 x (1 − 0.30) = $158.10
**Average total assets = ($1,370 + $1,380) ÷ 2 = $1,375
119. The return on common stockholders' equity for Year 2 is closest to:
A) 14.75%
B) 14.21%
C) 16.56%
D) 15.95%
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Return on common stockholders' equity = (Net income − Preferred dividends) ÷
Average common stockholders' equity* = ($135 − $5) ÷ $815 = 15.95%
*Average common stockholders' equity = ($790 + $840) ÷ 2 = $815
120. The book value per share at the end of Year 2 is closest to:
A) $4.70
B) $4.20
C) $0.65
D) $6.90
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Book value per share = Common stockholders' equity ÷
Number of common shares outstanding* = $840 ÷ 200 = $4.20
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $1 = 200
Use the following to answer questions 121-127:
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 |
| | | | |
| |Stockholders’ equity: | | |
| |Preferred stock, $100 par value, 5% |$ 100 |$ 100 |
| |Common stock, $1 par value |200 |200 |
| |Additional paid-in capital–common stock |150 |150 |
| |Retained earnings | 620 | 590 |
| |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 | |
Dividends on common stock during Year 2 totaled $60 thousand. Dividends on preferred stock totaled $5 thousand. The market price of common stock at the end of Year 2 was $3.87 per share.
121. The earnings per share of common stock for Year 2 is closest to:
A) $0.48
B) $0.68
C) $0.45
D) $0.83
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷
Average number of common shares outstanding*
= ($95 − $5) ÷ 200 = $0.45
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $1 = 200
122. The price-earnings ratio for Year 2 is closest to:
A) 5.69
B) 8.60
C) 4.66
D) 8.06
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends) ÷
Average number of common shares outstanding*
= ($95 − $5) ÷ 200 = $0.45
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $1 = 200
Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $3.87 ÷ $0.45 = 8.60
123. The dividend payout ratio for Year 2 is closest to:
A) 1111.1%
B) 63.2%
C) 66.7%
D) 72.2%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
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%
*Dividends per share = Common dividends ÷ Common shares
= $60 ÷ 200 = $0.30
124. The dividend yield ratio for Year 2 is closest to:
A) 92.31%
B) 7.75%
C) 0.65%
D) 8.40%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $1 = 200
*Dividends per share = Common dividends ÷ Common shares
= $60 ÷ 200 = $0.30
Dividend yield ratio = Dividends per share* ÷ Market price per share
= $0.30 ÷ $3.87 = 7.75%
125. The return on total assets for Year 2 is closest to:
A) 6.17%
B) 7.53%
C) 6.19%
D) 7.56%
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**
= $116 ÷ $1,535 = 7.56%
*Adjusted net income = Net income + [Interest expense × (1 − Tax rate)]
= $95 + [$30 × (1 − 0.30)] = $116
**Average total assets = ($1,530 + $1,540) ÷ 2 = $1,535
126. The return on common stockholders' equity for Year 2 is closest to:
A) 9.42%
B) 8.53%
C) 9.00%
D) 9.95%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Return on common stockholders' equity = (Net income − Preferred dividends) ÷
Average common stockholders' equity* = ($95 − $5) ÷ $955 = 9.42%
*Average common stockholders' equity = ($940 + $970) ÷ 2 = $955
127. The book value per share at the end of Year 2 is closest to:
A) $5.35
B) $4.85
C) $0.45
D) $7.70
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Book value per share = Common stockholders' equity ÷
Number of common shares outstanding* = $970 ÷ 200 = $4.85
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $1 = 200
Use the following to answer questions 128-132:
Financial statements for Spencer Company appear below:
| |Spencer Company |
| |Balance Sheet |
| |December 31 |
| | |
| | |
| | | |
| |Cash |$ 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
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
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
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities = $440,000 ÷ $400,000 = 1.10
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term 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
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,120,000 ÷ $320,000 = 3.50
*Average inventory = ($300,000 + $340,000) ÷ 2 = $320,000
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
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,800,000 ÷ $240,000 = 7.5
*Average accounts receivable = ($240,000 + $240,000) ÷ 2 = $240,000
Average collection period = 365 days ÷ Accounts receivable turnover
= 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
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Solution:
Debt-to-equity ratio = Liabilities ÷ Stockholders' equity
= ($300,000 + $90,000 + $10,000 + $200,000) ÷ ($280,000 + $320,000) = 1.000
Use the following to answer questions 133-139:
Financial statements for Marbet Company appear below:
| |Marbet Company |
| |Statement of Financial Position |
| |December 31, Year 2 and Year 1 |
| |(dollars in thousands) |
| | |
| | |
| | |
| | | | |
| | |Year 2 |Year 1 |
| |Current assets: | | |
| |Cash and marketable securities |$ 160 |$ 160 |
| |Accounts receivable, net |180 |160 |
| |Inventory |110 |130 |
| |Prepaid expenses | 40 | 40 |
| |Total current assets |490 |490 |
| |Noncurrent assets: | | |
| |Plant & equipment, net | 1,910 | 1,870 |
| |Total assets |$2,400 |$2,360 |
| | | | |
| |Current liabilities: | | |
| |Accounts payable |$ 120 |$ 150 |
| |Accrued liabilities |80 |50 |
| |Notes payable, short term | 200 | 200 |
| |Total current liabilities |400 |400 |
| |Noncurrent liabilities: | | |
| |Bonds payable |500 |500 |
| |Total liabilities |900 |900 |
| |Stockholders’ equity: | | |
| |Preferred stock, $10 par, 8% |120 |120 |
| |Common stock, $5 par |200 |200 |
| |Additional paid-in capital–common stock |280 |280 |
| |Retained earnings | 900 | 860 |
| |Total stockholders’ equity | 1,500 | 1,460 |
| |Total liabilities & stockholders’ equity |$2,400 |$2,360 |
| |Marbet Company |
| |Income Statement |
| |For the Year Ended December 31, Year 2 |
| |(dollars in thousands) |
| | |
| | |
| | |
| | | |
| |Sales (all on account) |$1,600 |
| |Cost of goods sold | 1,120 |
| |Gross margin |480 |
| |Selling and administrative expense | 190 |
| |Net operating income |290 |
| |Interest expense | 50 |
| |Net income before taxes |240 |
| |Income taxes (30%) | 72 |
| |Net income |$ 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
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
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
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Current ratio = Current assets ÷ Current liabilities = $490 ÷ $400 = 1.23
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
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities = $340 ÷ $400 = 0.85
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term 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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,600 ÷ $170 = 9.4
*Average accounts receivable = ($160 + $180) ÷ 2 = $170
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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,600 ÷ $170 = 9.4
*Average accounts receivable = ($160 + $180) ÷ 2 = $170
Average collection period = 365 days ÷ Accounts receivable turnover
= 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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,120 ÷ $120 = 9.3
*Average inventory = ($130 + $110) ÷ 2 = $120
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
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,120 ÷ $120 = 9.3
*Average inventory = ($130 + $110) ÷ 2 = $120
Average sale period = 365 days ÷ Inventory turnover = 365 ÷ 9.3
= 39.1 days
Use the following to answer questions 140-142:
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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium Source: CPA, adapted
Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities
= $340,000 ÷ ($30,000 + $120,000 + $50,000) = 1.7
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $75,000 + $225,000 + $40,000 = $340,000
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
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium Source: CPA, adapted
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory*
= $900,000 ÷ $240,000 = 3.75
*Average inventory = ($210,000 + $270,000) ÷ 2 = $240,000
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
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium Source: CPA, adapted
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,500,000 ÷ $212,500 = 7.06
*Average accounts receivable = ($200,000 + $225,000) ÷ 2 = $212,500
Average collection period = 365 days ÷ Accounts receivable turnover = 365 days ÷ 7.06 = 52 days
Use the following to answer questions 143-149:
Rosenfield Corporation's most recent balance sheet and income statement appear below:
| |Statement of Financial Position |
| |December 31, Year 2 and Year 1 |
| |(in thousands of dollars) |
| | |
| | |
| |Assets |Year 2 |Year 1 |
| |Current assets: | | |
| |Cash |$ 10 |$ 130 |
| |Accounts receivable |150 |130 |
| |Inventory |140 |120 |
| |Prepaid expenses | 20 | 20 |
| |Total current assets |320 |400 |
| |Plant and equipment, net | 890 | 830 |
| |Total assets |$1,210 |$1,230 |
| | | | |
| |Liabilities and Stockholders’ Equity | | |
| |Current liabilities: | | |
| |Accounts payable |$ 160 |$ 180 |
| |Accrued liabilities |60 |70 |
| |Notes payable, short term | 60 | 70 |
| |Total current liabilities |280 |320 |
| |Bonds payable |70 |110 |
| |Total liabilities |350 |430 |
| |Stockholders’ equity: | | |
| |Preferred stock, $100 par value, 5% |100 |100 |
| |Common stock, $1 par value |200 |200 |
| |Additional paid-in capital–common stock |180 |180 |
| |Retained earnings | 380 | 320 |
| |Total stockholders’ equity | 860 | 800 |
| |Total liabilities & stockholders’ equity |$1,210 |$1,230 |
| |Income Statement |
| |For the Year Ended December 31, Year 2 |
| |(in thousands of dollars) |
| | |
| | |
| |Sales (all on account) |$1,280 |
| |Cost of goods sold | 870 |
| |Gross margin |410 |
| |Selling and administrative expense | 215 |
| |Net operating income |195 |
| |Interest expense | 16 |
| |Net income before taxes |179 |
| |Income taxes (30%) | 54 |
| |Net income |$ 125 |
143. The working capital at the end of Year 2 is:
A) $320 thousand
B) $860 thousand
C) $890 thousand
D) $40 thousand
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Working capital = Current assets − Current liabilities = $320 thousand − $280 thousand = $40 thousand
144. The current ratio at the end of Year 2 is closest to:
A) 1.09
B) 1.14
C) 0.26
D) 0.29
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Current ratio = Current assets ÷ Current liabilities = $320 ÷ $280 = 1.14
145. The acid-test ratio at the end of Year 2 is closest to:
A) 0.91
B) 1.14
C) 0.57
D) 0.64
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities = $160 ÷ $280 = 0.57
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $10 + $0 + $150 = $160
146. The accounts receivable turnover for Year 2 is closest to:
A) 1.15
B) 8.53
C) 0.87
D) 9.14
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,280 ÷ $140 = 9.14
*Average accounts receivable = ($130 + $150) ÷ 2 = $140
147. The average collection period for Year 2 is closest to:
A) 1.2 days
B) 39.9 days
C) 0.9 days
D) 42.8 days
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,280 ÷ $140 = 9.14
*Average accounts receivable = ($130 + $150) ÷ 2 = $140
Average collection period = 365 days ÷ Accounts receivable turnover
= 365 days ÷ 9.14 = 39.9 days
148. The inventory turnover for Year 2 is closest to:
A) 0.86
B) 6.21
C) 6.69
D) 1.17
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory*
= $870 ÷ $130 = 6.69
*Average inventory = ($140 + $120) ÷ 2 = $130
149. The average sale period for Year 2 is closest to:
A) 248.1 days
B) 54.6 days
C) 58.8 days
D) 39.9 days
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory*
= $870 ÷ $130 = 6.69
*Average inventory = ($140 + $120) ÷ 2 = $130
Average sale period = 365 days ÷ Inventory turnover
= 365 days ÷ 6.69 = 54.6 days
Use the following to answer questions 150-156:
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.
150. The working capital at the end of Year 2 is:
A) $330 thousand
B) $530 thousand
C) $1,030 thousand
D) $860 thousand
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Working capital = Current assets − Current liabilities = $530 thousand − $200 thousand = $330 thousand
151. The current ratio at the end of Year 2 is closest to:
A) 0.38
B) 0.26
C) 2.65
D) 0.68
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Current ratio = Current assets ÷ Current liabilities = $530 ÷ $200 = 2.65
152. The acid-test ratio at the end of Year 2 is closest to:
A) 1.40
B) 1.85
C) 1.47
D) 2.65
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities = $280 ÷ $200 = 1.40
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $150 + $0 + $130 = $280
153. The accounts receivable turnover for Year 2 is closest to:
A) 9.00
B) 0.85
C) 1.18
D) 9.75
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,170 ÷ $120 = 9.75
*Average accounts receivable = ($110 + $130) ÷ 2 = $120
154. The average collection period for Year 2 is closest to:
A) 0.8 days
B) 37.4 days
C) 1.2 days
D) 40.6 days
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,170 ÷ $120 = 9.75
*Average accounts receivable = ($110 + $130) ÷ 2 = $120
Average collection period = 365 days ÷ Accounts receivable turnover
= 365 days ÷ 9.75 = 37.4 days
155. The inventory turnover for Year 2 is closest to:
A) 1.07
B) 0.94
C) 4.38
D) 4.52
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $700 ÷ $155 = 4.52
*Average inventory = ($150 + $160) ÷ 2 = $155
156. The average sale period for Year 2 is closest to:
A) 80.8 days
B) 49.9 days
C) 83.3 days
D) 218.4 days
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $700 ÷ $155 = 4.52
*Average inventory = ($150 + $160) ÷ 2 = $155
Average sale period = 365 days ÷ Inventory turnover
= 365 days ÷ 4.52 = 80.8 days
Use the following to answer questions 157-161:
Excerpts from Jordison Corporation's most recent balance sheet appear below:
| | |Year 2 |Year 1 |
| |Current assets: | | |
| |Cash |$200 |$160 |
| |Accounts receivable |160 |150 |
| |Inventory |170 |150 |
| |Prepaid expenses | 80 | 80 |
| |Total current assets |$610 |$540 |
| |Total current liabilities |$290 |$270 |
Sales on account in Year 2 amounted to $1,240 and the cost of goods sold was $730.
157. The working capital at the end of Year 2 is:
A) $320 thousand
B) $840 thousand
C) $1,000 thousand
D) $610 thousand
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Working capital = Current assets − Current liabilities = $610 thousand − $290 thousand = $320 thousand
158. The current ratio at the end of Year 2 is closest to:
A) 2.10
B) 0.42
C) 0.31
D) 0.74
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Current ratio = Current assets ÷ Current liabilities = $610 ÷ $290 = 2.10
159. The acid-test ratio at the end of Year 2 is closest to:
A) 1.36
B) 2.10
C) 1.24
D) 1.52
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities = $360 ÷ $290 = 1.24
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $200 + $0 + $160 = $360
160. The accounts receivable turnover for Year 2 is closest to:
A) 1.07
B) 0.94
C) 8.00
D) 7.75
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,240 ÷ $155 = 8.00
*Average accounts receivable = ($150 + $160) ÷ 2 = $155
161. The inventory turnover for Year 2 is closest to:
A) 1.13
B) 4.56
C) 4.29
D) 0.88
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $730 ÷ $160 = 4.56
*Average inventory = ($150 + $170) ÷ 2 = $160
Use the following to answer questions 162-166:
Data from Carrel Corporation's most recent balance sheet appear below:
| | |Year 2 |Year 1 |
| |Current assets: | | |
| |Cash |$100 |$160 |
| |Accounts receivable |250 |300 |
| |Inventory |120 |110 |
| |Prepaid expenses | 90 | 80 |
| |Total current assets |$560 |$650 |
| |Total current liabilities |$250 |$270 |
Sales on account in Year 2 amounted to $1,440 and the cost of goods sold was $890.
162. The working capital at the end of Year 2 is:
A) $930 thousand
B) $310 thousand
C) $950 thousand
D) $560 thousand
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Working capital = Current assets − Current liabilities = $560 thousand − $250 thousand = $310 thousand
163. The current ratio at the end of Year 2 is closest to:
A) 0.38
B) 0.96
C) 2.24
D) 0.36
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Current ratio = Current assets ÷ Current liabilities = $560 ÷ $250 = 2.24
164. The acid-test ratio at the end of Year 2 is closest to:
A) 1.40
B) 2.24
C) 1.76
D) 1.04
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities = $350 ÷ $250 = 1.40
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $100 + $0 + $250 = $350
165. The average collection period for Year 2 is closest to:
A) 69.7 days
B) 0.8 days
C) 1.2 days
D) 63.4 days
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Average collection period = 365 days ÷ Accounts receivable turnover*
= 365 days ÷ 5.24 = 69.7 days
*Accounts receivable turnover = Net credit sales ÷ Average accounts receivable
= $1,440 ÷ [($300 + $250) ÷ 2] = 5.24
166. The average sale period for Year 2 is closest to:
A) 30.4 days
B) 47.2 days
C) 49.2 days
D) 225.6 days
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $890 ÷ $115 = 7.73
*Average inventory = ($110 + $120) ÷ 2 = $115
Average sale period = 365 days ÷ Inventory turnover
= 365 days ÷ 7.73 = 47.2 days
Use the following to answer questions 167-168:
Financial statements for Narasaki Company appear below:
| |Narasaki Company |
| |Statement of Financial Position |
| |December 31, Year 2 and Year 1 |
| |(dollars in thousands) |
| | |
| | |
| | |
| | |Year 2 |Year 1 |
| |Current assets: | | |
| |Cash and marketable securities |$ 130 |$ 120 |
| |Accounts receivable, net |200 |170 |
| |Inventory |130 |130 |
| |Prepaid expenses | 90 | 80 |
| |Total current assets |550 |500 |
| |Noncurrent assets: | | |
| |Plant & equipment, net | 1,380 | 1,360 |
| |Total assets |$1,930 |$1,860 |
| | | | |
| |Current liabilities: | | |
| |Accounts payable |$ 160 |$ 160 |
| |Accrued liabilities |90 |80 |
| |Notes payable, short term | 110 | 110 |
| |Total current liabilities |360 |350 |
| |Noncurrent liabilities: | | |
| |Bonds payable | 510 | 500 |
| |Total liabilities | 870 | 850 |
| |Stockholders’ equity: | | |
| |Preferred stock, $10 par, 6% |100 |100 |
| |Common stock, $2 par |160 |160 |
| |Additional paid-in capital–common stock |240 |240 |
| |Retained earnings | 560 | 510 |
| |Total stockholders’ equity | 1,060 | 1,010 |
| |Total liabilities & stockholders’ equity |$1,930 |$1,860 |
| |Narasaki Company |
| |Income Statement |
| |For the Year Ended December 31, Year 2 |
| |(dollars in thousands) |
| | |
| | |
| | |
| |Sales (all on account) |$2,960 |
| |Cost of goods sold | 2,070 |
| |Gross margin |890 |
| |Selling and administrative expense | 350 |
| |Net operating income |540 |
| |Interest expense | 50 |
| |Net income before taxes |490 |
| |Income taxes (30%) | 147 |
| |Net income |$ 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
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Solution:
Times interest earned = Net operating income ÷ Interest expense
= $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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Solution:
Debt-to-equity ratio = Liabilities ÷ Stockholders' equity
= $870 ÷ $1,060 = 0.82
Use the following to answer questions 169-170:
Parmeter Corporation's most recent balance sheet and income statement appear below:
| |Statement of Financial Position |
| |December 31, Year 2 and Year 1 |
| |(in thousands of dollars) |
| | |
| | |
| | |Year 2 |Year 1 |
| |Assets | | |
| |Current assets: | | |
| |Cash |$ 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 |$1,180 |
| | | | |
| |Liabilities and Stockholders’ Equity | | |
| |Current liabilities: | | |
| |Accounts payable |$ 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 |
| |For the Year Ended December 31, Year 2 |
| |(in thousands of dollars) |
| | |
| | |
| |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 |
169. The times interest earned for Year 2 is closest to:
A) 5.17
B) 8.81
C) 6.17
D) 3.61
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Solution:
Times interest earned = Net operating income ÷ Interest expense
= $111 ÷ $18 = 6.17
170. The debt-to-equity ratio at the end of Year 2 is closest to:
A) 0.20
B) 0.56
C) 0.09
D) 0.49
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Solution:
Debt-to-equity ratio = Liabilities ÷ Stockholders' equity
= $360 ÷ $740 = 0.49
Use the following to answer questions 171-172:
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 |
| |For the Year Ended December 31, Year 2 |
| |(in thousands of dollars) |
| | |
| | |
| |Sales (all on account) |$1,270 |
| |Cost of goods sold | 860 |
| |Gross margin |410 |
| |Selling and administrative expense | 280 |
| |Net operating income |130 |
| |Interest expense | 30 |
| |Net income before taxes |100 |
| |Income taxes (30%) | 30 |
| |Net income |$ 70 |
171. The times interest earned for Year 2 is closest to:
A) 6.19
B) 3.33
C) 4.33
D) 2.33
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Solution:
Times interest earned = Net operating income ÷ Interest expense
= $130 ÷ $30 = 4.33
172. The debt-to-equity ratio at the end of Year 2 is closest to:
A) 0.34
B) 0.85
C) 1.21
D) 0.43
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Solution:
Debt-to-equity ratio = Liabilities ÷ Stockholders' equity
= $580 ÷ $680 = 0.85
Essay Questions
173. Espinola Corporation's most recent balance sheet and income statement appear below:
| |Statement of Financial Position |
| |December 31, Year 2 and Year 1 |
| |(in thousands of dollars) |
| | |
| | |
| | |Year 2 |Year 1 |
| |Assets | | |
| |Current assets: | | |
| |Cash |$ 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 |$1,490 |
| | | | |
| |Liabilities and Stockholders’ Equity | | |
| |Current liabilities: | | |
| |Accounts payable |$ 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 |
| |Stockholders’ equity: | | |
| |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 |
| |For the Year Ended December 31, Year 2 |
| |(in thousands of dollars) |
| | |
| | |
| |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)
÷ Average number of common shares outstanding*
= ($95 − $5) ÷ (100 shares + 100 shares)/2 = $0.90 per share
*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%
*Adjusted net income
= Net income + [Interest expense × (1−Tax rate)]
= $95 + 26 × (1-0.30) = $113.2
**Average total assets = ($1,560 + $1,490) ÷ 2 = $1,525
g. Return on common stockholders' equity = (Net income − Preferred dividends)
÷ Average common stockholders' equity*
= ($95 − $5) ÷ $905 = 9.94%
*Average common stockholders' equity = ($930 + $880) ÷ 2 = $905
h. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding* = $930 ÷ 100 shares = $9.30 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $100 ÷ $1 per share = 100 shares
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
*Average accounts receivable = ($220 + $240) ÷ 2 = $230
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
*Average inventory = ($140 + $130) ÷ 2 = $135
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 ÷ $1,030 = 0.51
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,2,3,4 Level: Medium
174. Slaubaugh Corporation's most recent balance sheet and income statement appear below:
| |Statement of Financial Position |
| |December 31, Year 2 and Year 1 |
| |(in thousands of dollars) |
| | |
| | |
| | |Year 2 |Year 1 |
| |Assets | | |
| |Current assets: | | |
| |Cash |$ 100 |$ 140 |
| |Accounts receivable |160 |180 |
| |Inventory |210 |190 |
| |Prepaid expenses | 40 | 50 |
| |Total current assets |510 |560 |
| |Plant and equipment, net | 860 | 820 |
| |Total assets |$1,370 |$1,380 |
| | | | |
| |Liabilities and Stockholders’ Equity | | |
| |Current liabilities: | | |
| |Accounts payable |$ 160 |$ 180 |
| |Accrued liabilities |80 |80 |
| |Notes payable, short term | 80 | 80 |
| |Total current liabilities |320 |340 |
| |Bonds payable | 70 | 100 |
| |Total liabilities | 390 | 440 |
| |Stockholders’ equity: | | |
| |Preferred stock, $100 par value, 10% |200 |200 |
| |Common stock, $1 par value |200 |200 |
| |Additional paid-in capital–common stock |130 |130 |
| |Retained earnings | 450 | 410 |
| |Total stockholders’ equity | 980 | 940 |
| |Total liabilities & stockholders’ equity |$1,370 |$1,380 |
| | | | |
| |Income Statement |
| |For the Year Ended December 31, Year 2 |
| |(in thousands of dollars) |
| | |
| | |
| |Sales (all on account) |$1,350 |
| |Cost of goods sold | 820 |
| |Gross margin |530 |
| |Selling and administrative expense | 399 |
| |Net operating income |131 |
| |Interest expense | 17 |
| |Net income before taxes |114 |
| |Income taxes (30%) | 34 |
| |Net income |$ 80 |
Dividends on common stock during Year 2 totaled $20 thousand. Dividends on preferred stock totaled $20 thousand. The market price of common stock at the end of Year 2 was $2.88 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.
Ans:
a. Gross margin percentage = Gross margin ÷ Sales = $530 ÷ $1,350 = 39.3%
b. Earnings per share = (Net Income - Preferred Dividends)
÷ Average number of common shares outstanding*
= ($80 - $20) ÷ (200 shares + 200 shares)/2 = $0.30 per share
*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%
*Dividends per share = Common dividends ÷ Common shares (see above)
= $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
**Average total assets = ($1,370 + $1,380) ÷ 2 = $1,375
g. Return on common stockholders' equity = (Net income − Preferred dividends)
÷ Average common stockholders' equity*
= ($80 − $20) ÷ $760 = 7.89%
*Average common stockholders' equity = ($780 + $740) ÷ 2 = $760
h. Book value per share = Common stockholders' equity
÷ Number of common shares outstanding*
= $780 ÷ 200 shares = $3.90 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $1 per share = 200 shares
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,2 Level: Medium
175. Philo Corporation's most recent income statement appears below:
| |Sales (all on account) |$561,000 |
| |Cost of goods sold | 325,000 |
| |Gross margin |236,000 |
| |Selling and administrative expense | 106,000 |
| |Net operating income |130,000 |
| |Interest expense | 35,000 |
| |Net income before taxes |95,000 |
| |Income taxes | 30,000 |
| |Net income |$ 65,000 |
Required:
Compute the gross margin percentage.
Ans:
Gross margin percentage = Gross margin ÷ Sales = $236,000 ÷ $561,000 = 42.1%
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
176. Financial statements for Pratt Company appear below:
| |Pratt Company |
| |Statement of Financial Position |
| |December 31, Year 2 and Year 1 |
| |(dollars in thousands) |
| | |
| | |
| | |
| | |Year 2 |Year 1 |
| |Current assets: | | |
| |Cash and marketable securities |$ 140 |$ 140 |
| |Accounts receivable, net |190 |180 |
| |Inventory |150 |150 |
| |Prepaid expenses | 70 | 70 |
| |Total current assets |550 |540 |
| |Noncurrent assets: | | |
| |Plant & equipment, net | 1,490 | 1,420 |
| |Total assets |$2,040 |$1,960 |
| | | | |
| |Current liabilities: | | |
| |Accounts payable |$ 160 |$ 160 |
| |Accrued liabilities |50 |60 |
| |Notes payable, short term | 230 | 250 |
| |Total current liabilities |440 |470 |
| |Noncurrent liabilities: | | |
| |Bonds payable | 300 | 300 |
| |Total liabilities | 740 | 770 |
| |Stockholders’ equity: | | |
| |Preferred stock, $5 par, 10% |120 |120 |
| |Common stock, $5 par |180 |180 |
| |Additional paid-in capital–common stock |210 |210 |
| |Retained earnings | 790 | 680 |
| |Total stockholders’ equity | 1,300 | 1,190 |
| |Total liabilities & stockholders’ equity |$2,040 |$1,960 |
| |Pratt Company |
| |Income Statement |
| |For the Year Ended December 31, Year 2 |
| |(dollars in thousands) |
| | |
| | |
| | |
| |Sales (all on account) |$2,000 |
| |Cost of goods sold | 1,400 |
| |Gross margin |600 |
| |Selling and administrative expense | 240 |
| |Net operating income |360 |
| |Interest expense | 30 |
| |Net income before taxes |330 |
| |Income taxes (30%) | 99 |
| |Net income |$ 231 |
Dividends during Year 2 totaled $121 thousand, of which $12 thousand were preferred dividends. The market price of a share of common stock on December 31, Year 2 was $80.
Required:
Compute the following for Year 2:
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) ÷
Average number of common shares outstanding*
= ($231 − $12) ÷ 36 = $6.08
*Number of common shares outstanding = Common stock ÷ Par value
= $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%
*Adjusted net income = Net income + [Interest expense × (1−Tax rate)]
= $231 + 30 × (1 − 0.30) = $252
**Average total assets = ($2,040 + $1,960) ÷ 2 = $2,000
f. Return on common stockholders' equity = (Net income − Preferred dividends) ÷
Average common stockholders' equity* = ($231 − $12) ÷ $1,125 = 19.47%
*Average common stockholders' equity = ($1,180 + $1,070) ÷ 2 = $1,125
g. Book value per share = Common stockholders' equity ÷
Number of common shares outstanding* = $1,180 ÷ 36 = $32.78
*Number of common shares outstanding = Common stock ÷ Par value
= $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
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $140 + $190 = $330
k. Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $2,000 ÷ $185 = 10.81
*Average accounts receivable = ($190 + $180) ÷ 2 = $185
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
*Average inventory = ($150 + $150) ÷ 2 = $150
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 ÷ $1,300
= 0.57
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,3,4 Level: Medium
177. Financial statements for Qadri Company appear below:
| |Qadri Company |
| |Statement of Financial Position |
| |December 31, Year 2 and Year 1 |
| |(dollars in thousands) |
| | |
| | |
| | |
| | |Year 2 |Year 1 |
| |Current assets: | | |
| |Cash and marketable securities |$ 120 |$ 100 |
| |Accounts receivable, net |130 |120 |
| |Inventory |160 |180 |
| |Prepaid expenses | 50 | 50 |
| |Total current assets |460 |450 |
| |Noncurrent assets: | | |
| |Plant & equipment, net | 1,730 | 1,730 |
| |Total assets |$2,190 |$2,180 |
| | | | |
| |Current liabilities: | | |
| |Accounts payable |$ 50 |$ 100 |
| |Accrued liabilities |60 |50 |
| |Notes payable, short term | 160 | 200 |
| |Total current liabilities |270 |350 |
| |Noncurrent liabilities: | | |
| |Bonds payable | 280 | 300 |
| |Total liabilities | 550 | 650 |
| |Stockholders’ equity: | | |
| |Preferred stock, $10 par, 5% |120 |120 |
| |Common stock, $10 par |220 |220 |
| |Additional paid-in capital–common stock |110 |110 |
| |Retained earnings | 1,190 | 1,080 |
| |Total stockholders’ equity | 1,640 | 1,530 |
| |Total liabilities & stockholders’ equity |$2,190 |$2,180 |
| |Qadri Company |
| |Income Statement |
| |For the Year Ended December 31, Year 2 |
| |(dollars in thousands) |
| | |
| | |
| | |
| |Sales (all on account) |$2,300 |
| |Cost of goods sold | 1,610 |
| |Gross margin |690 |
| |Selling and administrative expense | 270 |
| |Net operating income |420 |
| |Interest expense | 30 |
| |Net income before taxes |390 |
| |Income taxes (30%) | 117 |
| |Net income |$ 273 |
Dividends during Year 2 totaled $163 thousand, of which $6 thousand were preferred dividends. The market price of a share of common stock on December 31, Year 2 was $150.
Required:
Compute the following for Year 2:
a. Earnings per share of common stock.
b. Price-earnings ratio.
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) ÷
Average number of common shares outstanding* = ($273 − $6) ÷ 22 = $12.14
*Number of common shares outstanding = Common stock ÷ Par value
= $220 ÷ $10 = 22
b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $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%
*Adjusted net income = Net income + [Interest expense × (1−Tax rate)]
= $273 + 30 × (1 − 0.30) = $294
**Average total assets = ($2,190 + $2,180) ÷ 2 = $2,185
e. Return on common stockholders' equity = (Net income − Preferred dividends) ÷
Average common stockholders' equity* = ($273 − $6) ÷ $1,465 = 18.23%
*Average common stockholders' equity = ($1,520 + $1,410) ÷ 2 = $1,465
f. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding* = $1,520 ÷ 22 = $69.09
*Number of common shares outstanding = Common stock ÷ Par value
= $220 ÷ $10 = 22
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
178. Maranville Corporation's most recent balance sheet and income statement appear below:
| |Statement of Financial Position |
| |December 31, Year 2 and Year 1 |
| |(in thousands of dollars) |
| | |
| | |
| | |Year 2 |Year 1 |
| |Assets | | |
| |Current assets: | | |
| |Cash |$ 170 |$ 180 |
| |Accounts receivable |160 |180 |
| |Inventory |170 |160 |
| |Prepaid expenses | 70 | 60 |
| |Total current assets |570 |580 |
| |Plant and equipment, net | 840 | 830 |
| |Total assets |$1,410 |$1,410 |
| | | | |
| |Liabilities and Stockholders’ Equity | | |
| |Current liabilities: | | |
| |Accounts payable |$ 150 |$ 160 |
| |Accrued liabilities |40 |40 |
| |Notes payable, short term | 50 | 50 |
| |Total current liabilities |240 |250 |
| |Bonds payable |90 |100 |
| |Total liabilities |330 |350 |
| |Stockholders’ equity: | | |
| |Preferred stock, $100 par value, 10% |200 |200 |
| |Common stock, $2 par value |400 |400 |
| |Additional paid-in capital–common stock |140 |140 |
| |Retained earnings | 340 | 320 |
| |Total stockholders’ equity | 1,080 | 1,060 |
| |Total liabilities & stockholders’ equity |$1,410 |$1,410 |
| |Income Statement |
| |For the Year Ended December 31, Year 2 |
| |(in thousands of dollars) |
| | |
| | |
| |Sales (all on account) |$1,410 |
| |Cost of goods sold | 860 |
| |Gross margin |550 |
| |Selling and administrative expense | 449 |
| |Net operating income |101 |
| |Interest expense | 15 |
| |Net income before taxes |86 |
| |Income taxes (30%) | 26 |
| |Net income |$ 60 |
Dividends on common stock during Year 2 totaled $20 thousand. Dividends on preferred stock totaled $20 thousand. The market price of common stock at the end of Year 2 was $2.36 per share.
Required:
Compute the following for Year 2:
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.
Ans:
a. Earnings per share = (Net Income − Preferred Dividends)
÷ Average number of common shares outstanding*
= ($60 - $20) ÷ (200 shares + 200 shares)/2 = $0.20 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $400 ÷ $2 per share = 200 shares
b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $2.36 ÷ $0.20 = 11.8
c. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)
= $0.10 ÷ $0.20 = 50.0%
*Dividends per share = Common dividends ÷ Common shares (see above)
= $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%
e. Return on total assets = Adjusted net income* ÷ Average total assets**
= $70.5 ÷ $1,410 = 5.00%
*Adjusted net income
= Net income + [Interest expense × (1−Tax rate)]
= $60 + 15 × (1 − 0.30) = $70.5
**Average total assets = ($1,410 + $1,410) ÷ 2 = $1,410
f. Return on common stockholders' equity
= (Net income − Preferred dividends) ÷ Average common stockholders' equity*
= ($60 − $20) ÷ $870 = 4.60%
*Average common stockholders' equity = ($880 + $860) ÷ 2 = $870
g. Book value per share = Common stockholders' equity
÷ Number of common shares outstanding* = $880 ÷ 200 shares = $4.40 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $400 ÷ $2 per share = 200 shares
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting 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 |
| |Stockholders’ equity: | | |
| |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:
Compute the following for Year 2:
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.
Ans:
a. Earnings per share = (Net Income − Preferred Dividends)
÷ Average number of common shares outstanding*
= ($110 − $10) ÷ (200 shares + 200 shares)/2 = $0.50 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $400 ÷ $2 per share = 200 shares
b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $9.15 ÷ $0.50 = 18.3
c. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)
= $0.20 ÷ $0.50 = 40.0%
*Dividends per share = Common dividends ÷ Common shares (see above)
= $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%
e. Return on total assets = Adjusted net income* ÷ Average total assets**
= $124.7 ÷ $1,505 = 8.29%
*Adjusted net income = Net income + [Interest expense × (1−Tax rate)]
= $110 + 21 × (1 − 0.30) = $124.7
**Average total assets = ($1,520 + $1,490) ÷ 2 = $1,505
f. Return on common stockholders' equity = (Net income − Preferred dividends)
÷ Average common stockholders' equity* = ($110 − $10) ÷ $910 = 10.99%
*Average common stockholders' equity = ($940 + $880) ÷ 2 = $910
g. Book value per share = Common stockholders' equity
÷ Number of common shares outstanding*
= $940 ÷ 200 shares = $4.70 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $400 ÷ $2 per share = 200 shares
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting 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:
Earnings per share = (Net Income − Preferred Dividends)
÷ Average number of common shares outstanding
= ($1,379,000 − $260,000) ÷ 100,000 shares = $11.19 per share
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
181. Hoa Corporation's net income last year was $7,460,000. The dividend on common stock was $8.40 per share and the dividend on preferred stock was $4.30 per share. The market price of common stock at the end of the year was $78.90 per share. Throughout the year, 500,000 shares of common stock and 100,000 shares of preferred stock were outstanding.
Required:
Compute the price-earnings ratio. Show your work!
Ans:
Price-earnings ratio = Market price per share ÷ Earnings per share*
= $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
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
182. Dupas Corporation's net income last year was $7,330,000. The dividend on common stock was $12.70 per share and the dividend on preferred stock was $1.70 per share. The market price of common stock at the end of the year was $47.20 per share. Throughout the year, 500,000 shares of common stock and 200,000 shares of preferred 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)
÷ Average number of common shares outstanding
= ($7,330,000 − $340,000) ÷ 500,000 shares = $13.98 per share
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting 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:
Dividend yield ratio = Dividends per share ÷ Market price per share
= $13.00 ÷ $68.60 = 0.19
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
184. Allaman Corporation's most recent income statement appears below:
| |Sales (all on account) |$760,000 |
| |Cost of goods sold | 450,000 |
| |Gross margin |310,000 |
| |Selling and administrative expense | 100,000 |
| |Net operating income |210,000 |
| |Interest expense | 40,000 |
| |Net income before taxes |170,000 |
| |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:
Return on total assets = Adjusted net income* ÷ Average total assets**
= $147,000 ÷ $950,000 = 15.5%
*Adjusted net income = Net income + [Interest expense × (1−Tax rate)]
= $119,000 + 40,000 × (1 − 0.30) = $147,000
**Average total assets = ($930,000 + $970,000) ÷ 2 = $950,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
185. Excerpts from Orr Corporation's most recent balance sheet appear below:
| | |Year 2 |Year 1 |
| |Preferred stock |$ 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:
Return on common stockholders' equity = (Net income − Preferred dividends)
÷ Average common stockholders' equity* = ($147,000 − $27,000) ÷ $1,175,000 = 10.2%
*Average common stockholders' equity = ($1,210,000 + $1,140,000) ÷ 2 = $1,175,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
186. Data from Speir Corporation's most recent balance sheet appear below:
| |Preferred stock |$ 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 = $7.80 per share
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
187. Financial statements for Rarick Company appear below:
| |Rarick Company |
| |Statement of Financial Position |
| |December 31, Year 2 and Year 1 |
| |(dollars in thousands) |
| | |
| | |
| | |
| | |Year 2 |Year 1 |
| |Current assets: | | |
| |Cash and marketable securities |$ 120 |$ 120 |
| |Accounts receivable, net |180 |150 |
| |Inventory |100 |100 |
| |Prepaid expenses | 10 | 20 |
| |Total current assets |410 |390 |
| |Noncurrent assets: | | |
| |Plant & equipment, net | 1,830 | 1,780 |
| |Total assets |$2,240 |$2,170 |
| | | | |
| |Current liabilities: | | |
| |Accounts payable |$ 130 |$ 150 |
| |Accrued liabilities |30 |50 |
| |Notes payable, short term | 270 | 270 |
| |Total current liabilities |430 |470 |
| |Noncurrent liabilities: | | |
| |Bonds payable | 310 | 300 |
| |Total liabilities | 740 | 770 |
| |Stockholders’ equity: | | |
| |Preferred stock, $10 par, 10% |100 |100 |
| |Common stock, $5 par |240 |240 |
| |Additional paid-in capital–common stock |250 |250 |
| |Retained earnings | 910 | 810 |
| |Total stockholders’ equity | 1,500 | 1,400 |
| |Total liabilities & stockholders’ equity |$2,240 |$2,170 |
| |Rarick Company |
| |Income Statement |
| |For the Year Ended December 31, Year 2 |
| |(dollars in thousands) |
| | |
| | |
| | |
| |Sales (all on account) |$2,400 |
| |Cost of goods sold | 1,680 |
| |Gross margin |720 |
| |Selling and administrative expense | 280 |
| |Net operating income |440 |
| |Interest expense | 30 |
| |Net income before taxes |410 |
| |Income taxes (30%) | 123 |
| |Net income |$ 287 |
Required:
Compute the following for Year 2:
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
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $120 + $180 = $300
c. Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $2,400 ÷ $165 = 14.55
*Average accounts receivable = ($180 + $150) ÷ 2 = $165
Average collection period = 365 days ÷ Accounts receivable turnover
= 365 ÷ 14.55 = 25.1 days
d. Inventory turnover = Cost of goods sold ÷ Average inventory*
= $1,680 ÷ $100 = 16.80
*Average inventory = ($100 + $100) ÷ 2 = $100
e. Times interest earned = Net operating income ÷ Interest expense
= $440 ÷ $30 = 14.67
f. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity
= $740 ÷ $1,500 = 0.49
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,4 Level: Medium
188. Carleton Corporation's most recent balance sheet and income statement appear below:
| |Statement of Financial Position |
| |December 31, Year 2 and Year 1 |
| |(in thousands of dollars) |
| | |
| | |
| | |Year 2 |Year 1 |
| |Assets | | |
| |Current assets: | | |
| |Cash |$ 30 |$ 110 |
| |Accounts receivable |210 |260 |
| |Inventory |190 |170 |
| |Prepaid expenses | 70 | 70 |
| |Total current assets |500 |610 |
| |Plant and equipment, net | 810 | 740 |
| |Total assets |$1,310 |$1,350 |
| | | | |
| |Liabilities and Stockholders’ Equity | | |
| |Current liabilities: | | |
| |Accounts payable |$ 140 |$ 150 |
| |Accrued liabilities |30 |30 |
| |Notes payable, short term | 40 | 40 |
| |Total current liabilities |210 |220 |
| |Bonds payable | 190 | 240 |
| |Total liabilities | 400 | 460 |
| |Stockholders’ equity: | | |
| |Preferred stock, $100 par value, 5% |100 |100 |
| |Common stock, $2 par value |400 |400 |
| |Additional paid-in capital–common stock |130 |130 |
| |Retained earnings | 280 | 260 |
| |Total stockholders’ equity | 910 | 890 |
| |Total liabilities & stockholders’ equity |$1,310 |$1,350 |
| |Income Statement |
| |For the Year Ended December 31, Year 2 |
| |(in thousands of dollars) |
| | |
| | |
| |Sales (all on account) |$1,260 |
| |Cost of goods sold | 770 |
| |Gross margin |490 |
| |Selling and administrative expense | 400 |
| |Net operating income |90 |
| |Interest expense | 26 |
| |Net income before taxes |64 |
| |Income taxes (30%) | 19 |
| |Net income |$ 45 |
Required:
Compute the following for Year 2:
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 thousand = $290 thousand
b. Current ratio = Current assets ÷ Current liabilities = $500 ÷ $210 = 2.38
c. Acid-test ratio = Quick assets* ÷ Current liabilities = $240 ÷ $210 = 1.14
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $30 + $0 + $210 = $240
d. Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,260 ÷ $235 = 5.36
*Average accounts receivable = ($210 + $260) ÷ 2 = $235
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
*Average inventory = ($190 + $170) ÷ 2 = $180
g. Average sale period = 365 days ÷ Inventory turnover (see above)
= 365 days ÷ 4.28 = 85.3 days
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
189. Excerpts from Beaty Corporation's most recent balance sheet (in thousands of dollars) appear below:
| | |Year 2 |Year 1 |
| |Current assets: | | |
| |Cash |$ 70 |$140 |
| |Accounts receivable |250 |280 |
| |Inventory |150 |140 |
| |Prepaid expenses | 20 | 20 |
| |Total current assets |$490 |$580 |
| |Current liabilities: | | |
| |Accounts payable |$150 |$170 |
| |Accrued liabilities |90 |90 |
| |Notes payable, short term | 80 | 80 |
| |Total current liabilities |$320 |$340 |
Sales on account during the year totaled $1,320 thousand. Cost of goods sold was $730 thousand.
Required:
Compute the following for Year 2:
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 thousand = $170 thousand
b. Current ratio = Current assets ÷ Current liabilities = $490 ÷ $320 = 1.53
c. Acid-test ratio = Quick assets* ÷ Current liabilities = $320 ÷ $320 = 1.00
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $70 + $0 + $250 = $320
d. Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,320 ÷ $265 = 4.98
*Average accounts receivable = ($250 + $280) ÷ 2 = $265
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
*Average inventory = ($150 + $140) ÷ 2 = $145
g. Average sale period = 365 days ÷ Inventory turnover (see above)
= 365 days ÷ 5.03 = 72.6 days
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
190. Romaine Corporation's total current assets are $300,000, its noncurrent assets are $570,000, its total current liabilities are $270,000, its long-term liabilities 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
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
191. Wayment Corporation's total current assets are $310,000, its noncurrent assets are $680,000, its total current liabilities are $270,000, its long-term liabilities 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
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting 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:
Acid-test ratio = Quick assets* ÷ Current liabilities = $66,000 ÷ $118,000 = 0.56
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $13,000 + $21,000 + $32,000 = $66,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
193. Cozzolino Corporation has provided the following data:
| | |This Year |Last Year |
| |Accounts receivable |$118,000 |$123,000 |
| |Inventory |$141,000 |$165,000 |
| |Sales on account |$687,000 | |
| |Cost of goods sold |$455,000 | |
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
*Average accounts receivable = ($118,000 + $123,000) ÷ 2 = $120,500
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
194. Data from Ringwald Corporation's most recent balance sheet and income statement appear below:
| | |This Year |Last Year |
| |Accounts receivable |$118,000 |$103,000 |
| |Inventory |$164,000 |$173,000 |
| |Sales on account |$727,000 | |
| |Cost of goods sold |$481,000 | |
Required:
Compute the average collection period for this year:
Ans:
Average collection period = 365 days ÷ Accounts receivable turnover*
= 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
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
195. Hsieh Corporation has provided the following data:
| | |This Year |Last Year |
| |Accounts receivable |$104,000 |$115,000 |
| |Inventory |$150,000 |$157,000 |
| |Sales on account |$879,000 | |
| |Cost of goods sold |$575,000 | |
Required:
Compute the inventory turnover for this year:
Ans:
Inventory turnover = Cost of goods sold ÷ Average inventory*
= $575,000 ÷ $153,500 = 3.75
*Average inventory = ($150,000 + $157,000) ÷ 2 = $153,500
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
196. Data from Buttler Corporation's most recent balance sheet and income statement appear below:
| | |This Year |Last Year |
| |Accounts receivable |$134,000 |$138,000 |
| |Inventory |$151,000 |$171,000 |
| |Sales on account |$864,000 | |
| |Cost of goods sold |$675,000 | |
Required:
Compute the average sale period for this year:
Ans:
Average sale period = 365 days ÷ Inventory turnover*
= 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 = $161,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
197. Erke Corporation's most recent balance sheet and income statement appear below:
| |Statement of Financial Position |
| |December 31, Year 2 and Year 1 |
| |(in thousands of dollars) |
| | |
| | |
| | |Year 2 |Year 1 |
| |Assets | | |
| |Current assets: | | |
| |Cash |$ 130 |$ 160 |
| |Accounts receivable |120 |110 |
| |Inventory |90 |100 |
| |Prepaid expenses | 20 | 20 |
| |Total current assets |360 |390 |
| |Plant and equipment, net | 890 | 840 |
| |Total assets |$1,250 |$1,230 |
| | | | |
| |Liabilities and Stockholders’ Equity | | |
| |Current liabilities: | | |
| |Accounts payable |$ 190 |$ 180 |
| |Accrued liabilities |70 |60 |
| |Notes payable, short term | 40 | 40 |
| |Total current liabilities |300 |280 |
| |Bonds payable | 130 | 150 |
| |Total liabilities | 430 | 430 |
| |Stockholders’ equity: | | |
| |Preferred stock, $100 par value, 5% |100 |100 |
| |Common stock, $2 par value |200 |200 |
| |Additional paid-in capital–common stock |130 |130 |
| |Retained earnings | 390 | 370 |
| |Total stockholders’ equity | 820 | 800 |
| |Total liabilities & stockholders’ equity |$1,250 |$1,230 |
| |Income Statement |
| |For the Year Ended December 31, Year 2 |
| |(in thousands of dollars) |
| | |
| | |
| |Sales (all on account) |$1,150 |
| |Cost of goods sold | 710 |
| |Gross margin |440 |
| |Selling and administrative expense | 358 |
| |Net operating income |82 |
| |Interest expense | 18 |
| |Net income before taxes |64 |
| |Income taxes (30%) | 19 |
| |Net income |$ 45 |
Required:
Compute the following for Year 2:
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
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting 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:
Compute the following for Year 2:
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
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting 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:
Times interest earned = Net operating income ÷ Interest expense
= $51,000 ÷ $37,000 = 1.38
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting 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:
Debt-to-equity ratio = Liabilities ÷ Stockholders' equity
= $610,000 ÷ $130,000 = 4.69
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
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