Required: Method A Method B Method C

12/16/21, 1:40 PM Assignment Print View

1.
Several investors are in the process of organizing a new company. The investors feel that $500,000 would be adequate to
finance the new company's operations. Three methods are available to finance the new company:
(1.) All $500,000 could be obtained through the issuance of common shares.
(2.) Common shares could be issued to provide $250,000 with the other $250,000 obtained by issuing $100 par value,
l0% preferred shares.
(3.) Common shares could be issued to provide $25,000 with the other $250,000 obtained by issuing bonds with an
interest rate of 10%.
The investors are confident that the company could earn $175,000 each year before interest and taxes. The tax rate is
25%.
Required:
a) If the estimates are correct, compute the net income available to common shareholders under each of the three
financing methods proposed above.
b) Using the income data computed in part a) above, compute the return on common shareholders' equity under each of
the three methods.
c) Why do methods 2 and 3 provided a greater return on common equity than does method 1? Why does method 3
provide a greater return on common equity than method 2?
a) Net income available to common shareholders:

Method A Method B Method C
Income before interest $175,000 $175,000 $175,000
and taxes
Deduct interest 25,000
expense: 0.10 ×
$250,000
Income before taxes $175,000 $175,000 $150,000
Deduct income taxes 70,000 70,000 60,000
(40%)
Net income $105,000 $105,000 $90,000
Deduct preferred 25,000 U
dividends: 0.10 ×
$250,000
Net income to common $105,000 $80,000 90,000
shareholders
b) Return on common equity:

Method A Method B Method C
Net income to common $105,000 $80,000 $90,0000
shareholders
Common shareholders' $500,000 $250,000 $250,000
investment
Return on common 21.00% 32.00% 36.00%
equity
c) Methods 2 and 3 provide a greater return on common equity than Method 1 due to the effect of positive leverage.
Methods 2 and 3 each contain sources of funds that require a fixed annual return on the funds provided. This fixed annual
return is less than what is being earned on the assets of the company, with the difference going to common shareholders.
Method 3 uses debt and provides more leverage than Method 2, in which preferred shares are issued. The difference is
due to the deductibility for tax purposes of the interest on debt, whereas dividends on preferred shares are not deductible
for tax purposes.
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2.
Financial statements for Qiang Company appear below:

Qiang 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 $170 $160
Accounts Receivable, Net $130 $100
Inventory $130 $130
Prepaid Expenses $60 $70
Total Current Assets $490 $460
Noncurrent Assets:
Plant & Equipment, Net $1900 $1880
Total Assets $2390 $2340
Current Liabilities:
Accounts Payable $160 $160
Accrued Liabilities $50 $70
Notes Payable, Short Term $80 $110
Total Current Liabilities $290 $340
Noncurrent Liabilities:
Bonds Payable $400 $400
Total Liabilities $690 $740
Shareholders' Equity:
Preferred Shares, $5 Par, 10% $120 $120
Common Shares, $5 Par 180 $180
Additional Paid-In Capital - $120 $120
Common Shares
Retained Earnings $1280 $1180
Total Shareholders' Equity $1700 $1600
Total Liabilities & Shareholders' $2390 $2340
Equity

Qiang Company Income Statement for the Year
Ended December 31, Year 2 (dollars in
thousands)
Sales (All on Account) $1500
Costs of Goods Sold $1050
Gross Margin $450
Operating Expenses $180
Net Operating Income $270
Interest Expense $40
Net Income before Taxes $230
Income Taxes (30%) $69
Net Income $161
Total dividends paid during Year 2 were $61,000, of which $12,000 were for preferred shares. The market price of a
common share on December 31, Year 2 was $50.
The preferred shares are convertible to common shares on the basis of four common shares for each preferred share.
Required:
Calculate the following for Year 2:
a) Basic earnings per common share.

b) Fully diluted earnings per common share.
c) Price-earnings ratio (use basic earnings per share).
d) Dividend yield ratio.
e) Return on total assets.
f) Return on common shareholders' equity.
g) Book value per share.

a) Basic earnings per share = (Net Income - Preferred Dividends)/Average number of common shares outstanding*
= ($161 - $12)/36
= $4.14
* Number of common shares outstanding = Common shares/Par value
= $180/$5
= 36
b) Fully diluted earnings per share = Net Income/(Number of common shares outstanding + Common shares to be issued
on assumed conversion of preferred shares*)
= $161/(36 + 96*)
= $161/132
= $1.22
* Number of common shares to be issued on assumed conversion of preferred shares
= ($120/$5) × 4
= 24 × 4
= 96
c) Price-earnings ratio = Market price per share/Basic earnings per share*
= $50/$4.14
= 12.1
* See part a) above
d) Dividend yield ratio = Dividends per share*/Market price per share
= $1.36/$50.00
= 2.72%
* Dividends per share = Common dividends/Common shares**
= $49/36
= $1.36
** See part a) above
e) Return on total assets = Adjusted net income*/Average total assets**
= $189/$2,365
= 7.99%
* Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]
= $161 + 40 × (1 - 0.30)
= $189
** Average total assets = ($2,390 + $2,340)/2
= $2,365
f) Return on common shareholders' equity = (Net income - Preferred dividends)/Average common shareholders' equity*
= ($161 - $12)/$1,530
= 9.74%
* Average common shareholders' equity = ($1,580 + $1,480)/2
= $1,530
g) Book value per share = Common shareholders' equity/Number of common shares outstanding*
= $1,580/36
= $43.89
* See part a) above

3.
Information concerning the common shares of Morris Company as of the end of the company's fiscal year is presented
below:

Number of Shares Outstanding 460,000
Par Values per Share $5.00
Dividend per Share $6.00
Market Price per Share $54.00
Earnings per Share $18.00
The dividend yield ratio is closest to which of the following?
 11.1%
 33.3%
 50.0%
 120.0%
6/54 = 11.1%.

4.
Financial statements for Monkey Company appear below:

Monkey Company Statement of Financial Position December 31,
Year 2 Year 1
Current Assets:
Inventory $190 $260
Noncurrent Assets:
Total Assets $2,060 $2,010
Common Shares
Total Liabilities & Shareholders' $2,060 $2,010
Equity

Monkey Company Income Statement for the
Year Ended December 31, Year 2 (dollars in
thousands)
Sales (All on Account) $2,000
Gross Margin $740
Net Income $196
Required:
a) Current ratio.
b) Acid-test (quick) ratio.
c) Average collection period (age of receivables).
d) Inventory turnover.
e) Times interest earned.
f) Debt-to-equity ratio.
a) Current ratio = Current assets/Current liabilities

= $560 /$280
= 2.00 to 1
b) Acid-test ratio = Quick assets*/Current liabilities
= $330 /$280
= 1.18 to 1
* Quick assets = Cash + Marketable securities + Current receivables
= $210 + $120
= $330
c) Accounts receivable turnover = Sales on account/Average accounts receivable*
= $2,000 /$110
= 18.18 times
* Average accounts receivable= ($120 + $100 )/2
= $110
Average collection period = 365 days/Accounts receivable turnover
= 365/18.18
= 20.1 days
d) Inventory turnover = Cost of goods sold/Average inventory*
= $1,260/$225
= 5.60 times
* Average inventory = ($190 + $260 )/2
= $225
e) Times interest earned = Net operating income/Interest expense
= $530 /$250
= 2.12 times
f) Debt-to-equity ratio = Liabilities/Shareholders' equity
= $740 /$1,320
= 0.56 to 1

5.
Draban Company's working capital is $38,000, and its current liabilities are $59,000. The company's current ratio is
closest to which of the following?
 0.36 to 1.
 0.64 to 1.
 1.64 to 1.
 2.55 to 1.
(59,000 + 38,000)/59,000 = 1.64 to 1.

6.
The times interest earned ratio of McHugh Company was 4.5 times. The interest expense for the year was $20,000, and
the company's tax rate was 40%. What was the company's net income?
 $22,000
 $42,000
 $54,000
 $66,000
EBIT = 20,000 * 4.5 = 90,000. NI = (90,000 - 20,000) * (1 -.40) = $42,000.

7.
Braverman Company's net income last year was $75,000, and its interest expense was $10,000. Total assets at the
beginning of the year were $650,000, and total assets at the end of the year were $610,000. The company's income tax
rate was 30%. The company's return on total assets for the year was closest to which of the following?
 11.9%
 12.4%
 13.0%
 13.5%
[75,000 + 10,000 * (1 -.30)]/[(650,000 + 610,000)/2] = 13.0%.

8.

Gross margin is an important indicator of liquidity.
 True
 False

9.

Karma Company has total assets of $190,000 and total liabilities of $90,000. The company's debt-to-equity ratio is closest
to which of the following?
 0.32 to 1.
 0.47 to 1.
 0.53 to 1.
 0.90 to 1.
90,000/(190,000 - 90,000) = 0.90 to 1.

10.
Financial statements for AAR Company appear below:

AAR Company Statement of Financial Position
December 31
Current Assets:
Cash and Marketable Securities $21,000
Accounts Receivable, Net $170,000
Inventory $300,000
Prepaid Expenses $10,000
Total Current Assets $501,000
Noncurrent Assets:
Plant & Equipment, Net $810,000
Total Assets $1,311,000
Accounts Payable $77,000
Accrued Liabilities $26,000
Notes Payable, Short Term $108,000
Total Current Liabilities $211,000
Bonds Payable $300,000
Total Liabilities $511,000
Common Shares, $5 Par $100,000
Retained Earnings $700,000
Total Shareholders' Equity $800,000
Total Liabilities & Shareholders' Equity $1,311,000

AAR Company Income Statement for the Year
thousands)
Sales (All on Account) $2,100,000
Costs of Goods Sold $1,300,000
Gross Margin $800,000
Operating Expenses $130,000
Net Operating Income $670,000
Interest Expense $52,000
Net Income before Taxes $618,000
Income Taxes (30%) $185,400
Net Income $432,500
AAR Company paid dividends of $3.15 per share during the year. The market price of the company's common shares at
December 31 was $63 per share. Total assets at the beginning of the year were $1,100,000, and total shareholders' equity
was $725,000. The balance of accounts receivable at the beginning of the year was $150,000. The balance in inventory at
the beginning of the year was $250,000.
Required:
Calculate the following:
a) Current ratio.
b) Acid-test (quick) ratio.
c) Average collection period (age of receivables).
d) Inventory turnover.
e) Times interest earned.
f) Debt-to-equity ratio.
g) Dividend payout ratio.
h) Price-earnings ratio.
i) Return on total assets.
j) Return on common shareholders' equity.
k) Was financial leverage positive or negative for the year? Explain.
a) Current ratio = Current assets/Current liabilities
= $501, 000/$211,000
= 2.37 to 1
b) Acid-test ratio = Quick assets*/Current liabilities
= $19 1,000/$211, 000
= 0.91 to 1
c) Accounts receivable turnover = Sales on account/Average accounts receivable*

= $2,100,000/$160,000
= 13.13 times
* Average accounts receivable = ($17 0,000 + $150,000)/2
= $160,000
Average collection period = 365 days/Accounts receivable turnover
= 365/13.13 5
= 27.80 days
d) Inventory turnover = Cost of goods sold/Average inventory*
= $1,300,000/$275,000
= 4.73 times
* Average inventory = ($300,000 + $250,000)/2
= $275,000
e) Times interest earned = Net operating income/Interest expense
= $670,000 /$52,000
= 12.88 Times.
f) Debt-to-equity ratio = Liabilities/Shareholders' equity
= $511,000 /$800,000
= 0.639 to 1
g) Dividend payout ratio = Dividends per share/Earnings per share.
= $3.15/($105,000/20,000 shares)
= $3.15/$5.25
= 60%
h) Dividend yield ratio = Dividends paid per share/Market price per share
= $3.15/$63.00
= 5%
i) Price-earnings ratio = Market price per share/Earnings per share
= $63/$5.25
= 12.0
j) Return on total assets = ((Net income + (Interest expense × (1 - Tax rate))/Average total assets
= (($432,500 + (52,000 × (1 - 0.30))/(($1,100,000 + $1,311,000 )/2))
= $468,900 /$710,500
= 66.00%
k) Return on common shareholders' equity = (Net income - Preferred dividends)/Average common shareholders' equity
= $432,600 /[($725,000 + $800,000)/2]
= 432,600 / 762,500
= 56.73%
l) Financial leverage was negative since rate of return to common shareholders (56.73) was less than the rate of return on
total assets (66%).

11.

The total assets of the Philbin Company on January 1 were $2.3 million and on December 31 were $2.5 million. Net income
for the year was $188,000. Dividends for the year were $75,000, interest expense was $70,000, and the tax rate was 30%.
The return on total assets for the year was closest to which of the following?
 6.8%
 9.5%
 9.9%
 10.8%
[188,000 + 70,000 * (1 -.30)]/[(2.3M + 2.5M)/2] = 9.9%.

12.

Last year, Dunn Company purchased $1,600,000 of inventory. The cost of goods sold was $1,500,000 and the ending
inventory was $230,000. What was the inventory turnover? (Round your final answer to one decimal place.)
 5.0 times.
 5.3 times.
 8.3 times.
 6.4 times.
BI = $1,500,000 + $230,000 - $1,600,000 = $130,000;

Turnover = $1,500,000 / (($130,000 + $230,000) / 2) = 8.33 times = 8.3 times (rounded).

13.

The market price of XYZ Company's common shares dropped from $25 to $21 per share. The dividend paid per share
remained unchanged. How would the company's dividend payout ratio change?
 Increase.
 Decrease.
 Remain unchanged.
 Impossible to determine without more information.

14.

The Miller Company's current ratio is greater than 1.0 to 1. By paying off some of its accounts payable using cash, what
would be the effect on the company's current ratio?
 An increase.
 A decrease.
 Remain unchanged.
 Impossible to determine from the information given.

15.

Vertical analysis is the preparation of common-size statements.
 True
 False

16.

The price-earnings ratio is calculated by dividing the market price per share by the current earnings per share.
 True
 False

17.
At April 30th, 2022, IOU Inc, had the following balance sheet:

Assets
Cash & Cash Equivalents $ 25,000
Accounts Receivable $ 30,000
Inventory $ 20,000
Prepaid Rent $ 10,000
Building $ 150,000
Less: Accumulated Depreciation: $ (25,000)
Machinery & Equipment $ 25,000
Total Assets $ 230,000
Liabilities
Accounts Payable $ 30,000
Accrued Liabilities $ 30,000
Interest Payable $ 1,000
Bonds Payable $ 42,000
Common Shares $ 25,000
Retained Earnings $ 102,000
Total Liabilities & Shareholder Equity $ 230,000

The following events took place during May 2022:
1. Sold $40,000 worth of merchandise to a client on account
2. Purchased $100,000 worth of merchandise for resale on account
3. Paid $10,000 worth of administrative expenses for the month, all in cash
4. Sold machinery & equipment with a cost of $5,000 and accumulated depreciation of $2,000 for $1,000
5. The prepaid rent balance as at April 30th represents IOU’s May 2022 rent.
6. Depreciation expense on an annual basis are as follows: - building $18,000 - machinery & equipment $12,000
7. On May 1st, IOU Inc. received $3,000 cash for 3 months worth of consulting services, to be rendered evenly over the
next 3 months
8. The bonds were issued at par and pay 10% interest per annum, payable semi-annually on June 30th and December 31st
each year

Compute IOU’s Debt-to-Equity Ratio on April 30th.
 0.70
 1.05
 0.81
 1.33
Debt-to-Equity Ratio = total liabilities / shareholders' equity

= $103,000 / $127,000
= 0.81 (rounded).

18.

Assets
Inventory $ 20,000
Building $ 150,000
Liabilities

next 3 months
each year

Compute IOU's Inventory Turnover, assuming IOU's Cost of Goods Sold was $22,000 for May.
 0.70
 1.05
 0.37
 1.33
Inventory Turnover:

Average Inventory: ($20,000 + $20,000 + $100,000 – $22,000) / 2 = $59,000.

Inventory Turnover = cost of goods sold / average inventory balance
= $22,000 / $59,000
= 0.37 times.

19.

A firm had the following results for its first two years of operations:

Year 1 Year 2
Sales $ 1,800,000 $ 3,200,000
Cost of Goods Sold $ 800,000 $ 1,700,000

What percentage increase in gross margin (dollars) did the company experience?
 20%
 25%
 30%
 50%
The company’s gross margin figures for years 1 and 2 were $1,000,000 and $1,500,000 respectively. This represents a
50% increase.

20.


Assets
Inventory $ 20,000
Building $ 150,000
Liabilities

next 3 months
each year
Compute IOU's Acid Test Ratio on April 30th, 2022.
 0.902
 0.84
 1.45
 1.39
Acid Test Ratio = Current Assets (excluding inventories and prepaid expenses) / Current Liabilities
= ($25,000 + $30,000) / ($30,000 + $30,000 + $1,000)
= 0.902 (rounded)

21.

If a company has a current ratio greater than 1.0 to 1, repaying a short-term note payable will increase the current ratio.
 True
 False

22.

At July 31st, 2022, IOU Inc, had the following balance sheet:

Assets
Inventory $ 20,000
Building $ 150,000
Liabilities
Interest Payable $ 350

The following events took place during August 2022:
5. The prepaid rent balance as at July 31st represents IOU’s August 2022 rent.
6. Depreciation expense on an annual basis are as follows:
- building $18,000
- machinery & equipment $12,000
7. On August 1st, IOU Inc. received $3,000 cash for 3 months worth of consulting services, to be rendered evenly over the
next 3 months
each year

Compute IOU's Times Interest Earned Ratio assuming that earnings before interest and income taxes amounted to $1,750
for August.
 1 times
 2 times
 3.57 times
 5 times
Times Interest Earned Ratio:

Monthly Interest Expense: $42,000 × 10% / 12 = $350.

Times Interest Earned Ratio = earnings before interest and income taxes / interest expense = $1,750 / $350 = 5 times.

23.

Condensed financial statements of Miller Company at the beginning and at the end of the current year are given below:

Millar Company. Balance Sheet
End of Current Year Beginning of Current Year
Cash $10,000 $8,000
Marketable Securities 26,000 28,000
Accounts Receivable, Net 100,000 120,000
Inventories 170,000 100,000
Prepaid and equipment, net 280,000 260,000
Total Assets $586,000 $516,000

Accounts Payable 60,000 $40,000
Accrued Short Term liabilities 76,000 61,000
Bonds Payable 75,000 75,000
Preferred Shares, 10%, $100 Par 50,000 50,000
Common Shares, $10 Par 100,000 100,000
Additional Paid-In Capital - 50,000 50,000
Common Shares
Retained Earnings 175,000 140,000
Total Liabilities & Equity 586,000 516,000

Millar Company Condensed Income Statement
for the Current Year
Costs of Goods Sold $380,000
Net Income $50,000
The company paid total dividends of $15,000 during the year, of which $5,000 were to preferred shareholders. The
market price of a common share at the end of the year was $30.
Required:
On the basis of the information given above, fill in the blanks with the appropriate figures.
Example: The current ratio at the end of the current year would be computed by dividing $270,000 by $100,000.
a) The acid-test (quick) ratio at the end of the current year would be computed by dividing _______________ by
________________.
b) The inventory turnover for the year would be computed by dividing _______________ by ________________.
c) The debt-to-equity ratio at the end of the current year would be computed by dividing _______________ by
________________.
d) The earnings per common share would be computed by dividing _______________ by ________________.
e) The accounts receivable turnover for the year would be computed by dividing _______________ by
________________.
f) The times interest earned for the year would be computed by dividing _______________ by ________________.
g) The return on common shareholders' equity for the year would be computed by dividing _______________ by
________________.
h) The dividend yield would be computed by dividing _______________ by ________________.
a) $136,000; $136,000.
b) $380,000; $135,000.
c) $211,000; $375,000.
d) $45,000; 10,000 shares.
e) $700,000; $100,000.
f) $100,000; $10,000.
g) $50,000; $375,000
h) $1; $30.

24.

ABC Inc. had the following Shareholders Equity on January 1st, Year 2:

Common Shares (2,200,000 shares issued and outstanding) $2,500,000
Preferred Shares (500,000 shares issues and outstanding) $1,500,000
Retained Earnings $3,500,000

On April 1st, Year 2, the company issued an additional 800,000 common shares. On December 31st, Year 2, the company
declared dividends as follows: Common Shares: $0.50 per share outstanding Preferred Shares: $1.00 per share
outstanding. Other Information: ABC reported a net income of $8 million for Year 2, which included an extraordinary gain
of $1.5 million net of tax. ABC is subject to a 40% tax rate. On January 1st, ABC also had 1,000 convertible bonds which
were issued at face value during year. These bonds were carried at $1,000,000 on ABC's books. Each bond was
convertible into 200 common shares at ABC's option. The market value of ABC's common shares was $4.00 per share on
December 31st, Year 2.

Based on the information provided compute ABC's book value per share at the end of Year 2.
 $9.25
 $11
 $10
 $5
Book Value per share = (total shareholders' equity – preferred shares) / number of common shares outstanding = ($4
million + $8 million – $500,000 – $500,000) / 2,200,000 = $5.

25.

At April 30th, 2022, IOU Inc, had the following balance sheet: Compute IOU's Working Capital on April 30th, 2022.

Assets
Inventory $ 20,000
Building $ 150,000
Liabilities

next 3 months
each year

Compute IOU' s Working Capital on April 30th, 2022.
 $24,000
 ($12,000)
 $31,000
 $43,000
Book Value per share = (total shareholders' equity − preferred shares) / number of common shares outstanding = ($4
million + $8 million − $500,000 − $500,000) / 2,200,000 = $5.

26.


outstanding. Other Information: ABC reported a net income of $9 million for Year 2. On January 1st, ABC also had 1,000
convertible bonds which were issued at face value during year. These bonds were carried at $1,000,000 on ABC's books.
Each bond was convertible into 200 common shares at ABC's option. The market value of ABC's common shares was
$5.00 per share on December 31st, Year 2.

Based on the information provided compute ABC's dividend yield for Year 2.
 10%
 6%
 12.5%
 8%
Dividend Yield = dividends per share / market price per share = $0.50 / $5 = 10%.

27.

Harris Company, a retailer, had cost of goods sold of $290,000 last year. The beginning inventory balance was $26,000,
and the ending inventory balance was $24,000. The company's inventory turnover was closest to which of the following?
 5.80 times.
 11.15 times.
 11.60 times.
 12.08 times.
290,000/[(26,000 + 24,000)/2] = 11.60 times.

28.

The gross margin percentage is most likely to be used to assess which of the following?
 How quickly accounts receivables can be collected.
 How quickly inventories are sold.
 The efficiency of administrative departments.
 The overall profitability of the company's products.

29.

How is horizontal analysis of financial statements accomplished?
 By placing statement items on an after-tax basis.
 By common-size statements.
 By calculating both earnings per share and the price-earnings ratio.
 By trend percentages.

30.
Financial leverage results from the difference between the rate of return the company earns on investments in its own
assets and the rate of return that the company must pay its creditors.
 True
 False

31.

What will be the effect of a sale of a piece of equipment at book value for cash?
 An increase in working capital.
 A decrease in working capital.
 A decrease in the debt-to-equity ratio.
 An increase in net income.

32.

The net accounts receivable for Andante Company were $180,000 at the beginning of the most recent year and
$200,000 at the end of the year. If the accounts receivable turnover for the year was 6.0 and 17% of total sales were cash
sales, what were the total sales for the year?
 $1,445,000
 $1,500,000
 $1,373,494
 $1,900,000
Credit Sales = 6.0 * ($180,000 + $200,000) / 2 = $1,140,000.

Sales = $1,140,000/ (1-0.17) = $1,373,494.

33.

Which one of the following would increase the working capital of a company?
 Cash payment of payroll taxes payable.
 Refinancing a short-term note payable with a two-year note payable.
 Cash collection of accounts receivable.
 Payment of a 20-year mortgage payable with cash.

34.


Assets
Inventory $ 20,000
Building $ 150,000
Liabilities

next 3 months
each year

Compute IOU's Average Collections Period. IOU's collections from clients amounted to $30,000.
 10 days
 30 days
 12.5 days
 15 days
Accounts Receivable Turnover = sales on account / average accounts receivable balance

= $40,000 / ($30,000 + $40,000 – $30,000)
= 1 time

Average Collection Period (age of receivables) = 365 days / accounts receivable turnover
= 30 / 1
= 30 days

Note that we are using one month of sales, so we divide by 30 days and not 365 days (which would be
used for annual sales).

35.
Marcy Corporation's current ratio is currently 1.75 to 1. The firm's current ratio cannot fall below 1.5 to 1 without violating
agreements with its bondholders. If current liabilities are presently $250 million, what is the maximum new short-term debt
that can be issued to finance an equivalent amount of inventory expansion?
 $41.67 million.
 $62.50 million.
 $125.00 million.
 $375.00 million.
CA = 250M * 1.75 = 437.5M. max.

New short term debt = (437.5M - 250M * 1.5)/(1.5 - 1) = $125 million.

36.
Frabine Company had $150,000 in sales on account last year. The beginning accounts receivable balance was $14,000,
and the ending accounts receivable balance was $18,000. The company's accounts receivable turnover was closest to
which of the following?
 4.69 times.
 8.33 times.
 9.38 times.
 10.71 times.
150,000/[(14,000 + 18,000)/2] = 9.38 times.

37.

During the year just ended, James Company purchased $425,000 of inventory. The inventory balance at the beginning of
the year was $175,000. If the cost of goods sold for the year was $450,000, what was the inventory turnover for the year?
 2.57 times.
 2.62 times.
 2.77 times.
 3.00 times.
EI = 175,000 + 425,000 - 450,000 = 150,000.

Turnover = 450,000/[(175,000 + 150,000)/2] = 2.77 times.

38.

Last year, Allen Company's average collection period for accounts receivable was 40 days; this year, it increased to 60
days. Which of the following would most likely account for this change?
 A decrease in accounts receivable relative to sales.
 A decrease in sales.
 A relaxation of credit policies.
 An increase in sales.

39.

Karl Company has total assets of $170,000 and total liabilities of $110,000. The company's debt-to-equity ratio is closest to
 0.33 to 1.
 0.39 to 1.
 0.65 to 1.
 1.83 to 1.
110,000/(170,000 - 110,000) = 1.83 to 1.

40.

At the end of the year just completed, Orem Company's total current liabilities were $75,000, and its total long-term
liabilities were $225,000. Working capital at year-end was $100,000. If the company's debt-to-equity ratio is 0.30 to 1, total
long-term assets must equal which of the following?
 $1,000,000
 $1,125,000
 $1,225,000
 $1,300,000
TA = (75,000 + 225,000)/.30 + (75,000 + 225,000) = 1,300,000.

LTA = 1,300,000 - (100,000 + 75,000) = $1,125,000.

41.

Arlberg Company's net income last year was $270,000. The company had 150,000 common shares and 80,000 preferred
shares. 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 $1.80 per common share and $1.90 per preferred share. The earnings per
common share was closest to which of the following?
 $0.79
 $0.92
 $1.67
 $2.41
($270,000 - 80,000 * $1.90) / 150,000 = $0.79.

42.

The elements involved in the computation of working capital are frequently expressed in ratio form.
 True
 False

43.

A higher earnings per share is preferable.
 True
 False

44.

Crawler Company's net income last year was $80,000. The company paid dividends on preferred shares of $10,000, and
its average common shareholders' equity was $400,000. The company's return on common shareholders' equity for the
year was closest to which of the following?
 2.5%
 17.5%
 20.0%
 22.5%
(80,000 - 10,000)/400,000 = 17.5%.

45.


Assets
Inventory $ 20,000
Building $ 150,000
Liabilities

- building $18,000
next 3 months
each year

Compute IOU's current ratio on July 31st, 2022.
 1
 1.2
 1.45
 1.24
Current Ratio = Current Assets / Current Liabilities = ($30,000 + $30,000 + $20,000 + $20,000) / ($40,000 + $40,000 +
$350)
= 1.24 (rounded)

46.

Book value per share measures the amount that would be distributed to holders of each common share if all assets were
sold at their balance sheet carrying amounts and if all creditors were paid off.
 True
 False

47.

Brawer Company's net income last year was $55,000, and its interest expense was $20,000. Total assets at the beginning
of the year were $660,000, and total assets at the end of the year were $620,000. The company's income tax rate was
30%. The company's return on total assets for the year was closest to which of the following?
 8.6%
 9.5%
 10.8%
 11.7%
[55,000 + 20,000 * (1 -.30)]/[(660,000 + 620,000)/2] = 10.8%.

48.

If the company's accounts receivable turnover is decreasing, the average collection period is going up.
 True
 False

49.

Last year, Javer Company had a net income of $200,000, income tax expense of $90,000, and interest expense of
$18,000. The company's times interest earned was closest to which of the following? (Round your final answer to one
decimal place.)
 5.30 times.
 10.00 times.
 11.00 times.
 17.11 times.
($200,000 + $90,000 + $18,000) / $18,000 = 17.11 Times.

50.

Last year, Jackson Company had a net income of $170,000, income tax expense of $70,000, and interest expense of
$10,000. The company's times interest earned was closest to which of the following?
 3.70 times.
 8.00 times.
 9.00 times.
 25.00 times.
($170,000 + $70,000 + $10,000) /$10,000 = 25 times.

51.

M. K. Berry is the managing director of CE Ltd. a small, family-owned company that manufactures cutlery. His company
belongs to a trade association that publishes a monthly magazine. The latest issue of the magazine contains a very brief
article based on the analysis of the accounting statements published by the 35 companies that manufacture this type of
product. The article contains the following table:

Average for All Companies in the Industry
Return on Shareholders' Equity 30%
Return on Total Assets 25%
Gross Margin Percentage 28%
Current Ratio 1.4:1
Average Sale Period 40 days
Average Collection Period 45 days
CE Ltd.'s latest financial statements are as follows:

CE Ltd. Income Statement For the year end 31
October (in thousands)
Sales $900
Cost of Goods Sold $720
Gross Margin $180
Selling and Administrative Expenses $70
Interest $20
Net Income $90
The country in which the company operates has no corporate income tax. No dividends were paid during the year. All
sales are on account.

CE Ltd. Balance Sheets As of 31 October (in thousands)
This Year Last Year
Current assets:
Cash $7 $10
Accounts Receivable 110 105
Inventories 98 80
Noncurrent assets 530 510
Total assets $753 $705
Current liabilities:
Accounts payable $180 $206
Noncurrent liabilities:
Bonds payable 180 180
Common shares 130 130
Retained earnings 263 189
Total liabilities and shareholders' $753 $705
equity
Required:
a) Calculate each of the ratios listed in the magazine article for this year for CE, and comment briefly on CE Ltd.'s
performance in comparison to the industry averages.
b) Explain why it could be misleading to compare CE Ltd.'s ratios with those taken from the article.
a) Return on common shareholders' equity:
Net income = $90

Preferred dividends = $0
Average common shareholders' equity = ((130 + 263) + (130 + 189)) / 2 = $356
Return on common shareholders' equity = 90 / 356 = 25.3%
Return on total assets:
Net income = $90

Tax rate = 0%
Interest expense = $20
Average total assets = ($753 + $705) / 2 = $729
Return on total assets = (90 + 20) /729 = 15.1%.
Gross margin percentage:
Gross margin = $180

Sales = $900
Gross margin percentage = $180/$900 = 20%
Current ratio:
Current assets = $7 + $110 + $98 = $215

Current liabilities = $180
Current ratio = $215 / $180 = 1.2: 1
Average sale period:
Cost of goods sold = $720

Average inventory balance = (98 + 80) /2 = $89.
Inventory turnover = $720 / 89 = 8.1.
Average sale period = 365 /8.1 = 45 days
Average collection period:
Sales on account = $900 Average accounts receivable balance = ($110 + $105) / 2 = $107.50.
Accounts receivable turnover = $900 /107.50 = 8.4
Average collection period = 365 days / 8.4 = 43.5 days
CE Ltd.'s return on shareholders' equity is not as good as the industry's average. For every dollar invested, shareholders
are obtaining a return that is smaller than they should expect, based on the article's figures. Similarly, the return on total
assets is much less than the average. This indicates that the company is unable to make good use of the funds invested in
the company.
CE Ltd.'s gross margin percentage is also lower than average-perhaps because its selling prices are lower than the
average or its cost of sales is higher.
The industry average shows an even higher figure, with current assets amounting to double current liabilities.
Most companies aim to turn over inventory as quickly as possible, in order to improve cash flow. CE Ltd. is not managing
to do this as quickly as the industry's average of 40 days. Similarly, companies should try to obtain payment from
customers as soon as possible. CE Ltd. is taking much longer to do this than the average for the industry.
b) Care must be taken when comparing CE Ltd.'s ratios with industry averages because there may be differences in
accounting methods. Although accounting standards have reduced the range of acceptable accounting policies, there is
still scope for different firms to apply different accounting policies. For example, one firm may use straight-line
depreciation, while another may use accelerated depreciation. These variations make comparisons difficult.
Size differences may also mean that ratios are not comparable. A very large manufacturing business should be able to
achieve economies of scale that are not possible for CE Ltd. For example, large companies may be able to negotiate
sizable discounts from suppliers.
A third problem arises from differences in product range. CE Ltd. may produce cutlery that is sold at the top end of the
market, for very high prices, and in small volumes. Alternatively, it may be producing high-volume, low quality cutlery for
the catering industry. Either situation will reduce the value of comparisons with the industry average.

52.

Investors who seek growth in the market price of their shares would like the dividend payout ratio to be large.
 True
 False
Investors who seek dividends prefer the dividend payout ratio to be large.

53.

Dragin Company's working capital is $36,000, and its current liabilities are $61,000. The company's current ratio is closest
to which of the following?
 0.41 to 1.
 0.59 to 1.
 1.59 to 1.
 2.69 to 1.
(61,000 + 36,000)/61,000 = 1.59 to 1.

54.

An increase in the market price of a company's common shares will immediately affect which of the following?
 Dividend yield ratio.
 Debt-to-equity ratio.
 Earnings per common share.
 Dividend payout ratio.

55.
GNL Inc. had the following Shareholders Equity on January 1st, Year 2:

Preferred Shares (500,000 shares issues and outstanding) $ 1,500,000

On July 1st, Year 2, the company issued an additional 800,000 common shares.

On December 31st, Year 2, the company declared dividends as follows:
Common Shares: $1.50 per share outstanding.
Preferred Shares: $1.00 per share outstanding.

Other Information:

GNL reported a net income of $9 million for Year 2.

On January 1st, GNL also had 1,000 convertible bonds which were issued at face value during year. These bonds were
carried at $1,000,000 on GNL's books. Each bond was convertible into 200 common shares at GNL's option.

The market value of GNL's common shares was $5.00 per share on December 31st, Year 2.

Based on the information provided compute GNL's dividend yield for Year 2.
 10%
 6%
 12.5%
 30%
Dividend Yield = dividends per share / market price per share = $1.50 / $5 = 30%.

56.

If a firm has a high current ratio but a low acid-test ratio, one can conclude which of the following?
 The firm has a large outstanding accounts receivable balance.
 The firm has a large investment in inventory.
 The firm has a large amount of current liabilities.
 The firm's financial leverage is very high.

57.

Last year, Cat Company had a net income of $170,000, income tax expense of $70,000, and interest expense of $30,000.
The company's times interest earned was closest to which of the following?
 4.90 times.
 9.00 times.
 10.00 times.
 8.00 times.
($170,000 + $70,000) / $30,000 = 8 times.

58.



outstanding. Other Information: ABC reported a net income of $5 million for Year 2, which included interest expense of
$300,000. ABC is subject to a tax rate of 30%. ABC's net total assets on January 1st, Year were $40 million. Net total
assets rose to $60 million by December 31st, Year 2.On January 1st, ABC also had 1,000 convertible bonds which were
issued at face value during year. These bonds were carried at $1,000,000 on ABC's books. Each bond was convertible
into 200 common shares at ABC's option. The market value of ABC's common shares was $4.00 per share on December
31st, Year 2.

Based on the information provided compute ABC's return on common shareholder's equity for Year 2.
 40%
 60%
 80%
 49.32%
Return on Common Shareholders' Equity = (net income – preferred dividends) / average common shareholders' equity =
($5 million – $500,000) / [(($3.5 million + $1.5 million) + ($3.5 million + $1.5 million + $9 million – $500,000 – $250,000)) /
2] = 49.32%.

59.

A high price earnings ratio means that investors are willing to pay a premium for the company’s shares.
 True
 False
A high price earnings ratio means that investors are willing to pay a premium for the company’s shares, presumably
because the company is expected to have higher than average future earnings growth.

60.

Harton Company, a retailer, had cost of goods sold of $270,000 last year. The beginning inventory balance was $17,000,
and the ending inventory balance was $27,000. The company's inventory turnover was closest to which of the following?
(Round your final answer to two decimal places.)
 5.95 times.
 11.36 times.
 12.27 times.
 12.50 times.
$270,000 / $22,000 = 12.27 times.

61.



On July 1st, Year 2, the company issued an additional 800,000 common shares. On December 31st, Year 2, the company
outstanding. Other Information: ABC reported a net income of $8 million for Year 2, which included an extraordinary gain
of $1.5 million net of tax. ABC is subject to a 40% tax rate. On January 1st, ABC also had 1,000 convertible bonds which
were issued at face value during year. These bonds were carried at $1,000,000 on ABC's books. Each bond was
convertible into 200 common shares at ABC's option. The market value of ABC's common shares was $4.00 per share on
December 31st, Year 2.

Based on the information provided compute ABC's earnings per share before extraordinary items for Year 2.
 $1.25
 $2.20
 $4.29
 $6.25
Earnings Per Share before Extraordinary Items (extraordinary items shown net of tax) = (net income – preferred dividends)
/ weighted-average number of common shares outstanding = ($6,500,000 – $500,000) / (1,000,000 + (6/12 × 800,000)) =
$4.29 per share.

62.

The following account balances have been provided for the end of the most recent year:

Total Assets $150,000
Total Shareholders' Equity $120,000
Total Common Shares $50,000 (5,000 shares)
Total Preferred Shares $10,000 (1,000 shares)
What is the book value per common share?
 $20
 $22
 $25
 $28
(120,000 - 10,000)/5,000 = $22.

63.

Desktop Co. presently has a current ratio of 1.2 to 1 and an acid-test ratio of 0.8 to 1. What will be effect of prepaying next
year's office rent of $50,000?
 No effect on either the company's current ratio or its acid-test ratio.
 No effect on the company's current ratio but will decrease its acid-test ratio.
 A decrease in both the company's current ratio and its acid-test ratio.
 An increase in both the company's current ratio and its acid-test ratio.

64.


Assets
Inventory $ 20,000
Building $ 150,000
Liabilities

- building $18,000
next 3 months
each year

Compute IOU's Average Collections Period. IOU's collections from clients amounted to $12,000.
 10 days
 22 days
 43.5 days
 15 days
Accounts Receivable Turnover = sales on account / average accounts receivable balance

= $40,000 / [(($30,000 + $40,000 − $12,000)) / 2]
= 1.38 times (rounded)

Average Collection Period (age of receivables) = 365 days / accounts receivable turnover
= 30 / 1.38
= 22 days (rounded)

Note that we are using one month of sales, so we divide by 30 days and not 365 days (which would be used for annual
sales).

65.

Earnings per common share will immediately increase as a result of which of the following?
 The sale of additional common shares by the company.
 An increase in the dividends paid to common shareholders by the company.
 An increase in the company's net income.
 The issuance of bonds by the company to finance construction of new buildings.

66.

Crabtree Company's net income last year was $50,000. The company paid dividends on preferred shares of $20,000, and
its average common shareholders' equity was $440,000. The company's return on common shareholders' equity for the
 4.5%
 6.8%
 11.4%
 15.9%
(50,000 - 20,000)/440,000 = 6.8%.

67.




Other Information:




Based on the information provided compute GNL's basic earnings per share for Year 2.
 $1.25
 $2.20
 $4.29
 $3.85
Earnings Per Share before Extraordinary Items (extraordinary items shown net of tax) = (net income − preferred dividends)
/ weighted-average number of common shares outstanding = ($6,500,000 − $500,000) / (1,000,000 + (6/12 × 800,000)) =
$4.29 per share.

68.

Shelzo Inc., a manufacturer of construction equipment is considering the purchase of one of its suppliers, Raritron
Industries. The purchase has been given preliminary approval by Shelzo's board of directors, and several discussions have
taken place between the management of both companies. Raritron has submitted financial data for the past several years.
Shelzo's controller has analyzed Raritron's financial statements and prepared the following ratio analysis comparing
Raritron's performance with the industry averages.

Year 3 Year 2 Year 1 Average
Return on common 13.03 13.02 12.98 12.96
shareholders' equity
Average sale period 51.16 47.29 42.15 38.63
Times interest 3.87 3.46 3.28 3.56
earned
Price-earnings ratio 10.96 11.23 11.39 11.54
Debt-to-equity ratio 0.50 0.46 0.4 80.57
Accounts receivable 6.98 7.25 7.83 7.78
turnover
Current ratio 1.65 1.95 1.70 2.30
Dividend yield ratio 2.08 2.06 2.12 2.25
Required:
Using the information provided above for Raritron Industries:
a) (1.) Identify the two ratios from the above list that would be of most interest to short-term creditors.
(2.) Explain what these two ratios measure.
(3.) What do these two ratios indicate about Shelzo Inc.?
b) (1.) Identify the three ratios from the above list that would be of most interest to shareholders.
(2.) Explain what these three ratios measure.
(3.) What do these three ratios indicate about Shelzo Inc.?
c) (1.) Identify the two ratios from the above list that would be of most interest to long-term creditors.
(2.) Explain what these two ratios measure.
(3.) What do these two ratios indicate about Shelzo Inc.?
a) (1.) Two ratios that would be of most interest to short-term creditors would be the average sale period and the current
ratio.
(2.) The average sale period relates the average amount of inventory to the cost of goods sold. This ratio measures the
length of time it takes on average to sell inventory and is a gauge of how well the company manages its inventory. The
current ratio is calculated by dividing current assets by current liabilities. This ratio measures short-run solvency, i.e., the
ability to meet current obligations.
(3.) For Shelzo Inc., the average sale period has been increasing and is well above the industry average, while the current
ratio has been below the industry average. Both of these ratios indicate that there may be problems with the company's
liquidity position. This could be caused by poor inventory control.
b) (1.) The three ratios that would be of most interest to common shareholders are the return on common shareholders'
equity, the price-earnings ratio, and the dividend yield ratio.
(2.) The return on common shareholders' equity is a measure of how effectively the company has used the shareholders'
investment in the company to generate profits. The price-earnings ratio provides a measure of how the stock market
perceives the company's future earnings prospects. The higher the ratio, the more favourable the future looks for the
company. The dividend yield ratio tells what proportion of the company's profits is paid out as cash dividends to common
shareholders.
(3.) These three ratios are close to the industry averages and there are no discernible significant trends.
c) (1.) The two ratios that would be of most interest to long-term creditors are times interest earned and the debt-to-equity
ratio.
(2.) Times interest earned is earnings before interest expense and taxes divided by interest expense. This ratio measures
debt-paying ability. If stable, the company will be able to refinance or obtain new funds at reasonable rates. The debt-to-
equity ratio measures the relative proportions of debt and equity in the company's capital structure. The lower the level of
the debt-to-equity ratio, the more security long-term debtors have.
(3.) For Shelzo Inc., times interest earned has been improving and is currently above the industry average, indicating that
the company should be able to borrow additional funds if needed. The company's debt-to-equity ratio is below the
industry average, which also indicates the company has the capacity to perhaps take on additional debt.

69.
South Company's net income last year was $900,000. The company paid dividends on preferred shares of $820,000 and
its average common shareholders' equity was 1,400,000. The company's return on common shareholders' equity for the
 3.4%
 5.7%
 17.2%
 20.7%
($900,000 - $820,000) / 1,400,000 = 5.7%.

70.

Arget Company's net income last year was $600,000. The company had 150,000 common shares and 60,000 preferred
shares. 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 $1.10 per common share and $0.60 per preferred share. The earnings per
common share was closest to which of the following?
 $2.90
 $3.76
 $4.00
 $4.24
(600,000 - 60,000 *.60)/150,000 = $3.76.

71.

The following data have been taken from your company's financial records for the current year:

Earnings per Share $20
Dividend per Share $11
Market Price per Share $120
Book Value per Share $110
What is the price-earnings ratio?
 6.0 to 1.
 7.5 to 1.
 8.0 to 1.
 12.5 to 1.
$120/$20 = 6.00.

72.

Selected data from Sheridan Corporation's year-end financial statements are presented below. The difference between
average and ending inventory is immaterial.

Current Ratio 2.0
Acid-Test Ratio 1.5
Current Liabilities $120,000
Inventory Turnover 8 times
Gross Profit Margin 40%
Prepaid Expenses $0
What were Sheridan's sales for the year?
 $240,000
 $480,000
 $800,000
 $1,200,000
Inventory = CA - QA = 120,000 * 2 - 120,000 * 1.5 = 60,000.

Sales = (60,000 * 8)/(1 -.40).

73.
If a loss resulting from an earthquake is classified as extraordinary, which of the following disclosures meets the minimum
requirements in Canada?
 Two earnings per share figures, one before and the other after the net of tax effect of the extraordinary loss.
 One earnings per share figure that ignores the extraordinary loss.
 One earnings per share figure, net of the before-tax effect of the extraordinary loss.
 One earnings per share figure, net of the after-tax effect of the extraordinary loss.

74.

The acid-test ratio is a test of the quality of accounts receivable-in other words, whether they are likely to be collected.
 True
 False

75.

If a company converts a short-term note payable into a long-term note payable, what would be the effect of this
transaction?
 A decrease in working capital and an increase in the current ratio.
 A decrease in both working capital and the current ratio.
 A decrease in both the current ratio and the acid-test ratio.
 An increase in both working capital and the current ratio.

76.

Current ratio is calculated by current liabilities divided by shareholder's equity.
 True
 False

77.

Harwichport Company has a current ratio of 3.5 to 1 and an acid-test ratio of 2.8 to 1. Current assets equal $175,000, of
which $5,000 consists of prepaid expenses. What must be Harwichport Company's inventory?
 $30,000
 $35,000
 $40,000
 $50,000
QA = 175,000/3.5 * 2.8 = 140,000.

Inventory = 175,000 - 140,000 - 5,000 = $30,000.

78.

Financial statements for Qualle Company appear below:

Qualle Company Statement of Financial Position December 31,
Year 2 Year 1
Current Assets:
Inventory $110 $110
Noncurrent Assets:
Plant & Equipment, Net $2,200 $1880
Total Liabilities $1,120 $1,150
Common Shares
Equity

Qualle Company Income Statement for the Year
thousands)
Gross Margin $870
Net Income $259
Total dividends paid during Year 2 were $149,000, of which $10,000 were preferred dividends. The market price of a
common share on December 31, Year 2 was $280.
Required:
a) Earnings per share.

b) Price-earnings ratio.
c) Dividend yield ratio.
d) Return on total assets.
e) Return on common shareholders' equity.
f) Book value per share.
Answer: a) Earnings per share = (Net Income - Preferred Dividends)/Average number of common shares outstanding*
= ($259 - $10)/16
= $15.56
* Number of common shares outstanding = Common shares/Par value
= $160/$10
= 16
b) Price-earnings ratio = Market price per share/Earnings per share*
= $280/$15.56
= 18.0
* See part a) above
c) Dividend yield ratio = Dividends per share*/Market price per share
= $8.69/$280.00
= 3.10%
* Dividends per share = Common dividends/Common shares**
= $139/16
= $8.69
** See part a) above
d) Return on total assets = Adjusted net income*/Average total assets
= $294/$2,520
= 11.67%
*Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]
= $259 + 230 × (1 - 0.30)
= $420
e) Return on common shareholders' equity = (Net income - Preferred dividends)/Average common shareholders' equity*
= ($259 - $10)/$1,285
= 19.38%
* Average common shareholders' equity = ($1,340 + $1,230)/2
= $1,285
f) Book value per share = Common shareholders' equity/Number of common shares outstanding*
= $1,340/16
= $83.75
* See part a) above

79.

Light Company had $100,000 in sales on account last year. The beginning accounts receivable balance was $19,000, and
the ending accounts receivable balance was $18,000. The company's average collection period (age of receivables) was
closest to which of the following? (Round your intermediate calculations and final answer to two decimal places.)
 24.33 days.
 67.47 days.
 34.07 days.
 58.40 days.
$100,000 / $18,500 = 5.41;

Days = 365 / 5.41 = 67.47 days.

80.

The long-term creditor is most interested in:
 Liquidity ratios
 Solvency ratios
 Vertical Analysis
 Horizontal Analysis

81.


Assets
Inventory $ 20,000
Building $ 150,000
Liabilities

next 3 months
each year

 0.67
 1.05
 1.2
 1.33
Inventory Turnover:


= $35,000 / $52,500
= 0.67 times.

82.

Only credit sales (i.e., sales on account) are included in the computation of the accounts receivable turnover.
 True
 False

83.

If a company's bonds bear an interest rate of 8%, its tax rate is 30%, and its assets are generating an after-tax return of 7%,
what would be the leverage?
 Positive.
 Negative.
 Neither positive nor negative.
 Impossible to determine without knowing the return on common shareholders' equity.

84.

Ayn Company, a retailer, had cost of goods sold of $170,000 last year. The beginning inventory balance was $10,000, and
the ending inventory balance was $8,000. The company's average sale period (turnover in days) was closest to which of
the following? (Round your final answer to two decimal places.)
 19.32 days.
 60.83 days.
 63.27 days.
 121.67 days.
($170,000 / (($10,000 + $8,000)/2) = 18.89 days;

Days = 365 / 18.89 = 19.32 days.

85.





Other Information:




Based on the information provided compute GNL's basic earnings per share for Year 2.

 $1.25
 $2.20
 $5.63
 $6.43
Basic Earnings Per Share = (net income − preferred dividends) / weighted-average number of common shares outstanding
= ($10,000,000 − $1,000,000) / (1,000,000 + (6/12 × 800,000)) = $6.43 per share (rounded).

86.





Other Information:

GNL reported a net income of $6 million for Year 2, which included an extraordinary gain of $1.5 million net of tax. GNL is
subject to a 40% tax rate.



Based on the information provided compute GNL's book value per share at the end of Year 2.
 $9.25
 $11
 $10
 $4.50
Book Value per share = (total shareholders' equity − preferred shares) / number of common shares outstanding = ($4
million + $6 million − $500,000 − $500,000) / 2,000,000 = $4.50.

87.





Other Information:




Based on the information provided compute GNL's dividend payout ratio for Year 2.
 12%
 6%
 10%
 20%
Dividend Payout Ratio = dividends per share / earnings per share = $1.25 / $6.25 = 20%.

88.

Perlman Company had 100,000 common shares and 20,000 preferred shares at the end of the year just completed.
Preferred shareholders received total dividends of $140,000. Common shareholders received total dividends of $210,000.
If the dividend payout ratio for the year was 70%, what was the net income for the year?
 $147,000
 $287,000
 $300,000
 $440,000
EPS = (210,000/100,000)/.70 = $3/share.

NI = 3 * 100,000 + 140,000 = $440,000.

89.


Assets
Inventory $ 20,000
Building $ 150,000
Liabilities

- building $18,000
next 3 months
each year

Compute IOU's Times Interest Earned Ratio assuming that earnings before interest and income taxes amounted to $7,000
for August.
 11 times
 20 times
 21.86 times
 41 times
Times Interest Earned Ratio:

Monthly Interest Expense: $42,000 × 10%/12 = $350.
Times Interest Earned Ratio = $7,000/$350 = 20 times (rounded).

90.

Trend percentages state several years' financial data in terms of a base year. For example, sales for every year would be
stated as a percentage of the sales in the base year.
 True
 False

91.

Common shareholders are most interested in:
 Liquidity ratios
 Solvency ratios
 Profitability ratios
 Vertical analysis

92.

Erambo Company has $11,000 in cash, $6,000 in marketable securities, $27,000 in current receivables, $8,000 in
inventories, and $51,000 in current liabilities. The company's acid-test (quick) ratio is closest to which of the following?
 0.53 to 1.
 0.75 to 1.
 0.86 to 1.
 1.02 to 1.
(11,000 + 6,000 + 27,000)/51,000 = 0.86 to 1.

93.

Comparative financial statements for Springville Company for the last two years appear below. The market price of
Springville's common shares was $25 per share on December 31, Year 2. During Year 2, dividends of $2,000,000 were
paid to preferred shareholders and $10,000,000 to common shareholders.

Springville 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 $11,000 $10,000
Accounts Receivable, Net $20,000 $12,000
Inventory $25,000 $30,000
Total Current Assets $56,000 $52,000
Noncurrent Assets:
Investments $75,000 $81,600
Plant & Equipment, Net $19,000 $19,000
Total Assets $150,000 $182,600
Accounts Payable $8,000 $7,600
Accrued Liabilities $1,000 $1,200
Total Current Liabilities $9,000 $8,800
Bonds Payable $32,000 $61,000
Preferred Shares, 8%, 1,000,000 $20000 $20000
shares
Common Shares, no Par, $30000 $30000
5,000,000 shares
Equity

Springville Company Income Statement for the
Year Ended December 31, Year 2 (dollars in
thousands)
Net Income $8,200
Required:
a) Dividend payout ratio.

b) Dividend yield ratio.
c) Price-earnings ratio.
d) Accounts receivable turnover.
e) Inventory turnover.
f) Return on total assets.
g) Return on common shareholders' equity.
h) Was financial leverage positive or negative for the year? Explain.
a) Dividend payout ratio = Dividends per share/Earnings per share.
= ($10,000,000/5,000,000)/(($8,200,000 - $2,000,000)/5,000,000))
= $2.00/$1.24
= 161.3%
b) Dividend yield ratio = Dividends paid per share/Market price per share
= $2.00/$25
= 8%
c) Price-earnings ratio = Market price per share/Earnings per share
= $25/(($8,200,000 - $2,000,000)/5,000,000))
= 20.16
d) Accounts receivable turnover = Sales on account/Average accounts receivable balance
= $280,000/(($12,000 + $20,000)/2))
= 280,000 / 16,000
= 17.50 Times
e) Inventory turnover = Cost of goods sold/Average inventory balance

= $180,000 / 27,500
= 6.55 times
f) Return on total assets = [Net income + ((Interest expense × (1 - Tax rate))]/Average total assets
= 8,200,000 + (26,333,000 × (1 - 0.40)/[($150,000,000 + $182,600,000 )/2]
= 23,999,800 / 166,300,000
= 14.43%
g) Return on common shareholders' equity = (Net income - preferred dividends)/Average common shareholders' equity
= ($8,200,000 - $2,000,000)/(($92,800,000 + $89,000,000)/2)
= 6.8%
h) Financial leverage was negative, since the rate of return to the common shareholders (6.8%) was less than the rate of
return on total assets (14.43%).

94.

A company's current ratio and acid-test ratios are both greater than 1.0 to 1. If obsolete inventory is written off, what would
be the effect?
 A decrease in the acid-test ratio.
 An increase in the acid-test ratio.
 An increase in net working capital.
 A decrease in the current ratio.

95.

Heart Company had $120,000 in sales on account last year. The beginning accounts receivable balance was $20,000,
and the ending accounts receivable balance was $15,000. The company's average collection period (age of receivables)
was closest to which of the following? (Do not round intermediate calculations. Round your final answer to two decimal
places.)
 44.92 days.
 47.73 days.
 50.54 days.
 53.23 days.
$120,000 / (($20,000 + $15,000)/ 2) = 6.8571;

Days = 365 / 6.8571 = 53.23 days.

96.

Erack Company has $15,000 in cash, $4,000 in marketable securities, $38,000 in current receivables, $18,000 in
inventories, and $40,000 in current liabilities. The company's acid-test (quick) ratio is closest to which of the following?
 0.95 to 1.
 1.33 to 1.
 1.43 to 1.
 1.88 to 1.
(15,000 + 4,000 + 38,000)/40,000 = 1.43 to 1.

97.

Brachlan Company's net income last year was $80,000, and its interest expense was $20,000. Total assets at the
beginning of the year were $700,000, and total assets at the end of the year were $680,000. The company's income tax
rate was 20%. The company's return on total assets for the year was closest to which of the following? (Round your
percentage answer to 1 decimal place).
 12.5%
 13.4%
 13.9%
 15.6%
($80,000 + $20,000 * (1- 0.2)) / ((700,000 + 680,000)/ 2) = 13.9%.

98.


Assets
Inventory $ 20,000
Building $ 150,000
Liabilities

- building $18,000
next 3 months
each year

Compute IOU's Debt-to-Equity Ratio on July 31st.
 0.70
 1.05
 0.99
 1.33
Debt-to-Equity Ratio = total liabilities / shareholders' equity

= $122,350 / $122,650
= 0.99 (rounded).

99.

Starrs Company has current assets of $300,000 and current liabilities of $200,000. Which of the following transactions
would increase its working capital?
 Prepayment of $50,000 of next year's rent.
 Refinancing $50,000 of short-term debt with long-term debt.
 Acquisition of land valued at $50,000 by issuing new common shares.
 Purchase of $50,000 of marketable securities for cash.

100.

In determining whether a company's financial condition is improving or deteriorating over time, vertical analysis of financial
statement data would be more useful than horizontal analysis.
 True
 False

101.

A short-term creditor is most interested in:
 Liquidity ratios
 Solvency ratios
 Profitability ratios
 Vertical Analysis

102.
Common-size statements are particularly useful when comparing data from different companies.
 True
 False

103.





Other Information:

GNL reported a net income of $12 million for Year 2, which included interest expense of $300,000. GNL is subject to a tax
rate of 30%.

GNL's net total assets on January 1st, Year were $40 million. Net total assets rose to $80 million by December 31st, Year 2.



Based on the information provided compute GNL's return on total assets for Year 2.
 12%
 6%
 15.35%
 20.35%
Return on Total Assets = {net income + [interest expense × (1 − tax rate)]} / average total assets = ($12 million + ($300,000 ×
0.70)) / $60 million = 20.35%.

104.

The acid test ratio measures how well a company can meet its obligations without having to liquidate or depend too
heavily on its inventory.
 True
 False

105.

Fracus Company had $100,000 in sales on account last year. The beginning accounts receivable balance was $14,000,
and the ending accounts receivable balance was $16,000. The company's accounts receivable turnover was closest to
 3.33 times.
 6.25 times.
 6.67 times.
 7.14 times.
100,000/[(14,000 + 16,000)/2] = 6.67 times.

106.

Horizontal analysis involves analyzing financial data over time.
 True
 False

107.

Rahner Company has a current ratio of 1.75 to 1. This ratio will decrease if Rahner Company engages in which of the
following transactions?
 Borrows cash using a six-month note.
 Pays the taxes payable that have been a current liability.
 Pays the following month's rent on the last day of the year.
 Sells inventory for more than its cost.

108.

The person(s) most interested in analyzing earnings per share is:
 Creditors
 Investors
 Managers
 Government

109.


Assets
Inventory $ 20,000
Building $ 150,000
Liabilities

next 3 months
each year

 0.33
 1.05
 1.2
 1.33
Inventory Turnover:


= $20,000 / $60,000
= 0.33 times.

110.

The price-earnings ratio is determined by dividing the price of a product by its profit margin.
 True
 False
Selected financial data for Barnstable Company appear below:

Year 2 Year 1
(in thousands)
Sales $1,900 $2,500
Operating Expense $500 $450
Interest Expense $70 $50
Cost of Goods Sold $800 $800
Dividends Declared and Paid $30 $0

111.

For Year 2, what was the gross margin as a percentage of sales? (Round your final answer to the nearest whole percent.)
 5%
 18%
 58%
 60%
($1,900 - $800) / $1,900 = 58%.

112.

For Year 2, what was the net income before taxes as a percentage of sales? (Round your final answer to the nearest whole
percent).
 3%
 28%
 8%
 10%
($1,900 - $800 - $500 - $70) / $1,900 = 28%.

113.

For Year 2, what was the net operating income as a percentage of sales? (Round your final answer to the nearest whole
percent).
 8%
 32%
 40%
 70%
($1,900 - $800 - $500) / $1,900 = 32%.

114.

Between Year 1 and Year 2, what happened to the times interest earned?
 It increased.
 It decreased.
 It remained the same.
 The effect cannot be determined from the data provided.
Yr. 1 = ($2,500 - $800 - $450) / $50 = 25.

Yr. 2 = ($1,900 - $800 - $500) / $70 = 8.57.
Financial statements for Learned Company appear below:
Learned Company
Statement of Financial Position
December 31, Year 2 and Year 1 (dollars in thousands)

Year 2 Year 1
Current Assets:
Inventory $100 $100
Noncurrent Assets:
Common Shares, $10 Par $180 $180
Common Shares
Total Shareholders' Equity $1,270 $1190
Equity
Learned Company
Income Statement
For the Year Ended December 31, Year 2 (dollars in thousands)

Gross Margin $880
Net Income $343
Total dividends during Year 2 were $263,000, of which $12,000 were for preferred shares. The market price of a common
share on December 31, Year 2 was $160.

115.

Learned Company's earnings per common share for Year 2 was closest to which of the following?
 $11.03
 $18.39
 $19.06
 $27.22
(343 - 120 *.10)/(180/10) = $18.39.

116.

Learned Company's price-earnings ratio on December 31, Year 2 was closest to which of the following?
 5.88
 8.40
 8.70
 14.50
160/18.39 = 8.70.

117.

Learned Company's dividend payout ratio for Year 2 was closest to which of the following?
 28.5%
 47.4%
 75.8%
 76.7%
[(263,000 - 12,000)/18,000]/18.39 = 75.8%.

118.

Learned Company's dividend yield ratio on December 31, Year 2 was closest to which of the following?
 5.5%
 8.3%
 8.7%
 9.1%
[(263,000 - 12,000)/18,000]/160 = 8.7%.

119.

Learned Company's return on total assets for Year 2 was closest to which of the following?
 15.8%
 17.2%
 17.8%
 18.6%
[343 + 40 * (1 -.30)]/[(2,040 + 1,950)/2] = 18.60%.

120.

Learned Company's return on common shareholders' equity for Year 2 was closest to which of the following?
 26.9%
 27.9%
 29.8%
 30.9%
(343 - 12)/[(1,270 + 1,190)/2 - 120] = 29.8%.

121.
Learned Company's book value per share at the end of Year 2 was closest to which of the following?
 $10.00
 $16.11
 $63.89
 $70.56
(1,270 - 120)/18 = $63.89.
Financial statements for Laroche Company appear below:
Learned Company

Year 2 Year 1
Current Assets:
Inventory $160 $180
Noncurrent Assets:
Common Shares
Equity
Learned Company
Income Statement

Gross Margin $680
Net Income $266
Total dividends during Year 2 were $166,000, of which $10,000 were preferred dividends. The market price of a common

122.

Laroche Company's earnings per common share for Year 2 was closest to which of the following?
 $3.71
 $10.67
 $11.08
 $15.83
(266 - 10)/24 = $10.67.

123.

Laroche Company's price-earnings ratio on December 31, Year 2 was closest to which of the following?
 9.47
 13.53
 14.06
 40.43
150/10.67 = 14.06.

124.

Laroche Company's dividend payout ratio for Year 2 was closest to which of the following?
 22.9%
 38.0%
 60.9%
 62.4%
[(166 - 10)/24]/10.67 = 60.9%.

125.

Laroche Company's dividend yield ratio on December 31, Year 2 was closest to which of the following?
 1.6%
 4.1%
 4.3%
 4.6%
[(166 - 10)/24]/150 = 4.3%.

126.

Laroche Company's return on total assets for Year 2 was closest to which of the following?
 13.0%
 14.1%
 14.6%
 15.2%
[266 + 30 * (1 -.30)]/[(1,900 + 1,880)/2] = 15.2%.

127.

Laroche Company's return on common shareholders' equity for Year 2 was closest to which of the following?
 21.2%
 22.0%
 23.1%
 24.0%
(266 - 10)/[(1,260 + 1,160)/2 - 100] = 23.1%.

128.

Laroche Company's book value per share at the end of Year 2 was closest to which of the following?
 $10.00
 $17.50
 $48.33
 $52.50
(1,260 - 100)/24 = $48.33.
Financial statements for Larosa Company appear below:
Larosa Company

Year 2 Year 1
Current Assets:
Inventory $100 $100
Noncurrent Assets:
Common Shares
Retained Earnings $1,240 $1,070
Total Shareholders' Equity $1,760 $1,590
Equity
Larosa Company
Income Statement

Gross Margin $1,320
Net Income $217

129.

Larosa Company's earnings per common share for Year 2 was closest to which of the following?
 $3.09
 $9.41
 $9.86
 $14.09
(217 - 10)/22 = $9.41.

130.

Larosa Company's price-earnings ratio on December 31, Year 2 was closest to which of the following?
 4.97
 7.10
 7.44
 22.66
70/9.41 = 7.44.

131.

Larosa Company's dividend payout ratio for Year 2 was closest to which of the following?
 6.5%
 10.6%
 17.9%
 21.7%
[(47 - 10)/22]/9.41 = 17.9%.

132.

Larosa Company's dividend yield ratio on December 31, Year 2 was closest to which of the following?
 1.0%
 1.8%
 2.4%
 3.1%
[(47 - 10)/22]/70 = 2.4%.

133.

Larosa Company's return on total assets for Year 2 was closest to which of the following? (Round your percentage answer
to one decimal place.)
 7.6%
 8.7%
 9.2%
 21.3%
[$217 + $610 * (1 - 0.30)]/$3,025 = 21.3%.

134.

Larosa Company's return on common shareholders' equity for Year 2 was closest to which of the following? (Round your
percentage answer to one decimal place.)
 12.0%
 12.6%
 12.7%
 13.1%
($217 - $10)/[($1,760 + $1,590)/2 - $100] = 13.1%.

135.

Larosa Company's book value per share at the end of Year 2 was closest to which of the following? (Round your final
answer to two decimal places.)
 $10.00
 $21.36
 $75.45
 $82.27
($1,760 - $100)/ 22 = $75.45.
The Dawson Corporation projects the following for the upcoming year:

Earnings before Interest and Taxes $20 million
Interest Expense $2 million
Preferred Shares Dividends $6 million
Common Shares Dividend Payout Ratio 35%
Average Number of Common Shares 2 million
Outstanding
Effective Corporate Income Tax Rate 45%

136.

What is the expected dividend per common share?
 $0.68
 $2.10
 $2.70
 $3.90
EPS = (($20 - $2) * (1- 0.45) - $6) /2 = $1.95/ Share;

dividend per common share = 1.95 * 0.35 = $0.68.

137.
If Dawson Corporation's common shares have a price-earnings ratio of eight, what would be the market price per share,
rounded to the nearest dollar?
 $16
 $68
 $72
 $125
$8 * 1.95 = $15.60 = $16 (rounded).
Financial statements for Orange Company appear below:
Orange Company

Year 2 Year 1
Current Assets:
Inventory $160 $160
Noncurrent Assets:
Common Shares
Equity
Orange Company
Income Statement

Gross Margin $830
Net Income $336
Total dividends during Year 2 were $156,000, of which $18,000 were preferred dividends. The market price of a share of
common stock on December 31, Year 2 was $100.

138.

Orange Company's earnings per common share for Year 2 was closest to which of the following?
 $2.27
 $7.23
 $7.64
 $10.91
Avg. Shares o/s = 220/5 = 44. EPS = (336 - 18)/44 = $7.23.

139.

Orange Company's dividend yield ratio on December 31, Year 2 was closest to which of the following?
 1.1%
 2.7%
 3.1%
 3.5%
[(156 - 18)/44]/100 = 3.1%.

140.

Orange Company's return on total assets for Year 2 was closest to which of the following? (Round your percentage answer
 14.5%
 15.0%
 15.9%
 16.5%
[$336 + $10 * (1 - 0.30)]/$2,285 = 15.0%.

141.

Orange Company's current ratio at the end of Year 2 was closest to which of the following? (Round your final answer to
two decimal places.)
 0.44 to 1.
 0.55 to 1.
 1.24 to 1.
 2.34 to 1.
$750 / $320 = 2.34.

142.

Orange Company's accounts receivable turnover for Year 2 was closest to which of the following? (Round your final
answer to one decimal places.)
 11.0 times.
 12.4 times.
 15.7 times.
 14.2 times.
$2,830/$200 = 14.15 times = 14.2 times (rounded).

143.

Orange Company's average sale period (turnover in days) for Year 2 was closest to which of the following?
 20.6 days.
 23.2 days.
 29.2 days.
 33.2 days.
Inv. Turnover = $2,000 / $160 = 12.5;

Days = 365/ 12.5 = 29.2 days.

144.

Orange Company's times interest earned for Year 2 was closest to which of the following?
 49.0 times.
 16.0 times.
 17.0 times.
 28.3 times.
$490 / $10 = 49 times.
Financial statements for Orantes Company appear below:
Orantes Company

Year 2 Year 1
Current Assets:
Inventory $130 $130
Noncurrent Assets:
Common Shares
Equity
Orantes Company
Income Statement

Gross Margin $760
Net Income $301

145.

Orantes Company's earnings per common share for Year 2 was closest to which of the following?
 $3.61
 $14.45
 $15.05
 $21.50
Shares o/s = 200,000/10 = 20,000 shares. EPS = (301 - 12)/20 = $14.45.

146.

Orantes Company's dividend yield ratio on December 31, Year 2 was closest to which of the following?
 0.8%
 2.8%
 3.0%
 3.2%
[(181 - 12)/20]/280 = 3.0%.

147.

Orantes Company's return on total assets for Year 2 was closest to which of the following?
 11.4%
 12.3%
 12.7%
 13.1%
[301 + 30 * (1 -.30)]/[(2,490 + 2,410)/2] = 13.1%.

148.

Orantes Company's current ratio at the end of Year 2 was closest to which of the following?
 0.35 to 1.
 0.54 to 1.
 1.19 to 1.
 1.50 to 1.
480/320 = 1.5.

149.

Orantes Company's accounts receivable turnover for Year 2 was closest to which of the following?
 10.3 times.
 13.5 times.
 14.8 times.
 19.3 times.
2,510/[(180 + 160)/2] = 14.8 times.

150.

Orantes Company's average sale period (turnover in days) for Year 2 was closest to which of the following? Do not round
intermediate calculations.
 18.9 days.
 24.7 days.
 27.1 days.
 35.5 days.
Inv. Turnover = 1,750/(130 + 130)/2 = 13.462.

Days = 365/13.462 = 27.1 days.

151.

Orantes Company's times interest earned for Year 2 was closest to which of the following?
 10.0 times.
 14.3 times.
 15.3 times.
 25.3 times.
460/30 = 15.3 times.
Financial statements for Oratz Company appear below:
Oratz Company

Year 2 Year 1
Current Assets:
Inventory $200 $200
Noncurrent Assets:
Total Liabilities $1,210 1,010
Common Shares
Equity
Oratz Company
Income Statement

Gross Margin $1,000
Net Income $189

152.

Oratz Company's earnings per common share for Year 2 was closest to which of the following? (Do not round intermediate
calculations and round your final answer to two decimal places.)
 $1.74
 $19.61
 $20.25
 $28.93
Shares o/s = $140/$15 = 9.3333. EPS = ($189 - $6)/9.3333 = $19.61.

153.

Oratz Company's dividend yield ratio on December 31, Year 2 was closest to which of the following? (Do not round
intermediate calculations and round your percentage answer to one decimal place.)
 0.5%
 5.2%
 5.5%
 5.7%
[($139 - $6)/9.333]/$260 = 5.5%.

154.

Oratz Company's return on total assets for Year 2 was closest to which of the following? (Do not round intermediate
calculations and round your final answer to one decimal place.)
 8.9%
 10.0%
 10.5%
 11.1%
[$189 + $30 * (1 - 0.30)]/$2,095] = 10.0%.

155.

Oratz Company's current ratio at the end of Year 2 was closest to which of the following? (Round your final answer to one
decimal place.)
 0.51 to 1.
 2.26 to 1.
 1.23 to 1.
 1.26 to 1.
$860 /$380 = 2.26.

156.

Oratz Company's accounts receivable turnover for Year 2 was closest to which of the following? (Round your final answer
 6.3 times.
 8.8 times.
 9.1 times.
 7.5 times.
$2,000 /$265 = 7.5 times.

157.

Oratz Company's average sale period (turnover in days) for Year 2 was closest to which of the following?
 29.1 days.
 40.3 days.
 73.0 days.
 57.6 days.
Inv. Turnover = $1,000 /$200 = 5.0.

Days = 365/5 = 73.0 days.

158.

Oratz Company's times interest earned for Year 2 was closest to which of the following?
 6.3 times.
 9.0 times.
 10.0 times.
 16.3 times.
$300/$30 = 10.0 times.
Selected data for the MK Company follow:

Current Year Prior Year
Preferred Shares, 8% Par Value $250000 $250000
$50
Common Shares, Per Value $10 $500000 $500000
Retained Earnings at End of $257000 $240000
Year
Net Income $102000 $90000
Dividends Paid on Preferred $20000 $20000
Shares
Dividends Paid on Common $65000 $60000
Shares
Quoted Market Price per $25 $20
Common Share at Year End

159.

What was the price-earnings ratio for the prior year?
 11.1 to 1.
 12.2 to 1.
 14.3 to 1.
 15.8 to 1.
Shares 0/s = 500,000/10 = 50,000 shares. PE ratio = 20/[(90 - 20)/50] = 14.3 to 1.

160.

What is the dividend yield ratio on common shares for the current year, rounded to the nearest tenth of a percent?
 5.2%
 6.6%
 6.8%
 7.4%
(65,000/50,000)/25 = 5.2%.

161.

What is MK Company's return on common shareholders' equity for the current year, rounded to the nearest tenth of a
percent?
 8.2%
 10.2%
 11.0%
 13.6%
Amount in thousands (102 - 20)/[(250 + 500 + 257 + 250 + 500 + 240)/2 - (250 + 250)/2] = 11.0%.

162.

What was the dividend payout ratio for the prior year?
 55.6%
 85.7%.
 114.3%
 140.0%
(60,000/50,000)/[(90,000 - 20,000)/50,000] = 85.7%.

163.

What is the book value per share for the current year, rounded to the nearest cent?
 $15.14
 $18.31
 $20.14
 $22.18
(500,000 + 257,000)/50,000 = $15.14.
Lisa Inc.'s balance sheet appears below:
Lisa Inc.

Year 2 Year 1
Cash $30 $25
Marketable Securities $20 $15
Inventories $60 $50
Land $170 $140
Building (Net) $155 $125
Total Long-Term Assets $80 $90
Equipment (Net) $95 $100
Total Long-Term Assets $330 $315

Accrued Interest $15 $15
Short Term Notes Payable $23 $12
Long- Term Notes Payable $10 $10
Total Long-Term Liabilities $25 $25
Common Shares, $10 Par Value $150 $150
Common Shares
Equity
The company's sales for the year were $300,000, its cost of goods sold was $220,000, and its net income was $35,000. All
sales were on credit. Dividends paid on preferred shares for the year were $5,000.

164.

Lisa Inc.'s acid-test (quick) ratio at December 31, Year 2, was closest to which of the following?
 0.6 to 1.
 1.1 to 1.
 1.8 to 1.
 2.0 to 1.
(30 + 20 + 45)/85 = 1.1 to 1.

165.

Lisa Inc.'s accounts receivable turnover for Year 2 was closest to which of the following?
 4.9 times.
 5.9 times.
 6.7 times.
 8.0 times.
300/[(45 + 30)/2] = 8.0 times.

166.

Lisa Inc.'s inventory turnover for Year 2 was closest to which of the following?
 3.7 times.
 4.0 times.
 4.4 times.
 5.0 times.
220/[(60 + 50)/2] = 4.0 times.

167.

Lisa Inc.'s book value per common share at December 31, Year 2, was closest to which of the following?
 $10.00
 $11.25
 $18.33
 $19.33
(390 - 100)/15 = $19.33.

168.

Lisa Inc.'s return on common shareholders' equity for Year 2 was closest to which of the following?
 7.8%
 10.6%
 10.9%
 12.4%
Avg. Common SE = [(390 - 100) + (375 - 100)]/2 = 282.5.

Return = (35 - 5)/282.5 = 10.6%.
Financial statements for Marcell Company appear below:
Marcell Company

Year 2 Year 1
Current Assets:
Inventory $290 $104
Noncurrent Assets:
Accounts Payable $620 $1,160
Total Current Liabilities $1,110 $1,660
Bonds Payable $500 $1,000
Common Shares
Equity
Marcell Company Income Statement For the Year Ended December 31, Year 2 (dollars in thousands)

Gross Margin $1,220
Net Income $294

169.

Marcell Company's working capital (in thousands of dollars) at the end of Year 2 was closest to which of the following?
 $(260)
 $470
 $520
 $1,240
$850 - $1,110 = $(260).

170.

Marcell Company's current ratio at the end of Year 2 was closest to which of the following? (Round your final answer to two
decimal places.)
 0.77 to 1.
 0.48 to 1.
 1.04 to 1.
 1.22 to 1.
$850/ $1,110 = 0.77:1.

171.

Marcell Company's acid-test (quick) ratio at the end of Year 2 was closest to which of the following? (Round your final
 0.33 to 1.
 0.11 to 1.
 0.74 to 1.
 1.35 to 1.
$120 / $1,110 = 0.11:1.

172.

Marcell Company's accounts receivable turnover for Year 2 was closest to which of the following?
 9.9 times.
 150.0 times.
 16.2 times.
 23.2 times.
$3,000 / $20 = 150 times.

173.

Marcell Company's average collection period (age of receivables) for Year 2 was closest to which of the following? (Round
your final answer to one decimal place.)
 2.4 days.
 22.6 days.
 25.8 days.
 36.9 days.
365/150 = 2.4 days.

174.

Marcell Company's inventory turnover for Year 2 was closest to which of the following? (Round your final answer to one
decimal place.)
 9.9 times.
 14.2 times.
 6.1 times.
 23.2 times.
$1,780 / $197 = 6.1 times.

175.

Marcell Company's average sale period (turnover in days) for Year 2 was closest to which of the following? (Round your
final answer to one decimal place.)
 15.7 days.
 22.6 days.
 25.8 days.
 59.8 days.
365/6.1 = 59.8 days.
Financial statements for March Company appear below:
March Company

Year 2 Year 1
Current Assets:
Inventory $150 $150
Noncurrent Assets:
Common Shares
Equity
March Company Income Statement for the Year Ended December 31, Year 2 (dollars in thousands)

Gross Margin $490
Net Income $175

176.

March Company's working capital (in thousands of dollars) at the end of Year 2 was closest to which of the following?
 $180
 $520
 $580
 $1,290
580 - 400 = $180.

177.

March Company's current ratio at the end of Year 2 was closest to which of the following?
 0.47 to 1.
 0.49 to 1.
 1.27 to 1.
 1.45 to 1.
580/400 = 1.45 to 1.

178.

March Company's acid-test (quick) ratio at the end of Year 2 was closest to which of the following?
 0.39 to 1.
 0.53 to 1.
 0.95 to 1.
 1.90 to 1.
(220 + 160)/400 = 0.95 to 1.

179.

March Company's accounts receivable turnover for Year 2 was closest to which of the following?
 7.2 times.
 7.5 times.
 10.4 times.
 10.7 times.
1,610/[(160 + 150)/2] = 10.4 times.

180.

March Company's average collection period (age of receivables) for Year 2 was closest to which of the following?
 34.0 days.
 35.1 days.
 48.9 days.
 50.5 days.
365/10.4 = 35.1 days.

181.

March Company's inventory turnover for Year 2 was closest to which of the following?
 7.2 times.
 7.5 times.
 10.4 times.
 10.7 times.
1,120/[(150 + 150)/2] = 7.5 times.

182.

March Company's average sale period (turnover in days) for Year 2 was closest to which of the following? Round your
intermediate calculations to 2 decimal places.
 34.0 days.
 35.1 days.
 48.9 days.
 50.5 days.
365/7.47 = 48.9 days.
Financial statements for Marcial Company appear below:
Marcial Company

Year 2 Year 1
Current Assets:
Inventory $230 $240
Noncurrent Assets:
Common Shares
Equity
Marcial Company Income Statement for the Year Ended December 31, Year 2 (dollars in thousands)

Gross Margin $430
Net Income $128

183.

Marcial Company's working capital (in thousands of dollars) at the end of Year 2 was closest to which of the following?
 $200
 $440
 $570
 $1,360
$490 - $290 = $200.

184.

Marcial Company's current ratio at the end of Year 2 was closest to which of the following? (Round your final answer to two
decimal places.)
 0.35 to 1.
 0.38 to 1.
 1.22 to 1.
 1.69 to 1.
$490 / $290 = 1.69 to 1.

185.

Marcial Company's acid-test (quick) ratio at the end of Year 2 was closest to which of the following? (Round your final
 0.25 to 1.
 0.76 to 1.
 0.83 to 1.
 1.32 to 1.
($140 + $100) /$290 = 0.83:1.

186.

Marcial Company's accounts receivable turnover for Year 2 was closest to which of the following?
 8.4 times.
 10.4 times.
 16.3 times.
 14.8 times.
$1,630/$100 = 16.30 times.

187.

Marcial Company's average collection period (age of receivables) for Year 2 was closest to which of the following? (Do not
round intermediate calculations and round your final answer to one decimal place.)
 22.4 days.
 30.2 days.
 35.2 days.
 43.2 days.
365/16.3 = 22.4 days.

188.
Marcial Company's inventory turnover for Year 2 was closest to which of the following? (Round your final answer to one
decimal place.)
 8.4 times.
 10.4 times.
 12.1 times.
 5.1 times.
$1,200 / (($230 + $240)/ 2) = $1,200 / $235 = 5.1 times.

189.

Marcial Company's average sale period (turnover in days) for Year 2 was closest to which of the following? (Do not round
intermediate calculations and round your final answer to one decimal place).
 24.6 days.
 30.2 days.
 35.2 days.
 71.6 days.
365/5.1 = 71.6 days.
The following financial data have been taken from the records of CPZ Enterprises.

Accounts Receivable $600,000
Accounts Payable $120,000
Bonds Payable, Due in Ten Years $900,000
Cash $300,000
Interest Payable, Due in Three Months $30,000
Inventory $60,000
Land $750,000
Notes Payable, Due in Six Months $150,000

190.

What is the current ratio for CPZ Enterprises?
 3.20
 2.14
 5.00
 5.29
Amount in thousands ($600 + $300 + $60) / ($120 + $30 + $150) = 3.20.

191.

What is the company's acid-test (quick) ratio?
 0.68
 1.68
 3.00
 2.31
Amount in thousands ($600 + $300) / ($120 + $30 + $150) = 3.00.

192.

What will happen to the ratios below if CPZ Enterprises uses cash to pay 50% of its accounts payable?

Current Ratio Acid-Test Ratio
A) _Increase _Increase
B) _Decrease _Decrease
C) _Increase _Decrease
D) _Decrease _Increase
 Option A
 Option B
 Option C
 Option D
At December 31, Curry Co. had the following balances in selected asset accounts:

Year 2 Year 1
Cash $300 $200
Accounts receivable, Net $1200 $800
Inventory $500 $300
Other Assets $400 $250
Curry had current liabilities of $1,000 at December 31, Year 2, and credit sales of $7,200 for Year 2.

193.

Curry Company's acid-test (quick) ratio at December 31, Year 2 was closest to which of the following?
 1.5 to 1.
 1.6 to 1.
 2.0 to 1.
 2.1 to 1.
(300 + 1,200)/1,000 = 1.5 to 1.

194.

Curry Company's average collection period (age of receivables) for Year 2 was closest to which of the following?
 30.4 days.
 40.6 days.
 50.7 days.
 60.8 days.
365/[7,200/(1,200 + 800)/2] = 50.7 days.
Financial statements for Narita Company appear below:
Narita Company

Year 2 Year 1
Current Assets:
Inventory $110 $110
Noncurrent Assets:
Common Shares
Equity
Narita Company
Income Statement

Gross Margin $1,000
Net Income $308

195.

Narita Company's times interest earned for Year 2 was closest to which of the following?
 10.3 times.
 14.7 times.
 2.76 times.
 26.0 times.
$690 /$250 = 2.76 times.

196.

Narita Company's debt-to-equity ratio at the end of Year 2 was closest to which of the following?
 0.17 to 1.
 0.40 to 1.
 0.42 to 1.
 0.58 to 1.
$620/$1,540 = 0.40 to 1.
Financial statements for Narlock Company appear below:
Narlock Company

Year 2 Year 1
Current Assets:
Inventory $130 $120
Noncurrent Assets:
Shareholders' Equity: 100
Common Shares
Total Liabilities & Shareholders' $2160 $
Equity
Narlock Company
Income Statement

Gross Margin $680
Net Income $252

197.

Narlock Company's times interest earned for Year 2 was closest to which of the following?
 5.0 times.
 7.2 times.
 8.2 times.
 13.6 times.
410/50 = 8.2 times.

198.

Narlock Company's debt-to-equity ratio at the end of Year 2 was closest to which of the following?
 0.32 to 1.
 0.38 to 1.
 0.70 to 1.
 1.09 to 1.
890/1,270 = 0.70 to 1.
Financial statements for Narumi Company appear below:
Narumi Company

Year 2 Year 1
Current Assets:
Inventory $200 $200
Noncurrent Assets:
Preferred Shares, $10 Par, 6% $120 120
Common Shares
Equity
Narumi Company
Income Statement

Gross Margin $1,500
Interest Expense 970
Net Income $231

199.

Narumi Company's times interest earned for Year 2 was closest to which of the following? (Round your final answer to one
decimal place.)
 4.6 times.
 6.6 times.
 1.3 times.
 12.4 times.
$1,300 /$970 = 1.3 times.

200.
Narumi Company's debt-to-equity ratio at the end of Year 2 was closest to which of the following? (Round your final
 0.99 to 1.
 0.56 to 1.
 0.98 to 1.
 2.07 to 1.
$900/$910 = 0.99 to 1.
Selected data for the Boat Rental Company follow:

Current Year Prior Year
Preferred Shares, 8% Par Value $250000 $250000
$50
Common Shares, Per Value $10 $500000 $500000
Retained Earnings at End of $257000 $240000
Year
Net Income $102000 $90000
Dividends Paid on Preferred $20000 $20000
Shares
Dividends Paid on Common $55000 $50000
Shares
Quoted Market Price per $25 $20
Common Share at Year End

201.

What is the dividend yield ratio on common shares for the current year, rounded to the nearest tenth of a percent?
 4.4%
 6.6%
 6.8%
 7.4%
(55,000/50,000)/25 = 4.4%.

202.
What was the dividend payout ratio for the prior year?
 55.6%
 71.4%
 114.3%
 140.0%
(50,000/50,000)/[(90,000 - 20,000)/50,000] = 71.4%.

203.

What is the book value per share for the current year, rounded to the nearest cent?
 $15.14
 $18.31
 $20.14
 $22.18
(500,000 + 257,000)/50,000 = $15.14.

Required: Method A Method B Method C

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12/16/21, 1:40 PM Assignment Print View

a) Net income available to common shareholders:

b) Return on common equity:

Financial statements for Qiang Company appear below:

Calculate the following for Year 2:

a) Basic earnings per common share.

The dividend yield ratio is closest to which of the following?

Financial statements for Monkey Company appear below:

Calculate the following for Year 2:

a) Current ratio = Current assets/Current liabilities

(59,000 + 38,000)/59,000 = 1.64 to 1.

EBIT = 20,000 * 4.5 = 90,000. NI = (90,000 - 20,000) * (1 -.40) = $42,000.

[75,000 + 10,000 * (1 -.30)]/[(650,000 + 610,000)/2] = 13.0%.

Gross margin is an important indicator of liquidity.

90,000/(190,000 - 90,000) = 0.90 to 1.

Financial statements for AAR Company appear below:

Calculate the following:

c) Accounts receivable turnover = Sales on account/Average accounts receivable*

[188,000 + 70,000 * (1 -.30)]/[(2.3M + 2.5M)/2] = 9.9%.

BI = $1,500,000 + $230,000 - $1,600,000 = $130,000;

 Impossible to determine without more information.

 Impossible to determine from the information given.

Vertical analysis is the preparation of common-size statements.

Debt-to-Equity Ratio = total liabilities / shareholders' equity

Times Interest Earned Ratio:

290,000/[(26,000 + 24,000)/2] = 11.60 times.

 How quickly accounts receivables can be collected.

 How quickly inventories are sold.

 The efficiency of administrative departments.

 The overall profitability of the company's products.

How is horizontal analysis of financial statements accomplished?

 By placing statement items on an after-tax basis.

 By calculating both earnings per share and the price-earnings ratio.

 An increase in working capital.

 A decrease in working capital.

 A decrease in the debt-to-equity ratio.

 An increase in net income.

Credit Sales = 6.0 * ($180,000 + $200,000) / 2 = $1,140,000.

 Cash payment of payroll taxes payable.

 Refinancing a short-term note payable with a two-year note payable.

 Cash collection of accounts receivable.

 Payment of a 20-year mortgage payable with cash.

Accounts Receivable Turnover = sales on account / average accounts receivable balance

CA = 250M * 1.75 = 437.5M. max.

150,000/[(14,000 + 18,000)/2] = 9.38 times.

EI = 175,000 + 425,000 - 450,000 = 150,000.

 A decrease in accounts receivable relative to sales.

 A relaxation of credit policies.

110,000/(170,000 - 110,000) = 1.83 to 1.

TA = (75,000 + 225,000)/.30 + (75,000 + 225,000) = 1,300,000.

($270,000 - 80,000 * $1.90) / 150,000 = $0.79.

A higher earnings per share is preferable.

(80,000 - 10,000)/400,000 = 17.5%.

[55,000 + 20,000 * (1 -.30)]/[(660,000 + 620,000)/2] = 10.8%.

($200,000 + $90,000 + $18,000) / $18,000 = 17.11 Times.

($170,000 + $70,000 + $10,000) /$10,000 = 25 times.

CE Ltd.'s latest financial statements are as follows:

a) Return on common shareholders' equity:

Net income = $90

Return on common shareholders' equity = 90 / 356 = 25.3%

Net income = $90

Return on total assets = (90 + 20) /729 = 15.1%.