Managerial Accounting: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer

Managerial Accounting
Ray H. Garrison, Eric W. Noreen, Peter C. Brewer
Chapter – 15
Financial Statement Analysis

Chapter 15: financial statement analysis
Chapter 15 Financial Statement Analysis
True / False Questions
1. Horizontal analysis involves comparing two or more years' financial data for a single
company.
TRUE
AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Knowledge
Learning Objective: 15-01 Prepare and interpret financial statements in comparative and common-sized form
Level: Easy
2. The gross margin percentage is computed by dividing the gross margin by sales.
TRUE

Bloom's: Knowledge
Level: Easy
3. If a company's return on assets is substantially higher than its cost of borrowing, then the
common stockholders would normally want the company to have a relatively high debt/equity
ratio.
TRUE

Bloom's: Knowledge
Learning Objective: 15-02 Compute and interpret financial ratios that would be useful to a common stockholder
Learning Objective: 15-04 Compute and interpret financial ratios that would be useful to a long-term creditor
Level: Easy
1/174
4. Dividing the market price of a share of stock by the dividends per share gives the price-
earnings ratio.
FALSE

Bloom's: Knowledge
Level: Easy
5. The dividend yield ratio is calculated by dividing dividends per share by earnings per
share.
FALSE

Bloom's: Knowledge
Level: Easy
6. Financial leverage is positive if the interest rate on debt is lower than the return on total
assets.
TRUE

Bloom's: Comprehension
Level: Medium
7. Issuing common stock will increase a company's financial leverage.

FALSE

Level: Medium
2/174
8. If the assets in which borrowed funds are invested are able to earn a rate of return greater
than the interest rate required by the lender, then financial leverage is positive.
TRUE

Level: Medium
9. One would expect the book value of a share of stock to be about the same as the stock's
market value.
FALSE

Level: Medium
10. The acid-test ratio is always smaller than the current ratio.
TRUE

Learning Objective: 15-03 Compute and interpret financial ratios that would be useful to a short-term creditor
Level: Hard
11. All debt is considered in the computation of the acid-test ratio.

FALSE

Bloom's: Knowledge
Level: Easy
3/174
12. When computing the acid-test ratio, a short-term note receivable would be included in the
numerator.
TRUE

Level: Medium
13. The purchase of marketable securities for cash will lower a firm's acid-test ratio.
FALSE

Level: Medium
14. As the inventory turnover increases, the number of days required to sell the inventory one
time also increases.
FALSE

Level: Medium
4/174
15. Negative working capital indicates that the sum of all current assets is negative.
FALSE

Level: Medium
Multiple Choice Questions
16. The formula for the gross margin percentage is:

A. (Sales - Cost of goods sold)/Cost of goods sold
B. (Sales - Cost of goods sold)/Sales
C. Net income/Sales
D. Net income/Cost of goods sold

Bloom's: Knowledge
Level: Easy
17. The gross margin percentage is most likely to be used to assess:

A. how quickly accounts receivables can be collected.
B. how quickly inventories are sold.
C. the efficiency of administrative departments.
D. the overall profitability of the company's products.
The gross margin percentage is a broad measure of profitability

Bloom's: Knowledge
Level: Easy
5/174
18. The market price of XYZ Company's common stock dropped from $25 to $21 per share.
The dividend paid per share remained unchanged. The company's dividend payout ratio
would:
A. increase.
B. decrease.
C. be unchanged.
D. impossible to determine without more information.
The dividend payout ratio is unaffected by market price (e.g., Dividend payout ratio =
Dividends per share ÷ Earnings per share)

Bloom's: Knowledge
Level: Easy
19. A drop in the market price of a firm's common stock will immediately affect its:
A. return on common stockholders' equity.
B. current ratio.
C. dividend payout ratio.
D. dividend yield ratio.
Dividend yield ratio = Dividends per share ÷ Market price per share

Level: Medium
Source: CMA, adapted
6/174
20. Financial leverage is negative when:

A. the return on total assets is less than the rate of return on common stockholders' equity.
B. total liabilities are less than stockholders' equity.
C. total liabilities are less than total assets.
D. the return on total assets is less than the rate of return demanded by creditors.
If the rate of return on total assets is less than the rate of return the company pays its creditors,
financial leverage is negative

Level: Medium
21. Which of the following is not a potential source of financial leverage?

A. Long-term debt.
B. Common stock.
C. Accounts payable.
D. Interest payable.
Financial leverage is obtained from current and long-term liabilities.

Level: Hard
7/174
22. Issuing new shares of stock in a five-for-one split of common stock would:
A. decrease the book value per share of common stock.
B. increase the book value per share of common stock.
C. increase total stockholders' equity.
D. decrease total stockholders' equity.
If the number of shares increases the book value per share is decreased as illustrated in the
formula:
Book value per share = (Total stockholders' equity - Preferred stock) ÷ Number of common
shares outstanding

Level: Medium
23. A company's current ratio and acid-test ratios are both greater than 1. Issuing bonds to
finance purchase of an office building with the first installment of the bonds due in the current
year would:
A. decrease net working capital.
B. decrease the current ratio.
C. decrease the acid-test ratio.
D. affect all of the above as indicated.
The transaction would be as follows:
Current assets would remain unchanged while current liabilities would increase, therefore all
of the listed ratios would decrease.

Level: Hard
8/174
24. What is the effect of a purchase of inventory on account on the current ratio and on
working capital, respectively? (Assume a current ratio greater than one prior to this
transaction.)
A. Option A
B. Option B
C. Option C
D. Option D
The current ratio would decline; since the same amount is added to the numerator and
denominator the fraction is reduced.
There would be no change to working capital since the increase in current assets and current
liabilities is the same.

Level: Medium
25. At the beginning of the year, a company's current ratio is 2.2. At the end of the year, the
company has a current ratio of 2.5. Which of the following could help explain the change in
the current ratio?
A. An increase in inventories.
B. An increase in accounts payable.
C. An increase in property, plant, and equipment.
D. An increase in bonds payable.
An increase in inventory would increase the current ratio. An increase in accounts payable
would decrease the current ratio. The other two changes would have no effect on the current
ratio.

Level: Medium
9/174
26. A company's current ratio and acid-test ratios are both greater than 1. The collection of a
current accounts receivable of $29,000 would:
A. increase the current ratio.
B. decrease the current ratio.
C. not affect the current ratio or the acid-test ratio.
D. decrease the acid-test ratio.
There would be no change in the current ratio or the acid-test ratio as the collection of an
account receivable is exchanging one current asset for another current asset.

Level: Medium
27. Assume a company has a current ratio that is greater than 1. Which of the following
transactions will reduce the company's current ratio?
A. Selling office equipment at book value.
B. Paying a cash dividend already declared.
C. Borrowing by taking out a short-term loan.
D. Selling equipment at a loss.
When the current ratio is greater than 1 (e.g., $500 ÷ $400 = 1.25) then increasing both
portions of the fraction by an equal amount would reduce the current ratio (e.g., $550 ÷ $450
= 1.22.)

Level: Hard
10/174
28. Higgins Company presently has a current ratio of 0.6. It is currently negotiating a loan,
but it has been informed it must improve its current ratio before the loan will be approved.
Which of the following actions would improve its current ratio?
A. Pay off a portion of its long-term debt.
B. Use cash to pay off some current liabilities.
C. Purchase additional inventory on credit.
D. Collect some of the current accounts receivable.
When the current ratio is less than 1 (e.g., $300 ÷ $500 = 0.6) then increasing both portions of
the fraction by an equal amount would increase the current ratio (e.g., $350 ÷ $550 = 0.64.)

Level: Hard
29. The ratio of cash, trade receivables, and marketable securities to current liabilities is:
A. the working capital of a company.
B. the acid-test ratio.
C. the current ratio.
D. the debt to equity ratio.
Acid-test ratio = (Cash + Marketable securities + Accounts receivable + Short-term notes

receivable) ÷ Current liabilities

Bloom's: Knowledge
Level: Easy
11/174
30. Wolbers Company has an acid-test ratio of 1.4. Which of the following events will cause
this ratio to decrease?
A. Selling merchandise on account.
B. Paying a cash dividend already declared.
C. Borrowing using a short-term note.
D. Selling equipment at a loss.
When the acid-test ratio is greater than 1 (e.g., $1,400 ÷ $1,000 = 1.4) then increasing both
portions of the fraction by an equal amount would reduce the current ratio (e.g., $1,500 ÷
$1,100 = 1.36.)

Level: Medium
31. Park Company purchased $100,000 in inventory from its suppliers, on account. The
company's acid-test ratio would:
A. increase.
B. decrease.
C. remain unchanged.
D. be impossible to determine from the given information.
Since inventory is excluded from the numerator in the acid-test ratio, with the denominator
increasing through the incursion of additional accounts payable, the ratio would decrease.

Level: Medium
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32. Assuming stable business conditions, an increase in the accounts receivable turnover ratio
could be explained by:
A. stricter policies with respect to the granting of credit to customers.
B. an easing of policies with respect to the granting of credit to customers.
C. a slowdown in collecting accounts receivables from customers.
D. none of these.
Stricter policies with respect to the granting of credit to customers would likely increase the
accounts receivable turnover ratio because given customers in a stronger financial position
and having more liquidity would be more able to pay on time.

Level: Medium
33. Ozols Corporation's most recent income statement appears below:
The gross margin percentage is closest to:

A. 33.2%
B. 55.7%
C. 300.8%
D. 125.6%
Gross margin percentage = Gross margin ÷ Sales

= $358,000 ÷ $643,000 = $55.7%
AACSB: Analytic
Bloom's: Application
Level: Easy
13/174
34. Crandler Company's net income last year was $60,000. The company paid preferred
dividends of $20,000 and its average common stockholders' equity was $500,000. The
company's return on common stockholders' equity for the year was closest to:
A. 16.0%
B. 4.0%
C. 8.0%
D. 12.0%
Return on common stockholders' equity

= (Net income - Preferred dividends) ÷ Average common stockholders' equity
= ($60,000 - $20,000) ÷ $500,000 = 8.0%
AACSB: Analytic
Level: Easy
35. The average stockholders' equity for Horn Co. last year was $2,000,000. Included in this
figure was $200,000 of preferred stock. Preferred dividends were $16,000. If the return on
common stockholders' equity was 12.5% for the year, net income was:
A. $225,000
B. $250,000
C. $241,000
D. $234,000
Return on common stockholders' equity = (Net income - Preferred dividends) ÷ Average

common stockholders' equity
12.5% = (Net income - $16,000) ÷ ($2,000,000 - $200,000)
Net income -$16,000 = 12.5% × $1,800,000
Net income = 12.5% × $1,800,000 + $16,000
= $225,000 + $16,000 = $241,000
AACSB: Analytic
Level: Medium
14/174
36. Artist Company's net income last year was $500,000. The company has 150,000 shares of
common stock and 40,000 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 $1.70 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. $3.15
B. $3.52
C. $1.63
D. $3.33
Earnings per share = (Net Income - Preferred Dividends)

÷ Average number of common shares outstanding
= ($500,000 - 40,000 shares × $0.70 per share) ÷ 150,000 shares
= ($500,000 - $28,000) ÷ 150,000 shares = $3.15 per share
AACSB: Analytic
Level: Medium
37. Archer Company had net income of $40,000 last year. The company has 5,000 shares of
common stock and 2,500 shares of preferred stock outstanding. There was no change in the
number of common or preferred shares outstanding during the year. Preferred dividends were
$2 per share. The earnings per share of common stock was:
A. $7.00
B. $8.00
C. $5.33
D. $7.50

= ($40,000 - 2,500 shares × $2.00 per share) ÷ 5,000 shares
= ($40,000 - $5,000) ÷ 5,000 shares = $7.00 per share
AACSB: Analytic
Level: Medium
15/174
38. The following data have been taken from your company's financial records for the current
year:
The price-earnings ratio is:

A. 12.5
B. 6.0
C. 8.0
D. 7.5
Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $120 per share ÷ $15 per share = 8.0
AACSB: Analytic
Level: Easy
16/174
39. The following data have been taken from your company's financial records for the current
year:
The price-earnings ratio is:

A. 7.5
B. 10.0
C. 9.4
D. 13.3
Price-earnings ratio = Market price per share ÷ Earnings per share

AACSB: Analytic
Level: Easy
17/174
40. Data concerning Bouerneuf Company's common stock follow:
The price-earnings ratio would be:

A. 2.00
B. 2.67
C. 3.00
D. 4.00

AACSB: Analytic
Level: Easy
18/174
41. Boggs Company has 40,000 shares of common stock outstanding. The book value per
share of this stock was $60.00 and the market value per share was $75.00 at the end of the
year. Net income for the year was $400,000. Interest on long term debt was $40,000.
Dividends paid to common stockholders were $3.00 per share. The tax rate was 30%. The
company's price-earnings ratio at the end of the year was:
A. 25
B. 20
C. 7.50
D. 6.00

÷ Average number of common shares outstanding*
= $400,000 ÷ 40,000 shares = $10 per share
AACSB: Analytic
Level: Medium
19/174
42. Last year the return on total assets in Jeffrey Company was 8.5%. The total assets were
2.9 million at the beginning of the year and 3.1 million at the end of the year. The tax rate was
30%, interest expense totaled $110 thousand, and sales were $5.2 million. Net income for the
year was:
A. $145,000
B. $222,000
C. $332,000
D. $178,000
Average total assets = ($2,900,000 + $3,100,000) ÷ 2 = $3,000,000

Return on total assets = Adjusted net income ÷ Average total assets
8.5% = Adjusted net income ÷ $3,000,000
Adjusted net income = 8.5% × $3,000,000 = $255,000
Adjusted net income = Net income + [Interest expense × (1-Tax rate)]
$255,000 = Net income + [$110,000 × (1 - 0.30)]
Net income = $255,000 - $110,000 × 0.70 = $178,000
AACSB: Analytic
Level: Hard
20/174
43. Brandon Company's net income last year was $65,000 and its interest expense was
$20,000. Total assets at the beginning of the year were $640,000 and total assets at the end of
the year were $690,000. The company's income tax rate was 30%. The company's return on
total assets for the year was closest to:
A. 9.8%
B. 10.7%
C. 12.8%
D. 11.9%
Average total assets = ($640,000 + $690,000) ÷ 2 = $665,000

= $65,000 + [$20,000 × (1 - 0.30)] = $79,000
= $79,000 ÷ $665,000 = 11.9%
AACSB: Analytic
Level: Medium
21/174
44. The following account balances have been provided for the end of the most recent year:
The book value per share of common stock is:

A. $22
B. $25
C. $20
D. $28
Book value per share = Common stockholders' equity

÷ Number of common shares outstanding
= ($120,000 - $10,000) ÷ 5,000 shares = $22 per share
AACSB: Analytic
Level: Medium
45. Vessels Corporation's net income for the most recent year was $2,532,000. A total of
200,000 shares of common stock and 200,000 shares of preferred stock were outstanding
throughout the year. Dividends on common stock were $3.80 per share and dividends on
preferred stock were $1.25 per share. The earnings per share of common stock is closest to:
A. $12.66
B. $8.86
C. $7.61
D. $11.41

= ($2,532,000 - 200,000 shares × $1.25 per share) ÷ 200,000 shares
= ($2,532,000 - $250,000) ÷ 200,000 shares = $11.41 per share
AACSB: Analytic
Level: Easy
22/174
46. Tronnes Corporation's net income last year was $1,750,000. The dividend on common
stock was $2.60 per share and the dividend on preferred stock was $2.50 per share. The
market price of common stock at the end of the year was $57.70 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. 17.85
B. 11.54
C. 24.04
D. 9.89

= ($1,750,000 - $250,000) ÷ 300,000 shares = $5.00 per share
= $57.70 per share ÷ $5.00 per share = 11.54
AACSB: Analytic
Level: Easy
23/174
47. Delatrinidad Corporation's net income last year was $7,736,000. The dividend on common
outstanding. The dividend payout ratio is closest to:
A. 0.70
B. 0.65
C. 2.36
D. 1.87

= ($7,736,000 - $560,000) ÷ 400,000 shares = $17.94 per share
Dividend payout ratio = Dividends per share ÷ Earnings per share
AACSB: Analytic
Level: Easy
48. Last year, Shadow Corporation's dividend on common stock was $9.90 per share and the
dividend on preferred stock was $1.00 per share. The market price of common stock at the
end of the year was $68.10 per share. The dividend yield ratio is closest to:
A. 0.15
B. 0.16
C. 0.91
D. 0.01
AACSB: Analytic
Level: Easy
24/174
49. Hagerman Corporation's most recent income statement appears below:
The beginning balance of total assets was $140,000 and the ending balance was $90,000. The
return on total assets is closest to:
A. 18.3%
B. 24.3%
C. 34.8%
D. 26.1%

= $21,000 + [$10,000 × (1 - 0.30)] = $28,000
= $28,000 ÷ $115,000 = 24.3%
AACSB: Analytic
Level: Easy
25/174
50. Excerpts from Lasso Corporation's most recent balance sheet appear below:
Net income for Year 2 was $145,000. Dividends on common stock were $55,000 in total and
dividends on preferred stock were $20,000 in total. The return on common stockholders'
equity for Year 2 is closest to:
A. 12.3%
B. 8.1%
C. 13.0%
D. 14.3%
Average common stockholders' equity = ($1,050,000 + $980,000) ÷ 2 = $1,015,000

= ($145,000 - $20,000) ÷ $1,015,000 = 12.3%
AACSB: Analytic
Level: Easy
26/174
51. Data from Saldivar Corporation's most recent balance sheet appear below:
A total of 150,000 shares of common stock and 40,000 shares of preferred stock were
outstanding at the end of the year. The book value per share is closest to:
A. $2.73
B. $5.00
C. $6.53
D. $7.87

÷ Number of common shares outstanding = $980,000 ÷ 150,000 shares = $6.53 per share
AACSB: Analytic
Level: Easy
52. Drama Company's working capital is $16,000 and its current liabilities are $94,000. The
company's current ratio is closest to:
A. 1.17
B. 0.17
C. 6.88
D. 0.83
Current assets = Working capital + Current liabilities

= $94,000 + $16,000 = $110,000
Current ratio = Current assets ÷ Current liabilities
= $110,000 ÷ $94,000 = 1.17
AACSB: Analytic
Level: Medium
27/174
53. Selected year-end data for the Brayer Company are presented below:
The company has no prepaid expenses and inventories remained unchanged during the year.
Based on these data, the company's inventory turnover ratio for the year was closest to:
A. 1.20
B. 2.40
C. 1.67
D. 2.33

3.0 = Current assets ÷ $600,000
Current assets = 3.0 × $600,000 = $1,800,000
Acid-test ratio = Quick assets ÷ Current liabilities
2.5 = Quick assets ÷ $600,000
Quick assets = 2.5 × $600,000 = $1,500,000
Current assets = Inventory + Quick assets
$1,800,000 = Inventory + $1,500,000
Inventory = $1,800,000 - $1,500,000 = $300,000
Since the inventory remained unchanged throughout the year, the average inventory balance
was $300,000.
Inventory turnover = Cost of goods sold ÷ Average inventory balance
= $500,000 ÷ $300,000 = 1.67
AACSB: Analytic
Level: Hard
28/174
54. Brewster Company has an acid-test ratio of 1.5 and a current ratio of 2.5. Current assets
equal $200,000, of which $10,000 is prepaid expenses. The company's current assets consist
of cash, marketable securities, accounts receivable, prepaid expenses, and inventory. Brewster
Company's inventory must be:
A. $30,000
B. $110,000
C. $70,000
D. $80,000

2.5 = $200,000 ÷ Current liabilities
Current liabilities = $200,000 ÷ 2.5 = $80,000
1.5 = Quick assets ÷ $80,000
Quick assets = 1.5 × $80,000 = $120,000
Current assets = Quick assets + Inventory + Prepaid expenses
$200,000 = $120,000 + Inventory+ $10,000
Inventory = $200,000 - $120,000 - $10,000 = $70,000
AACSB: Analytic
Level: Hard
29/174
55. Cotuit Company has a current ratio of 3.2 and an acid-test ratio of 2.4. The company's
current assets consist of cash, marketable securities, accounts receivable, and inventory. The
company's inventory is $40,000. Cotuit Company's current liabilities must be:
A. $40,000
B. $120,000
C. $50,000
D. $32,000
Current assets = Quick assets + Inventory

Current assets = Quick assets + $40,000
2.4 = Quick assets ÷ Current liabilities
Quick assets = 2.4 × Current liabilities
3.2 = Current assets ÷ Current liabilities
3.2 = (Quick assets + $40,000) ÷ Current liabilities
3.2 = (2.4 × Current liabilities + $40,000) ÷ Current liabilities
3.2 = 2.4 + $40,000 ÷ Current liabilities
(3.2 - 2.4) = $40,000 ÷ Current liabilities
0.8 = $40,000 ÷ Current liabilities
Current liabilities = $40,000 ÷ 0.8 = $50,000
AACSB: Analytic
Level: Hard
30/174
56. Erastic Company has $14,000 in cash, $8,000 in marketable securities, $34,000 in account
receivable, $40,000 in inventories, and $42,000 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. 1.33
B. 0.81
C. 2.29
D. 1.14
Quick assets = Cash + Marketable securities + Accounts receivable

= $14,000 + $8,000 + $34,000 = $56,000
Acid-test ratio = Quick assets ÷ Current liabilities = $56,000 ÷ $42,000 = 1.33
AACSB: Analytic
Level: Easy
57. Fraser Company had $130,000 in sales on account last year. The beginning accounts
receivable balance was $10,000 and the ending accounts receivable balance was $14,000. The
company's accounts receivable turnover was closest to:
A. 5.42
B. 13.00
C. 9.29
D. 10.83
Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance*

= $130,000 ÷ $12,000 = 10.83
*Average accounts receivable balance = ($10,000 + $14,000) ÷ 2 = $12,000
AACSB: Analytic
Level: Easy
31/174
58. Grasse 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 $12,000. The
company's average collection period was closest to:
A. 25.09 days
B. 22.81 days
C. 50.19 days
D. 27.38 days
Average accounts receivable balance = ($10,000 + $12,000) ÷ 2 = $11,000

Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance
= $160,000 ÷ $11,000 = 14.55
Average collection period = 365 days ÷ Accounts receivable turnover
= 365 days ÷ 14.55 = 25.09 days
AACSB: Analytic
Level: Easy
59. Harbor Company, a retailer, had cost of goods sold of $170,000 last year. The beginning
inventory balance was $20,000 and the ending inventory balance was $24,000. The
company's inventory turnover was closest to:
A. 7.08
B. 7.73
C. 3.86
D. 8.50
Average inventory balance = ($20,000 + $24,000) ÷ 2 = $22,000

= $170,000 ÷ $22,000 = 7.73
AACSB: Analytic
Level: Easy
32/174
60. Irastan Company, a retailer, had cost of goods sold of $250,000 last year. The beginning
inventory balance was $28,000 and the ending inventory balance was $20,000. The
company's average sale period was closest to:
A. 40.88 days
B. 29.20 days
C. 35.03 days
D. 70.08 days

= $250,000 ÷ $24,000 = 10.42
Average sale period = 365 days ÷ Inventory turnover
= 365 days ÷ 10.42 = 35.03 days
AACSB: Analytic
Level: Easy
61. Deschambault Corporation's total current assets are $260,000, its noncurrent assets are
$700,000, its total current liabilities are $130,000, its long-term liabilities are $510,000, and
its stockholders' equity is $320,000. Working capital is:
A. $260,000
B. $320,000
C. $190,000
D. $130,000
Working capital = Current assets - Current liabilities

= $260,000 - $130,000 = $130,000
AACSB: Analytic
Level: Easy
33/174
62. Ladabouche Corporation's total current assets are $390,000, its noncurrent assets are
its stockholders' equity is $270,000. The current ratio is closest to:
A. 0.85
B. 0.79
C. 1.18
D. 0.62

= $390,000 ÷ $330,000 = 1.18
AACSB: Analytic
Level: Easy
63. Data from Adamis Corporation's most recent balance sheet appear below:
The company's acid-test ratio is closest to:

A. 0.33
B. 0.71
C. 0.81
D. 0.10
Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes

receivable
= $10,000 + $24,000 + $40,000 + $0 = $74,000
= $74,000 ÷ $104,000 = 0.71
34/174
AACSB: Analytic
Level: Easy
64. Bonine Corporation has provided the following data:
The accounts receivable turnover for this year is closest to:

A. 0.83
B. 8.94
C. 9.85
D. 1.20

= $867,000 ÷ $97,000 = 8.94
AACSB: Analytic
Level: Easy
35/174
65. Data from Concepcion Corporation's most recent balance sheet and income statement
appear below:
The average collection period for this year is closest to:

A. 54.3 days
B. 7.4 days
C. 7.2 days
D. 54.7 days

= $800,000 ÷ $119,000 = 6.72
= 365 days ÷ 6.72 = 54.3 days
AACSB: Analytic
Level: Easy
36/174
66. Kaelker Corporation has provided the following data:
The inventory turnover for this year is closest to:

A. 3.36
B. 0.87
C. 1.15
D. 3.15

= $671,000 ÷ $199,500 = 3.36
AACSB: Analytic
Level: Easy
37/174
67. Data from Davoren Corporation's most recent balance sheet and income statement appear
below:
The average sale period for this year is closest to:

A. 55.7 days
B. 64.4 days
C. 112.0 days
D. 122.1 days

= $522,000 ÷ $174,500* = 2.99
*Average inventory balance = ($160,000 + $189,000) ÷ 2 = $174,500
= 365 days ÷ 2.99 = 122.1 days
AACSB: Analytic
Level: Easy
68. Last year Jason Company had a net income of $250,000, income tax expense of $78,000,
and interest expense of $30,000. The company's times interest earned was closest to:
A. 4.73
B. 9.33
C. 11.93
D. 8.33
Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= ($250,000 + $78,000 + $30,000) ÷ $30,000 = 11.93
AACSB: Analytic
Level: Easy
38/174
69. Jersey Corporation has total interest expense of $10,000, sales of $1 million, a tax rate of
40%, and net income (after taxes) of $60,000. What is this firm's times interest earned ratio?
A. 16
B. 11
C. 10
D. 7
Earnings after tax = Earnings before tax - Income tax

Earnings after tax = Earnings before tax - 0.4 × Earnings before tax
Earnings after tax = Earnings before tax × (1 - 0.4)
Earnings before tax = Earnings after tax ÷ (1 - 0.4)
=$60,000 ÷ (1 - 0.4) = $100,000
Earnings before interest and taxes = $100,000 + $10,000 = $110,000
= $110,000 ÷ $10,000 = 11
AACSB: Analytic
Level: Hard
70. Krast Company has total assets of $160,000 and total liabilities of $70,000. The
company's debt-to-equity ratio is closest to:
A. 0.56
B. 0.44
C. 0.30
D. 0.78
Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity

= $70,000 ÷ $90,000* = 0.78
*Stockholders' equity = Total assets - Total liabilities = $160,000 - $70,000 = $90,000
AACSB: Analytic
Level: Easy
39/174
71. Pia Corporation has provided the following data from its most recent income statement:
The times interest earned ratio is closest to:

A. 2.09
B. 1.09
C. 0.76
D. 2.98
= $71,000 ÷ $34,000 = 2.09
AACSB: Analytic
Level: Easy
72. Damon Corporation has provided the following data from its most recent balance sheet:
The debt-to-equity ratio is closest to:

A. 0.17
B. 6.00
C. 0.86
D. 7.00

= $540,000 ÷ $90,000 = 6.00
AACSB: Analytic
Level: Easy
40/174
Hartzog Corporation's most recent balance sheet and income statement appear below:
41/174
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 $7.04
per share.
73. The gross margin percentage for Year 2 is closest to:

A. 41.5%
B. 70.9%
C. 15.2%
D. 658.8%
Gross margin percentage = Gross margin ÷ Sales = $560 ÷ $1,350 = 41.5%
AACSB: Analytic
Level: Medium
42/174
74. The earnings per share of common stock for Year 2 is closest to:
A. $0.40
B. $0.73
C. $0.61
D. $0.43
Number of common shares outstanding = Common stock ÷ Par value

= $400 ÷ $2 per share = 200 shares
= ($85 - $5) ÷ 200 shares = $0.40 per share
AACSB: Analytic
Level: Medium
43/174
75. The price-earnings ratio for Year 2 is closest to:

A. 9.64
B. 16.37
C. 11.54
D. 17.60

= ($85 - $5) ÷ 200 shares = $0.40 per share
= $7.04 ÷ $0.40 = 17.60
AACSB: Analytic
Level: Medium
44/174
76. The dividend payout ratio for Year 2 is closest to:

A. 81.3%
B. 75.0%
C. 70.6%
D. 1250.0%

= ($85 - $5) ÷ 200 shares = $0.40 per share
Dividends per share = Common dividends ÷ Common shares
= $60 ÷ 200 shares = $0.30 per share
= $0.30 ÷ $0.40 = 75.0%
AACSB: Analytic
Level: Medium
77. The dividend yield ratio for Year 2 is closest to:

A. 0.36%
B. 92.31%
C. 4.26%
D. 4.62%

= $60 ÷ 200 shares = $0.30 per share
Dividend yield ratio = Dividends per share (see above) ÷ Market price per share
= $0.30 ÷ $7.04 = 4.26%
AACSB: Analytic
Level: Medium
45/174
78. The return on total assets for Year 2 is closest to:

A. 7.85%
B. 7.77%
C. 6.51%
D. 6.44%

= $85 + [$25 × (1 - 0.30)] = $102.5
= $102.5 ÷ $1,305 = 7.85%
AACSB: Analytic
Level: Medium
79. The return on common stockholders' equity for Year 2 is closest to:
A. 11.33%
B. 10.00%
C. 10.67%
D. 9.41%
Average common stockholders' equity = ($760 + $740) ÷ 2 = $750

Return on common stockholders' equity= (Net income - Preferred dividends) ÷ Average
common stockholders' equity
= ($85 - $5) ÷ $750 = 10.67%
AACSB: Analytic
Level: Medium
46/174
80. The book value per share at the end of Year 2 is closest to:
A. $6.60
B. $4.30
C. $3.80
D. $0.40

÷ Number of common shares outstanding = $760 ÷ 200 shares = $3.80 per share
AACSB: Analytic
Level: Medium
81. The working capital at the end of Year 2 is:

A. $610 thousand
B. $860 thousand
C. $310 thousand
D. $710 thousand

= $610 thousand - $300 thousand = $310 thousand
AACSB: Analytic
Level: Medium
47/174
82. The current ratio at the end of Year 2 is closest to:

A. 2.03
B. 0.35
C. 0.75
D. 0.46
Current ratio = Current assets ÷ Current liabilities = $610 ÷ $300 = 2.03
AACSB: Analytic
Level: Medium
83. The acid-test ratio at the end of Year 2 is closest to:

A. 2.03
B. 1.47
C. 1.60
D. 1.33

receivable
= $180 + $0 + $260 = $440
Acid-test ratio = Quick assets ÷ Current liabilities = $440 ÷ $300 = 1.47
AACSB: Analytic
Level: Medium
48/174
84. The accounts receivable turnover for Year 2 is closest to:

A. 5.19
B. 5.40
C. 1.08
D. 0.92

= $1,350 ÷ $250* = 5.40
*Average accounts receivable balance = ($260 + $240) ÷ 2 = $250
AACSB: Analytic
Level: Medium
85. The average collection period for Year 2 is closest to:

A. 0.9 days
B. 70.3 days
C. 1.1 days
D. 67.6 days

= $1,350 ÷ $250* = 5.40
= 365 days ÷ 5.40 = 67.6 days
AACSB: Analytic
Level: Medium
49/174
86. The inventory turnover for Year 2 is closest to:

A. 0.93
B. 1.08
C. 5.85
D. 6.08
Inventory turnover = Cost of goods sold ÷ Average inventory balance* = $790 ÷ $135 = 5.85
*Average inventory balance = ($130 + $140) ÷ 2 = $135
AACSB: Analytic
Level: Medium
87. The average sale period for Year 2 is closest to:

A. 60.0 days
B. 35.1 days
C. 62.4 days
D. 213.6 days
Average inventory balance = ($130 + $140) ÷ 2 = $135

= $790 ÷ $135 = 5.85
= 365 days ÷ 5.85 = 62.4 days
AACSB: Analytic
Level: Medium
50/174
88. The times interest earned for Year 2 is closest to:

A. 3.40
B. 8.34
C. 4.84
D. 5.84
= $146 ÷ $25 = 5.84
AACSB: Analytic
Level: Medium
89. The debt-to-equity ratio at the end of Year 2 is closest to:

A. 0.61
B. 0.28
C. 0.53
D. 0.19

= $460 ÷ $860 = 0.53
AACSB: Analytic
Level: Medium
51/174
Hick Corporation's most recent balance sheet and income statement appear below:
52/174
53/174
per share.
90. The gross margin percentage for Year 2 is closest to:

A. 82.9%
B. 45.3%
C. 446.2%
D. 22.4%
Gross margin percentage = Gross margin ÷ Sales = $580 ÷ $1,280 = 45.3%
AACSB: Analytic
Level: Medium
A. $0.55
B. $0.93
C. $1.01
D. $0.65

= ($130 - $20) ÷ 200 shares = $0.55 per share
AACSB: Analytic
Level: Medium
54/174

A. 14.72
B. 17.40
C. 9.48
D. 10.29

= ($130 - $20) ÷ 200 shares = $0.55 per share
= $9.57 ÷ $0.55 = 17.40
AACSB: Analytic
Level: Medium
55/174

A. 72.7%
B. 54.5%
C. 46.2%
D. 1818.2%

= $60 ÷ 200 shares = $0.30 per share
= ($130 - $20) ÷ 200 shares = $0.55 per share
= $0.30 ÷ $0.55 = 54.5%
AACSB: Analytic
Level: Medium

A. 1.05%
B. 4.18%
C. 75.00%
D. 3.13%

= $60 ÷ 200 shares = $0.30 per share
= $0.30 ÷ $9.57 = 3.13%
AACSB: Analytic
Level: Medium
56/174

A. 9.35%
B. 10.23%
C. 9.42%
D. 10.16%

= $130 + [$16 × (1 - 0.30)] = $141.2
= $141.2 ÷ $1,380 = 10.23%
AACSB: Analytic
Level: Medium
A. 12.44%
B. 13.02%
C. 15.38%
D. 10.53%

= ($130 - $20) ÷ $845* = 13.02%
*Average common stockholders' equity = ($870 + $820) ÷ 2 = $845
AACSB: Analytic
Level: Medium
57/174
A. $4.35
B. $5.35
C. $0.55
D. $6.95

÷ Number of common shares outstanding = $870 ÷ 200 shares* = $4.35 per share
*Number of common shares outstanding = Common stock ÷ Par value
AACSB: Analytic
Level: Medium
Selected financial data from Osterville Company for the most recent year appear below:
The income tax rate is 40%.
58/174
98. Net income as a percentage of sales was:

A. 5%
B. 3%
C. 2.25%
D. 1.75%
Net income percentage = Net income ÷ Sales = $24 ÷ $800 = 3%
AACSB: Analytic
Level: Easy
59/174
99. Net operating income as a percentage of sales was:

A. 40%
B. 30%
C. 10%
D. 5%
Net operating income percentage = Net operating income ÷ Sales = $80 ÷ $800 = 10%
AACSB: Analytic
Level: Easy
60/174
Financial statements for Orange Company appear below:
61/174
Dividends during Year 2 totaled $156 thousand, of which $18 thousand were preferred
dividends.
The market price of a share of common stock on December 31, Year 2 was $100.
100. Orange Company's earnings per share of common stock for Year 2 was closest to:
A. $7.23
B. $2.27
C. $10.91
D. $7.64

= ($336 - $18) ÷ (44 shares* + 44 shares*)/2 = $7.23 per share
AACSB: Analytic
Level: Medium
62/174
101. Orange Company's dividend yield ratio on December 31, Year 2 was closest to:
A. 3.1%
B. 1.1%
C. 3.5%
D. 2.7%

= ($156 - $18) ÷ 44 shares = $3.14 per share
= $3.14 per share ÷ $100 per share = 3.1%
AACSB: Analytic
Level: Medium
102. Orange Company's return on total assets for Year 2 was closest to:
A. 15.5%
B. 15.9%
C. 16.5%
D. 14.5%

= $336 + [$30 × (1 - 0.30)] = $357
= $357 ÷ $2,170 = 16.5%
AACSB: Analytic
Level: Medium
63/174
103. Orange Company's current ratio at the end of Year 2 was closest to:
A. 1.24
B. 0.55
C. 0.44
D. 1.71
AACSB: Analytic
Level: Medium
104. Orange Company's accounts receivable turnover for Year 2 was closest to:
A. 15.7
B. 11.0
C. 17.7
D. 12.4

= $2,830 ÷ $180* = 15.7
AACSB: Analytic
Level: Medium
64/174
105. Orange Company's average sale period for Year 2 was closest to:
A. 23.2 days
B. 29.5 days
C. 33.2 days
D. 20.6 days

= $1,980 ÷ $160* = 12.38
= 365 days ÷ 12.38 = 29.5 days
AACSB: Analytic
Level: Medium
106. Orange Company's times interest earned for Year 2 was closest to:
A. 16.0
B. 28.3
C. 17.0
D. 11.2
= $510 ÷ $30 = 17.0
AACSB: Analytic
Level: Medium
65/174
Financial statements for Harwich Company for the most recent year appear below:
The balances in the Cash, Accounts Receivable, Inventory, Bonds Payable, Common Stock,
and Additional Paid-In Capital accounts are unchanged from the beginning of the year. A
$0.75 per share dividend was declared and paid during the year. On December 31, Harwich
Company's common stock was trading at $24.00 per share.
66/174
107. Harwich Company's current ratio at December 31 was closest to:

A. 1.95
B. 2.67
C. 1.33
D. 2.00

= ($90 + $150 + $150 + $10) ÷ ($150 + $25 + $20 + $5)
= $400 ÷ $200 = 2.00
AACSB: Analytic
Level: Medium
108. Harwich Company's times interest earned ratio for the year was closest to:
A. 11.0
B. 10.5
C. 12.0
D. 22.0
= $110 ÷ $10 = 11.0
AACSB: Analytic
Level: Medium
67/174
109. Harwich Company's acid-test ratio at December 31 was closest to:

A. 0.45
B. 0.83
C. 2.00
D. 1.20

receivable
= $90 + $0 + $150 = $240
Current liabilities = Accounts payable + Accrued expenses payable + Income taxes payable +
Interest payable) = $150 + $25 + $20 + $5 = $200
AACSB: Analytic
Level: Medium
110. Harwich Company's inventory turnover ratio for the year was closest to:
A. 8
B. 3
C. 5
D. 7.5
Inventory turnover = Cost of goods sold ÷ Average inventory balance = $750 ÷ $150 = 5
AACSB: Analytic
Level: Medium
68/174
111. Harwich Company's average collection period for the year was closest to:
A. 72 days
B. 8 days
C. 120 days
D. 46 days

= $1,200 ÷ $150 = 8
= 365 days ÷ 8 = 46 days
AACSB: Analytic
Level: Medium
112. Harwich Company's price-earnings ratio at December 31 was closest to:

A. 3.00
B. 8.25
C. 8.00
D. 7.25

= ($60 - $0) ÷ (20 shares + 20 shares)/2 = $3.00 per share
= $24.00 ÷ $3.00 = 8.00
AACSB: Analytic
Level: Medium
69/174
113. Harwich Company's book value per share at December 31 was closest to:
A. $7.00
B. $15.00
C. $24.00
D. $30.00

÷ Number of common shares outstanding = $300 ÷ 20 shares = $15.00 per share
AACSB: Analytic
Level: Medium
114. Harwich Company's dividend payout ratio for the year was closest to:
A. 75%
B. 25%
C. 5%
D. 3.125%

= $0.75 ÷ $3.00 = 25%
AACSB: Analytic
Level: Medium
70/174
115. Harwich Company's debt-to-equity ratio at the end of the year was closest to:
A. 0.33
B. 0.50
C. 0.67
D. 1.00
Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $300 ÷ $300 = 1.00
AACSB: Analytic
Level: Medium
116. Harwich Company's dividend yield ratio for the year was closest to:
A. 3.125%
B. 12.500%
C. 9.125%
D. 25.000%
= $0.75 per share ÷ $24.00 per share = 3.125%
AACSB: Analytic
Level: Medium
71/174
Financial statements for Larned Company appear below:
72/174
73/174
dividends.
117. Larned Company's earnings per share of common stock for Year 2 was closest to:
A. $18.39
B. $27.22
C. $19.06
D. $11.03

AACSB: Analytic
Level: Medium
74/174
118. Larned Company's price-earnings ratio on December 31, Year 2 was closest to:
A. 5.88
B. 14.50
C. 8.70
D. 8.40

= $160 ÷ $18.39 = 8.70
AACSB: Analytic
Level: Medium
75/174
119. Larned Company's dividend payout ratio for Year 2 was closest to:
A. 75.8%
B. 28.5%
C. 76.7%
D. 47.4%

= ($263 - $12) ÷ 18 shares = $13.94 per share
= $13.94 ÷ $18.39 = 75.8%
AACSB: Analytic
Level: Medium
120. Larned Company's dividend yield ratio on December 31, Year 2 was closest to:
A. 8.7%
B. 9.1%
C. 8.3%
D. 5.5%

= ($263 - $12) ÷ 18 shares = $13.94 per share
= $13.94 per share ÷ $160 per share = 8.7%
AACSB: Analytic
Level: Medium
76/174
121. Larned Company's return on total assets for Year 2 was closest to:
A. 15.8%
B. 17.2%
C. 18.6%
D. 17.8%

= $343 + [$40 × (1 - 0.30)] = $371
= $371 ÷ $1,995 = 18.6%
AACSB: Analytic
Level: Medium
122. Larned Company's return on common stockholders' equity for Year 2 was closest to:
A. 29.8%
B. 26.9%
C. 30.9%
D. 27.9%

= ($343 - $12) ÷ $1,110* = 29.8%
*Average common stockholders' equity = ($1,150 + $1,070) ÷ 2 = $1,110
AACSB: Analytic
Level: Medium
77/174
123. Larned Company's book value per share at the end of Year 2 was closest to:
A. $16.11
B. $63.89
C. $70.56
D. $10.00

÷ Number of common shares outstanding = $1,150 ÷ 18 shares* = $63.89 per share
AACSB: Analytic
Level: Medium
The following selected data are for Geneva Company:
78/174
124. Geneva Company's return on common stockholders' equity for Year 2 is closest to:
A. 11%
B. 12%
C. 13%
D. 6%

= ($110 - $12) ÷ $825* = 12%
AACSB: Analytic
Level: Medium
A. $1.60
B. $2.07
C. $3.27
D. $3.67

AACSB: Analytic
Level: Medium
79/174
Cadarette Corporation's most recent balance sheet and income statement appear below:
80/174
81/174
stock totaled $10 thousand. The market price of common stock at the end of Year 2 was
$17.73 per share.
A. $1.00
B. $1.60
C. $1.43
D. $0.90

AACSB: Analytic
Level: Medium
82/174

A. 11.08
B. 12.40
C. 19.70
D. 17.73

= $17.73 ÷ $0.90 = 19.70
AACSB: Analytic
Level: Medium
83/174

A. 55.6%
B. 44.4%
C. 40.0%
D. 1111.1%

= $40 ÷ 100 shares = $0.40 per share
= $0.40 ÷ $0.90 = 44.4%
AACSB: Analytic
Level: Medium

A. 2.26%
B. 2.82%
C. 80.00%
D. 0.56%

= $40 ÷ 100 shares = $0.40 per share
= $0.40 ÷ $17.73 = 2.26%
AACSB: Analytic
Level: Medium
84/174

A. 7.75%
B. 8.67%
C. 7.69%
D. 8.61%

= $100 + [$17 × (1 - 0.30)] = $111.9
= $111.9 ÷ $1,290 = 8.67%
AACSB: Analytic
Level: Medium
A. 11.43%
B. 11.61%
C. 10.29%
D. 12.90%

= ($100 - $10) ÷ $775* = 11.61%
AACSB: Analytic
Level: Medium
85/174
A. $8.00
B. $0.90
C. $13.00
D. $9.00

AACSB: Analytic
Level: Medium
86/174
Excerpts from Goodrow Corporation's most recent balance sheet and income statement
appear below:
per share.
87/174
A. $0.35
B. $0.50
C. $0.30
D. $0.65

AACSB: Analytic
Level: Medium

A. 8.22
B. 15.26
C. 17.80
D. 10.68

= $5.34 ÷ $0.30 = 17.80
AACSB: Analytic
Level: Medium
88/174

A. 50.0%
B. 28.6%
C. 33.3%
D. 3333.3%

= $20 ÷ 200 shares = $0.10 per share
AACSB: Analytic
Level: Medium

A. 2.81%
B. 66.67%
C. 1.87%
D. 0.94%

= $20 ÷ 200 shares = $0.10 per share
AACSB: Analytic
Level: Medium
89/174

A. 5.74%
B. 7.46%
C. 7.40%
D. 5.79%

= $70 + [$29 × (1 - 0.30)] = $90.3
= $90.3 ÷ $1,210 = 7.46%
AACSB: Analytic
Level: Medium
A. 8.70%
B. 10.17%
C. 10.14%
D. 11.86%

= ($70 - $10) ÷ $590* = 10.17%
AACSB: Analytic
Level: Medium
90/174
A. $0.30
B. $3.05
C. $6.10
D. $3.55

AACSB: Analytic
Level: Medium
91/174
Financial statements for Marcell Company appear below:
92/174
140. Marcell Company's working capital (in thousands of dollars) at the end of Year 2 was
closest to:
A. $470
B. $20
C. $520
D. $1,240
Working capital = Current assets - Current liabilities = $470 - $450 = $20
AACSB: Analytic
Level: Medium
141. Marcell Company's current ratio at the end of Year 2 was closest to:
A. 1.04
B. 0.42
C. 0.48
D. 1.22
AACSB: Analytic
Level: Medium
93/174
142. Marcell Company's acid-test ratio at the end of Year 2 was closest to:
A. 0.33
B. 1.35
C. 0.60
D. 0.74
Acid-test ratio = Quick assets* ÷ Current liabilities = $270 ÷ $450 = 0.60

*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes
receivable
= $160 + $0 + $110 = $270
AACSB: Analytic
Level: Medium
143. Marcell Company's accounts receivable turnover for Year 2 was closest to:
A. 16.2
B. 9.9
C. 23.2
D. 14.2

= $2,550 ÷ $110* = 23.2
AACSB: Analytic
Level: Medium
94/174
144. Marcell Company's average collection period for Year 2 was closest to:
A. 22.6 days
B. 15.7 days
C. 25.8 days
D. 36.9 days

= $2,550 ÷ $110* = 23.2
Average collection period = 365 days ÷ Accounts receivable turnover (see above)
= 365 days ÷ 23.2 = 15.7 days
AACSB: Analytic
Level: Medium
145. Marcell Company's inventory turnover for Year 2 was closest to:
A. 16.2
B. 23.2
C. 14.2
D. 9.9
Inventory turnover = Cost of goods sold ÷ Average inventory balance = $1,780 ÷ $180* = 9.9
AACSB: Analytic
Level: Medium
95/174
146. Marcell Company's average sale period for Year 2 was closest to:
A. 15.7 days
B. 25.8 days
C. 36.9 days
D. 22.6 days
Inventory turnover = Cost of goods sold ÷ Average inventory balance = $1,780 ÷ $180* = 9.9
Average sale period = 365 days ÷ Inventory turnover (see above) = 365 days ÷ 9.9 = 36.9
days
AACSB: Analytic
Level: Medium
Selected financial data for Bragg Company appear below:
96/174
147. Bragg Company's inventory turnover ratio for Year 2 was closest to:
A. 2.00
B. 2.67
C. 4.80
D. 4.00
Inventory turnover = Cost of goods sold ÷ Average inventory balance = $80,000 ÷ $30,000*
= 2.67
*Average inventory balance = ($40,000 + $20,000) ÷ 2 = $30,000
AACSB: Analytic
Level: Easy
148. Suppose that 45% of Bragg Company's total sales are cash sales. The company's average
collection period (age of receivables) for Year 2 was closest to:
A. 44.24 days
B. 54.07 days
C. 36.05 days
D. 29.49 days
Sales on account = 55% × $180,000 = $99,000

= $99,000 ÷ $12,000 = 8.25
= 365 days ÷ 8.25 = 44.24 days
AACSB: Analytic
Level: Medium
97/174
Dieringer Corporation's most recent balance sheet and income statement appear below:
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A. $970 thousand
B. $570 thousand
C. $280 thousand
D. $810 thousand
Working capital = Current assets - Current liabilities = $570 - $290 = $280 thousand
AACSB: Analytic
Level: Medium

A. 1.97
B. 0.72
C. 0.30
D. 0.41
AACSB: Analytic
Level: Medium
99/174

A. 1.69
B. 1.97
C. 1.39
D. 1.52
Acid-test ratio = Quick assets ÷ Current liabilities = $440* ÷ $290 = 1.52

receivable
= $280 + $0 + $160 = $440
AACSB: Analytic
Level: Medium

A. 1.14
B. 8.19
C. 0.88
D. 8.73

= $1,310 ÷ $150* = 8.73
AACSB: Analytic
Level: Medium
100/174

A. 1.1 days
B. 0.9 days
C. 41.8 days
D. 44.6 days

= $1,310 ÷ $150* = 8.73
= 365 days ÷ 8.73 = 41.8 days
AACSB: Analytic
Level: Medium

A. 1.25
B. 9.89
C. 11.13
D. 0.80

= $890 ÷ $90* = 9.89
AACSB: Analytic
Level: Medium
101/174

A. 36.9 days
B. 248.0 days
C. 22.3 days
D. 32.8 days

= $890 ÷ $90* = 9.89
= 365 days ÷ 9.89 = 36.9 days
AACSB: Analytic
Level: Medium
Excerpts from Zorra Corporation's most recent balance sheet appear below:
Sales on account in Year 2 amounted to $1,370 and the cost of goods sold was $850.
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A. $630
B. $810
C. $680
D. $420
AACSB: Analytic
Level: Easy

A. 0.38
B. 2.62
C. 0.52
D. 0.74
AACSB: Analytic
Level: Easy
103/174

A. 1.81
B. 2.62
C. 1.69
D. 1.36

receivable
= $240 + $0 + $200 = $440
= $440 ÷ $260 = 1.69
AACSB: Analytic
Level: Easy

A. 6.85
B. 0.87
C. 1.15
D. 6.37

= $1,370 ÷ $215* = 6.37
AACSB: Analytic
Level: Easy
104/174

A. 57.3 days
B. 53.3 days
C. 0.9 days
D. 1.2 days

= $1,370 ÷ $215* = 6.37
= 365 days ÷ 6.37 = 57.3 days
AACSB: Analytic
Level: Easy

A. 4.05
B. 4.36
C. 1.17
D. 0.86

= $850 ÷ $195* = 4.36
AACSB: Analytic
Level: Easy
105/174

A. 55.9 days
B. 90.1 days
C. 83.7 days
D. 226.5 days

= $850 ÷ $195* = 4.36
= 365 days ÷ 4.36 = 83.7 days
AACSB: Analytic
Level: Easy
Excerpts from Tigner Corporation's most recent balance sheet appear below:
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A. $740
B. $790
C. $430
D. $150

= $430 thousand - $280 thousand = $150 thousand
AACSB: Analytic
Level: Easy

A. 1.12
B. 1.54
C. 0.35
D. 1.00
AACSB: Analytic
Level: Easy
107/174

A. 1.18
B. 1.55
C. 1.00
D. 0.96

receivable
= $120 + $0 + $150 = $270
AACSB: Analytic
Level: Easy

A. 7.10
B. 0.91
C. 8.79
D. 1.10

= $1,230 ÷ $140* = 8.79
AACSB: Analytic
Level: Easy
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A. 0.86
B. 1.17
C. 6.31
D. 6.83

= $820 ÷ $130* = 6.31
AACSB: Analytic
Level: Easy
Data from Kooistra Corporation's most recent balance sheet appear below:
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A. $990
B. $170
C. $1,010
D. $450
AACSB: Analytic
Level: Easy

A. 0.96
B. 0.30
C. 0.31
D. 1.61
AACSB: Analytic
Level: Easy
110/174

A. 0.75
B. 1.61
C. 0.96
D. 1.05

receivable
= $70 + $0 + $140 = $210
AACSB: Analytic
Level: Easy

A. 0.9 days
B. 38.8 days
C. 40.2 days
D. 1.1 days

= $1,270 ÷ $135* = 9.41
= 365 days ÷ 9.41 = 38.8 days
AACSB: Analytic
Level: Easy
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A. 51.7 days
B. 221.3 days
C. 78.2 days
D. 85.3 days

= $770 ÷ $165* = 4.67
= 365 days ÷ 4.67 = 78.2 days
AACSB: Analytic
Level: Easy
112/174
Financial statements for Narita Company appear below:
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173. Narita Company's times interest earned for Year 2 was closest to:
A. 14.7
B. 26.0
C. 10.3
D. 15.7
= $470 ÷ $30 = 15.7
AACSB: Analytic
Level: Medium
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174. Narita Company's debt-to-equity ratio at the end of Year 2 was closest to:
A. 0.17
B. 0.58
C. 0.25
D. 0.42
Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $640 ÷ $1,540 = 0.42
AACSB: Analytic
Level: Medium
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Mclaughlin Corporation's most recent balance sheet and income statement appear below:
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A. 2.73
B. 4.91
C. 7.01
D. 3.91
= $162 ÷ $33 = 4.91
AACSB: Analytic
Level: Medium

A. 0.69
B. 0.40
C. 0.35
D. 0.93
AACSB: Analytic
Level: Medium
117/174
Data from Kempen Corporation's most recent balance sheet and the company's income
statement appear below:

A. 3.45
B. 6.36
C. 4.45
D. 2.42
= $147 ÷ $33 = 4.45
AACSB: Analytic
Level: Easy
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A. 0.71
B. 0.33
C. 0.24
D. 0.57
AACSB: Analytic
Level: Easy
Essay Questions
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179. Lundberg Corporation's most recent balance sheet and income statement appear below:
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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.
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a. Gross margin percentage = Gross margin ÷ Sales = $480 ÷ $1,330 = 36.1%

b. Earnings per share = (Net Income - Preferred Dividends)
c. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $9.36 ÷ $0.90 = 10.4
d. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)
= $0.50 ÷ $0.90 = 55.6%
*Dividends per share = Common dividends ÷ Common shares (see above)
= $50 ÷ 100 shares = $0.50 per share
e. Dividend yield ratio = Dividends per share (see above) ÷ Market price per share
= $0.50 ÷ $9.36 = 5.34%
f. Return on total assets = Adjusted net income* ÷ Average total assets**
= $131.7 ÷ $1,335 = 9.87%
*Adjusted net income = Net income + [Interest expense × (1-Tax rate)]
= $110 + [$31 × (1 - 0.30)] = $131.7
**Average total assets = ($1,330 + $1,340) ÷ 2 = $1,335
g. Return on common stockholders' equity
= (Net income - Preferred dividends) ÷ Average common stockholders' equity*
= ($110 - $20) ÷ $610 = 14.75%
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h. Book value per share = Common stockholders' equity

÷ Number of common shares outstanding* = $630 ÷ 100 shares = $6.30 per share
i. Working capital = Current assets - Current liabilities = $430 - $310 = $120 thousand
j. Current ratio = Current assets ÷ Current liabilities = $430 ÷ $310 = 1.39
k. Acid-test ratio = Quick assets* ÷ Current liabilities = $310 ÷ $310 = 1.00
receivable
= $100 + $0 + $210 = $310
l. Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance*
= $1,330 ÷ $215 = 6.19
m. Average collection period = 365 days ÷ Accounts receivable turnover (see above)
= 365 days ÷ 6.19 = 59.0 days
n. Inventory turnover = Cost of goods sold ÷ Average inventory balance* = $850 ÷ $115 =
7.39
o. Average sale period = 365 days ÷ Inventory turnover (see above) = 365 days ÷ 7.39 = 49.4
days
p. Times interest earned = Earnings before interest expense and income taxes ÷ Interest
expense = $188 ÷ $31 = 6.06
q. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $500 ÷ $830 = 0.60
AACSB: Analytic
Level: Medium
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180. Guedea Corporation's most recent balance sheet and income statement appear below:
per share.
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Required:
a. Gross margin percentage.
b. Earnings per share (of common stock).
c. Price-earnings ratio.
d. Dividend payout ratio.
e. Dividend yield ratio.
f. Return on total assets.
g. Return on common stockholders' equity.
h. Book value per share.
a. Gross margin percentage = Gross margin ÷ Sales = $540 ÷ $1,310 = 41.2%

b. Earnings per share = (Net Income - Preferred Dividends)
c. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $5.22 ÷ $0.45 = 11.6
d. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)
= $0.20 ÷ $0.45 = 44.4%
*Dividends per share = Common dividends ÷ Common shares (see above)
= $40 ÷ 200 shares = $0.20 per share
e. Dividend yield ratio = Dividends per share (see above) ÷ Market price per share
= $0.20 ÷ $5.22 = 3.83%
f. Return on total assets = Adjusted net income* ÷ Average total assets**
= $125.9 ÷ $1,575 = 7.99%
= $100 + [$37 × (1 - 0.30)] = $125.9
g. Return on common stockholders' equity = (Net income - Preferred dividends)
÷ Average common stockholders' equity* = ($100 - $10) ÷ $785 = 11.46%
h. Book value per share = Common stockholders' equity÷ Number of common shares
outstanding*
= $810 ÷ 200 shares = $4.05 per share
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AACSB: Analytic
Level: Medium
181. Tubergen Corporation's most recent income statement appears below:
Required:
Compute the gross margin percentage.
Gross margin percentage = Gross margin ÷ Sales = $518,000 ÷ $928,000 = 55.8%
AACSB: Analytic
Level: Easy
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182. Financial statements for Pracht Company appear below:
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dividends.
Required:
a. Earnings per share of common stock.
b. Price-earnings ratio.
c. Dividend payout ratio.
d. Dividend yield ratio.
e. Return on total assets.
f. Return on common stockholders' equity.
g. Book value per share.
h. Working capital.
i. Current ratio.
j. Acid-test ratio.
k. Accounts receivable turnover.
l. Average collection period.
m. Inventory turnover.
n. Average sale period.
o. Times interest earned.
p. Debt-to-equity ratio.
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a. Earnings per share = (Net Income - Preferred Dividends) ÷ Average number of common
shares outstanding* = ($182 - $15) ÷ 14 = $11.93
*Number of common shares outstanding = Common stock ÷ Par value = $140 ÷ $10 = 14
b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $160 ÷ $11.93 = 13.4
c. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)
= $3.36 ÷ $11.93 = 28.1%
*Dividends per share = Common dividends ÷ Common shares** = $47 ÷ 14 = $3.36
**See above
d. Dividend yield ratio = Dividends per share* ÷ Market price per share = $3.36 ÷ $160.00
= 2.10% *See above
e. Return on total assets = Adjusted net income* ÷ Average total assets** = $217 ÷ $2,340 =
9.27%
= $182 + [$50 × (1 - 0.30)] = $217
f. Return on common stockholders' equity = (Net income - Preferred dividends) ÷
Average common stockholders' equity*
= ($182 - $15) ÷ $1,400 = 11.93%
*Average common stockholders' equity = ($1,460 + $1,340) ÷ 2 = $1,400
g. Book value per share = Common stockholders' equity ÷ Number of common shares
outstanding*
= $1,460 ÷ 14 = $104.29
*Number of common shares outstanding = Common stock ÷ Par value = $140 ÷ $10 = 14
h. Working capital = Current assets - Current liabilities = $510 - $340 = $170
i. Current ratio = Current assets ÷ Current liabilities = $510 ÷ $340 = 1.50
j. Acid-test ratio = Quick assets* ÷ Current liabilities = $310 ÷ $340 = 0.91
receivable
= $180 + $130 = $310
k. Average accounts receivable balance = ($130 + $100) ÷ 2 = $115
= $1,700 ÷ $115 = 14.78
l. Average collection period = 365 days ÷ Accounts receivable turnover*
= 365 ÷ 14.78 = 24.7 days
m. Average inventory balance = ($150 + $160) ÷ 2 = $155
Inventory turnover = Cost of goods sold ÷ Average inventory balance = $1,190 ÷ $155 = 7.68
n. Average sale period = 365 days ÷ Inventory turnover = 365 ÷ 7.68 = 47.5 days
o. Times interest earned = Earnings before interest expense and income taxes ÷ Interest
expense = $310 ÷ $50 = 6.20
p. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $830 ÷ $1,560 = 0.53
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AACSB: Analytic
Level: Medium
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183. Condensed financial statements for Blackhurst Company appear below:
There were 72,000 shares of common stock outstanding throughout the year. Dividends on
common stock amounted to $320,400 and dividends on preferred stock amounted to $45,000.
The market value of a share of common stock was $54 at the end of the year.
Required:
On the basis of the information given above, fill in the blanks with the appropriate figures:
Example: The gross margin as a percent of sales would be computed by dividing $2,160,000
by $5,400,000.
a. The earnings per share of common stock for the year would be computed by dividing
_______________ by _________________.
b. The times interest earned for the year would be computed by dividing _______________
by _________________.
c. The price-earnings ratio at the end of the year would be computed by dividing
_______________ by _________________.
d. The dividend payout ratio for the year would be computed by dividing _______________
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by _________________.
e. The dividend yield ratio for the year would be computed by dividing _______________ by
_________________.
f. The return on total assets for the year would be computed by dividing _______________ by
_________________.
g. The return on common stockholders' equity for the year would be computed by dividing
_______________ by _________________.
h. The acid-test ratio at the end of the year would be computed by dividing _______________
by _________________.
i. The accounts receivable turnover for the year would be computed by dividing
_______________ by _________________.
j. The inventory turnover for the year would be computed by dividing _______________ by
_________________.
k. The debt-to-equity ratio at the end of the year would be computed by dividing
_______________ by _________________.
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a. Earnings per share = (Net income - Preferred dividends) ÷ Average number of common
shares outstanding = $704,000 ÷ 72,000 shares
b. The times interest earned = (Net operating income - Interest expense) ÷ Interest expense =
$1,150,000 ÷ $80,000
c. Price-earnings ratio = Market price ÷ Earnings per share = $54 ÷ $9.78
d. Dividend payout ratio = Dividends per share* ÷ Earnings per share** = $4.45 ÷ $9.78
*Dividends per share = $320,400 ÷ 72,000 = $4.45
**Earnings per share = (Net income - Preferred dividends) ÷ Average number of common
shares
outstanding = $704,000 ÷ 72,000 shares = $9.78 per share
e. Dividend yield ratio = Dividends per share ÷ Earnings per share = $4.45 ÷ $54
f. Return on total assets = {Net income + [Interest expense × (1 - Tax rate)]} ÷ Average total
assets
= [$749,000 + $80,000 × (1 - .30)] ÷ ($4,133,000 + $3,832,000)/2
= $805,000 ÷ $3,982,500
g. Return on common stockholders' equity = (Net income - Preferred dividends) ÷ (Average
total stockholders' equity - Average preferred stock)
= ($749,000 - $45,000) ÷ ($1,800,000 + $685,000 + $1,800,000 + $301,400)/2
= $704,000 ÷ $2,293,200
h. Acid-test ratio = (Cash + Marketable securities + Accounts receivable + Short-term notes
receivable) ÷ Current liabilities
= ($128,000 + $472,000) ÷ $198,000
= $600,000 ÷ $198,000
i. Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance
= ($5,400,000 × .90) ÷ [($472,000 + $438,000)/2]
= $4,860,000 ÷ $455,000
j. Inventory turnover = Cost of goods sold ÷ Average inventory balance
= $3,240,000 ÷ [($797,000 + $673,000)/2]
= $3,240,000 ÷ $735,000
k. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity
= ($198,000 + $1,000,000) ÷ ($450,000 + $1,800,000 + $685,000)
= $1,198,000 ÷ $2,935,000
AACSB: Analytic
Level: Medium
134/174
184. Condensed financial statements for Pardin Company are given below:
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The company paid total dividends of $100,000 during the year. At the end of Year 2, the
company's common stock was selling for $38 per share.
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 Year 2 would be computed by dividing $1,080,000
by $400,000.
a. The acid-test ratio at the end of Year 2 would be computed by dividing _______________
by _________________.
b. The accounts receivable turnover during Year 2 would be computed by dividing
_______________ by _________________.
c. The inventory turnover during Year 2 would be computed by dividing _______________
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by _________________.
d. The times interest earned for Year 2 would be computed by dividing _______________ by
_________________.
e. The earnings per share of common stock for Year 2 would be computed by dividing
_______________ by _________________.
f. The return on total assets for Year 2 would be computed by dividing _______________ by
_________________.
g. The debt-to-equity ratio at the end of Year 2 would be computed by dividing
_______________ by _________________.
h. The dividend yield ratio would be computed by dividing _______________ by
_________________.
i. The return on common stockholders' equity for Year 2 would be computed by dividing
_______________ by _________________.
j. Whether the common stockholders gained or lost from the use of financial leverage during
Year 2 would be determined by comparing the ratio computed in question ___ above to the
ratio computed in question above ____. In this case, financial leverage is (positive/negative)
___________________.
a. $480,000; $400,000
b. $2,600,000; $400,000
c. $1,400,000; $500,000
d. $450,000; $50,000
e. $220,000; 40,000 shares
f. $270,000; $2,100,000
g. $700,000; $1,500,000
h. $2.50; $38
i. $220,000; $1,230,000
j. f; i; positive
AACSB: Analytic
Level: Medium
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185. Bedrosian Incorporated has a line of credit from the Belmont National Bank that is due
to be renewed on February 1. The bank has requested the company's current Income
Statement and Comparative Statements of Financial Position which appear below.
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The bank has also requested that Bedrosian calculate a number of financial ratios. Bedrosian's
financial ratios have not yet been calculated for this year, but the company's accounting staff
has gathered the following industry averages for the ratios from various sources.
Required:
a. Calculate the following financial ratios for this year for Bedrosian Incorporated.
1. Return on total assets.
2. Return on common stockholders' equity.
3. Current ratio.
4. Acid-test ratio.
5. Debt-to-equity ratio.
6. Times interest earned.
7. Dividend payout ratio.
b. By comparing the ratios calculated in Requirement A with the industry ratios, evaluate
Bedrosian's operations.
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a. The financial ratios are calculated as follows.

1. Return on total assets = {Net income + [Interest expense × (1 - Tax rate)]} ÷ Average total
assets
Tax rate = $3,600/$9,000 = 40%
Average total assets = ($40,500 + $38,250)/2 = $39,375
Return on total assets = {$5,400 + [$1,500 × (1 - 0.4)]}/$39,375 = 16%
2. Return on common stockholders' equity = (Net income - Preferred dividends) ÷ (Average
Average common stockholders' equity = ($19,500 + $16,275)/2 = $17,887.50
Return on common stockholders' equity = ($5,400 - $0)/$17,887.50 = 30.2%
3. Current ratio = Current assets ÷ Current liabilities = $10,800/$9,000 = 1.2
4. Acid-test ratio = (Cash + Marketable securities + Accounts receivable + Short-term notes
receivable) ÷ Current liabilities = ($1,950 + $3,600 + $0) ÷ $9,000 = $5,550 ÷ $9,000 = 0.62
5. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity
= $21,000 ÷ $19,500 = 1.08
6. Times interest earned = Earnings before interest expense and income taxes ÷ Interest
expense
= ($9,000 + $1,500) ÷ $1,500 = $10,500 ÷ $1,500 = 7
7. Dividend payout ratio = Dividends per share ÷ Earnings per share
= $3.86 ÷ $8.18 = 47.2%
b. A comparison of Bedrosian's ratios with industry ratios indicates that Bedrosian generates a
higher than average return on both assets and equity. Its debt-to-equity ratio is lower than the
industry average indicating some capacity to incur more debt. However, the company's
current ratio, acid-test ratio, and times interest earned are lower than average which may
indicate a higher than average credit risk for a creditor in the short term. Also, the higher
dividend payout ratio indicates a high cash outflow which could aggravate Bedrosian's
liquidity position.
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AACSB: Analytic
Level: Hard
142/174
186. Renbud Computer Services Co. (RCS) specializes in customized software development
for the broadcast and telecommunications industries. The company was started by three
people in 1973 to develop software primarily for a national network to be used in
broadcasting national election results. After sustained and manageable growth for many years,
the company has grown very fast over the last three years, doubling in size.
This growth has placed the company in a challenging financial position. Within thirty days,
RCS will need to renew its $300,000 loan with the Third State Bank of San Marcos. This loan
is classified as a current liability on RCS's balance sheet. Harvey Renbud, president of RCS,
is concerned about renewing the loan. The bank has requested RCS's most recent financial
statements which appear below, including balance sheets for this year and last year. The bank
has also requested four ratios relating to operating performance and liquidity.
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Required:
a. Explain why the Third State Bank of San Marcos would be interested in reviewing Renbud
Computer Services Co.'s comparative financial statements and its financial ratios before
renewing the loan.
b. Calculate the following financial ratios for Renbud Computer Services Co.:
The current ratio for both this year and last year.
Accounts receivable turnover for this year.
Return on common stockholders' equity for this year.
The debt-to-equity ratio for both this year and last year.
c. Discuss briefly the limitations and difficulties that can be encountered in using ratio
analysis.
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a. The Third State Bank would be interested in comparative financial statements so that it
could analyze trends in data and operating results. Trends are important because they may
point to basic changes in the nature of the business. Ratio analysis would give some indication
of the company's short-term solvency and help Third State Bank assess the level of risk
involved in the loan. The ratios would also be useful in analyzing how RCS is performing
compared to industry averages, and thus serve as a benchmark for comparison to other
companies. Ratios reduce absolute dollar amounts to more meaningful data in order for the
bank to compare ratios to prior periods, other companies, and the industry. Ratios can be used
to show how well the company is being managed and to highlight areas for further
investigation. If the ratios do not appear favorable compared to the company's own past and to
other companies in its industry, the bank may consider adjusting the dollar level and/or the
interest rate of the note or may even decide not to renew the note.
b. Calculations of selected financial ratios are presented below.
1. Current ratio = Current assets ÷ Current liabilities
This Year
Current assets = $50 + $350 + $70 = $470
Current liabilities = $150 + $140 + $300 = $590
Current assets =
Last Year
Current assets = $50 + $250 + $160 = $460
Current liabilities = $130 + $120 + $200 = $450
Current ratio = $460 ÷ $450 = 1.02
2. Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance
= $2,500 ÷ ($350 + $250)/2 = $2,500 ÷ $300 = 8.33
3. Return on common stockholders' equity = (Net income - Preferred dividends) ÷ (Average
= ($290 - $0) ÷ (($940 + $710)/2 - $0) = $290 ÷ $825 = 35.15%
4. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity
This Year
Debt-to-equity ratio = $990 ÷ $940 = 1.05
Last Year
Debt-to-equity ratio = $850 ÷ $710 = 1.20
c. The difficulties and limitations of ratio analysis include the following:
• Although ratios are useful as a starting point in financial analysis, they are not an end in
themselves. Ratios can be used as indicators of what to pursue in a more detailed analysis.
• Different companies often use different accounting methods (e.g., FIFO versus LIFO
inventory valuation) and this can have an impact on the financial ratios that does not reflect
real differences in the operations and financial health of the companies.
• Making comparisons across industries can be difficult. Companies in different industries
tend to have different financial ratios.
• Since the ratios are based on accounting statements, they measure what has happened in the
past and not necessarily what will happen in the future.
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AACSB: Analytic
Level: Hard
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187. Recent financial statements for Madison Company are given below:
Madison Company paid dividends of $3.15 per share during the year. The company's
common stock had a market price of $63 per share on December 31. Assets at the beginning
of the year totaled $1,100,000 and stockholders' equity totaled $725,000.
Required:
Compute the following:
b. Dividend payout ratio.
c. Dividend yield ratio.
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d. Price-earnings ratio.
g. Was financial leverage positive or negative for the year? Explain.
a. Earnings per share = (Net income - Preferred dividends) ÷ Average number of common
shares outstanding = ($105,000 - $0) ÷ 20,000 = $5.25/share
b. Dividend payout ratio = Dividends per share ÷ Earnings per share = $3.15 ÷ $5.25 = 60%
c. Dividend yield ratio = Dividends paid per share ÷ Market price per share = $3.15 ÷ $63.00
= 5%
d. Price-earnings ratio = Market price per share ÷ Earnings per share = $63.00 ÷ $5.25 = 12.0
e. Return on total assets = [Net income + Interest expense × (1-Tax rate)] ÷ Average total
assets
= [$105,000 + $30,000 × (1-.40)] ÷ [$1,100,000 + $1,300,000)] = $123,000 ÷ $1,200,000 =
10.25%
f. Return on common stockholders' equity = (Net income - Preferred dividends) ÷ Average
common stockholders' equity = ($105,000 - $0) ÷ [1/2 × ($725,000 + $800,000)] = $105,000
÷ $762,500 = 13.8%
g. Financial leverage is positive since the rate of return to the common stockholders of 13.8%
is greater than the rate of return on total assets of 10.25%.
AACSB: Analytic
Level: Medium
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188. Financial statements for Qualle Company appear below:
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dividends.
Required:
c. Dividend yield ratio.
d. Return on total assets.
e. Return on common stockholders' equity.
f. Book value per share.
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a. Number of common shares outstanding = Common stock ÷ Par value = $160 ÷ $10 = 16
Earnings per share = (Net Income - Preferred Dividends) ÷ Average number of common
shares outstanding = ($259 - $10) ÷ 16 = $15.56
= $280 ÷ $15.56 = 18.0
c. Number of common shares outstanding = Common stock ÷ Par value = $160 ÷ $10 = 16
Dividends per share = Common dividends ÷ Common shares = $139 ÷ 16 = $8.69
Dividend yield ratio = Dividends per share ÷ Market price per share = $8.69 ÷ $280.00 =
3.10%
d. Average total assets = ($2,330 + $2,300) ÷ 2 = $2,315
= $259 + [$50 × (1 - 0.30)] = $294
Return on total assets = Adjusted net income ÷ Average total assets = $294 ÷ $2,315
= 12.70%
e. Average common stockholders' equity = ($1,340 + $1,230) ÷ 2 = $1,285
common stockholders' equity = ($259 - $10)÷$1,285 = 19.38%
f. Number of common shares outstanding = Common stock ÷ Par value = $160 ÷ $10 = 16
Book value per share = Common stockholders' equity ÷ Number of common shares
outstanding
= $1,340 ÷ 16 = $83.75
AACSB: Analytic
Level: Medium
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189. Debutiaco Corporation's most recent balance sheet and income statement appear below:
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stock totaled $10 thousand. The market price of common stock at the end of Year 2 was
$12.00 per share.

Required:
a. Earnings per share (of common stock).
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a. Number of common shares outstanding = Common stock ÷ Par value = $200 ÷ $2 per share
= 100 shares
shares outstanding = ($70 - $10) ÷ (100 shares + 100 shares)/2 = $0.60 per share
= $12.00 ÷ $0.60 = 20.0
c. Dividends per share = Common dividends ÷ Common shares (see above)
= $20 ÷ 100 shares = $0.20 per share
Dividend payout ratio = Dividends per share ÷ Earnings per share (see above)
= $0.20 ÷ $0.60 = 33.3%
d. Dividend yield ratio = Dividends per share (see above) ÷ Market price per share
= $0.20 ÷ $12.00 = 1.67%
e. Average total assets = ($1,620 + $1,630) ÷ 2 = $1,625
= $70 + [$29 × (1 - 0.30)] = $90.3
= $90.3 ÷ $1,625 = 5.56%
f. Average common stockholders' equity = ($1,110 + $1,070) ÷ 2 = $1,090
common stockholders' equity = ($70 - $10) ÷ $1,090 = 5.50%
g. Number of common shares outstanding = Common stock ÷ Par value
Book value per share = Common stockholders' equity ÷ Number of common shares
outstanding
= $1,110 ÷ 100 shares = $11.10 per share
AACSB: Analytic
Level: Medium
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190. Sweetman Corporation has provided the following financial data (in thousands of
dollars):
Net income for Year 2 was $120 thousand. Interest expense was $25 thousand. The tax rate
was 30%. Dividends on common stock during Year 2 totaled $80 thousand. Dividends on
preferred stock totaled $20 thousand. The market price of common stock at the end of Year 2
was $4.75 per share.
Required:
a. Earnings per share (of common stock).
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a. Number of common shares outstanding = Common stock ÷ Par value

shares outstanding
= $4.75 ÷ $0.50 = 9.5
c. Dividends per share = Common dividends ÷ Common shares (see above)
= $80 ÷ 200 shares = $0.40 per share
Dividend payout ratio = Dividends per share ÷ Earnings per share (see above)
= $0.40 ÷ $0.50 = 80.0%
d. Dividend yield ratio = Dividends per share (see above) ÷ Market price per share
= $0.40 ÷ $4.75 = 8.42%
e. Average total assets = ($1,310 + $1,290) ÷ 2 = $1,300
Return on total assets = {Net income + [Interest expense × (1 - Tax rate)]} ÷ Average total
assets
= {$120 + [$25 × (1 - 0.30)]} ÷ $1,300
= $137.5 ÷ $1,300 = 10.58%
f. Average common stockholders' equity = ($710 + $690) ÷ 2 = $700
common stockholders' equity = ($120 - $20) ÷ $700 = 14.29%
g. Number of common shares outstanding = Common stock ÷ Par value
shares outstanding = ($200 + $160 + $350) ÷ 200 shares = $3.55 per share
AACSB: Analytic
Level: Easy
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191. Lunghofer Corporation's net income for the most recent year was $3,189,000. A total of
300,000 shares of common stock and 100,000 shares of preferred stock were outstanding
throughout the year. Dividends on common stock were $4.90 per share and dividends on
preferred stock were $1.95 per share.
Required:
Compute the earnings per share of common stock. Show your work!
shares outstanding = ($3,189,000 - $195,000) ÷ 300,000 shares = $9.98 per share
AACSB: Analytic
Level: Easy
192. Basta Corporation's net income last year was $1,401,000. The dividend on common
outstanding.
Required:
Compute the price-earnings ratio. Show your work!
Price-earnings ratio = Market price per share ÷ Earnings per share = $65.40 ÷ $3.37 = 19.41
AACSB: Analytic
Level: Easy
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193. Sabb Corporation's net income last year was $6,190,000. The dividend on common stock
was $13.90 per share and the dividend on preferred stock was $1.60 per share. The market
price of common stock at the end of the year was $41.50 per share. Throughout the year,
300,000 shares of common stock and 100,000 shares of preferred stock were outstanding.
Required:
Compute the dividend payout ratio. Show your work!
Dividend payout ratio = Dividends per share ÷ Earnings per share = $13.90 ÷ $20.10 = 0.69
AACSB: Analytic
Level: Easy
194. Last year, Bickham Corporation's dividend on common stock was $8.70 per share and
the dividend on preferred stock was $3.80 per share. The market price of common stock at the
end of the year was $66.10 per share.
Required:
Compute the dividend yield ratio. Show your work!
Dividend yield ratio = Dividends per share ÷ Market price per share = $8.70 ÷ $66.10 = 0.13
AACSB: Analytic
Level: Easy
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195. Gulick Corporation's most recent income statement appears below:
The beginning balance of total assets was $320,000 and the ending balance was $280,000.
Required:
Compute the return on total assets. Show your work!

Return on total assets = {Net income + [Interest expense × (1 - Tax rate)]} ÷ Average total
assets
= {$56,000 + [$10,000 × (1 - 0.30))]} ÷ $300,000
= $63,000 ÷ $300,000 = 21.0%
AACSB: Analytic
Level: Easy
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196. Excerpts from Ruden Corporation's most recent balance sheet appear below:
Net income for Year 2 was $102,000. Dividends on common stock were $47,000 in total and
dividends on preferred stock were $15,000 in total.
Required:
Compute the return on common stockholders' equity. Show your work!
Average common stockholders' equity = ($1,320,000 + $1,280,000) ÷ 2 = $1,300,000

Return on common stockholders' equity = (Net income - Preferred dividends)
÷ Average common stockholders' equity = ($102,000 - $15,000) ÷ $1,300,000 = 6.7%
AACSB: Analytic
Level: Easy
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197. Data from Paynter Corporation's most recent balance sheet appear below:
A total of 100,000 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!
shares outstanding = ($840,000 + $0) ÷ 100,000 shares = $8.40 per share
AACSB: Analytic
Level: Easy
161/174
198. Financial statements for Rarig Company appear below:
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Required:
a. Current ratio.
b. Acid-test ratio.
c. Average collection period.
d. Inventory turnover.
e. Times interest earned.
f. Debt-to-equity ratio.
a. Current ratio = Current assets ÷ Current liabilities = $590 ÷ $310 = 1.90

b. Acid-test ratio = (Cash + Marketable securities + Accounts receivable + Short-term notes
receivable) ÷ Current liabilities = ($210 + $160 + $0) ÷ $310 = $370 ÷ $310 = 1.19
c. Average accounts receivable balance = ($160 + $150) ÷ 2 = $155
= $1,800 ÷ $155 = 11.61
Average collection period = 365 days ÷ Accounts receivable turnover = 365 ÷ 11.61 = 31.4
days
d. Average inventory balance = ($190 + $180) ÷ 2 = $185
Inventory turnover = Cost of goods sold ÷ Average inventory balance = $1,260 ÷ $185 = 6.81
e. Times interest earned = Earnings before interest expense and income taxes ÷ Interest
expense = $330 ÷ $50 = 6.60
f. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $770 ÷ $1,320 = 0.58
AACSB: Analytic
Level: Medium
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199. Malbrough Corporation's most recent balance sheet and income statement appear below:
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Required:
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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.
a. Working capital = Current assets - Current liabilities = $500 - $270 = $230

b. Current ratio = Current assets ÷ Current liabilities = $500 ÷ $270 = 1.85
c. Acid-test ratio = (Cash + Marketable securities + Accounts receivable + Short-term notes
receivable) ÷ Current liabilities = ($110 + $0 + $140) ÷ $270 = $250 ÷ $270 = 0.93
d. Average accounts receivable balance = ($140 + $140) ÷ 2 = $140
= $1,290 ÷ $140 = 9.21
e. Average collection period = 365 days ÷ Accounts receivable turnover
= 365 days ÷ 9.21 = 39.6 days
f. Average inventory balance = ($180 + $170) ÷ 2 = $175
Inventory turnover = Cost of goods sold ÷ Average inventory balance = $740 ÷ $175 = 4.23
g. Average sale period = 365 days ÷ Inventory turnover
= 365 days ÷ 4.23 = 86.3 days
AACSB: Analytic
Level: Medium
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200. Excerpts from Stepney Corporation's most recent balance sheet (in thousands of dollars)
appear below:
Sales on account during the year totaled $1,440 thousand. Cost of goods sold was $890
thousand.
Required:
a. Working capital.
b. Current ratio.
c. Acid-test ratio.
d. Accounts receivable turnover.
e. Average collection period.
f. Inventory turnover.
g. Average sale period.
a. Working capital = Current assets - Current liabilities = $720 - $360 = $360

b. Current ratio = Current assets ÷ Current liabilities = $720 ÷ $360 = 2.00
c. Acid-test ratio = (Cash + Marketable securities + Accounts receivable + Short-term notes
receivable) ÷ Current liabilities = ($260 + $0 + $260 = $520) ÷ $360 = $520 ÷ $360 = 1.44
d. Average accounts receivable balance = ($260 + $270) ÷ 2 = $265
= $1,440 ÷ $265 = 5.43
e. Average collection period = 365 days ÷ Accounts receivable turnover
= 365 days ÷ 5.43 = 67.2 days
f. Average inventory balance = ($140 + $140) ÷ 2 = $140
Inventory turnover = Cost of goods sold ÷ Average inventory balance = $890 ÷ $140 = 6.36
g. Average sale period = 365 days ÷ Inventory turnover (see above)
= 365 days ÷ 6.36 = 57.4 days
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AACSB: Analytic
Level: Easy
201. Heningburg Corporation's total current assets are $230,000, its noncurrent assets are
its stockholders' equity is $250,000.
Required:
Compute the company's working capital. Show your work!
Working capital = Current assets - Current liabilities = $230,000 - $140,000 = $90,000
AACSB: Analytic
Level: Easy
202. Gaskamp Corporation's total current assets are $270,000, its noncurrent assets are
its stockholders' equity is $310,000.
Required:
Compute the company's current ratio. Show your work!
Current ratio = Current assets ÷ Current liabilities = $270,000 ÷ $170,000 = 1.59
AACSB: Analytic
Level: Easy
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203. Data from Weichbrodt Corporation's most recent balance sheet appear below:
Required:
Compute the company's acid-test ratio. Show your work!
Acid-test ratio = (Cash + Marketable securities + Accounts receivable + Short-term notes

receivable) ÷ Current liabilities = ($15,000 + $26,000 + $37,000) ÷ $102,000 = $78,000 ÷
$102,000 = 0.76
AACSB: Analytic
Level: Easy
204. Millage Corporation has provided the following data:
Required:
Compute the accounts receivable turnover for this year. Show your work!

= $721,000 ÷ $135,000 = 5.34
AACSB: Analytic
Level: Easy
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205. Data from Adame Corporation's most recent balance sheet and income statement appear
below:
Required:
Compute the average collection period for this year:

= $799,000 ÷ $111,500 = 7.17
= 365 days ÷ 7.17 = 50.9 days
AACSB: Analytic
Level: Easy
206. Eaglen Corporation has provided the following data:
Required:
Compute the inventory turnover for this year:

Inventory turnover = Cost of goods sold ÷ Average inventory balance = $530,000 ÷ $153,500
= 3.45
AACSB: Analytic
Level: Easy
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207. Data from Ankeny Corporation's most recent balance sheet and income statement appear
below:
Required:
Compute the average sale period for this year:

= $641,000 ÷ $181,500 = 3.53
Average sale period = 365 days ÷ Inventory turnover = 365 days ÷ 3.53 = 103.4 days
AACSB: Analytic
Level: Easy
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208. Zide Corporation's most recent balance sheet and income statement appear below:
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Required:
a. Times interest earned.

b. Debt-to-equity ratio.
a. Times interest earned = Earnings before interest expense and income taxes ÷ Interest
expense = $83 ÷ $19 = 4.37
b. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $400 ÷ $1,070 = 0.37
AACSB: Analytic
Level: Medium
209. Pettengill Corporation's net operating income last year was $280,000; its interest expense
was $37,000; its total stockholders' equity was $920,000; and its total liabilities were
$620,000.
Required:
a. Times interest earned.
b. Debt-to-equity ratio.
a. Times interest earned = Earnings before interest expense and income taxes ÷ Interest
expense = $280,000 ÷ $37,000 = 7.57
b. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $620,000 ÷ $920,000 = 0.67
AACSB: Analytic
Level: Easy
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210. Dehne Corporation has provided the following data from its most recent income
statement:
Required:
Compute the times interest earned ratio. Show your work!
= $75,000 ÷ $32,000 = 2.34
AACSB: Analytic
Level: Easy
211. Schiff Corporation has provided the following data from its most recent balance sheet:
Required:
Compute the debt-to-equity ratio. Show your work!
Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $500,000 ÷ $160,000 = 3.13
AACSB: Analytic
Level: Easy
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Managerial Accounting: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer

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Financial Statement Analysis

Chapter 15 Financial Statement Analysis

True / False Questions

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

7. Issuing common stock will increase a company's financial leverage.

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

11. All debt is considered in the computation of the acid-test ratio.

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

Multiple Choice Questions

16. The formula for the gross margin percentage is:

AACSB: Reflective Thinking

17. The gross margin percentage is most likely to be used to assess:

The gross margin percentage is a broad measure of profitability

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

20. Financial leverage is negative when:

AACSB: Reflective Thinking

21. Which of the following is not a potential source of financial leverage?

Financial leverage is obtained from current and long-term liabilities.

AACSB: Reflective Thinking

AACSB: Reflective Thinking

The transaction would be as follows:

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

Acid-test ratio = (Cash + Marketable securities + Accounts receivable + Short-term notes

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

33. Ozols Corporation's most recent income statement appears below:

The gross margin percentage is closest to:

Gross margin percentage = Gross margin ÷ Sales

Return on common stockholders' equity

Return on common stockholders' equity = (Net income - Preferred dividends) ÷ Average

Earnings per share = (Net Income - Preferred Dividends)

Earnings per share = (Net Income - Preferred Dividends)

The price-earnings ratio is:

The price-earnings ratio is:

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