Acc 206 accounting principles week 10 quiz

ACC 206 Week 10 Quiz – Strayer
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Quiz 8 Chapte r 18
FINANCIAL STATEMENT ANALYSIS
CHAPTER STUDY OBJECTIVES
1. Discuss the need for comparative analysis.
2. Identify the tools of financial statement analysis.
3. Explain and apply horizontal (trend) analysis.
4. Describe and apply vertical analysis.
5. Identify and compute ratios used in analyzing a firm's liquidity,
profitability, and solvency.
6. Understand the concept of earning power, and indicate how
irregular items are presented.
7. Understand the concept of quality of earnings.
TRUE-FALSE STATEMENTS
1. Intracompany comparisons of the same financial statement items
can often detect changes in financial relationships and significant
trends.
2. Calculating financial ratios is a financial reporting requirement under
generally accepted accounting principles.
3. Measures of a company's liquidity are concerned with the frequency
and amounts of dividend payments.
4. Analysis of financial statements is enhanced with the use of comparative data.
5. Comparisons of company data with industry averages can provide
some insight into the company's relative position in the industry.
6. Vertical and horizontal analyses are concerned with the format used to
prepare financial statements.
7. Horizontal, vertical, and circular analyses are the most common
tools of financial statement analysis.

8. Horizontal analysis is a technique for evaluating a financial statement
item in the current year with other items in the current year.
9. Another name for trend analysis is horizontal analysis.
10. If a company has sales of $110 in 2008 and $154 in 2009, the
percentage increase in sales from 2008 to 2009 is 140%.
11. In horizontal analysis, if an item has a negative amount in the base
year, and a positive amount in the following year, no percentage change
for that item can be computed.
12. Common size analysis expresses each item within a financial
statement in terms of a percent of a base amount.
13. Vertical analysis is a more sophisticated analytical tool than horizontal analysis.
14. Vertical analysis is useful in making comparisons of companies of different
sizes.
15. Meaningful analysis of financial statements will include either
horizontal or vertical analysis, but not both.
16. Using vertical analysis of the income statement, a company's net income
as a percentage of net sales is 10%; therefore, the cost of goods sold
as a percentage of sales must be 90%.
17. In the vertical analysis of the income statement, each item is
generally stated as a percentage of net income.
18. A ratio can be expressed as a percentage, a rate, or a proportion.
19. A solvency ratio measures the income or operating success of an
enterprise for a given period of time.
20. The current ratio is a measure of all the ratios calculated for the current year.
21. Inventory turnover measures the number of times on the average the
inventory was sold during the period.
22. Profitability ratios are frequently used as a basis for evaluating
management's operating effectiveness.
23. The rate of return on total assets will be greater than the rate of
return on common stockholders' equity if the company has been
successful in trading on the equity at a gain.
24. From a creditor's point of view, the higher the total debt to total assets
ratio, the lower the risk that the company may be unable to pay its
obligations.
25. A current ratio of 1.2 to 1 indicates that a company's current assets

exceed its current liabilities.
26. Using borrowed money to increase the rate of return on common
stockholders' equity is called "trading on the equity."
27. When the disposal of a significant segment occurs, the income
statement should report both income from continuing operations and
income (loss) from discontinued operations.
28. An event or transaction should be classified as an extraordinary item if
it is unusual in nature or if it occurs infrequently.
29. Variations among companies in the application of generally
accepted accounting principles may reduce quality of earnings.
30. Pro forma income usually excludes items that the company thinks
are unusual or nonrecurring.
Additional True-False Questions
31. The three basic tools of analysis are horizontal analysis, vertical
analysis, and ratio analysis.
32. A percentage change can be computed only if the base amount is zero or
positive.
33. In vertical analysis, the base amount in an income statement is usually net
sales.
34. Profitability ratios measure the ability of the enterprise to survive over
a long period of time.
35. The days in inventory is computed by multiplying inventory turnover by 365.
36. Extraordinary items are reported net of applicable taxes in a separate
section of the income statement.
MULTIPLE CHOICE QUESTIONS
37. Which one of the following is primarily interested in the
liquidity of a company? a. Federal government
b. Stockholders
c.
Long
-term
credi
tors
d.

Short
-term
credi
tors
38. Which one of the following is not a characteristic generally evaluated in
analyzing financial statements?
a. Liquidity
b
.
P
r
o
f
i
t
a
b
i
l
i
t
y
c
.
M
a
r
k
e
t
a
b
i
l
i
t
y
d
.
S
o
l
v
e

n
c
y
39. In analyzing the financial statements of a company, a single item
on the financial statements
a. should be reported in bold-face type.
b. is more meaningful if compared to other
financial information. c. is significant only if
it is large.
d. should be accompanied by a footnote.
40. Short-term creditors are usually most
interested in evaluating a. solvency.
b. liquidity.
c
.
m
a
r
k
e
t
a
b
i
l
i
t
y
.
d
.
p
r
o
f
i
t
a
b
i
l
i
t
y
.

41. Long-term creditors are usually most
interested in evaluating a. liquidity and
solvency.
b. solvency
and
marketabilit
y. c.
liquidity
and
profitability.
d. profitabilityand solvency.
42. Stockholders are most
interested in evaluating a.
liquidity and solvency.
b.
profitabili
tyand
solvency.
c.
liquidity
and
profitabilit
y.
d. marketability and solvency.
FinancialStatement
Analysis 18 - 7
43. A stockholder is interested in the
ability of a firm to a. pay
consistent dividends.
b. appreciate
in share price.
c. survive
over a long
period. d. all
of these.
44. Comparisons of financial data made within a
company are called a.
intracompanycomparisons.
b. interior comparisons.
c.
intercompanyc
omparisons. d.
intramural
comparisons.
45. A technique for evaluating financial statements that expresses the
relationship among selected items of financial statement data is

a.
common
size
analysis. b.
horizontal
analysis.
c. ratio analysis.
d. vertical analysis.
46. Which one of the following is not a tool in financial
statement analysis? a. Horizontal analysis
b.
Circ
ular
anal
ysis
c.
Verti
cal
anal
ysis
d.
Rati
o
anal
ysis
47. In analyzing financial statements,
horizontal analysis is a a. requirement.
b. tool.
c
.
p
r
i
n
c
i
p
l
e
.
d
.
t
h
e

o
r
y
.
48. Horizontal
analysis is also
called a. linear
analysis.
b.
verti
cal
anal
ysis.
c.
tren
d
anal
ysis.
d. common size analysis.
49. Vertical analysis
is also known as a.
perpendicular analysis.
b.
common
size
analysis. c.
trend
analysis.
d. straight-line analysis.
50. In ratio analysis, the ratios are never
expressed as a a. rate.
b.
neg
ati
ve
fig
ure
. c.
per
cen
tag
e.
d. simple proportion.
18 - 8
51. The formula for horizontal analysis of changes since the base period is
the current year amount
a. divided by the base year amount.

b. minus the base year amount divided by the
base year amount. c. minus the base year
amount divided by the current year amount. d.
plus the base year amount divided by the base year
amount.
52. Horizontal analysis evaluates a series of financial statement data
over a period of time a. that has been arranged from the highest
number to the lowest number.
b. that has been arranged from the lowest number to the
highest number. c. to determine which items are in
error.
d. to determine the amount and/or percentage increase or decrease
that has taken place.
53. Horizontal analysis evaluates
financial statement data a. within a
period of time.
b.
over a
period
of
time.
c. on
a
certain
date.
d. as it may appear in the future.
54. Assume the following sales data for a company:
2010 $1,000,000 2009 900,000 2008 750,000
If 2007 is the base year, what is the percentage increase in sales
from 2007 to 2009? a. 100%
b
.
1
5
0
%
c
.
5
0
%
d
.

6
6
.
7
%
55. Comparative balance sheets are
usually prepared for a. one year.
b
.
t
w
o
y
e
a
r
s
.
c
.
t
h
r
e
e
y
e
a
r
s
.
d
.
f
o
u
r
y
e
a

r
s
.
56. Horizontal analysis is
appropriately performed a.
only on the income
statement.
b. only on the balance sheet.
c. only on the statement of
retained earnings. d. on all
three of these statements.
57. A horizontal analysis performed on a statement of retained earnings
would not show a percentage change in
a
.
d
i
v
i
d
e
n
d
s
p
a
i
d
.
b
.
n
e
t
i
n
c
o
m
e
.
c. expenses.
d. beginning retained earnings.
FinancialStatement
Analysis 18 - 9

58. Under which of the following cases may a percentage
change be computed? a. The trend of the balances is
decreasing but all balances are positive.
b. There is no balance in the base year.
c. There is a positive balance in the base year and a negative balance in
the subsequent year.
d. There is a negative balance in the base year and a positive balance in
the subsequent year.
59. Assume the following sales data for a company:
2009 $945,000 2008 780,000 2007 650,000
If 2007 is the base year, what is the percentage increase in sales from
2007 to 2008? a. 25%
b
.
2
0
%
c
.
1
2
5
%
d
.
1
4
3
%
60. Assume the following cost of goods sold data for a company:
2009 $1,500,000 2008 1,200,000 2007 900,000
If 2007 is the base year, what is the percentage increase in cost of goods
sold from 2007 to 2009?
a
.
1
6
7
%
b

.
6
7
%
c
.
6
0
%
d
.
4
0
%
Use the following information for questions 61–62:
Moon Beam, Inc. has the following income statement (in millions):
M
O
O
N
BE
A
M,
IN
C.
Inc
om
e S
tat
em
ent
For the Year Ended December 31, 2008
Net Sales $180 Cost of Goods Sold
61. Using vertical analysis, what percentage is assigned to Cost
of Goods Sold? a. 67%
b
.
3
3
%

c
.
1
0
0
%
d. None of the above
18 - 10
62. Using vertical analysis, what percentage is
assigned to Net Income? a. 100%
b
.
8
5
%
c
.
1
5
%
d. None of the above
63. Vertical
analysis is
also called
a.
common
size
analysis.
b.
hori
zont
al
anal
ysis.
c.
ratio
anal
ysis.
d. trend analysis.
64. Vertical analysis is a technique which expresses each item within a
financial statement a. in dollars and cents.
b. in terms of a percentage of the item in

the previous year. c. in terms of a percent
of a base amount.
d. starting with the highest value down to the lowest value.
65. In common size analysis,
a. a base
amount is
required. b.
a base
amount is
optional.
c. the same base is used across all financial statements analyzed.
d. the results of the horizontal analysis are necessary inputs for performing the
analysis.
66. In performing a vertical analysis, the base for
prepaid expenses is a. total current assets.
b. total assets.
c. total liabilities and
stockholders' equity. d.
prepaid expenses.
67. In performing a vertical analysis, the base for sales revenues on the
income statement is a. net sales.
b. sales.
c. net income.
d. cost of goods available for sale.
68. In performing a vertical analysis, the base for sales returns
and allowances is a. sales.
b
.
s
a
l
e
s
d
is
c
o
u
n
t
s.
c
.
n
e
t
s

a
l
e
s.
d. total revenues.
69. In performing a vertical analysis, the base for
cost of goods sold is a. total selling expenses.
b. net sales.
c
.
t
o
t
a
l
r
e
v
e
n
u
e
s
.
d
.
t
o
t
a
l
e
x
p
e
n
s
e
s
.
FinancialStatement
Analysis 18 - 11
70. Each of the following is a
liquidity ratio except the a. acid-
test ratio.
b. current ratio.
c. debt to
total assets

ratio. d.
inventory
turnover.
71. A ratio calculated in the analysis of financial statements
a. expresses a mathematical relationship between
two numbers. b. shows the percentage increase
from one year to another.
c. restates all items on a financial statement in terms of dollars of the
same purchasing power.
d. is meaningful only if the numerator is greater than the denominator.
72. A liquidity ratio measures the
a. income or operating success of an enterprise over a
period of time. b. ability of the enterprise to survive
over a long period of time.
c. short-term ability of the enterprise to pay its maturing
obligations and to meet unexpected needs for cash.
d. number of times interest is earned.
73. The current ratio is
a. calculated by dividing current liabilities by current assets.
b. used to evaluate a company's liquidity and short-term
debt paying ability. c. used to evaluate a company's solvency
and long-term debt paying ability. d. calculated by
subtracting current liabilities from current assets.
74. The acid-test (quick) ratio
a. is used to quickly determine a company's solvency and long-term debt
paying ability. b. relates cash, short-term investments, and net
receivables to current liabilities.
c. is calculated by taking one item from the income statement and one
item from the balance sheet.
d. is the same as the current ratio except it is rounded to the nearest whole
percent.
75. Walker Clothing Store had a balance in the Accounts Receivable account
of $780,000 at the beginning of the year and a balance of $820,000 at
the end of the year. Net credit sales during the year amounted to
$8,000,000. The average collection period of the receivables in terms of
days was
a
.
3
0
d
a
y
s

.
b
.
3
6
5
d
a
y
s
.
c
.
1
0
d
a
y
s
.
d
.
3
7
d
a
y
s
.
76. Parr Hardware Store had net credit sales of $5,200,000 and cost of
goods sold of $4,000,000 for the year. The Accounts Receivable balances
at the beginning and end of the year were $600,000 and $700,000,
respectively. The receivables turnover was
a
.
7
.
4

t
i
m
e
s
.
b
.
8
.
7
t
i
m
e
s
.
c
.
6
.
2
t
i
m
e
s
.
d
.
8
t
i
m
e
s
.
18 - 12
Use the following information for questions 77–78.

Waters Department Store had net credit sales of $12,000,000 and cost of
goods sold of $9,000,000 for the year. The average inventory for the year
amounted to $2,000,000.
77. Inventory
turnover for
the year is a.
6 times.
b
.
1
0
.
5
t
i
m
e
s
.
c
.
4
.
5
t
i
m
e
s
.
d
.
3
t
i
m
e
s
.
78. The average number of days in inventory

during the year was a. 122 days.
b
.
8
1
d
a
y
s
.
c
.
6
1
d
a
y
s
.
d
.
3
5
d
a
y
s
.
79. Each of the following is included in computing the
acid-test ratio except a. cash.
b
.
i
n
v
e
n
t
o
r

y
.
c
.
r
e
c
e
i
v
a
b
l
e
s
.
d. short-term investments.
80. Which one of the following would not be
considered a liquidity ratio? a. Current ratio
b.
Inv
ent
ory
tur
nov
er
c.
Aci
d-
test
rati
o
d. Return on assets
81. Asset turnover measures
a. how often a company replaces its assets.
b. how efficiently a company uses its assets to
generate sales. c. the portion of the assets that
have been financed by creditors. d. the overall
rate of return on assets.
82. Profit margin is
calculated by
dividing a. sales
by cost of goods
sold.
b. gross profit by net sales.

c. net income by
stockholders' equity.
d. net income by
net sales.
Raney Corporation had net income of $200,000 and paid dividends to common
stockholders of $50,000 in 2008. The weighted average number of shares
outstanding in 2008 was 50,000 shares. Raney Corporation's common stock is
selling for $40 per share on the New York Stock Exchange.
83. Raney Corporation's
price-earnings ratio is a.
2.5 times.
b
.
1
0
t
i
m
e
s
.
c
.
1
3
.
3
t
i
m
e
s
.
d
.
4
t
i
m

e
s
.
FinancialStatement
Analysis 18 - 13
84 Raney Corporation's payout
ratio for 2008 is a. $4 per
share.
b
3
3
.
3
%
.
c
.
2
5
%
.
d
.
1
0
%
.
85 Holt Company reported the following on its income statement:
Income before income taxes Income tax expense
Net income
$420,000
120,000 $300,000
An analysis of the income statement revealed that interest expense was
$50,000. Holt Company's times interest earned was
a
.
9
t
i
m

e
s
.
b
.
8
t
i
m
e
s
.
c
.
7
t
i
m
e
s
.
d
.
6
t
i
m
e
s
.
86. The debt to total assets
ratio measures a. the
company's profitability.
b. whether interest can be paid on debt in
the current year. c. the proportion of
interest paid relative to dividends paid. d.
the percentage of the total assets provided by
creditors.
87. Trading on the equity

(leverage) refers to the a.
amount of working capital.
b. amount of capital provided by owners.
c. use of borrowed money to increase the
return to owners. d. number of times
interest is earned.
88. The current assets of Kile Company are $150,000. The current liabilities
are $120,000. The current ratio expressed as a proportion is
a
.
1
2
5
%
.
b
.
1
.
2
5
:
1
c
.
.
8
0
:
1
d. $150,000 ÷ $120,000.
89. The current ratio may also be
referred to as the a. short run
ratio.
b. acid-test ratio.
c.
working
capital
ratio. d.

contemp
orary
ratio.
90. A weakness of the
current ratio is a.
the difficulty of
the calculation.
b. that it doesn't take into account the composition of the
current assets. c. that it is rarely used by sophisticated
analysts.
d. that it can be expressed as a percentage, as a rate, or as a proportion.
18 - 14
91. A supplier to a company would be most interested
in the company’s a. asset turnover.
b
.
p
r
o
f
i
t
m
a
r
g
i
n
.
c
.
c
u
r
r
e
n
t
r
a
t
i
o

.
d. earnings per share.
92. Which one of the following ratios would not likely be used by a
short-term creditor in evaluating whether to sell on credit to a
company?
a
.
C
u
r
r
e
n
t
r
a
t
i
o
b
.
A
c
i
d
-
t
e
s
t
r
a
t
i
o
c
.
A
s
s
e
t
t
u
r
n
o

v
e
r
d. Receivables turnover
93. Ratios are used as tools in
financial analysis a.
instead of horizontal and
vertical analyses.
b. because they may provide information that is not apparent from
inspection of the individual components of the ratio.
c. because even single ratios by themselves are
quite meaningful. d. because they are prescribed
by GAAP.
94. The ratios that are used to determine a company's short-term debt
paying ability are a. asset turnover, times interest earned, current
ratio, and receivables turnover.
b. times interest earned, inventory turnover, current ratio, and
receivables turnover. c. times interest earned, acid-test ratio,
current ratio, and inventory turnover.
d. current ratio, acid-test ratio, receivables turnover, and inventory turnover.
95. A measure of the percentage of each dollar of sales that results
in net income is a. profit margin.
b. return on assets.
c. return on common
earnings per share.
Risen Company had $250,000 of current assets and $90,000 of current
liabilities before borrowing $50,000 from the bank with a 3-month note
payable.
96. What effect did the borrowing transaction have on the amount of
Risen Company's working capital?
a. No effect
b. $50,000 increase c. $90,000 increase d. $50,000 decrease
97. What effect did the borrowing transaction have on Risen
Company's current ratio? a. The ratio remained unchanged.
b. The change in the current ratio
cannot be determined. c. The ratio
decreased.
d. The ratio increased.
FinancialStatement
Analysis 18 - 15
98. If equal amounts are added to the numerator and the denominator of the

current ratio, the ratio will always
a
.
i
n
c
r
e
a
s
e
.
b
.
d
e
c
r
e
a
s
e
.
c.
st
a
y
t
h
e
s
a
m
e.
d
.
e
q
u
al
z
e
r
o
.
99. The acid-test ratio

a. is a quick calculation of an approximation of
the current ratio. b. does not include all current
liabilities in the calculation.
c. does not include inventory as part of the numerator.
d. does include prepaid expenses as part of the numerator.
100. If a company has an acid-test ratio of 1.2:1, what respective effects will
the borrowing of cash by short-term debt and collection of accounts
receivable have on the ratio?
Short-term Borrowing a. Increase
b. Increase c. Decrease d. Decrease
Collection of Receivable No effect Increase
No effect Decrease
101. A company has a receivables turnover of 10 times. The average
netceivables during the period are $500,000. What is the amount of net
credit sales for the period?
a. $50,000
b
.
$
5
,
0
0
0
,
0
0
0
c
.
$
6
0
0
,
0
0
0
d. Cannot be determined from the information given
102. If the average collection period is 35 days, what is the
receivables turnover? a. 9.49 times
b
.

1
0
.
4
3
t
i
m
e
s
c
.
5
.
2
2
t
i
m
e
s
d. None of these
103. A general rule to use in assessing the average
collection period is that a. it should not exceed 30
days.
b. it can be any length as long as the customer continues to
buy merchandise. c. it should not greatly exceed the discount
period.
d. it should not greatly exceed the credit term period.
104. Inventory turnover is calculated by dividing
a. cost of goods sold by the ending inventory.
b. cost of goods sold by the
beginning inventory. c. cost of
goods sold by the average
inventory. d. average inventory
by cost of goods sold.
105. A company has an average inventory on hand of $100,000 and the days in
inventory is 73 days. What is the cost of goods sold?
a
.
$
5
0

0
,
0
0
0
b
.
$
7
,
3
0
0
,
0
0
0
c
.
$
1
,
0
0
0
,
0
0
0
d
.
$
3
,
6
5
0
,
0
0
0
18 - 16
106. A successful grocery store

would probably have a. a
low inventory turnover.
b. a high
inventory
turnover.
c. zero
profit
margin.
d. low volume.
107. An aircraft company
would most likely have
a. a high inventory
turnover.
b.
lo
w
pr
ofi
t
m
ar
gi
n.
c.
hi
gh
vo
lu
m
e.
d. a low inventory turnover.
108. Net sales are $4,500,000, beginning total assets are $2,100,000, and the
asset turnover is 3.0 times. What is the ending total asset balance?
a
.
$
1
,
5
0
0
,
0
0
0
b

.
$
9
0
0
,
0
0
0
c
.
$
2
,
1
0
0
,
0
0
0
d
.
$
1
,
2
0
0
,
0
0
0
109. Earnings per
share is
calculated a.
only for
common
stock.
b. only for preferred stock.
c. for common
and preferred
stock. d. only for
treasury stock.

110. Which of the following is not
a profitability ratio? a.
Payout ratio
b. Profit margin
c. Times interest earned
d. Return on common stockholders' equity
111. Times interest earned
is also called the a.
money multiplier.
b.
interest
coverage
ratio. c.
coupon
coverage
ratio. d.
premium
ratio.
112. The ratio that uses weighted average common shares outstanding in the
denominator is the
a. price-earnings ratio.
b. return on common
stockholders' equity. c.
earnings per share.
d. payout ratio.
113. Net income does not appear in the
numerator of the a. profit
margin.
b. return on assets.
c. return on common
payout ratio.
FinancialStatement
Analysis 18 - 17
114. Fall Clothing Store had a balance in the Accounts Receivable account of
$820,000 at the beginning of the year and a balance of $880,000 at the
end of the year. Net credit sales during the year amounted to $6,120,000.
The receivables turnover ratio was
a
.
7
.
2
t

i
m
e
s
.
b
.
7
t
i
m
e
s
.
c
.
6
.
9
t
i
m
e
s
.
d
.
6
.
8
t
i
m
e
s
.
115. Fall Clothing Store had a balance in the Accounts Receivable account of
$810,000 at the beginning of the year and a balance of $850,000 at the
end of the year. Net credit sales during the year amounted to $5,814,980.
The average collection period of the receivables in terms of days was

a
.
5
0
d
a
y
s
.
b
.
5
2
.
1
d
a
y
s
.
c
.
3
6
5
d
a
y
s
.
d
.
5
2
.
9
d
a
y

s
.
Luthor Corporation had net income of $160,000 and paid dividends to common
outstanding in 2008 was 50,000 shares. Luthor Corporation's common stock is
116. Luthor Corporation's
price-earnings ratio is a.
3.2 times.
b
.
1
5
.
6
t
i
m
e
s
.
c
.
1
0
t
i
m
e
s
.
d
.
5
t
i
m
e
s

.
117. Luthor Corporation's
payout ratio for 2008 is a.
$5 per share.
b
.
2
5
%
.
c
.
2
0
%
.
d
.
1
2
.
5
%
.
118. Raye Company reported the following on its income statement:
Income before income taxes Income tax expense
Net income
$500,000
150,000 $350,000
An analysis of the income statement revealed that interest expense was
$80,000. Raye Company's times interest earned was
a. 8 times.
b
.
7
.
2
5
t
i
m

e
s
.
c
.
6
.
2
5
t
i
m
e
s
.
d
.
4
.
4
t
i
m
e
s
.
18 - 18
Use the following information for questions 119-125.
The following information pertains to Soho Company. Assume that all
balance sheet amounts represent both average and ending balance figures.
Assume that all sales were on credit.
Assets
Cash and short-term investments Accounts receivable
(net) Inventory
Property, plant and equipment Total Assets
Liabilities and Stockholders’ Equity Current liabilities
Long-term liabilities Stockholders’ equity—
common
Total Liabilities and Stockholders’ Equity
$ 40,000 25,000 20,000

210,000 $295,000
$ 60,000 85,000
150,000 $295,000
Sales
Cost of goods sold Gross margin Operatingexpenses
Net income
Income Statement
$ 85,000
45,000 40,000
20,000 $ 20,000
Number of shares of common stock 6,000 Market price of comm
119. What is the current ratio
for this company? a.
1.42
b
.
.
8
0
c
.
1
.
1
6
d
.
.
6
0
120. What is the receivables turnover
for this company? a. 2.8 times
b
.
2
t
i

m
e
s
c
.
3
.
4
t
i
m
e
s
d
.
3
t
i
m
e
s
121. What is the inventory turnover
for this company? a. 2 times
b
.
2
.
2
5
t
i
m
e
s
c
.
1
t

i
m
e
d. .44 times
122. What is the return on assets
for this company? a. 6.8%
b
.
1
0
.
5
%
c
.
1
1
.
7
%
d
.
2
6
.
7
%
FinancialStatement
Analysis 18 - 19
123. What is the profit margin
42.86%
b
.
1
8
.
7
5
%
c

.
2
3
.
5
%
d
.
1
5
.
0
%
124. What is the return on common stockholders’ equity
b. 5%
c
.
2
3
.
3
%
d
.
5
3
.
3
%
125. What is the price-earnings ratio
b
.
2
.
5
t
i
m

e
s
c
.
8
t
i
m
e
s
d
.
4
t
i
m
e
s
The following information pertains to Cashe Company. Assume that all balance
sheet amounts represent both average and ending balance figures. Assume that
all sales were on credit.
Assets Cash and short-term investments
Accounts receivable (net)
Inventory
Property, plant and equipment Total Assets
$ 40,000 30,000 25,000
215,000 $310,000
Liabilities and Stockholders’ Equity Current liabilities
Long-term liabilities Stockholders’ equity—
common
Total Liabilities and Stockholders’ Equity
$ 60,000 95,000
155,000 $310,000
Sales
Cost of goods sold Gross margin Operatingexpenses
Net income
Income Statement
$ 90,000

45,000 45,000
20,000 $ 25,000
Number of shares of common stock 6,000 Market price of comm
126. What is the return on assets
b
.
1
0
.
5
%
c
.
8
.
1
%
d
.
1
6
.
1
%
18 - 20
127. What is the profit margin
50.0%
b
.
5
5
.
6
%
c
.
2
3

.
5
%
d
.
2
7
.
8
%
128. What is the return on common stockholders’ equity
b
.
1
6
.
1
%
c
.
2
3
.
5
%
d
.
5
3
.
3
%
129. What is the price-earnings ratio
b
.
4
.
2

t
i
m
e
s
c
.
8
t
i
m
e
s
d
.
4
.
8
t
i
m
e
s
The following information is available for Charles Company:
Accounts receivable Inventory
Net credit sales Cost of goods sold Net income
2008
$ 360,000 280,000 3,000,000 1,200,000 300,000
2007
$ 400,000 320,000 1,400,000 1,060,000
170,000
130. The receivables
turnover ratio for 2008
is a. 8.3 times.
b
.
3

.
9
t
i
m
e
s
.
c
.
7
.
9
t
i
m
e
s
.
d
.
1
0
.
0
t
i
m
e
s
.
131. The inventory
turnover ratio for
2008 is a. 4.3
times.
b
.
4
.
0

t
i
m
e
s
.
c
.
2
.
0
t
i
m
e
s
.
d
.
2
.
4
t
i
m
e
s
.
The following amounts were taken from the financial statements of Palmer Company:
Total assets Net sales Gross profit
Net income
Weighted average number of common shares outstanding Market price of common
stock
2008
$800,000 720,000 352,000 144,000 120,000 $36
2007
$1,000,000 650,000 320,000 117,000 120,000 $40
FinancialStatement
Analysis 18 - 21

132. The return on assets
ratio for 2008 is a.
18%.
b
.
1
6
%
.
c
.
3
6
%
.
d
.
3
2
%
.
133. The profit
margin ratio for
2008 is a. 10%.
b
.
1
5
%
.
c
.
2
0
%
.
d
.
3

0
%
.
134. The price-earnings
ratio for 2008 is a.
30 times.
b
.
2
0
t
i
m
e
s
.
c
.
1
0
t
i
m
e
s
.
d
.
5
t
i
m
e
s
.
Panza Corporation had net income of $250,000 and paid dividends to common
outstanding in 2008 was 50,000 shares. Panza Corporation's common stock is

135. Panza Corporation's price-
earnings ratio is a. 2
times.
b
.
8
t
i
m
e
s
.
c
.
1
0
t
i
m
e
s
.
d
.
5
t
i
m
e
s
.
136. Panza Corporation's payout
ratio for 2008 is a. $5 per
share.
b
.
2
5
%
.

c
.
2
0
%
.
d
.
1
2
.
5
%
.
137. Ester’s Bunny Barn has experienced a $40,000 loss due to tornado
damage to its inventory. Tornados have never before occurred in
this area. Assuming that the company’s tax rate is 30%, what
amount will be reported for this loss on the income statement?
a
.
$
4
0
,
0
0
0
b
.
$
2
8
,
0
0
0
c
.
$
1
2

,
0
0
0
d
.
$
3
6
,
0
0
0
138. Wenger Company reported income before taxes of $600,000 and an
extraordinary loss of $150,000. Assume that the company’s tax rate is
30%. What amounts will be reported on the income statement for
income before irregular items and extraordinary items, respectively?
a.
$420,000
and
$150,000 b.
$420,000
and
$105,000 c.
$495,000
and
$150,000
d.
$495,000
and
$105,000
18 - 22
139. Kandy Kane Corporation has income before taxes of $400,000 and an
extraordinary gain of $100,000. If the income tax rate is 25% on all
items, the income statement should show income before irregular items
and extraordinary items, respectively, of
a.
$325,000
and
$100,000.
b.
$325,000
and
$75,000.
c.
$300,000
and

$100,000.
d.
$300,000
and
$75,000.
140. Hardy Inc. has an investment in available-for-sale securities of
$50,000. This investment experienced an unrealized loss of $3,000
during the current year. Assuming a 35% tax rate, the effect of this loss
on comprehensive income will be
a. no effect.
b.
$50,
000
incr
ease
. c.
$17,
500
decr
ease
. d.
$3,0
00
decr
ease
.
141. The disposal of a significant segment of a
business is called a. a change in
accounting principle.
b. an
extraor
dinary
item. c.
an
other
expens
e.
d. discontinued operations.
142. ABC Company reports income before income taxes of $1,800,000
and had an extra-ordinary loss of $600,000. If the tax rate is 30%,
a. the income before the extraordinary item is $1,440,000.
b. the extraordinary loss would be reported on the income
statement at $600,000. c. the income before the extraordinary
item is $1,260,000.
d. the extraordinary loss will be reported at $180,000.
143. Evers, Inc. disposes of an unprofitable segment of its business. The

operation of the segment suffered a $240,000 loss in the year of
disposal. The loss on disposal of the segment was $120,000. If the
tax rate is 30%, and income before income taxes was $1,500,000,
a. the income tax expense on the income before discontinued
operations is $342,000. b. the income from continuing operations is
$1,050,000.
c. net income is $1,140,000.
d. the losses from discontinued operations are reported net of income taxes at
$180,000.
144. Each of the following is an
extraordinary item except the a.
effects of major casualties, if rare in
the area.
b. effects of a newly enacted law or regulation.
c. expropriation of property by a
foreign government. d. losses
attributable to labor strikes.
145. The discontinued operations section of the income
statement refers to a. discontinuance of a product
line.
b. the income or loss on products that have been
completed and sold. c. obsolete equipment and
discontinued inventory items.
d. the disposal of a significant segment of a business.
FinancialStatement
Analysis 18 - 23
146. Which one of the following would be classified as an
extraordinary item? a. Expropriation of property by a
foreign government
b. Losses attributed
to a labor strike c.
Write-down of
inventories
d. Gains or losses from sales of equipment
147. A loss on the write down of obsolete inventory
should be reported as a. "other expenses and
losses."
b. part of
discontinued
operations. c. an
operating expense.
d. an extraordinary item.
148. If an item meets one (but not both) of the criteria for an
extraordinary item, it a. only needs to be disclosed in the
footnotes of the financial statements.
b. may be treated as sales revenue (if it is a gain) and as an operating

expense (if it is a loss).
c. is reported as an "other revenue or gain" or "other expense and loss," net of
tax.
d. is reported at its gross amount as an "other revenue or gain" or
"other expense or loss."
149. The order of presentation of nontypical items that may appear on the
income statement is a. Extraordinary items, Discontinued operations,
Other revenues and expenses.
b. Discontinued operations, Extraordinary items, Other
revenues and expenses. c. Other revenues and expenses,
Discontinued operations, Extraordinary items. d. Other
revenues and expenses, Extraordinary items,
Discontinued operations.
150. Each of the following is a factor affecting quality
of earnings except a. alternative accounting
methods.
b.
imprope
r
recognit
ion. c.
pro
forma
income.
d. extraordinary items.
Additional Multiple Choice Questions
151. Comparisons can be made on each of the
following bases except a. industry averages.
b.
interco
mpan
ybasis
. c.
intraco
mpan
ybasis
.
d. Each of these is a basis for comparison.
152. Comparisons of data within a company are an example of the
following comparative basis:
a.
Indu
stry
aver
ages

b.
Inter
com
pany
c
.
I
n
t
r
a
c
o
m
p
a
n
y
d
.
I
n
t
e
r
r
e
g
i
o
n
a
l
18 - 24
153. Silva Corporation reported net sales of $240,000, $420,000, and
$540,000 in the years 2007, 2008, and 2009 respectively. If 2007 is the
base year, what is the trend percentage for 2009?
a
.
1
2
9
%
b
.

1
3
5
%
c
.
1
6
4
%
d
.
2
2
5
%
154. In vertical analysis, the base amount for each income
statement item is a. gross profit.
b
.
n
e
t
i
n
c
o
m
e
.
c
.
n
e
t
s
a
l
e
s

.
d
.
s
a
l
e
s
.
155. When performing vertical analysis, the base amount for
administrative expense is generally
a. administrative expense
in a previous year. b. net
sales.
c
.
g
r
o
s
s
p
r
o
f
i
t
.
d
.
f
i
x
e
d
a
s
s
e
t
s
.

156. Ratios that measure the short-term ability of the company to pay its
maturing obligations are
a. liquidity ratios.
b.
pr
ofi
tab
ilit
y
rat
ios
. c.
sol
ve
nc
y
rat
ios
.
d.
tre
nd
rat
ios
.
157. What type of ratios best measure the short-term ability of the
enterprise to pay its maturing obligations and to meet unexpected
needs for cash?
a
.
L
e
v
e
r
a
g
e
b
.
S
o
l
v
e

n
c
y
c
.
P
r
o
f
i
t
a
b
i
l
i
t
y
d
.
L
i
q
u
i
d
i
t
y
158. The acid-test ratio is
also known as the a.
current ratio.
b
.
q
u
i
c
k
r
a
t
i

o
.
c
.
f
a
s
t
r
a
t
i
o
.
d. times interest earned ratio.
159. The debt
to total
assets
ratio a. is
a solvency
ratio.
b. is computed by dividing total assets by total debt.
c. measures the total assets provided
by stockholders. d. is a profitability
ratio.
160. An extraordinary item is one that
a. occurs infrequently and is
uncontrollable in nature. b. occurs
infrequently and is unusual in
nature.
c. is material and is unusual in nature.
d. is material and is uncontrollable in nature.
FinancialStatement
Analysis 18 - 25
161. Galileo, Inc. decided on January 1 to discontinue its telescope
manufacturing division. On July 1, the division’s assets with a book
value of $630,000 are sold for $450,000. Operating income from
January 1 to June 30 for the division amounted to $75,000. Ignoring
income taxes, what total amount should be reported on Galileo’s
income statement for the current year under the caption, Discontinued
Operations?
a. $75,000
b
.

$
1
0
5
,
0
0
0
l
o
s
s
c
.
$
1
8
0
,
0
0
0
l
o
s
s
d
.
$
2
5
5
,
0
0
0
162. When there has been a change in accounting principle,
a. the old principle should be used in reporting the results of
operations for the current year.
b. the cumulative effect of the change should be reported in the current
year’s retained earnings statement.
c. the change should be reported retroactively.
d. the new principle should be used un reporting the results of
operations of the current year, but there is no change to prior years.

BRIEFEXERCISES
BE 163
The following items were taken from the financial statements of Horace, Inc.,
over a three-year period:
Item
Net Sales
Cost of Goods Sold Gross Profit
2009
$355,000
214,000 $141,000
2008
$336,000
206,000 $130,000
2007
$300,000
186,000 $114,000
Instructions
Compute the following for each of the
above time periods. a. The amount and
percentage change from 2007 to 2008. b.
The amount and percentage change from
2008 to 2009.
BE 164
If Parthenon Company had net income of $672,300 in 2009 and it experienced a
20% increase in net income over 2008, what was its 2008 net income?
BE 165
Horizontal analysis (trend analysis) percentages for Vishnu Company’s sales,
cost of goods sold, and expenses are listed here.
Horizontal Analysis 2009
Sales 98.2% Cost of goods sold 102.5
Expenses 108.6
2008 2007
104.8% 100.0% 98.0 100.0 96.4 100.0
FinancialStatement
Analysis 18 - 27
BE 165 (cont.)
Instructions
Explain whether Vishnu’s net income increased, decreased, or remained
unchanged over the 3-year period.

BE 166
Using the following operating data for Manchac Corporation, illustrate horizontal
analysis.
Net sales
Cost of goods sold Operating expenses Net income
2008 2007
$350,000 $320,000 200,000
180,000 120,000 100,000 30,000
40,000
BE 167
Using the data presented for Manchac Company in BE 166, prepare a
schedule showing a vertical analysis for 2008.
BE 168
Using these data from the comparative balance sheet of Luca Company,
perform vertical analysis.
Accounts receivable Inventory
Total assets
December 31, 2009 $ 500,000
780,000 3,220,000
December 31, 2008 $ 400,000
600,000 2,800,000
BE 169
For each of the ratios listed below, indicate by the appropriate code letter,
whether it is a liquidity ratio (L), a profitability ratio (P), or a solvency ratio (S).
1. Times
interest
earned ratio
2. Asset
turnover
3. Receivables turnover
4. Debt
to total
assets
ratio 5.

Current
ratio
6. Payout ratio
BE 170
Selected financial statement data for Meyer Company are presented below.
Cash
Short-term investments Accounts receivable Inventories
Total current liabilities
12/31/08 $ 10,000 15,000 60,000 75,000 110,000
Instructions
Compute the following ratios at
December 31, 2008: (a) Current.
(b) Acid-test.
BE 171
Breaktown Company had net income of $152,000 and net sales of
$625,000 in 2008. The company’s total assets for 2007/2008 averaged
$3,900,000. Its common stockholders’ equity for the period averaged
$2,340,000. Calculate (a) profit margin, (b) return on assets, and (c) return on
common stockholders’ equity.
BE 172
Berman Company reported the following financial information:
Accounts receivable Net credit sales
12/31/08 $ 320,000
2,100,000
12/31/07 $ 360,000
2,420,000
Compute (a) the receivables turnover and (b) the average collection period for 2008.
BE 173
Prepare a partial income statement, beginning with income before income
taxes using the following information for Slidell Corporation for the fiscal year
ended December 31, 2008:
Sales Extraordinary loss
Selling and administrative expenses Cost of goods sold
Loss on sale of land
$800,000 100,000 180,000 500,000 25,000

Slidell Corporation is subject to a 30% income tax rate.
EXERCISES
Ex. 174
Selected financial information for Bradley Corporation is presented below.
Current assets Long-term liabilities Retained earnings
December 31, 2009 $ 60,000
100,000 115,000
December 31, 2008 $ 50,000
80,000 100,000
Instructions
Prepare a schedule showing a horizontal analysis for 2009 using 2008 as the base year.
Ex. 175
Comparative information taken from the Wells Company financial statements is
shown below:
(a) Notes receivable (b) Accounts receivable (c) Retained earnings
(d) Income taxes payable (e) Sales
(f) Operating expenses
2009 2008
$ 20,000 $ -0-182,000 140,000
30,000 (40,000) 44,000 20,000 960,000
750,000 170,000 200,000
Instructions
Using horizontal analysis, show the percentage change from 2008 to 2009 with
2008 as the base year.
Ex. 176
Eaton Corporation had net income of $6,000,000 in 2007. Using 2007 as the
base year, net income decreased by 70% in 2008 and increased by 140% in
2009.
Instructions
Compute the net income reported by Eaton Corporation for 2008 and 2009.
Ex. 177
The following items were taken from the financial statements of Ritz, Inc., over a
four-year period:
Item
Net Sales
Cost of Goods Sold Gross Profit

2010
$800,000
560,000 $240,000
2009
$700,000
500,000 $200,000
2008
$550,000
420,000 $130,000
2007
$500,000
400,000 $100,000
Instructions
Using horizontal analysis and 2007 as the base year, compute the trend
percentages for net sales, cost of goods sold, and gross profit. Explain
whether the trends are favorable or unfavorable for each item.
Ex. 178
The comparative balance sheet of Greer Company appears below:
GREER
COMPA
NY
Comparat
ive
Balance
Sheet
December
31,
——————————————————————————————————
—————————
Assets 2009 2008
Current assets ...................................................................................... $
330
$
280 Plant assets ..........................................................................................
670
520 Total assets ..........................................................................................
$
1,000
$
800
Liabilities and stockholders' equity
Current liabilities ................................................................................... $
160 $120 Long-term debt
..................................................................................... 240
160 Common stock .....................................................................................

340 320 Retained earnings
................................................................................ 260 200
Total liabilities and stockholders' equity .........................................
$1,000 $800
FinancialStatement
Analysis 18 - 33
Ex. 178 (cont.)
Instructions
(a) Using horizontal analysis, show the percentage change for each balance
sheet item using 2008 as a base year.
(b) Using vertical analysis, prepare a common size comparative balance sheet.
Ex. 179
Using the following selected items from the comparative balance sheet of
Anders Company, illustrate horizontal and vertical analysis.
Accounts Receivable Inventory
Total Assets
December 31, 2009 $ 900,000
975,000 4,000,000
December 31, 2008 $ 600,000
750,000 2,500,000
Ex. 180
Operating data for Manning Corporation are presented below.
Net sales
Cost of goods sold Operating expenses Net income
2008
$500,000 340,000
120,000 40,000
Instructions
Prepare a schedule showing a vertical analysis for 2008.
Ex. 181
The following information was taken from the financial statements of Lee Company:
Gross profit on sales ............................................................ Income before income
taxes ................................................ Net
income ........................................................................... Net income as a percentage
of net sales.............................
2009
$750,000 280,000 200,000 8%

2008
$800,000 230,000 180,000 9%
Instructions
(a) Compute the net sales for each year.
(b) Compute the cost of goods sold in dollars and as a percentage of net sales
for each year. (c) Compute operating expenses in dollars and as a
percentage of net sales for each year.
(Income taxes are not operating expenses).
Ex. 182
Selected financial statement data for Morton Company are presented below.
Cash
Short-term investments Receivables (net) Inventories
December 31, 2009 $ 20,000
25,000 100,000 85,000 100,000
December 31, 2008 $30,000
18,000 80,000 65,000 90,000
During 2009, net sales were $810,000, and cost of goods sold was $615,000.
Instructions
Compute the following ratios at
December 31, 2009: (a) Current.
(b) Acid-test.
(c)
Receivabl
es
turnover.
(d)
Inventory
turnover.
Ex. 183
Selected information from the comparative financial statements of Fryman
Company for the year ended December 31, appears below:
2009 2008
Accounts receivable (net) $ 180,000 $200,000 Inventory
340,000 300,000 Net credit sales
1,520,000 700,000 Cost of goods sold
750,000 530,000 Interest expense
40,000 25,000 Income tax expense
60,000 29,000 Net income
160,000 85,000

Instructions
Answer the following questions relating to the year ended December 31,
2009. Show computa-tions.
1. Inventory turnover for 2009 is .
2. Times interest earned in 2009 is .
3. The debt to total assets ratio for 2009 is .
4. Receivables turnover for 2009 is .
5. Return on assets for 2009 is .
$750,000
————————————
Ex. 184
The financial statements of Dobson Company appear below:
DOBSON
COMPAN
Y
Comparativ
e Balance
Sheet
December
31,
——————————————————————————————————
—————————
Assets Cash................................................................................................. Short-term
investments.................................................................... Accounts receivable (net)
................................................................
Inventory.......................................................................................... Property, plant and
equipment (net) ................................................
Total assets ...............................................................................
Accounts payable............................................................................. Short-term notes
payable................................................................. Bonds
payable ................................................................................. Common
stock................................................................................. Retained
earnings............................................................................ Total liabilities and
stockholders' equity.....................................
2009
$ 35,000 15,000 50,000 50,000
250,000 $400,000
$ 10,000 40,000 88,000 160,000
102,000 $400,000

2008
$ 40,000 60,000 30,000 70,000
300,000 $500,000
$ 30,000 90,000 160,000 145,000
75,000 $500,000
DOB
SON
CO
MPA
NY
Inco
me
State
ment
For the Year Ended December 31, 2009
Net sales.......................................................................................... Cost of goods
sold ........................................................................... Gross profit
...................................................................................... Expenses
Interest expense......................................................................... Selling
expenses........................................................................ Administrative
expenses............................................................ Total
expenses..................................................................... Income before income
taxes............................................................ Income tax
expense......................................................................... Net
income.......................................................................................
$12,000 40,000
59,000
$360,000
198,000 162,000
111,000 51,000
15,000 $ 36,000
Additional information:
a. Cash dividends of $9,000 were declared and paid in 2009.
b. Weighted-average number of shares of common stock outstanding during
2009 was 30,000 shares.
c. Market value of common stock on December 31, 2009, was $21 per share.

———— = 3
$50,000
$12,000
18 - 38
Ex. 184 (cont.)
Instructions
Using the financial statements and additional information, compute the
following ratios for Coulter Company for 2009. Show all computations.
Computati
ons
1. Current ratio .
2. Return on common stockholders' equity .
3. Price-earnings ratio .
4. Acid-test ratio .
5. Receivables turnover .
6. Times interest earned .
7. Profit margin .
8. Days in inventory .
9. Payout ratio .
10. Return on assets .
Ex. 185
The following ratios have been computed for Pratt Company for 2009.
Profit margin
Times interest earned Receivables turnover Acid-test ratio Current ratio
Debt to total assets ratio
20% 15 times
5 times 1.60 : 1
3 : 1 26%
Pratt Company’s 2009 financial statements with missing information follow:
PRATT
COMPAN
Y
Comparativ
e Balance
Sheet
December
31,
——————————————————————————————————
—————————

Assets Cash........................................................................................... Short-term
Investments.............................................................. Accounts receivable (net)
..........................................................
Inventory.................................................................................... Property, plant, and
equipment (net) .........................................
Total assets ........................................................................
Accounts payable....................................................................... Short-term notes
payable........................................................... Bonds
payable ........................................................................... Common
stock........................................................................... Retained
earnings...................................................................... Total liabilities and stockholders'
equity..............................
2009
$ 25,000 15,000
? (6) ? (8)
200,000
$ ? (9)
$ ? (7) 35,000
? (10) 200,000
59,000
$ ? (11)
2008
$ 35,000 15,000 60,000 50,000
150,000 $310,000
$ 25,000 30,000 20,000 200,000
35,000 $310,000
18 - 40
Ex. 185 (cont.)
P
R
A
T
T
C
O
M
P
A
N
Y
I
n

c
o
m
e
S
t
a
t
e
m
e
n
t
For the Year Ended December 31, 2009 ————
————————————————————————————————
———————
Net sales .................................................................................... Cost of goods
sold...................................................................... Gross
profit................................................................................. Expenses:
Depreciation expense........................................................... Interest
expense................................................................... Selling
expenses .................................................................. Administrative expenses
...................................................... Total
expenses ............................................................... Income before income
taxes ...................................................... Income tax
expense ............................................................. Net
income .................................................................................
$250,000
125,000 125,000
$ ? (5) 5,000
10,000
15,000
? (4) ? (2)
? (3) $ ? (1)
Instructions
Use the above ratios and information from the Pratt Company financial
statements to fill in the missing information on the financial statements.
Follow the sequence indicated. Show computations that support your
answers.
Ex. 186
Selected data for Nancy's Store appear below.
Net sales
Cost of goods sold Inventory at end of year

Accounts receivable at end of year
2009 2008
$650,000 $520,000 455,000 345,000
65,000 85,000 80,000 50,000
Instructions
Compute the
following for
2009: (a)
Gross
profit rate.
(b)
Inv
entory
turnover.
(c)
Receivab
les
turnover.
Ex. 187
Selected financial statement data for Holmes Company are presented below.
Net sales
Cost of goods sold Interest expense Net income
Total assets (ending)
Total common stockholders' equity (ending)
$1,200,000 700,000 10,000 180,000 850,000
650,000
Total assets at the beginning of the year were $750,000; total common
stockholders' equity was $550,000 at the beginning of the period.
Instructions
Compute each
of the
following: (a)
Asset turnover
(b) Profit margin
(c) Return on assets
(d) Return on common stockholders' equity
Ex. 188
Winter Corporation has issued common stock only. The company has been
successful and has a gross profit rate of 20%. The information shown below
was taken from the company's financial statements.

Beginning inventory Purchases
Ending inventory
Average accounts receivable
Average common stockholders' equity Sales (all on credit)
Net income
$ 482,000 5,636,000
? 700,000
3,500,000 7,000,000 525,000
Instructions
Compute the following:
(a) Receivables turnover and the average
collection period. (b) Inventory turnover
and the days in inventory.
(c) Return on common stockholders' equity.
Ex. 189
Boyle Corporation had the following comparative current assets and current liabilities:
Current assets Cash
Short-term investments Accounts receivable Inventory
Prepaid expenses Total current assets
Current liabilities Accounts payable Salaries payable Income tax payable
Dec. 31, 2009
$ 20,000 40,000 55,000 110,000
35,000 $260,000
$140,000 40,000
20,000 $200,000
Dec. 31, 2008
$ 30,000 10,000 95,000 90,000
20,000 $245,000
$110,000 30,000
15,000 $155,000
During 2009, credit sales and cost of goods sold were $600,000 and $350,000,
respectively.
Instructions
Compute the following liquidity
measures for 2009: 1. Current
ratio.
2.
W
ork

ing
ca
pit
al.
3.
Ac
id-
tes
t
rati
o.
4.
Receiva
bles
turnover.
5.
Inventor
y
turnover.
Ex. 190
Selected data from Oates Company are presented below:
Total assets Average assets Net income Net sales
Average common stockholders' equity
$1,600,000 1,750,000 175,000 1,225,000 1,000,000
Instructions
Calculate the profitability ratios that can be computed from the above information.
Ex. 191
The following data are taken from the financial statements of Doyle Company:
Monthly average accounts receivable Net sales on account
Terms for all sales are 2/10, n/30
2009
$ 520,000 5,460,000
2008
$ 500,000 4,500,000
Instructions
(a) Compute the receivables turnover and the average collection period for both
years.
(b) What conclusion can an analyst draw about the management of the accounts
receivable?
—————
—————
FinancialStatement

Analysis 18 - 47
Ex. 192
State the effect of the following transactions on the current ratio. Use increase,
decrease, or no effect for your answer.
(a) Collection of an
accounts receivable. (b)
Declaration of cash
dividends.
(c) Additional stock is sold for cash.
(d) Short-term investments are
purchased for cash. (e)
Equipment is purchased for
cash.
(f) Inventory purchases are
made for cash. (g)
Accounts payable are
paid.
Ex. 193
The balance sheet for Farley Corporation at the end of the current year indicates the
following:
Bonds payable, 7% .............................................................. 6% Preferred stock, $100
par............................................... Common stock, $10
par .......................................................
$4,000,000 1,000,000 3,000,000
Income before income taxes was $1,120,000 and income taxes expense for
the current year amounted to $336,000. Cash dividends paid on common stock
were $300,000, and the common stock was selling for $45 per share at the
end of the year. There were no ownership changes during the year.
Instructions
Determine each of the following:
(a) times that bond
interest was earned. (b)
earnings per share
for common stock. (c)
price-earnings ratio.
Ex. 194
The income statement for Stoval Company for the year ended December
31, 2008 appears below.
Sales

Cost of goods sold Gross profit Expenses
Net income
$610,000
380,000 230,000
170,000* $ 60,000
*Includes $30,000 of interest expense and $18,000 of income tax expense.
—————————————
Ex.
194 (cont.) Additional information:
1. Common stock outstanding on January 1, 2008 was 40,000 shares. On July
1, 2008, 10,000 more shares were issued.
2. The market price of Stoval's stock was $15 at the end of 2008.
3. Cash dividends of $30,000 were paid, $6,000 of which were paid to preferred
stockholders.
Instructions
Compute the
following ratios for
2008: (a) earnings
per share.
(b) price-earnings.
(c) times interest earned.
$60,000 – $6,000 54,000
Ex. 195
Gumble Corporation had income from continuing operations of $300,000 for
the year ended December 31, 2008. It also had the following items (before
income taxes):
1. Extraordinary flood loss of $150,000.
2. Loss of $60,000 on discontinuance of a division.
All items are subject to income taxes at a 30% tax rate.
Instructions
Prepare a partial income statement, beginning with income from continuing
operations.
Ex. 196
Lawrenz Corporation gathered the following information for the fiscal year
ended December 31, 2008:
Sales $1,400,000 Extraordinary fire loss
Lawrenz Corporation is subject to a 30% income tax rate.
Instructions

Prepare a partial income statement, beginning with income before income taxes.
Ex. 197
Dennehy Corporation had the information listed below available in preparing an
income statement for the year ended December 31, 2008. All amounts are
before income taxes. Assume a 30% income tax rate for all items.
Sales
Expropriation of property by a foreign government (loss) Income from operation
of discontinued cement division Loss from disposal of cement division
Operating expenses
Gain on sale of equipment Cost of goods sold
$ 600,000 $(120,000) $ 100,000 $ (80,000) $ 125,000 $ 85,000 $
360,000
FinancialStatement
Analysis 18 - 51
Ex. 197 (cont.)
Instructions
Prepare a multiple-step income statement in good form which takes into
account intraperiod income tax allocation. Ignore EPS computations.
Ex. 198
Indicate whether the following items would be reported as an ordinary or an
extraordinary item in Logan Corporation's income statement.
(a) Loss
attributable to labor
strike. (b) Gain on
sale of fixed assets.
(c) Loss from fire. Logan is a
chemical company. (d) Loss
from sale of short-term
investments.
(e) Expropriation of property by a foreign government.
(f) Loss from tornado damage. Logan Corporation is located in the
Midwest's tornado alley. (g) Loss from government condemnation of
property through newly enacted law.
Ex. 199
Potter Company has income from continuing operations of $480,000 for
the year ended December 31, 2008. It also has the following items (before

considering income taxes):
(1) An extraordinary fire loss of $180,000.
(2) A gain of $110,000 on the discontinuance of a major segment.
(3) A correction of an error in last year's financial statement that
resulted in a $100,000 overstatement of 2007 net income.
Assume all items are subject to income taxes at a 30% tax rate.
Instructions
(a) Prepare an income statement, beginning with income from
continuing operations. (b) Indicate the statement presentation of
any item not included in (a) above.
COMPLETION STATEMENTS
200. In analyzing and interpreting financial statement information, three major
characteristics are generally evaluated: (1) , (2) , and (3) .
201. analysis, also called trend analysis, is a technique
for evaluating a percentage increase or decrease for a financial statement
item over a period of time.
202. Expressing each item within a financial statement as a percentage of a
base amount is called analysis.
203. The ratios used in evaluating a company's liquidity and short-term debt
paying ability that complement each other are the ratio and the ratio.
204. The receivables turnover is calculated by dividing by average
.
205. If inventory turnover is 5 times, and the average inventory was
$400,000, the cost of goods sold during the year was $ and
the days in inventory was
days.
206. Hansen Corporation had net income for the year of $300,000 and a profit
margin of 25%. If total average assets were $400,000, the asset turnover
ratio was times.
207. The ratio measures the percentage of earnings
distributed in the form of cash dividends.
208. The lower the to ratio, the more
equity "buffer" there is available to the creditors.
209. Times interest earned is calculated by dividing before

and by interest expense.
210. Discontinued operations refers to the disposal of a of a
business.
211. The two criteria necessary for an item to be classified as an extraordinary
item are that the transaction or event must be (1) and (2) .
212. A change in inventory methods during the year would be classified as a
change in
.
MATCHING
SET A
213. For each of the ratios listed below, indicate by the appropriate code
letter, whether it is a liquidity ratio, a profitability ratio, or a solvency
ratio.
Code:
L = Liquidity ratio
P = Profitability ratio S = Solvency ratio
1. Price-earnings ratio
2. Asset turnover
3. Receivables turnover
4. Earnings per share
5. Payout ratio
6. Current ratio
7. Acid-test ratio
8. Debt to total assets ratio
9. Times interest earned
10. Inventory turnover
SET B
214. Match the ratios with the appropriate ratio computation by entering the
appropriate letter in the space provided.

A. Current ratio B. Acid-test ratio C. Profit margin D. Asset turnover
E. Price-earnings ratio
F. Times interest earned G. Inventory turnover
H. Average collection period I. Days in inventory
J. Payout ratio
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Cost of
goods sold
Average
inventory
—————
Net
incom
e Net
sales
———————
Cash

dividen
ds Net
income
———————
Net
sales
Average
assets
————————
Current
assets
Current
liabilities
——————————
365 days
Receivables
turnover
——————————————
Market price per share of
stock Earnings per share
————————
365 days
Inventory
turnover
——————————————————————
Income before income taxes and interest
expense Interest expense
Cash + short-term investments + receivables (net)
Current liabilities
SHORT-ANSWER ESSAY QUESTIONS
S-A E 215
Horizontal and vertical analyses are analytical tools frequently used to
analyze financial statements. What type of information or insights can be
obtained by using these two techniques? Explain how the output of horizontal
analysis and vertical analysis can be compared to industry averages and/or
competitive companies.

S-A E 216
Manuel Mentirosa, the CEO of Mystical Products, is a successful entrepreneur
but a poor student of accounting. He asks you to explain to him, in a
memo, the bases of comparison for ratio analysis.
S-A E 217 (Ethics)
A trusted employee of Wilderness Tours was caught in the act of
embezzling funds. He confessed to earlier embezzlements, but retracted the
confession on the advice of his attorney. Over the course of the most recent
quarter, it has been determined that $20,000 was embezzled.
Wilderness Tours has suffered adverse publicity in the recent past because of
serious injury to five tourists that occurred during a two week "Winter Wilds
Adventure" tour. The company has therefore decided to avoid publicity and has
agreed to drop all charges against the embezzling employee. In return, the
employee has agreed to a notation of "Terminated—Not to be Rehired" to be
appended to his personnel file.
Required:
1. Who are the stakeholders in the decision not to prosecute?
2. Was it ethical for the company to decide not to prosecute? Explain.
S-A E 218 (Communication)
Kwik Express specializes in the overnight transportation of medical
equipment and laboratory specimens. The company has selected the following
information from its most recent annual report to be the subject of an
immediate press release.
• The financial statements are being released.
• Net income this year was $2.2 million. Last year's net income had
been $2.0 million. • The current ratio has changed to 2:1 from last
year's 1.5:1
• The debt/total assets ratio has changed to 4:5 from last year's 3:5
• The company expanded its truck fleet substantially by purchasing ten new
delivery vans. The company already had twelve delivery vans.
• The company is now the largest medical courier in the mid-Atlantic region.
Required:
Prepare a brief press release incorporating the information above. Include all
information. Think
carefully which information (if any) is good news for thetcompany, and which (if any)
is bad news.

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