Chapter 14 Financial Statem

Chapter 14 Financial Statement Analysis
1. How is horizontal analysis of financial statements accomplished?
A. By placing statement items on an after-tax basis.

B. By common-size statements.
C. By calculating both earnings per share and the price-earnings ratio.
D. By trend percentages.
2. The gross margin percentage is most likely to be used to assess which of the following?
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.
3. Earnings per common share will immediately increase as a result of which of the following?
A. The sale of additional common shares by the company.

B. An increase in the dividends paid to common shareholders by the company.
C. An increase in the company's net income.
D. The issuance of bonds by the company to finance construction of new buildings.
4. The market price of XYZ Company's common shares dropped from $25 to $21 per share. The
dividend paid per share remained unchanged. How would the company's dividend payout ratio
change?
A. Increase.
B. Decrease.
C. Remain unchanged.
D. Impossible to determine without more information.
5. An increase in the market price of a company's common shares will immediately affect which of
the following?
A. Dividend yield ratio.

B. Debt-to-equity ratio.
C. Earnings per common share.
D. Dividend payout ratio.
6. Which of the following is true regarding the calculation of return on total assets?
A. The numerator of the ratio consists only of net income.

B. The denominator of the ratio consists of the balance of total assets at the end of the period
under consideration.
C. The numerator of the ratio consists of net income plus interest expense multiplied by the tax
rate.
D. The numerator of the ratio consists of net income plus interest expense multiplied by one
minus the tax rate.
7. Financial leverage is negative in which of the following situations?
A. When the return on total assets is less than the rate of return on common shareholders' equity.
B. When total liabilities are less than shareholders' equity.
C. When total liabilities are less than total assets.
D. When the return on total assets is less than the rate of return demanded by creditors.
8. Which of the following is NOT a potential source of financial leverage?
A. Bonds payable.
B. Accounts payable.
C. Preferred shares.
D. Retained earnings.
9. If a company's bonds bear an interest rate of 8%, its tax rate is 30%, and its assets are
generating an after-tax return of 7%, what would be the leverage?
A. Positive.
B. Negative.
C. Neither positive nor negative.
D. Impossible to determine without knowing the return on common shareholders' equity.
10. A company's current ratio and acid-test ratios are both greater than 1.0 to 1. If obsolete inventory
is written off, what would be the effect?
A. A decrease in the acid-test ratio.

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

B. A decrease in both working capital and the current ratio.
C. A decrease in both the current ratio and the acid-test ratio.
D. An increase in both working capital and the current ratio.
12. Which one of the following would increase the working capital of a company?
A. Cash payment of payroll taxes payable.

B. Refinancing a short-term note payable with a two-year note payable.
C. Cash collection of accounts receivable.
D. Payment of a 20-year mortgage payable with cash.
13. What will be the effect of a sale of a piece of equipment at book value for cash?
A. An increase in working capital.

B. A decrease in working capital.
C. A decrease in the debt-to-equity ratio.
D. An increase in net income.
14. If a firm has a high current ratio but a low acid-test ratio, one can conclude which of the
following?
A. The firm has a large outstanding accounts receivable balance.

B. The firm has a large investment in inventory.
C. The firm has a large amount of current liabilities.
D. The firm's financial leverage is very high.
15. Desktop Co. presently has a current ratio of 1.2 to 1 and an acid-test ratio of 0.8 to 1. What will be
effect of prepaying next year's office rent of $50,000?
A. No effect on either the company's current ratio or its acid-test ratio.

B. No effect on the company's current ratio but will decrease its acid-test ratio.
C. A decrease in both the company's current ratio and its acid-test ratio.
D. An increase in both the company's current ratio and its acid-test ratio.
16. The Miller Company's current ratio is greater than 1.0 to 1. By paying off some of its accounts
payable using cash, what would be the effect on the company's current ratio?
A. An increase.
B. A decrease.
D. Impossible to determine from the information given.
17. Rahner Company has a current ratio of 1.75 to 1. This ratio will decrease if Rahner Company
engages in which of the following transactions?
A. Borrows cash using a six-month note.

B. Pays the taxes payable that have been a current liability.
C. Pays the following month's rent on the last day of the year.
D. Sells inventory for more than its cost.
18. Which of the following accounts would be included in the calculation of the acid-test ratio?
A. Option A
B. Option B
C. Option C
D. Option D
19. Last year, Allen Company's average collection period for accounts receivable was 40 days; this
year, it increased to 60 days. Which of the following would most likely account for this change?
A. A decrease in accounts receivable relative to sales.

B. A decrease in sales.
C. A relaxation of credit policies.
D. An increase in sales.
20. If a loss resulting from an earthquake is classified as extraordinary, which of the following
disclosures meets the minimum requirements in Canada?
A. Two earnings per share figures, one before and the other after the net of tax effect of the
extraordinary loss.
B. One earnings per share figure that ignores the extraordinary loss.
C. One earnings per share figure, net of the before-tax effect of the extraordinary loss.
D. One earnings per share figure, net of the after-tax effect of the extraordinary loss.
21. Which of the following events is unique to the calculation of fully diluted earnings per share?
A. An extraordinary gain or loss resulting from fire.

B. Issuance of common share.
C. Issuance of bonds that can be converted to common shares.
D. Issuance of participating and cumulative preferred shares.
22. The net accounts receivable for Andante Company were $150,000 at the beginning of the most
recent year and $190,000 at the end of the year. If the accounts receivable turnover for the year
was 8.5, and 15% of total sales were cash sales, what were the total sales for the year?
A. $1,445,000.
B. $1,500,000.
C. $1,700,000.
D. $1,900,000.
23. Selected data from Sheridan Corporation's year-end financial statements are presented below.
The difference between average and ending inventory is immaterial.
What were Sheridan's sales for the year?
A. $240,000.
B. $480,000.
C. $800,000.
D. $1,200,000.
24. Fulton Company's price-earnings ratio is 8.0, and the market price of its common shares is $32.
The company has 3,000 shares of preferred shares outstanding, with each share receiving a
dividend of $3. What is the earnings per common share?
A. $3.
B. $4.
C. $7.
D. $10.
25. Perlman Company had 100,000 common shares and 20,000 preferred shares at the end of the
year just completed. Preferred shareholders received total dividends of $140,000. Common
shareholders received total dividends of $210,000. If the dividend payout ratio for the year was
70%, what was the net income for the year?
A. $147,000.
B. $287,000.
C. $300,000.
D. $440,000.
26. Arlberg Company's net income last year was $250,000. The company had 150,000 common
shares and 80,000 preferred shares. There was no change in the number of common or preferred
shares outstanding during the year. The company declared and paid dividends last year of $1.30
per common share and $1.40 per preferred share. The earnings per common share was closest
to which of the following?
A. $0.37.
B. $0.92.
C. $1.67.
D. $2.41.
27. Arget Company's net income last year was $600,000. The company had 150,000 common shares
and 60,000 preferred shares. There was no change in the number of common or preferred shares
outstanding during the year. The company declared and paid dividends last year of $1.10 per
common share and $0.60 per preferred share. The earnings per common share was closest to
which of the following?
A. $2.90.
B. $3.76.
C. $4.00.
D. $4.24.
28. Arquandt Company's net income last year was $550,000. The company had 150,000 common
shares and 50,000 preferred shares 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 $1.20 per common share and $1.70 per preferred share. The earnings per common share
was closest to which of the following?
A. $2.47.
B. $3.10.
C. $3.67.
D. $4.23.
29. The following data have been taken from your company's financial records for the current year:
What is the price-earnings ratio?
A. 1.67 to 1.
B. 7.00 to 1.
C. 9.00 to 1.
D. 15.00 to 1.
30. The following data have been taken from your company's financial records for the current year:
A. 6.0 to 1.
B. 7.5 to 1.
C. 8.0 to 1.
D. 12.5 to 1.
31. Information concerning the common shares of Morris Company as of the end of the company's
fiscal year is presented below:
The dividend yield ratio is closest to which of the following?
A. 11.1%.
B. 33.3%.
C. 50.0%.
D. 120.0%.
32. Cameron Company had 50,000 common shares issued and outstanding during the year just
ended. The following information pertains to these shares:
The total dividend on common shares for the year was $400,000. What was Cameron Company's
dividend yield ratio for the year?
A. 8.89%.
B. 9.41%.
C. 11.43%.
D. 20.00%.
33. Braverman Company's net income last year was $75,000, and its interest expense was $10,000.
Total assets at the beginning of the year were $650,000, and total assets at the end of the year
were $610,000. The company's income tax rate was 30%. The company's return on total assets
for the year was closest to which of the following?
A. 11.9%.
B. 12.4%.
C. 13.0%.
D. 13.5%.
34. Brachlan Company's net income last year was $80,000, and its interest expense was $20,000.
A. 12.5%.
B. 13.4%.
C. 14.7%.
D. 15.6%.
35. Brawer Company's net income last year was $55,000, and its interest expense was $20,000.
A. 8.6%.
B. 9.5%.
C. 10.8%.
D. 11.7%.
36. The total assets of the Philbin Company on January 1 were $2.3 million and on December 31
were $2.5 million. Net income for the year was $188,000. Dividends for the year were $75,000,
interest expense was $70,000, and the tax rate was 30%. The return on total assets for the year
was closest to which of the following?
A. 6.8%.
B. 9.5%.
C. 9.9%.
D. 10.8%.
37. Selected financial data for Irvington Company appear below:
During the year, the company paid dividends of $10,000 on its preferred shares. The company's
net income for the year was $120,000. The company's return on common shareholders' equity for
the year was closest to which of the following?
A. 17%.
B. 19%.
C. 23%.
D. 25%.
38. Crasler Company's net income last year was $100,000. The company paid dividends on preferred
shares of $20,000, and its average common shareholders' equity was $580,000. The company's
return on common shareholders' equity for the year was closest to which of the following?
A. 3.4%.
B. 13.8%.
C. 17.2%.
D. 20.7%.
39. Crawler Company's net income last year was $80,000. The company paid dividends on preferred
shares of $10,000, and its average common shareholders' equity was $400,000. The company's
return on common shareholders' equity for the year was closest to which of the following?
A. 2.5%.
B. 17.5%.
C. 20.0%.
D. 22.5%.
40. Crabtree Company's net income last year was $50,000. The company paid dividends on
preferred shares of $20,000, and its average common shareholders' equity was $440,000. The
company's return on common shareholders' equity for the year was closest to which of the
following?
A. 4.5%.
B. 6.8%.
C. 11.4%.
D. 15.9%.
41. The following account balances have been provided for the end of the most recent year:
What is the book value per common share?
A. $20.
B. $22.
C. $25.
D. $28.
42. Dratif Company's working capital is $33,000, and its current liabilities are $80,000. The
company's current ratio is closest to which of the following?
A. 0.41 to 1.
B. 0.59 to 1.
C. 1.41 to 1.
D. 3.42 to 1.
43. Dragin Company's working capital is $36,000, and its current liabilities are $61,000. The
A. 0.41 to 1.
B. 0.59 to 1.
C. 1.59 to 1.
D. 2.69 to 1.
44. Draban Company's working capital is $38,000, and its current liabilities are $59,000. The
A. 0.36 to 1.
B. 0.64 to 1.
C. 1.64 to 1.
D. 2.55 to 1.
45. At the end of the year just completed, Orem Company's total current liabilities were $75,000, and
its total long-term liabilities were $225,000. Working capital at year-end was $100,000. If the
company's debt-to-equity ratio is 0.30 to 1, total long-term assets must equal which of the
following?
A. $1,000,000.
B. $1,125,000.
C. $1,225,000.
D. $1,300,000.
46. Starrs Company has current assets of $300,000 and current liabilities of $200,000. Which of the
following transactions would increase its working capital?
A. Prepayment of $50,000 of next year's rent.

B. Refinancing $50,000 of short-term debt with long-term debt.
C. Acquisition of land valued at $50,000 by issuing new common shares.
D. Purchase of $50,000 of marketable securities for cash.
47. 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 which of
the following?
A. 1.20 times.
B. 1.67 times.
C. 2.33 times.
D. 2.40 times.
48. Harwichport Company has a current ratio of 3.5 to 1 and an acid-test ratio of 2.8 to 1. Current
assets equal $175,000, of which $5,000 consists of prepaid expenses. What must be Harwichport
Company's inventory?
A. $30,000.
B. $35,000.
C. $40,000.
D. $50,000.
49. Ben Company has the following data for the year just ended:
What were Ben Company's current liabilities?
A. $35,000.
B. $43,750.
C. $50,400.
D. $63,000.
50. Marcy Corporation's current ratio is currently 1.75 to 1. The firm's current ratio cannot fall below
1.5 to 1 without violating agreements with its bondholders. If current liabilities are presently $250
million, what is the maximum new short-term debt that can be issued to finance an equivalent
amount of inventory expansion?
A. $41.67 million.
B. $62.50 million.
C. $125.00 million.
D. $375.00 million.
51. Eral Company has $17,000 in cash, $3,000 in marketable securities, $36,000 in current
receivables, $24,000 in inventories, and $45,000 in current liabilities. The company's acid-test
(quick) ratio is closest to which of the following?
A. 0.44 to 1.
B. 0.80 to 1.
C. 1.24 to 1.
D. 1.78 to 1.
52. Erambo Company has $11,000 in cash, $6,000 in marketable securities, $27,000 in current
A. 0.53 to 1.
B. 0.75 to 1.
C. 0.86 to 1.
D. 1.02 to 1.
53. Erack Company has $15,000 in cash, $4,000 in marketable securities, $38,000 in current
A. 0.95 to 1.
B. 1.33 to 1.
C. 1.43 to 1.
D. 1.88 to 1.
54. Eastham Company's accounts receivable were $600,000 at the beginning of the year and
$800,000 at the end of the year. Cash sales for the year were $300,000. The accounts receivable
turnover for the year was 5 times. What were Eastham Company's total sales for the year?
A. $800,000.
B. $1,300,000.
C. $3,300,000.
D. $3,800,000.
55. Frantic 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 $16,000. The company's
accounts receivable turnover was closest to which of the following?
A. 5.00 times.
B. 8.13 times.
C. 10.00 times.
D. 13.00 times.
56. Fracus Company had $100,000 in sales on account last year. The beginning accounts receivable
A. 3.33 times.
B. 6.25 times.
C. 6.67 times.
D. 7.14 times.
57. Frabine Company had $150,000 in sales on account last year. The beginning accounts receivable
A. 4.69 times.
B. 8.33 times.
C. 9.38 times.
D. 10.71 times.
58. Granger Company had $180,000 in sales on account last year. The beginning accounts
receivable balance was $10,000, and the ending accounts receivable balance was $18,000. The
company's average collection period (age of receivables) was closest to which of the following?
A. 20.28 days.
B. 28.39 days.
C. 36.50 days.
D. 56.78 days.
59. Grapp Company had $130,000 in sales on account last year. The beginning accounts receivable
average collection period (age of receivables) was closest to which of the following?
A. 44.92 days.
B. 47.73 days.
C. 50.54 days.
D. 95.46 days.
60. Grave Company had $150,000 in sales on account last year. The beginning accounts receivable
average collection period (age of receivables) was closest to which of the following?
A. 24.33 days.
B. 29.20 days.
C. 34.07 days.
D. 58.40 days.
61. Harris Company, a retailer, had cost of goods sold of $290,000 last year. The beginning inventory
balance was $26,000, and the ending inventory balance was $24,000. The company's inventory
turnover was closest to which of the following?
A. 5.80 times.
B. 11.15 times.
C. 11.60 times.
D. 12.08 times.
62. Harton Company, a retailer, had cost of goods sold of $250,000 last year. The beginning
inventory balance was $20,000, and the ending inventory balance was $22,000. The company's
inventory turnover was closest to which of the following?
A. 5.95 times.
B. 11.36 times.
C. 11.90 times.
D. 12.50 times.
63. Harker Company, a retailer, had cost of goods sold of $160,000 last year. The beginning
inventory turnover was closest to which of the following?
A. 3.48 times.
B. 6.15 times.
C. 6.96 times.
D. 8.00 times.
64. Irawaddy Company, a retailer, had cost of goods sold of $230,000 last year. The beginning
average sale period (turnover in days) was closest to which of the following?
A. 34.91 days.
B. 36.50 days.
C. 38.09 days.
D. 73.00 days.
65. Irappa Company, a retailer, had cost of goods sold of $170,000 last year. The beginning inventory
balance was $28,000, and the ending inventory balance was $26,000. The company's average
sale period (turnover in days) was closest to which of the following?
A. 55.82 days.
B. 57.97 days.
C. 60.12 days.
D. 115.94 days.
66. Irally Company, a retailer, had cost of goods sold of $150,000 last year. The beginning inventory
balance was $26,000, and the ending inventory balance was $24,000. The company's average
sale period (turnover in days) was closest to which of the following?
A. 58.40 days.
B. 60.83 days.
C. 63.27 days.
D. 121.67 days.
67. Last year, Dunn Company purchased $1,920,000 of inventory. The cost of good sold was
$1,800,000, and the ending inventory was $360,000. What was the inventory turnover?
A. 5.0 times.
B. 5.3 times.
C. 6.0 times.
D. 6.4 times.
68. During the year just ended, James Company purchased $425,000 of inventory. The inventory
balance at the beginning of the year was $175,000. If the cost of goods sold for the year was
$450,000, what was the inventory turnover for the year?
A. 2.57 times.
B. 2.62 times.
C. 2.77 times.
D. 3.00 times.
69. Last year, Javer Company had a net income of $200,000, income tax expense of $74,000, and
interest expense of $20,000. The company's times interest earned was closest to which of the
following?
A. 5.30 times.
B. 10.00 times.
C. 11.00 times.
D. 14.70 times.
70. Last year, Jabber Company had a net income of $180,000, income tax expense of $62,000, and
following?
A. 4.90 times.
B. 9.00 times.
C. 10.00 times.
D. 13.10 times.
71. Last year, Jackson Company had a net income of $160,000, income tax expense of $66,000, and
following?
A. 3.70 times.
B. 8.00 times.
C. 9.00 times.
D. 12.30 times.
72. The times interest earned ratio of McHugh Company was 4.5 times. The interest expense for the
year was $20,000, and the company's tax rate was 40%. What was the company's net income?
A. $22,000.
B. $42,000.
C. $54,000.
D. $66,000.
73. Mariah Company had a times interest earned ratio of 3.0 for the year just ended. The company's
tax rate was 40%, and the interest expense for the year was $25,000. What was Mariah
Company's after-tax net income?
A. $25,000.
B. $30,000.
C. $50,000.
D. $75,000.
74. PFM Company has sales of $210,000, interest expense of $8,000, a tax rate of 30%, and a net
profit after tax of $35,000. What is PFM Company's times interest earned ratio?
A. 4.375 times.
B. 5.375 times.
C. 7.250 times.
D. 15.500 times.
75. Karma Company has total assets of $190,000 and total liabilities of $90,000. The company's
debt-to-equity ratio is closest to which of the following?
A. 0.32 to 1.
B. 0.47 to 1.
C. 0.53 to 1.
D. 0.90 to 1.
76. Karl Company has total assets of $170,000 and total liabilities of $110,000. The company's debt-
to-equity ratio is closest to which of the following?
A. 0.33 to 1.
B. 0.39 to 1.
C. 0.65 to 1.
D. 1.83 to 1.
77. Krakov Company has total assets of $170,000 and total liabilities of $80,000. The company's
A. 0.32 to 1.
B. 0.47 to 1.
C. 0.53 to 1.
D. 0.89 to 1.
78. McGraw Electronics showed Bonds Payable of $7,500,000 in 2011 and $8,000,000 in 2010 on its
comparative Balance Sheet. The percentage change is closest to:
A. 6.6%.
B. (6.6)%.
C. 6.3%.
D. (6.3)%.
79. Martin Company reported an extraordinary after-tax loss of $180,000, resulting from an
earthquake. What must have been the before-tax loss if Martin's marginal income tax rate was
40%?
A. $72,000.
B. $108,000.
C. $300,000.
D. $450,000.
Selected financial data for Barnstable Company appear below:
80. For Year 2, what was the gross margin as a percentage of sales?
A. 5%.
B. 10%.
C. 40%.
D. 60%.
81. For Year 2, what was the net income before taxes as a percentage of sales?
A. 3%.
B. 5%.
C. 8%.
D. 10%.
82. For Year 2, what was the net operating income as a percentage of sales?
A. 8%.
B. 10%.
C. 40%.
D. 70%.
83. Between Year 1 and Year 2, what happened to the times interest earned?
A. It increased.
B. It decreased.
C. It remained the same.
D. The effect cannot be determined from the data provided.
Financial statements for Larned Company appear below:
Shareholders' Equity:
Total dividends during Year 2 were $263,000, of which $12,000 were for preferred shares. The
market price of a common share on December 31, Year 2 was $160.
84. Larned Company's earnings per common share for Year 2 was closest to which of the following?
A. $11.03.
B. $18.39.
C. $19.06.
D. $27.22.
85. Larned Company's price-earnings ratio on December 31, Year 2 was closest to which of the
following?
A. 5.88.
B. 8.40.
C. 8.70.
D. 14.50.
86. Larned Company's dividend payout ratio for Year 2 was closest to which of the following?
A. 28.5%.
B. 47.4%.
C. 75.8%.
D. 76.7%.
87. Larned Company's dividend yield ratio on December 31, Year 2 was closest to which of the
following?
A. 5.5%.
B. 8.3%.
C. 8.7%.
D. 9.1%.
88. Larned Company's return on total assets for Year 2 was closest to which of the following?
A. 15.8%.
B. 17.2%.
C. 17.8%.
D. 18.6%.
89. Larned Company's return on common shareholders' equity for Year 2 was closest to which of the
following?
A. 26.9%.
B. 27.9%.
C. 29.8%.
D. 30.9%.
90. Larned Company's book value per share at the end of Year 2 was closest to which of the
following?
A. $10.00.
B. $16.11.
C. $63.89.
D. $70.56.
Financial statements for Laroche Company appear below:
Total dividends during Year 2 were $166,000, of which $10,000 were preferred dividends. The
91. Laroche Company's earnings per common share for Year 2 was closest to which of the
following?
A. $3.71.
B. $10.67.
C. $11.08.
D. $15.83.
92. Laroche Company's price-earnings ratio on December 31, Year 2 was closest to which of the
following?
A. 9.47.
B. 13.53.
C. 14.06.
D. 40.43.
93. Laroche Company's dividend payout ratio for Year 2 was closest to which of the following?
A. 22.9%.
B. 38.0%.
C. 60.9%.
D. 62.4%.
94. Laroche Company's dividend yield ratio on December 31, Year 2 was closest to which of the
following?
A. 1.6%.
B. 4.1%.
C. 4.3%.
D. 4.6%.
95. Laroche Company's return on total assets for Year 2 was closest to which of the following?
A. 13.0%.
B. 14.1%.
C. 14.6%.
D. 15.2%.
96. Laroche Company's return on common shareholders' equity for Year 2 was closest to which of the
following?
A. 21.2%.
B. 22.0%.
C. 23.1%.
D. 24.0%.
97. Laroche Company's book value per share at the end of Year 2 was closest to which of the
following?
A. $10.00.
B. $17.50.
C. $48.33.
D. $52.50.
Financial statements for Larosa Company appear below:
98. Larosa Company's earnings per common share for Year 2 was closest to which of the following?
A. $3.09.
B. $9.41.
C. $9.86.
D. $14.09.
99. Larosa Company's price-earnings ratio on December 31, Year 2 was closest to which of the
following?
A. 4.97.
B. 7.10.
C. 7.44.
D. 22.66.
100.Larosa Company's dividend payout ratio for Year 2 was closest to which of the following?
A. 6.5%.
B. 10.6%.
C. 17.9%.
D. 21.7%.
101.Larosa Company's dividend yield ratio on December 31, Year 2 was closest to which of the
following?
A. 1.0%.
B. 1.8%.
C. 2.4%.
D. 3.1%.
102.Larosa Company's return on total assets for Year 2 was closest to which of the following?
A. 7.6%.
B. 8.7%.
C. 9.2%.
D. 9.9%.
103.Larosa Company's return on common shareholders' equity for Year 2 was closest to which of the
following?
A. 12.0%.
B. 12.6%.
C. 12.7%.
D. 13.4%.
104.Larosa Company's book value per share at the end of Year 2 was closest to which of the
following?
A. $10.00.
B. $21.36.
C. $77.73.
D. $82.27.
The Dawson Corporation projects the following for the upcoming year:
105.What is the expected dividend per common share?
A. $1.80.
B. $2.10.
C. $2.70.
D. $3.90.
106.If Dawson Corporation's common shares have a price-earnings ratio of eight, what would be the
market price per share, rounded to the nearest dollar?
A. $56.
B. $68.
C. $72.
D. $125.
Financial statements for Orange Company appear below:
market price of a share of common stock on December 31, Year 2 was $100.
107.Orange Company's earnings per common share for Year 2 was closest to which of the following?
A. $2.27.
B. $7.23.
C. $7.64.
D. $10.91.
108.Orange Company's dividend yield ratio on December 31, Year 2 was closest to which of the
following?
A. 1.1%.
B. 2.7%.
C. 3.1%.
D. 3.5%.
109.Orange Company's return on total assets for Year 2 was closest to which of the following?
A. 14.5%.
B. 15.5%.
C. 15.9%.
D. 16.5%.
110.Orange Company's current ratio at the end of Year 2 was closest to which of the following?
A. 0.44 to 1.
B. 0.55 to 1.
C. 1.24 to 1.
D. 1.71 to 1.
111.Orange Company's accounts receivable turnover for Year 2 was closest to which of the
following?
A. 11.0 times.
B. 12.4 times.
C. 15.7 times.
D. 17.7 times.
112.Orange Company's average sale period (turnover in days) for Year 2 was closest to which of the
following?
A. 20.6 days.
B. 23.2 days.
C. 29.5 days.
D. 33.2 days.
113.Orange Company's times interest earned for Year 2 was closest to which of the following?
A. 11.2 times.
B. 16.0 times.
C. 17.0 times.
D. 28.3 times.
Financial statements for Orantes Company appear below:
114.Orantes Company's earnings per common share for Year 2 was closest to which of the
following?
A. $3.61.
B. $14.45.
C. $15.05.
D. $21.50.
115.Orantes Company's dividend yield ratio on December 31, Year 2 was closest to which of the
following?
A. 0.8%.
B. 2.8%.
C. 3.0%.
D. 3.2%.
116.Orantes Company's return on total assets for Year 2 was closest to which of the following?
A. 11.4%.
B. 12.3%.
C. 12.7%.
D. 13.1%.
117.Orantes Company's current ratio at the end of Year 2 was closest to which of the following?
A. 0.35 to 1.
B. 0.54 to 1.
C. 1.19 to 1.
D. 1.50 to 1.
118.Orantes Company's accounts receivable turnover for Year 2 was closest to which of the
following?
A. 10.3 times.
B. 13.5 times.
C. 14.8 times.
D. 19.3 times.
119.Orantes Company's average sale period (turnover in days) for Year 2 was closest to which of the
following?
A. 18.9 days.
B. 24.7 days.
C. 27.1 days.
D. 35.5 days.
120.Orantes Company's times interest earned for Year 2 was closest to which of the following?
A. 10.0 times.
B. 14.3 times.
C. 15.3 times.
D. 25.3 times.
Financial statements for Oratz Company appear below:
121.Oratz Company's earnings per common share for Year 2 was closest to which of the following?
A. $1.74.
B. $19.61.
C. $20.25.
D. $28.93.
122.Oratz Company's dividend yield ratio on December 31, Year 2 was closest to which of the
following?
A. 0.5%.
B. 5.2%.
C. 5.5%.
D. 5.7%.
123.Oratz Company's return on total assets for Year 2 was closest to which of the following?
A. 8.9%.
B. 10.0%.
C. 10.5%.
D. 11.1%.
124.Oratz Company's current ratio at the end of Year 2 was closest to which of the following?
A. 0.51 to 1.
B. 0.57 to 1.
C. 1.23 to 1.
D. 1.26 to 1.
125.Oratz Company's accounts receivable turnover for Year 2 was closest to which of the following?
A. 6.3 times.
B. 8.8 times.
C. 9.1 times.
D. 12.5 times.
126.Oratz Company's average sale period (turnover in days) for Year 2 was closest to which of the
following?
A. 29.1 days.
B. 40.3 days.
C. 41.6 days.
D. 57.6 days.
127.Oratz Company's times interest earned for Year 2 was closest to which of the following?
A. 6.3 times.
B. 9.0 times.
C. 10.0 times.
D. 16.3 times.
Selected data for the MK Company follow:
128.What was the price-earnings ratio for the prior year?
A. 11.1 to 1.
B. 12.2 to 1.
C. 14.3 to 1.
D. 15.8 to 1.
129.What is the dividend yield ratio on common shares for the current year, rounded to the nearest
tenth of a percent?
A. 5.2%
B. 6.6%.
C. 6.8%.
D. 7.4%.
130.What is MK Company's return on common shareholders' equity for the current year, rounded to
the nearest tenth of a percent?
A. 8.2%.
B. 10.2%.
C. 10.9%.
D. 13.6%.
131.What was the dividend payout ratio for the prior year?
A. 55.6%.
B. 85.7%.
C. 114.3%.
D. 140.0%.
132.What is the book value per share for the current year, rounded to the nearest cent?
A. $15.14.
B. $18.31.
C. $20.14.
D. $22.18.
Lisa Inc.'s balance sheet appears below:
The company's sales for the year were $300,000, its cost of goods sold was $220,000, and its net
income was $35,000. All sales were on credit. Dividends paid on preferred shares for the year
were $5,000.
133.Lisa Inc.'s acid-test (quick) ratio at December 31, Year 2, was closest to which of the following?
A. 0.6 to 1.
B. 1.1 to 1.
C. 1.8 to 1.
D. 2.0 to 1.
134.Lisa Inc.'s accounts receivable turnover for Year 2 was closest to which of the following?
A. 4.9 times.
B. 5.9 times.
C. 6.7 times.
D. 8.0 times.
135.Lisa Inc.'s inventory turnover for Year 2 was closest to which of the following?
A. 3.7 times.
B. 4.0 times.
C. 4.4 times.
D. 5.0 times.
136.Lisa Inc.'s book value per common share at December 31, Year 2, was closest to which of the
following?
A. $10.00.
B. $11.25.
C. $18.33.
D. $19.33.
137.Lisa Inc.'s return on common shareholders' equity for Year 2 was closest to which of the
following?
A. 7.8%.
B. 10.6%.
C. 10.9%.
D. 12.4%.
Financial statements for Marcell Company appear below:
138.Marcell Company's working capital (in thousands of dollars) at the end of Year 2 was closest to
A. $20.
B. $470.
C. $520.
D. $1,240.
139.Marcell Company's current ratio at the end of Year 2 was closest to which of the following?
A. 0.42 to 1.
B. 0.48 to 1.
C. 1.04 to 1.
D. 1.22 to 1.
140.Marcell Company's acid-test (quick) ratio at the end of Year 2 was closest to which of the
following?
A. 0.33 to 1.
B. 0.60 to 1.
C. 0.74 to 1.
D. 1.35 to 1.
141.Marcell Company's accounts receivable turnover for Year 2 was closest to which of the
following?
A. 9.9 times.
B. 14.2 times.
C. 16.2 times.
D. 23.2 times.
142.Marcell Company's average collection period (age of receivables) for Year 2 was closest to which
of the following?
A. 15.7 days.
B. 22.6 days.
C. 25.8 days.
D. 36.9 days.
143.Marcell Company's inventory turnover for Year 2 was closest to which of the following?
A. 9.9 times.
B. 14.2 times.
C. 16.2 times.
D. 23.2 times.
144.Marcell Company's average sale period (turnover in days) for Year 2 was closest to which of the
following?
A. 15.7 days.
B. 22.6 days.
C. 25.8 days.
D. 36.9 days.
Financial statements for March Company appear below:
145.March Company's working capital (in thousands of dollars) at the end of Year 2 was closest to
A. $180.
B. $520.
C. $580.
D. $1,290.
146.March Company's current ratio at the end of Year 2 was closest to which of the following?
A. 0.47 to 1.
B. 0.49 to 1.
C. 1.27 to 1.
D. 1.45 to 1.
147.March Company's acid-test (quick) ratio at the end of Year 2 was closest to which of the
following?
A. 0.39 to 1.
B. 0.53 to 1.
C. 0.95 to 1.
D. 1.90 to 1.
148.March Company's accounts receivable turnover for Year 2 was closest to which of the following?
A. 7.2 times.
B. 7.5 times.
C. 10.4 times.
D. 10.7 times.
149.March Company's average collection period (age of receivables) for Year 2 was closest to which
of the following?
A. 34.0 days.
B. 35.1 days.
C. 48.9 days.
D. 50.5 days.
150.March Company's inventory turnover for Year 2 was closest to which of the following?
A. 7.2 times.
B. 7.5 times.
C. 10.4 times.
D. 10.7 times.
151.March Company's average sale period (turnover in days) for Year 2 was closest to which of the
following?
A. 34.0 days.
B. 35.1 days.
C. 48.9 days.
D. 50.5 days.
Financial statements for Marcial Company appear below:
152.Marcial Company's working capital (in thousands of dollars) at the end of Year 2 was closest to
A. $200.
B. $440.
C. $570.
D. $1,360.
153.Marcial Company's current ratio at the end of Year 2 was closest to which of the following?
A. 0.35 to 1.
B. 0.38 to 1.
C. 1.22 to 1.
D. 1.83 to 1.
154.Marcial Company's acid-test (quick) ratio at the end of Year 2 was closest to which of the
following?
A. 0.25 to 1.
B. 0.76 to 1.
C. 1.04 to 1.
D. 1.32 to 1.
155.Marcial Company's accounts receivable turnover for Year 2 was closest to which of the
following?
A. 8.4 times.
B. 10.4 times.
C. 12.1 times.
D. 14.8 times.
156.Marcial Company's average collection period (age of receivables) for Year 2 was closest to which
of the following?
A. 24.6 days.
B. 30.2 days.
C. 35.2 days.
D. 43.2 days.
157.Marcial Company's inventory turnover for Year 2 was closest to which of the following?
A. 8.4 times.
B. 10.4 times.
C. 12.1 times.
D. 14.8 times.
158.Marcial Company's average sale period (turnover in days) for Year 2 was closest to which of the
following?
A. 24.6 days.
B. 30.2 days.
C. 35.2 days.
D. 43.2 days.
The following financial data have been taken from the records of CPZ Enterprises.
159.What is the current ratio for CPZ Enterprises?
A. 1.68.
B. 2.14.
C. 5.00.
D. 5.29.
160.What is the company's acid-test (quick) ratio?
A. 0.68.
B. 1.68.
C. 2.14.
D. 2.31.
161.What will happen to the ratios below if CPZ Enterprises uses cash to pay 50% of its accounts
payable?
A. Option A
B. Option B
C. Option C
D. Option D
At December 31, Curry Co. had the following balances in selected asset accounts:
Curry had current liabilities of $1,000 at December 31, Year 2, and credit sales of $7,200 for Year
2.
162.Curry Company's acid-test (quick) ratio at December 31, Year 2 was closest to which of the
following?
A. 1.5 to 1.
B. 1.6 to 1.
C. 2.0 to 1.
D. 2.1 to 1.
163.Curry Company's average collection period (age of receivables) for Year 2 was closest to which
of the following?
A. 30.4 days.
B. 40.6 days.
C. 50.7 days.
D. 60.8 days.
Financial statements for Narita Company appear below:
164.Narita Company's times interest earned for Year 2 was closest to which of the following?
A. 10.3 times.
B. 14.7 times.
C. 15.7 times.
D. 26.0 times.
165.Narita Company's debt-to-equity ratio at the end of Year 2 was closest to which of the following?
A. 0.17 to 1.
B. 0.25 to 1.
C. 0.42 to 1.
D. 0.58 to 1.
Financial statements for Narlock Company appear below:

166.Narlock Company's times interest earned for Year 2 was closest to which of the following?
A. 5.0 times.
B. 7.2 times.
C. 8.2 times.
D. 13.6 times.
167.Narlock Company's debt-to-equity ratio at the end of Year 2 was closest to which of the
following?
A. 0.32 to 1.
B. 0.38 to 1.
C. 0.70 to 1.
D. 1.09 to 1.
Financial statements for Narumi Company appear below:
168.Narumi Company's times interest earned for Year 2 was closest to which of the following?
A. 4.6 times.
B. 6.6 times.
C. 7.6 times.
D. 12.4 times.
169.Narumi Company's debt-to-equity ratio at the end of Year 2 was closest to which of the
following?
A. 0.42 to 1.
B. 0.56 to 1.
C. 0.98 to 1.
D. 2.07 to 1.
170.In determining whether a company's financial condition is improving or deteriorating over time,
vertical analysis of financial statement data would be more useful than horizontal analysis.
True False
171.Trend percentages state several years' financial data in terms of a base year. For example, sales
for every year would be stated as a percentage of the sales in the base year.
True False
172.The gross margin percentage is calculated taking the difference between sales and cost of goods
and then dividing the result by sales.
True False
173.Common-size statements are particularly useful when comparing data from different companies.
True False
174.The price-earnings ratio is determined by dividing the price of a product by its profit margin.
True False
175.The price-earnings ratio is calculated by dividing the market price per share by the current
earnings per share.
True False
176.When calculating the return on total assets, the after-tax effect of interest expense must be
subtracted from net income.
True False
177.If the assets in which funds are invested have a rate of return lower than the fixed rate of return
paid to the supplier of the funds, then financial leverage is positive.
True False
178.If the market value of a common share is greater than its book value, the common share is
probably overpriced.
True False
179.To put the working capital figure into perspective it must be supplemented with other short-term
ratios.
True False
180.If a company has a current ratio greater than 1.0 to 1, repaying a short-term note payable will
increase the current ratio.
True False
181.The acid-test ratio is a test of the quality of accounts receivable—in other words, whether they
are likely to be collected.
True False
182.When calculating the acid-test ratio, prepaid expenses are ignored.
True False
183.Only credit sales (i.e., sales on account) are included in the computation of the accounts
receivable turnover.
True False
184.The inventory turnover ratio is equal to the average inventory balance divided by the cost of
goods sold.
True False
185.A positive fully diluted earnings per share can sometimes exceed basic (undiluted) earnings per
share.
True False
186.M. K. Berry is the managing director of CE Ltd. a small, family-owned company that
manufactures cutlery. His company belongs to a trade association that publishes a monthly
magazine. The latest issue of the magazine contains a very brief article based on the analysis of
the accounting statements published by the 40 companies that manufacture this type of product.
The article contains the following table:
CE Ltd's latest financial statements are as follows:
The country in which the company operates has no corporate income tax. No dividends were
paid during the year. All sales are on account.
Required:
a) Calculate each of the ratios listed in the magazine article for this year for CE, and comment
briefly on CE Ltd.'s performance in comparison to the industry averages.
b) Explain why it could be misleading to compare CE Ltd.'s ratios with those taken from the
article.
187.Comparative financial statements for Springville Company for the last two years appear below.
The market price of Springville's common shares was $25 per share on December 31, Year 2.
During Year 2, dividends of $2,000,000 were paid to preferred shareholders and $10,000,000 to
common shareholders.
Required:
Calculate the following for Year 2:
a) Dividend payout ratio.

b) Dividend yield ratio.
c) Price-earnings ratio.
d) Accounts receivable turnover.
e) Inventory turnover.
f) Return on total assets.
g) Return on common shareholders' equity.
h) Was financial leverage positive or negative for the year? Explain.
188.Financial statements for Praeger Company appear below:
Dividends during Year 2 totalled $45,000, of which $10,000 were preferred dividends. The market
price of a common share on December 31, Year 2 was $30.
The preferred shares are convertible to common shares on the basis of 2 common shares for
each preferred share.
Required:
a) Basic earnings per common share.

b) Fully diluted earnings per common share.
c) Price-earnings ratio (use basic earnings per share).
d) Dividend payout ratio (use basic earnings per share).
e) Dividend yield ratio.
h) Book value per share.
i) Working capital.
j) Current ratio.
k) Acid-test (quick) ratio.
l.) Accounts receivable turnover.
m) Average collection period (age of receivables).
n) Inventory turnover.
o) Average sale period (turnover in days).
p) Times interest earned.
q) Debt-to-equity ratio.
189.Financial statements for AAR Company appear below:
AAR Company paid dividends of $3.15 per share during the year. The market price of the
company's common shares at December 31 was $63 per share. Total assets at the beginning of
the year were $1,100,000, and total shareholders' equity was $725,000. The balance of accounts
receivable at the beginning of the year was $150,000. The balance in inventory at the beginning
of the year was $250,000.
Required:
Calculate the following:
a) Current ratio.
b) Acid-test (quick) ratio.
c) Average collection period (age of receivables).
d) Inventory turnover.
e) Times interest earned.
f) Debt-to-equity ratio.
g) Dividend payout ratio.
h) Price-earnings ratio.
i) Return on total assets.
j) Return on common shareholders' equity.
k) Was financial leverage positive or negative for the year? Explain.
190.Financial statements for Qiang Company appear below:
Total dividends paid during Year 2 were $61,000, of which $12,000 were for preferred shares.
The market price of a common share on December 31, Year 2 was $50.
The preferred shares are convertible to common shares on the basis of four common shares for
Required:

d) Dividend yield ratio.
e) Return on total assets.
f) Return on common shareholders' equity.
g) Book value per share.
191.Financial statements for Qualle Company appear below:
Total dividends paid during Year 2 were $149,000, of which $10,000 were preferred dividends.
Required:
a) Earnings per share.

b) Price-earnings ratio.
c) Dividend yield ratio.
d) Return on total assets.
e) Return on common shareholders' equity.
f) Book value per share.
192.Financial statements for Quade Company appear below:
Required:

193.Condensed financial statements of Miller Company at the beginning and at the end of the current
year are given below:
The company paid total dividends of $15,000 during the year, of which $5,000 were to preferred
shareholders. The market price of a common share at the end of the year was $30.
Required:
On the basis of the information given above, fill in the blanks with the appropriate figures.
Example: The current ratio at the end of the current year would be computed by dividing
$270,000 by $100,000.
a) The acid-test (quick) ratio at the end of the current year would be computed by dividing
_______________ by ________________.
b) The inventory turnover for the year would be computed by dividing _______________ by
________________.
c) The debt-to-equity ratio at the end of the current year would be computed by dividing
_______________ by ________________.
d) The earnings per common share would be computed by dividing _______________ by
________________.
e) The accounts receivable turnover for the year would be computed by dividing
_______________ by ________________.
f) The times interest earned for the year would be computed by dividing _______________ by
________________.
g) The return on common shareholders' equity for the year would be computed by dividing
_______________ by ________________.
h) The dividend yield would be computed by dividing _______________ by ________________.
194.Shelzo Inc., a manufacturer of construction equipment is considering the purchase of one of its
suppliers, Raritron Industries. The purchase has been given preliminary approval by Shelzo's
board of directors, and several discussions have taken place between the management of both
companies. Raritron has submitted financial data for the past several years. Shelzo's controller
has analyzed Raritron's financial statements and prepared the following ratio analysis comparing
Raritron's performance with the industry averages.
Required:
Using the information provided above for Raritron Industries:
a) (1.) Identify the two ratios from the above list that would be of most interest to short-term
creditors.
(2.) Explain what these two ratios measure.
(3.) What do these two ratios indicate about Shelzo Inc.?
b) (1.) Identify the three ratios from the above list that would be of most interest to shareholders.
(2.) Explain what these three ratios measure.
(3.) What do these three ratios indicate about Shelzo Inc.?
c) (1.) Identify the two ratios from the above list that would be of most interest to long-term
creditors.
195.Financial statements for Lowe Company appear below:
Total dividends paid during the year were $25,000, of which $12,000 was paid to the preferred
shareholders.
Required:
a) Current ratio.
f) Times interest earned.
g) Debt-to-equity ratio.
196.Several investors are in the process of organizing a new company. The investors feel that
$800,000 would be adequate to finance the new company's operations. Three methods are
available to finance the new company:
(1.) All $800,000 could be obtained through the issuance of common shares.
(2.) Common shares could be issued to provide $400,000 with the other $400,000 obtained by
issuing $100 par value, l0% preferred shares.
issuing bonds with an interest rate of 10%.
The investors are confident that the company could earn $175,000 each year before interest and
taxes. The tax rate is 40%.
Required:
a) If the estimates are correct, compute the net income available to common shareholders under
each of the three financing methods proposed above.
b) Using the income data computed in part a) above, compute the return on common
shareholders' equity under each of the three methods.
c) Why do methods 2 and 3 provided a greater return on common equity than does method 1?
Why does method 3 provide a greater return on common equity than method 2?
197.Financial statements for Raridan Company appear below:
Required:
a) Current ratio.
198.Financial statements for Rarig Company appear below:
Required:
a) Current ratio.
199.Financial statements for Rarity Company appear below:
Required:
a) Current ratio.
200.Financial statements for Sarosa Company appear below:
Required:
a) Calculate Sarosa Company's return on total assets for Year 2.

b) Calculate Sarosa Company's return on common shareholders' equity for Year 2.
c) Financial leverage was positive for Year 2. Why?
d) Assume all current liabilities are interest free and that the interest expense of $40 is for the
bonds payable.
(i) Calculate the dollar amount of the financial leverage (in $1,000)
(ii) Allocate the dollar amount of the financial leverage to the following sources of financing:
Preferred Shares, Bonds Payable, and Current Liabilities (rounded to the nearest $1,000)
Chapter 14 Financial Statement Analysis Key
1. How is horizontal analysis of financial statements accomplished?
A. By placing statement items on an after-tax basis.

B. By common-size statements.
C. By calculating both earnings per share and the price-earnings ratio.
D. By trend percentages.
Blooms Level: Understand
Difficulty: Easy
Garrison - Chapter 14 #1
Learning Objective: 1
2. The gross margin percentage is most likely to be used to assess which of the following?
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.
Difficulty: Easy
3. Earnings per common share will immediately increase as a result of which of the following?
A. The sale of additional common shares by the company.

B. An increase in the dividends paid to common shareholders by the company.
C. An increase in the company's net income.
D. The issuance of bonds by the company to finance construction of new buildings.
Difficulty: Medium
4. The market price of XYZ Company's common shares dropped from $25 to $21 per share. The
dividend paid per share remained unchanged. How would the company's dividend payout ratio
change?
A. Increase.
B. Decrease.
D. Impossible to determine without more information.
Difficulty: Easy
5. An increase in the market price of a company's common shares will immediately affect which
of the following?
A. Dividend yield ratio.

B. Debt-to-equity ratio.
C. Earnings per common share.
D. Dividend payout ratio.
Difficulty: Medium
6. Which of the following is true regarding the calculation of return on total assets?
A. The numerator of the ratio consists only of net income.

B. The denominator of the ratio consists of the balance of total assets at the end of the period
under consideration.
C. The numerator of the ratio consists of net income plus interest expense multiplied by the
tax rate.
D. The numerator of the ratio consists of net income plus interest expense multiplied by one
minus the tax rate.
Difficulty: Medium
7. Financial leverage is negative in which of the following situations?
A. When the return on total assets is less than the rate of return on common shareholders'
equity.
B. When total liabilities are less than shareholders' equity.
C. When total liabilities are less than total assets.
D. When the return on total assets is less than the rate of return demanded by creditors.
Difficulty: Medium
8. Which of the following is NOT a potential source of financial leverage?
A. Bonds payable.
B. Accounts payable.
C. Preferred shares.
D. Retained earnings.
Difficulty: Medium
9. If a company's bonds bear an interest rate of 8%, its tax rate is 30%, and its assets are
generating an after-tax return of 7%, what would be the leverage?
A. Positive.
B. Negative.
C. Neither positive nor negative.
D. Impossible to determine without knowing the return on common shareholders' equity.
Difficulty: Medium
10. A company's current ratio and acid-test ratios are both greater than 1.0 to 1. If obsolete
inventory is written off, what would be the effect?
A. A decrease in the acid-test ratio.

B. An increase in the acid-test ratio.
C. An increase in net working capital.
D. A decrease in the current ratio.
Difficulty: Medium
11. If a company converts a short-term note payable into a long-term note payable, what would be
the effect of this transaction?
A. A decrease in working capital and an increase in the current ratio.

B. A decrease in both working capital and the current ratio.
C. A decrease in both the current ratio and the acid-test ratio.
D. An increase in both working capital and the current ratio.
Difficulty: Medium
12. Which one of the following would increase the working capital of a company?
A. Cash payment of payroll taxes payable.

B. Refinancing a short-term note payable with a two-year note payable.
C. Cash collection of accounts receivable.
D. Payment of a 20-year mortgage payable with cash.
Difficulty: Hard
13. What will be the effect of a sale of a piece of equipment at book value for cash?
A. An increase in working capital.

B. A decrease in working capital.
C. A decrease in the debt-to-equity ratio.
D. An increase in net income.
Difficulty: Medium
14. If a firm has a high current ratio but a low acid-test ratio, one can conclude which of the
following?
A. The firm has a large outstanding accounts receivable balance.

B. The firm has a large investment in inventory.
C. The firm has a large amount of current liabilities.
D. The firm's financial leverage is very high.
Difficulty: Medium
15. Desktop Co. presently has a current ratio of 1.2 to 1 and an acid-test ratio of 0.8 to 1. What will
be effect of prepaying next year's office rent of $50,000?
A. No effect on either the company's current ratio or its acid-test ratio.

B. No effect on the company's current ratio but will decrease its acid-test ratio.
C. A decrease in both the company's current ratio and its acid-test ratio.
D. An increase in both the company's current ratio and its acid-test ratio.
Difficulty: Hard
16. The Miller Company's current ratio is greater than 1.0 to 1. By paying off some of its accounts
payable using cash, what would be the effect on the company's current ratio?
A. An increase.
B. A decrease.
D. Impossible to determine from the information given.
Difficulty: Medium
17. Rahner Company has a current ratio of 1.75 to 1. This ratio will decrease if Rahner Company
engages in which of the following transactions?
A. Borrows cash using a six-month note.

B. Pays the taxes payable that have been a current liability.
C. Pays the following month's rent on the last day of the year.
D. Sells inventory for more than its cost.
Difficulty: Hard
18. Which of the following accounts would be included in the calculation of the acid-test ratio?
A. Option A
B. Option B
C. Option C
D. Option D
Difficulty: Easy
19. Last year, Allen Company's average collection period for accounts receivable was 40 days;
this year, it increased to 60 days. Which of the following would most likely account for this
change?
A. A decrease in accounts receivable relative to sales.

B. A decrease in sales.
C. A relaxation of credit policies.
D. An increase in sales.
Difficulty: Medium
20. If a loss resulting from an earthquake is classified as extraordinary, which of the following
disclosures meets the minimum requirements in Canada?
A. Two earnings per share figures, one before and the other after the net of tax effect of the
extraordinary loss.
B. One earnings per share figure that ignores the extraordinary loss.
C. One earnings per share figure, net of the before-tax effect of the extraordinary loss.
D. One earnings per share figure, net of the after-tax effect of the extraordinary loss.
Difficulty: Medium
21. Which of the following events is unique to the calculation of fully diluted earnings per share?
A. An extraordinary gain or loss resulting from fire.

B. Issuance of common share.
C. Issuance of bonds that can be converted to common shares.
D. Issuance of participating and cumulative preferred shares.
Difficulty: Medium
22. The net accounts receivable for Andante Company were $150,000 at the beginning of the
most recent year and $190,000 at the end of the year. If the accounts receivable turnover for
the year was 8.5, and 15% of total sales were cash sales, what were the total sales for the
year?
A. $1,445,000.
B. $1,500,000.
C. $1,700,000.
D. $1,900,000.
Credit sales = 8.5*(150,000 + 190,000)/2 = 1,445,000. Sales = 1,445,000/(1 - .15)
Blooms Level: Analyze

Difficulty: Hard
23. Selected data from Sheridan Corporation's year-end financial statements are presented below.
The difference between average and ending inventory is immaterial.
What were Sheridan's sales for the year?
A. $240,000.
B. $480,000.
C. $800,000.
D. $1,200,000.
Inventory = CA - QA = 120,000*2 - 120,000*1.5 = 60,000.

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

Difficulty: Hard
24. Fulton Company's price-earnings ratio is 8.0, and the market price of its common shares is
$32. The company has 3,000 shares of preferred shares outstanding, with each share
receiving a dividend of $3. What is the earnings per common share?
A. $3.
B. $4.
C. $7.
D. $10.
32/8

Difficulty: Medium
25. Perlman Company had 100,000 common shares and 20,000 preferred shares at the end of
the year just completed. Preferred shareholders received total dividends of $140,000.
Common shareholders received total dividends of $210,000. If the dividend payout ratio for the
year was 70%, what was the net income for the year?
A. $147,000.
B. $287,000.
C. $300,000.
D. $440,000.
EPS = (210,000/100,000)/.70 = $3/share. NI = 3*100,000 + 140,000

Difficulty: Hard
26. Arlberg Company's net income last year was $250,000. The company had 150,000 common
shares and 80,000 preferred shares. There was no change in the number of common or
preferred shares outstanding during the year. The company declared and paid dividends last
year of $1.30 per common share and $1.40 per preferred share. The earnings per common
share was closest to which of the following?
A. $0.37.
B. $0.92.
C. $1.67.
D. $2.41.
(250,000 - 80,000*1.40)/150,000
Blooms Level: Apply

Difficulty: Medium
27. Arget Company's net income last year was $600,000. The company had 150,000 common
shares and 60,000 preferred shares. There was no change in the number of common or
preferred shares outstanding during the year. The company declared and paid dividends last
year of $1.10 per common share and $0.60 per preferred share. The earnings per common
share was closest to which of the following?
A. $2.90.
B. $3.76.
C. $4.00.
D. $4.24.
(600,000 - 60,000*.60)/150,000
Blooms Level: Apply

Difficulty: Medium
28. Arquandt Company's net income last year was $550,000. The company had 150,000 common
shares and 50,000 preferred shares 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 $1.20 per common share and $1.70 per preferred share. The earnings
per common share was closest to which of the following?
A. $2.47.
B. $3.10.
C. $3.67.
D. $4.23.
(550,000 - 50,000*1.70)/150,000
Blooms Level: Apply

Difficulty: Medium
29. The following data have been taken from your company's financial records for the current
year:
A. 1.67 to 1.
B. 7.00 to 1.
C. 9.00 to 1.
D. 15.00 to 1.
90/10
Blooms Level: Apply

Difficulty: Easy
30. The following data have been taken from your company's financial records for the current
year:
A. 6.0 to 1.
B. 7.5 to 1.
C. 8.0 to 1.
D. 12.5 to 1.
120/15
Blooms Level: Apply

Difficulty: Easy
31. Information concerning the common shares of Morris Company as of the end of the company's
fiscal year is presented below:
The dividend yield ratio is closest to which of the following?
A. 11.1%.
B. 33.3%.
C. 50.0%.
D. 120.0%.
6/54
Blooms Level: Apply

Difficulty: Easy
32. Cameron Company had 50,000 common shares issued and outstanding during the year just
ended. The following information pertains to these shares:
The total dividend on common shares for the year was $400,000. What was Cameron
Company's dividend yield ratio for the year?
A. 8.89%.
B. 9.41%.
C. 11.43%.
D. 20.00%.
(400,000/50,000)/90
Blooms Level: Apply

Difficulty: Medium
33. Braverman Company's net income last year was $75,000, and its interest expense was
$10,000. Total assets at the beginning of the year were $650,000, and total assets at the end
of the year were $610,000. The company's income tax rate was 30%. The company's return
on total assets for the year was closest to which of the following?
A. 11.9%.
B. 12.4%.
C. 13.0%.
D. 13.5%.
[75,000 + 10,000*(1 - .30)]/[(650,000 + 620,000)/2]
Blooms Level: Apply

Difficulty: Medium
34. Brachlan Company's net income last year was $80,000, and its interest expense was $20,000.
Total assets at the beginning of the year were $660,000, and total assets at the end of the
year were $620,000. The company's income tax rate was 30%. The company's return on total
assets for the year was closest to which of the following?
A. 12.5%.
B. 13.4%.
C. 14.7%.
D. 15.6%.
[80,000 + 20,000*(1 - .30)]/[(660,000 + 620,000)/2]
Blooms Level: Apply

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

Difficulty: Medium
36. The total assets of the Philbin Company on January 1 were $2.3 million and on December 31
were $2.5 million. Net income for the year was $188,000. Dividends for the year were
$75,000, interest expense was $70,000, and the tax rate was 30%. The return on total assets
A. 6.8%.
B. 9.5%.
C. 9.9%.
D. 10.8%.
[188,000 + 70,000*(1 - .30)]/[(2.3M + 2.5M)/2]
Blooms Level: Apply

Difficulty: Medium
37. Selected financial data for Irvington Company appear below:
During the year, the company paid dividends of $10,000 on its preferred shares. The
company's net income for the year was $120,000. The company's return on common
shareholders' equity for the year was closest to which of the following?
A. 17%.
B. 19%.
C. 23%.
D. 25%.
Avg. Common SE = [(125,000 + 300,000 + 75,000 + 125,000 + 400,000 + 185,000)/2] -

125,000 = 480,000. Return on Common SE = (120,000 - 10,000)/480,000
Blooms Level: Apply

Difficulty: Medium
38. Crasler Company's net income last year was $100,000. The company paid dividends on
following?
A. 3.4%.
B. 13.8%.
C. 17.2%.
D. 20.7%.
(100,000 - 20,000)/580,000
Blooms Level: Apply

Difficulty: Easy
39. Crawler Company's net income last year was $80,000. The company paid dividends on
following?
A. 2.5%.
B. 17.5%.
C. 20.0%.
D. 22.5%.
(80,000 - 10,000)/400,000
Blooms Level: Apply

Difficulty: Easy
40. Crabtree Company's net income last year was $50,000. The company paid dividends on
following?
A. 4.5%.
B. 6.8%.
C. 11.4%.
D. 15.9%.
(50,000 - 20,000)/440,000
Blooms Level: Apply

Difficulty: Easy
41. The following account balances have been provided for the end of the most recent year:
What is the book value per common share?
A. $20.
B. $22.
C. $25.
D. $28.
(120,000 - 10,000)/5,000
Blooms Level: Apply

Difficulty: Easy
42. Dratif Company's working capital is $33,000, and its current liabilities are $80,000. The
A. 0.41 to 1.
B. 0.59 to 1.
C. 1.41 to 1.
D. 3.42 to 1.
(80,000 + 33,000)/80,000

Difficulty: Medium
43. Dragin Company's working capital is $36,000, and its current liabilities are $61,000. The
A. 0.41 to 1.
B. 0.59 to 1.
C. 1.59 to 1.
D. 2.69 to 1.
(61,000 + 36,000)/61,000

Difficulty: Medium
44. Draban Company's working capital is $38,000, and its current liabilities are $59,000. The
A. 0.36 to 1.
B. 0.64 to 1.
C. 1.64 to 1.
D. 2.55 to 1.
(59,000 + 38,000)/59,000

Difficulty: Medium
45. At the end of the year just completed, Orem Company's total current liabilities were $75,000,
and its total long-term liabilities were $225,000. Working capital at year-end was $100,000. If
the company's debt-to-equity ratio is 0.30 to 1, total long-term assets must equal which of the
following?
A. $1,000,000.
B. $1,125,000.
C. $1,225,000.
D. $1,300,000.
T.A. = (75,000 + 225,000)/.30 + (75,000 + 225,000) = 1,300,000. LTA = 1,300,000 - (100,000 +

75,000)

Difficulty: Hard
46. Starrs Company has current assets of $300,000 and current liabilities of $200,000. Which of
the following transactions would increase its working capital?
A. Prepayment of $50,000 of next year's rent.

B. Refinancing $50,000 of short-term debt with long-term debt.
C. Acquisition of land valued at $50,000 by issuing new common shares.
D. Purchase of $50,000 of marketable securities for cash.
Difficulty: Hard
47. 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 which
of the following?
A. 1.20 times.
B. 1.67 times.
C. 2.33 times.
D. 2.40 times.
500,000/(600,000*3 - 600,000*2.5)

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

Difficulty: Hard
49. Ben Company has the following data for the year just ended:
What were Ben Company's current liabilities?
A. $35,000.
B. $43,750.
C. $50,400.
D. $63,000.
(42,000 + 28,000 + 35,000)/2.4

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

Difficulty: Hard
51. Eral Company has $17,000 in cash, $3,000 in marketable securities, $36,000 in current
A. 0.44 to 1.
B. 0.80 to 1.
C. 1.24 to 1.
D. 1.78 to 1.
(17,000 + 3,000 + 36,000)/45,000
Blooms Level: Apply

Difficulty: Easy
52. Erambo Company has $11,000 in cash, $6,000 in marketable securities, $27,000 in current
A. 0.53 to 1.
B. 0.75 to 1.
C. 0.86 to 1.
D. 1.02 to 1.
(11,000 + 6,000 + 27,000)/51,000
Blooms Level: Apply

Difficulty: Easy
53. Erack Company has $15,000 in cash, $4,000 in marketable securities, $38,000 in current
A. 0.95 to 1.
B. 1.33 to 1.
C. 1.43 to 1.
D. 1.88 to 1.
(15,000 + 4,000 + 38,000)/40,000
Blooms Level: Apply

Difficulty: Easy
54. Eastham Company's accounts receivable were $600,000 at the beginning of the year and
$800,000 at the end of the year. Cash sales for the year were $300,000. The accounts
receivable turnover for the year was 5 times. What were Eastham Company's total sales for
the year?
A. $800,000.
B. $1,300,000.
C. $3,300,000.
D. $3,800,000.
300,000 + 5* (600,000 + 800,000)/2

Difficulty: Hard
55. Frantic 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 $16,000.
The company's accounts receivable turnover was closest to which of the following?
A. 5.00 times.
B. 8.13 times.
C. 10.00 times.
D. 13.00 times.
130,000/[(10,000 + 16,000)/2]
Blooms Level: Apply

Difficulty: Easy
56. Fracus Company had $100,000 in sales on account last year. The beginning accounts
A. 3.33 times.
B. 6.25 times.
C. 6.67 times.
D. 7.14 times.
100,000/[(14,000 + 16,000)/2]
Blooms Level: Apply

Difficulty: Easy
57. Frabine Company had $150,000 in sales on account last year. The beginning accounts
A. 4.69 times.
B. 8.33 times.
C. 9.38 times.
D. 10.71 times.
150,000/[(14,000 + 18,000)/2]
Blooms Level: Apply

Difficulty: Easy
58. Granger Company had $180,000 in sales on account last year. The beginning accounts
The company's average collection period (age of receivables) was closest to which of the
following?
A. 20.28 days.
B. 28.39 days.
C. 36.50 days.
D. 56.78 days.
Turnover = 180,000/[(10,000 + 18,000)/2] = 12.857. days = 365/12.857
Blooms Level: Apply

Difficulty: Medium
59. Grapp Company had $130,000 in sales on account last year. The beginning accounts
following?
A. 44.92 days.
B. 47.73 days.
C. 50.54 days.
D. 95.46 days.
130,000/[(18,000 + 16,000)/2] = 7.647. Days = 365/7.647
Blooms Level: Apply

Difficulty: Medium
60. Grave Company had $150,000 in sales on account last year. The beginning accounts
following?
A. 24.33 days.
B. 29.20 days.
C. 34.07 days.
D. 58.40 days.
150,000/[(14,000 + 10,000)/2] = 12.5 days = 365/12.5
Blooms Level: Apply

Difficulty: Medium
61. Harris Company, a retailer, had cost of goods sold of $290,000 last year. The beginning
inventory balance was $26,000, and the ending inventory balance was $24,000. The
company's inventory turnover was closest to which of the following?
A. 5.80 times.
B. 11.15 times.
C. 11.60 times.
D. 12.08 times.
290,000/[(26,000 + 24,000)/2]
Blooms Level: Apply

Difficulty: Easy
62. Harton Company, a retailer, had cost of goods sold of $250,000 last year. The beginning
A. 5.95 times.
B. 11.36 times.
C. 11.90 times.
D. 12.50 times.
250,000/[(20,000 + 22,000)/2]
Blooms Level: Apply

Difficulty: Easy
63. Harker Company, a retailer, had cost of goods sold of $160,000 last year. The beginning
A. 3.48 times.
B. 6.15 times.
C. 6.96 times.
D. 8.00 times.
160,000/[(26,000 + 20,000)/2]
Blooms Level: Apply

Difficulty: Easy
64. Irawaddy Company, a retailer, had cost of goods sold of $230,000 last year. The beginning
company's average sale period (turnover in days) was closest to which of the following?
A. 34.91 days.
B. 36.50 days.
C. 38.09 days.
D. 73.00 days.
Turnover = 230,000/[(24,000 + 22,000)/2] = 10. Days = 365/10
Blooms Level: Apply

Difficulty: Medium
65. Irappa Company, a retailer, had cost of goods sold of $170,000 last year. The beginning
A. 55.82 days.
B. 57.97 days.
C. 60.12 days.
D. 115.94 days.
170,000/[(28,000 + 26,000)/2] = 6.296. days = 365/6.296
Blooms Level: Apply

Difficulty: Medium
66. Irally Company, a retailer, had cost of goods sold of $150,000 last year. The beginning
A. 58.40 days.
B. 60.83 days.
C. 63.27 days.
D. 121.67 days.
150,000/[(26,000 + 24,000)/2] = 6. Days = 365/6
Blooms Level: Apply

Difficulty: Medium
67. Last year, Dunn Company purchased $1,920,000 of inventory. The cost of good sold was
$1,800,000, and the ending inventory was $360,000. What was the inventory turnover?
A. 5.0 times.
B. 5.3 times.
C. 6.0 times.
D. 6.4 times.
BI = 1,800,000 + 360,000 - 1,920,000 = 240,000. Turnover = 1,800,000/[(240,000 +

360,000)/2]

Difficulty: Hard
68. During the year just ended, James Company purchased $425,000 of inventory. The inventory
balance at the beginning of the year was $175,000. If the cost of goods sold for the year was
$450,000, what was the inventory turnover for the year?
A. 2.57 times.
B. 2.62 times.
C. 2.77 times.
D. 3.00 times.
EI = 175,000 + 425,000 - 450,000 = 150,000. Turnover = 450,000/[(175,000 + 150,000)/2]

Difficulty: Hard
69. Last year, Javer Company had a net income of $200,000, income tax expense of $74,000, and
following?
A. 5.30 times.
B. 10.00 times.
C. 11.00 times.
D. 14.70 times.
(200,000 + 74,000 + 20,000)/20,000
Blooms Level: Apply

Difficulty: Easy
70. Last year, Jabber Company had a net income of $180,000, income tax expense of $62,000,
and interest expense of $20,000. The company's times interest earned was closest to which of
the following?
A. 4.90 times.
B. 9.00 times.
C. 10.00 times.
D. 13.10 times.
(180,000 + 62,000 + 20,000)/20,000
Blooms Level: Apply

Difficulty: Easy
71. Last year, Jackson Company had a net income of $160,000, income tax expense of $66,000,
and interest expense of $20,000. The company's times interest earned was closest to which of
the following?
A. 3.70 times.
B. 8.00 times.
C. 9.00 times.
D. 12.30 times.
(160,000 + 66,000 + 20,000)/20,000
Blooms Level: Apply

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

Difficulty: Hard
73. Mariah Company had a times interest earned ratio of 3.0 for the year just ended. The
company's tax rate was 40%, and the interest expense for the year was $25,000. What was
Mariah Company's after-tax net income?
A. $25,000.
B. $30,000.
C. $50,000.
D. $75,000.
(25,000*3 - 25,000)*(1 - .40)

Difficulty: Hard
74. PFM Company has sales of $210,000, interest expense of $8,000, a tax rate of 30%, and a
net profit after tax of $35,000. What is PFM Company's times interest earned ratio?
A. 4.375 times.
B. 5.375 times.
C. 7.250 times.
D. 15.500 times.
[35,000/(1 - .30) + 8,000]/8,000

Difficulty: Hard
75. Karma Company has total assets of $190,000 and total liabilities of $90,000. The company's
A. 0.32 to 1.
B. 0.47 to 1.
C. 0.53 to 1.
D. 0.90 to 1.
90,000/(190,000 - 90,000)
Blooms Level: Apply

Difficulty: Easy
76. Karl Company has total assets of $170,000 and total liabilities of $110,000. The company's
A. 0.33 to 1.
B. 0.39 to 1.
C. 0.65 to 1.
D. 1.83 to 1.
110,000/(170,000 - 110,000)
Blooms Level: Apply

Difficulty: Easy
77. Krakov Company has total assets of $170,000 and total liabilities of $80,000. The company's
A. 0.32 to 1.
B. 0.47 to 1.
C. 0.53 to 1.
D. 0.89 to 1.
80,000/(170,000 - 80,000)
Blooms Level: Apply

Difficulty: Easy
78. McGraw Electronics showed Bonds Payable of $7,500,000 in 2011 and $8,000,000 in 2010 on
its comparative Balance Sheet. The percentage change is closest to:
A. 6.6%.
B. (6.6)%.
C. 6.3%.
D. (6.3)%.
(7,500,000 - 8,000,000)/8,000,000
Blooms Level: Apply

Difficulty: Easy
79. Martin Company reported an extraordinary after-tax loss of $180,000, resulting from an
earthquake. What must have been the before-tax loss if Martin's marginal income tax rate was
40%?
A. $72,000.
B. $108,000.
C. $300,000.
D. $450,000.
180,000/(1 - .40)
Blooms Level: Apply

Difficulty: Easy
Selected financial data for Barnstable Company appear below:
Garrison - Chapter 14
80. For Year 2, what was the gross margin as a percentage of sales?
A. 5%.
B. 10%.
C. 40%.
D. 60%.
(1,500 - 900)/1,500
Blooms Level: Apply

Difficulty: Easy
81. For Year 2, what was the net income before taxes as a percentage of sales?
A. 3%.
B. 5%.
C. 8%.
D. 10%.
(1,500 - 900 - 450 - 75)/1,500
Blooms Level: Apply

Difficulty: Easy
82. For Year 2, what was the net operating income as a percentage of sales?
A. 8%.
B. 10%.
C. 40%.
D. 70%.
(1,500 - 900 - 450)/1,500
Blooms Level: Apply

Difficulty: Easy
83. Between Year 1 and Year 2, what happened to the times interest earned?
A. It increased.
B. It decreased.
C. It remained the same.
D. The effect cannot be determined from the data provided.
Yr. 1 = (1,200 - 720 - 400)/30 Yr. 2 = (1,500 - 900 - 450)/75
Blooms Level: Apply

Difficulty: Medium
Financial statements for Larned Company appear below:
Total dividends during Year 2 were $263,000, of which $12,000 were for preferred shares. The
84. Larned Company's earnings per common share for Year 2 was closest to which of the
following?
A. $11.03.
B. $18.39.
C. $19.06.
D. $27.22.
(343 - 120*.10)/(180/10)
Blooms Level: Apply

Difficulty: Medium
85. Larned Company's price-earnings ratio on December 31, Year 2 was closest to which of the
following?
A. 5.88.
B. 8.40.
C. 8.70.
D. 14.50.
160/18.39(#100)
Blooms Level: Apply

Difficulty: Medium
86. Larned Company's dividend payout ratio for Year 2 was closest to which of the following?
A. 28.5%.
B. 47.4%.
C. 75.8%.
D. 76.7%.
[(263,000 - 12,000)/18,000]/18.39(#100)
Blooms Level: Apply

Difficulty: Medium
87. Larned Company's dividend yield ratio on December 31, Year 2 was closest to which of the
following?
A. 5.5%.
B. 8.3%.
C. 8.7%.
D. 9.1%.
[(263,000 - 12,000)/18,000]/160
Blooms Level: Apply

Difficulty: Medium
88. Larned Company's return on total assets for Year 2 was closest to which of the following?
A. 15.8%.
B. 17.2%.
C. 17.8%.
D. 18.6%.
[343 + 40*(1 - .30)]/[(2,040 + 1,950)/2]
Blooms Level: Apply

Difficulty: Hard
89. Larned Company's return on common shareholders' equity for Year 2 was closest to which of
the following?
A. 26.9%.
B. 27.9%.
C. 29.8%.
D. 30.9%.
(343 - 12)/[(1,270 + 1,190)/2 - 120]
Blooms Level: Apply

Difficulty: Medium
90. Larned Company's book value per share at the end of Year 2 was closest to which of the
following?
A. $10.00.
B. $16.11.
C. $63.89.
D. $70.56.
(1,270 - 120)/18
Blooms Level: Apply

Difficulty: Medium
Financial statements for Laroche Company appear below:
91. Laroche Company's earnings per common share for Year 2 was closest to which of the
following?
A. $3.71.
B. $10.67.
C. $11.08.
D. $15.83.
(266 - 10)/24
Blooms Level: Apply

Difficulty: Medium
92. Laroche Company's price-earnings ratio on December 31, Year 2 was closest to which of the
following?
A. 9.47.
B. 13.53.
C. 14.06.
D. 40.43.
150/10.67(#107)
Blooms Level: Apply

Difficulty: Medium
93. Laroche Company's dividend payout ratio for Year 2 was closest to which of the following?
A. 22.9%.
B. 38.0%.
C. 60.9%.
D. 62.4%.
[(166 - 10)/24]/10.67(#107)
Blooms Level: Apply

Difficulty: Medium
94. Laroche Company's dividend yield ratio on December 31, Year 2 was closest to which of the
following?
A. 1.6%.
B. 4.1%.
C. 4.3%.
D. 4.6%.
[(166 - 10)/24]/150
Blooms Level: Apply

Difficulty: Medium
95. Laroche Company's return on total assets for Year 2 was closest to which of the following?
A. 13.0%.
B. 14.1%.
C. 14.6%.
D. 15.2%.
[266 + 30*(1 - .30)]/[(1,900 + 1,880)/2]
Blooms Level: Apply

Difficulty: Medium
96. Laroche Company's return on common shareholders' equity for Year 2 was closest to which of
the following?
A. 21.2%.
B. 22.0%.
C. 23.1%.
D. 24.0%.
(266 - 10)/[(1,260 + 1,160)/2 - 100]
Blooms Level: Apply

Difficulty: Medium
97. Laroche Company's book value per share at the end of Year 2 was closest to which of the
following?
A. $10.00.
B. $17.50.
C. $48.33.
D. $52.50.
(1,260 - 100)/24
Blooms Level: Apply

Difficulty: Medium
Financial statements for Larosa Company appear below:
98. Larosa Company's earnings per common share for Year 2 was closest to which of the
following?
A. $3.09.
B. $9.41.
C. $9.86.
D. $14.09.
(217 - 10)/22
Blooms Level: Apply

Difficulty: Medium
99. Larosa Company's price-earnings ratio on December 31, Year 2 was closest to which of the
following?
A. 4.97.
B. 7.10.
C. 7.44.
D. 22.66.
70/9.41(#114)
Blooms Level: Apply

Difficulty: Medium
100. Larosa Company's dividend payout ratio for Year 2 was closest to which of the following?
A. 6.5%.
B. 10.6%.
C. 17.9%.
D. 21.7%.
[(47 - 10)/22]/9.41(#114)
Blooms Level: Apply

Difficulty: Medium
101. Larosa Company's dividend yield ratio on December 31, Year 2 was closest to which of the
following?
A. 1.0%.
B. 1.8%.
C. 2.4%.
D. 3.1%.
[(47 - 10)/22]/70
Blooms Level: Apply

Difficulty: Medium
102. Larosa Company's return on total assets for Year 2 was closest to which of the following?
A. 7.6%.
B. 8.7%.
C. 9.2%.
D. 9.9%.
[217 + 40*(1 - .30)]/[(2,520 + 2,450)/2]

Difficulty: Medium
103. Larosa Company's return on common shareholders' equity for Year 2 was closest to which of
the following?
A. 12.0%.
B. 12.6%.
C. 12.7%.
D. 13.4%.
(217 - 10)/[(1,810 + 1,640)/2 - 100]
Blooms Level: Apply

Difficulty: Medium
104. Larosa Company's book value per share at the end of Year 2 was closest to which of the
following?
A. $10.00.
B. $21.36.
C. $77.73.
D. $82.27.
(1,810 - 100)/22
Blooms Level: Apply

Difficulty: Medium
The Dawson Corporation projects the following for the upcoming year:
105. What is the expected dividend per common share?
A. $1.80.
B. $2.10.
C. $2.70.
D. $3.90.
EPS = [(35 - 5)*(1 - .40) - 4]/2 = $7/share. Div./sh = 7/.30

Difficulty: Hard
106. If Dawson Corporation's common shares have a price-earnings ratio of eight, what would be
the market price per share, rounded to the nearest dollar?
A. $56.
B. $68.
C. $72.
D. $125.
8 * 7(#121)

Difficulty: Hard
Financial statements for Orange Company appear below:
market price of a share of common stock on December 31, Year 2 was $100.
107. Orange Company's earnings per common share for Year 2 was closest to which of the
following?
A. $2.27.
B. $7.23.
C. $7.64.
D. $10.91.
Avg. Shares o/s = 220,000/5 = 44,000. EPS = (336 - 18)/44

Difficulty: Medium
108. Orange Company's dividend yield ratio on December 31, Year 2 was closest to which of the
following?
A. 1.1%.
B. 2.7%.
C. 3.1%.
D. 3.5%.
[(156 - 18)/44]/100

Difficulty: Medium
109. Orange Company's return on total assets for Year 2 was closest to which of the following?
A. 14.5%.
B. 15.5%.
C. 15.9%.
D. 16.5%.
[336 + 30*(1 - .30)]/[(2,210 + 2,130)/2]

Difficulty: Medium
110. Orange Company's current ratio at the end of Year 2 was closest to which of the following?
A. 0.44 to 1.
B. 0.55 to 1.
C. 1.24 to 1.
D. 1.71 to 1.
530/310
Blooms Level: Apply

Difficulty: Easy
111. Orange Company's accounts receivable turnover for Year 2 was closest to which of the
following?
A. 11.0 times.
B. 12.4 times.
C. 15.7 times.
D. 17.7 times.
2,830/180
Blooms Level: Apply

Difficulty: Easy
112. Orange Company's average sale period (turnover in days) for Year 2 was closest to which of
the following?
A. 20.6 days.
B. 23.2 days.
C. 29.5 days.
D. 33.2 days.
365/15.7(#127)
Blooms Level: Apply

Difficulty: Medium
113. Orange Company's times interest earned for Year 2 was closest to which of the following?
A. 11.2 times.
B. 16.0 times.
C. 17.0 times.
D. 28.3 times.
510/30
Blooms Level: Apply

Difficulty: Easy
Financial statements for Orantes Company appear below:
114. Orantes Company's earnings per common share for Year 2 was closest to which of the
following?
A. $3.61.
B. $14.45.
C. $15.05.
D. $21.50.
Shares o/s = 200,000/10 = 20,000 shares. EPS = (301 - 12)/20

Difficulty: Medium
115. Orantes Company's dividend yield ratio on December 31, Year 2 was closest to which of the
following?
A. 0.8%.
B. 2.8%.
C. 3.0%.
D. 3.2%.
[(181 - 12)/20]/280

Difficulty: Medium
116. Orantes Company's return on total assets for Year 2 was closest to which of the following?
A. 11.4%.
B. 12.3%.
C. 12.7%.
D. 13.1%.
[301 + 30*(1 - .30)]/[(2,490 + 2,410)/2]

Difficulty: Medium
117. Orantes Company's current ratio at the end of Year 2 was closest to which of the following?
A. 0.35 to 1.
B. 0.54 to 1.
C. 1.19 to 1.
D. 1.50 to 1.
480/320

Difficulty: Easy
118. Orantes Company's accounts receivable turnover for Year 2 was closest to which of the
following?
A. 10.3 times.
B. 13.5 times.
C. 14.8 times.
D. 19.3 times.
2,510/[(180 + 160)/2]

Difficulty: Medium
119. Orantes Company's average sale period (turnover in days) for Year 2 was closest to which of
the following?
A. 18.9 days.
B. 24.7 days.
C. 27.1 days.
D. 35.5 days.
365/14.8(#134)

Difficulty: Medium
120. Orantes Company's times interest earned for Year 2 was closest to which of the following?
A. 10.0 times.
B. 14.3 times.
C. 15.3 times.
D. 25.3 times.
460/30

Difficulty: Medium
Financial statements for Oratz Company appear below:
121. Oratz Company's earnings per common share for Year 2 was closest to which of the
following?
A. $1.74.
B. $19.61.
C. $20.25.
D. $28.93.
Shares o/s = 140,000/15 = 9,333.333. EPS = (189 - 6)/9.3333

Difficulty: Medium
122. Oratz Company's dividend yield ratio on December 31, Year 2 was closest to which of the
following?
A. 0.5%.
B. 5.2%.
C. 5.5%.
D. 5.7%.
[(139 - 6)/9.333]/260

Difficulty: Medium
123. Oratz Company's return on total assets for Year 2 was closest to which of the following?
A. 8.9%.
B. 10.0%.
C. 10.5%.
D. 11.1%.
[189 + 30*(1 - .30)]/[(1,920 + 1,860)/2]

Difficulty: Medium
124. Oratz Company's current ratio at the end of Year 2 was closest to which of the following?
A. 0.51 to 1.
B. 0.57 to 1.
C. 1.23 to 1.
D. 1.26 to 1.
490/400

Difficulty: Easy
125. Oratz Company's accounts receivable turnover for Year 2 was closest to which of the
following?
A. 6.3 times.
B. 8.8 times.
C. 9.1 times.
D. 12.5 times.
1,630/130

Difficulty: Easy
126. Oratz Company's average sale period (turnover in days) for Year 2 was closest to which of the
following?
A. 29.1 days.
B. 40.3 days.
C. 41.6 days.
D. 57.6 days.
365/12.538(#141)

Difficulty: Medium
127. Oratz Company's times interest earned for Year 2 was closest to which of the following?
A. 6.3 times.
B. 9.0 times.
C. 10.0 times.
D. 16.3 times.
300/30

Difficulty: Medium
Selected data for the MK Company follow:
128. What was the price-earnings ratio for the prior year?
A. 11.1 to 1.
B. 12.2 to 1.
C. 14.3 to 1.
D. 15.8 to 1.
Shares 0/s = 500,000/10 = 50,000 shares. 20/[(90 - 20)/50]

Difficulty: Medium
129. What is the dividend yield ratio on common shares for the current year, rounded to the nearest
tenth of a percent?
A. 5.2%
B. 6.6%.
C. 6.8%.
D. 7.4%.
(65/50)/25

Difficulty: Medium
130. What is MK Company's return on common shareholders' equity for the current year, rounded
to the nearest tenth of a percent?
A. 8.2%.
B. 10.2%.
C. 10.9%.
D. 13.6%.
(102 - 20)/[(250 + 500 + 257 + 250 + 500 + 240)/2 - 250]

Difficulty: Hard
131. What was the dividend payout ratio for the prior year?
A. 55.6%.
B. 85.7%.
C. 114.3%.
D. 140.0%.
(60/50)/[(90 - 20)/50]

Difficulty: Medium
132. What is the book value per share for the current year, rounded to the nearest cent?
A. $15.14.
B. $18.31.
C. $20.14.
D. $22.18.
(500 + 257)/50

Difficulty: Medium
Lisa Inc.'s balance sheet appears below:
The company's sales for the year were $300,000, its cost of goods sold was $220,000, and its
net income was $35,000. All sales were on credit. Dividends paid on preferred shares for the
year were $5,000.
133. Lisa Inc.'s acid-test (quick) ratio at December 31, Year 2, was closest to which of the
following?
A. 0.6 to 1.
B. 1.1 to 1.
C. 1.8 to 1.
D. 2.0 to 1.
(30 + 20 + 45)/85

Difficulty: Medium
134. Lisa Inc.'s accounts receivable turnover for Year 2 was closest to which of the following?
A. 4.9 times.
B. 5.9 times.
C. 6.7 times.
D. 8.0 times.
300/[(45 + 30)/2]

Difficulty: Medium
135. Lisa Inc.'s inventory turnover for Year 2 was closest to which of the following?
A. 3.7 times.
B. 4.0 times.
C. 4.4 times.
D. 5.0 times.
220/[(60 + 50)/2]

Difficulty: Medium
136. Lisa Inc.'s book value per common share at December 31, Year 2, was closest to which of the
following?
A. $10.00.
B. $11.25.
C. $18.33.
D. $19.33.
(390 - 100)/15

Difficulty: Medium
137. Lisa Inc.'s return on common shareholders' equity for Year 2 was closest to which of the
following?
A. 7.8%.
B. 10.6%.
C. 10.9%.
D. 12.4%.
Avg. Common SE = [(390 - 100) + (375 - 100)]/2 = 282.5. Return = (35 - 5)/282.5

Difficulty: Medium
Financial statements for Marcell Company appear below:
138. Marcell Company's working capital (in thousands of dollars) at the end of Year 2 was closest to
A. $20.
B. $470.
C. $520.
D. $1,240.
470 - 450

Difficulty: Easy
139. Marcell Company's current ratio at the end of Year 2 was closest to which of the following?
A. 0.42 to 1.
B. 0.48 to 1.
C. 1.04 to 1.
D. 1.22 to 1.
470/450

Difficulty: Easy
140. Marcell Company's acid-test (quick) ratio at the end of Year 2 was closest to which of the
following?
A. 0.33 to 1.
B. 0.60 to 1.
C. 0.74 to 1.
D. 1.35 to 1.
(160 + 110)/450

Difficulty: Medium
141. Marcell Company's accounts receivable turnover for Year 2 was closest to which of the
following?
A. 9.9 times.
B. 14.2 times.
C. 16.2 times.
D. 23.2 times.
2,550/110

Difficulty: Easy
142. Marcell Company's average collection period (age of receivables) for Year 2 was closest to
A. 15.7 days.
B. 22.6 days.
C. 25.8 days.
D. 36.9 days.
365/23.2(#157)

Difficulty: Medium
143. Marcell Company's inventory turnover for Year 2 was closest to which of the following?
A. 9.9 times.
B. 14.2 times.
C. 16.2 times.
D. 23.2 times.
1,780/180

Difficulty: Easy
144. Marcell Company's average sale period (turnover in days) for Year 2 was closest to which of
the following?
A. 15.7 days.
B. 22.6 days.
C. 25.8 days.
D. 36.9 days.
365/9.9(#159)

Difficulty: Medium
Financial statements for March Company appear below:
145. March Company's working capital (in thousands of dollars) at the end of Year 2 was closest to
A. $180.
B. $520.
C. $580.
D. $1,290.
580 - 400

Difficulty: Easy
146. March Company's current ratio at the end of Year 2 was closest to which of the following?
A. 0.47 to 1.
B. 0.49 to 1.
C. 1.27 to 1.
D. 1.45 to 1.
580/400

Difficulty: Easy
147. March Company's acid-test (quick) ratio at the end of Year 2 was closest to which of the
following?
A. 0.39 to 1.
B. 0.53 to 1.
C. 0.95 to 1.
D. 1.90 to 1.
(220 + 160)/400

Difficulty: Medium
148. March Company's accounts receivable turnover for Year 2 was closest to which of the
following?
A. 7.2 times.
B. 7.5 times.
C. 10.4 times.
D. 10.7 times.
1,610/[(160 + 150)/2]

Difficulty: Medium
149. March Company's average collection period (age of receivables) for Year 2 was closest to
A. 34.0 days.
B. 35.1 days.
C. 48.9 days.
D. 50.5 days.
365/10.4(#164)

Difficulty: Medium
150. March Company's inventory turnover for Year 2 was closest to which of the following?
A. 7.2 times.
B. 7.5 times.
C. 10.4 times.
D. 10.7 times.
1,120/150

Difficulty: Easy
151. March Company's average sale period (turnover in days) for Year 2 was closest to which of
the following?
A. 34.0 days.
B. 35.1 days.
C. 48.9 days.
D. 50.5 days.
365/7.5(#166)

Difficulty: Medium
Financial statements for Marcial Company appear below:
152. Marcial Company's working capital (in thousands of dollars) at the end of Year 2 was closest to
A. $200.
B. $440.
C. $570.
D. $1,360.
440 - 240

Difficulty: Easy
153. Marcial Company's current ratio at the end of Year 2 was closest to which of the following?
A. 0.35 to 1.
B. 0.38 to 1.
C. 1.22 to 1.
D. 1.83 to 1.
440/240

Difficulty: Easy
154. Marcial Company's acid-test (quick) ratio at the end of Year 2 was closest to which of the
following?
A. 0.25 to 1.
B. 0.76 to 1.
C. 1.04 to 1.
D. 1.32 to 1.
(140 + 110)/240

Difficulty: Medium
155. Marcial Company's accounts receivable turnover for Year 2 was closest to which of the
following?
A. 8.4 times.
B. 10.4 times.
C. 12.1 times.
D. 14.8 times.
1,630/110

Difficulty: Easy
156. Marcial Company's average collection period (age of receivables) for Year 2 was closest to
A. 24.6 days.
B. 30.2 days.
C. 35.2 days.
D. 43.2 days.
365/14.8(#171)

Difficulty: Medium
157. Marcial Company's inventory turnover for Year 2 was closest to which of the following?
A. 8.4 times.
B. 10.4 times.
C. 12.1 times.
D. 14.8 times.
1,140/[(140 + 130)/2]

Difficulty: Medium
158. Marcial Company's average sale period (turnover in days) for Year 2 was closest to which of
the following?
A. 24.6 days.
B. 30.2 days.
C. 35.2 days.
D. 43.2 days.
365/8.4(#173)

Difficulty: Medium
The following financial data have been taken from the records of CPZ Enterprises.
159. What is the current ratio for CPZ Enterprises?
A. 1.68.
B. 2.14.
C. 5.00.
D. 5.29.
(200 + 100 + 440)/(80 + 10 + 50)

Difficulty: Medium
160. What is the company's acid-test (quick) ratio?
A. 0.68.
B. 1.68.
C. 2.14.
D. 2.31.
(200 + 100)/(80 + 10 + 50)

Difficulty: Medium
161. What will happen to the ratios below if CPZ Enterprises uses cash to pay 50% of its accounts
payable?
A. Option A
B. Option B
C. Option C
D. Option D
Difficulty: Medium
At December 31, Curry Co. had the following balances in selected asset accounts:
Curry had current liabilities of $1,000 at December 31, Year 2, and credit sales of $7,200 for
Year 2.
162. Curry Company's acid-test (quick) ratio at December 31, Year 2 was closest to which of the
following?
A. 1.5 to 1.
B. 1.6 to 1.
C. 2.0 to 1.
D. 2.1 to 1.
(300 + 1,200)/1,000

Difficulty: Medium
163. Curry Company's average collection period (age of receivables) for Year 2 was closest to
A. 30.4 days.
B. 40.6 days.
C. 50.7 days.
D. 60.8 days.
365/[7,200/(1,200 + 800)/2]

Difficulty: Medium
Financial statements for Narita Company appear below:
164. Narita Company's times interest earned for Year 2 was closest to which of the following?
A. 10.3 times.
B. 14.7 times.
C. 15.7 times.
D. 26.0 times.
470/30

Difficulty: Easy
165. Narita Company's debt-to-equity ratio at the end of Year 2 was closest to which of the
following?
A. 0.17 to 1.
B. 0.25 to 1.
C. 0.42 to 1.
D. 0.58 to 1.
640/1,540

Difficulty: Easy
Financial statements for Narlock Company appear below:
166. Narlock Company's times interest earned for Year 2 was closest to which of the following?
A. 5.0 times.
B. 7.2 times.
C. 8.2 times.
D. 13.6 times.
410/50

Difficulty: Easy
167. Narlock Company's debt-to-equity ratio at the end of Year 2 was closest to which of the
following?
A. 0.32 to 1.
B. 0.38 to 1.
C. 0.70 to 1.
D. 1.09 to 1.
890/1,270

Difficulty: Easy
Financial statements for Narumi Company appear below:
168. Narumi Company's times interest earned for Year 2 was closest to which of the following?
A. 4.6 times.
B. 6.6 times.
C. 7.6 times.
D. 12.4 times.
380/50

Difficulty: Easy
169. Narumi Company's debt-to-equity ratio at the end of Year 2 was closest to which of the
following?
A. 0.42 to 1.
B. 0.56 to 1.
C. 0.98 to 1.
D. 2.07 to 1.
890/910

Difficulty: Easy
170. In determining whether a company's financial condition is improving or deteriorating over time,
vertical analysis of financial statement data would be more useful than horizontal analysis.
FALSE
Difficulty: Medium
171. Trend percentages state several years' financial data in terms of a base year. For example,
sales for every year would be stated as a percentage of the sales in the base year.
TRUE
Difficulty: Easy
172. The gross margin percentage is calculated taking the difference between sales and cost of
goods and then dividing the result by sales.
TRUE
Difficulty: Easy
173. Common-size statements are particularly useful when comparing data from different
companies.
TRUE
Blooms Level: Remember
Difficulty: Easy
174. The price-earnings ratio is determined by dividing the price of a product by its profit margin.
FALSE
Difficulty: Easy
175. The price-earnings ratio is calculated by dividing the market price per share by the current
earnings per share.
TRUE
Difficulty: Easy
176. When calculating the return on total assets, the after-tax effect of interest expense must be
subtracted from net income.
FALSE
Difficulty: Medium
177. If the assets in which funds are invested have a rate of return lower than the fixed rate of
return paid to the supplier of the funds, then financial leverage is positive.
FALSE
Difficulty: Medium
178. If the market value of a common share is greater than its book value, the common share is
probably overpriced.
FALSE
Difficulty: Easy
179. To put the working capital figure into perspective it must be supplemented with other short-
term ratios.
TRUE
Difficulty: Easy
180. If a company has a current ratio greater than 1.0 to 1, repaying a short-term note payable will
increase the current ratio.
TRUE
Difficulty: Medium
181. The acid-test ratio is a test of the quality of accounts receivable—in other words, whether they
are likely to be collected.
FALSE
Difficulty: Medium
182. When calculating the acid-test ratio, prepaid expenses are ignored.
TRUE
Difficulty: Medium
183. Only credit sales (i.e., sales on account) are included in the computation of the accounts
receivable turnover.
TRUE
Difficulty: Easy
184. The inventory turnover ratio is equal to the average inventory balance divided by the cost of
goods sold.
FALSE
Difficulty: Easy
185. A positive fully diluted earnings per share can sometimes exceed basic (undiluted) earnings
per share.
FALSE
Difficulty: Medium
186. M. K. Berry is the managing director of CE Ltd. a small, family-owned company that
manufactures cutlery. His company belongs to a trade association that publishes a monthly
magazine. The latest issue of the magazine contains a very brief article based on the analysis
of the accounting statements published by the 40 companies that manufacture this type of
product. The article contains the following table:
CE Ltd's latest financial statements are as follows:
The country in which the company operates has no corporate income tax. No dividends were
paid during the year. All sales are on account.
Required:
a) Calculate each of the ratios listed in the magazine article for this year for CE, and comment
briefly on CE Ltd.'s performance in comparison to the industry averages.
b) Explain why it could be misleading to compare CE Ltd.'s ratios with those taken from the
article.
a)
Return on common shareholders' equity:
Net income = ≤110

Preferred dividends = ≤0
Average common shareholders' equity = [(≤100 + ≤324) + (≤100 + ≤214)]/2
= ≤369
Return on common shareholders' equity = (≤110 - ≤0)/≤369
= 29.8% (rounded)
Return on total assets:
Net income = ≤110

Tax rate = 0%
Interest expense = ≤15
Average total assets = (≤721 + ≤670)/2 = ≤695.5
Return on total assets = [≤110 + ≤15(1 - 0.00)]/≤695.5
= 18.0% (rounded)
Gross margin percentage:
Gross margin = ≤180

Sales = ≤900
Gross margin percentage = ≤180/≤900 = 20%
Current ratio:
Current assets = ≤5 + ≤120 + ≤96 = ≤221

Current liabilities = ≤147
Current ratio = ≤221/≤147 = 1.5:1 (rounded)
Average sale period:
Cost of goods sold = ≤720

Average inventory balance = (≤96 + ≤80)/2 = ≤88
Inventory turnover = ≤720/≤88 = 8.2 (rounded)
Average sale period = 365 days/8.2 = 45 days (rounded)
Average collection period:
Sales on account = ≤900

Average accounts receivable balance = (≤120 + ≤110)/2 = ≤115
Accounts receivable turnover = ≤900/≤115 = 7.8 (rounded)
Average collection period = 365 days/7.8 = 47 days (rounded)
CE Ltd.'s return on shareholders' equity is not as good as the industry's average. For every
pound invested, shareholders are obtaining a return that is smaller than they should expect,
based on the article's figures. Similarly, the return on total assets is much less than the
average. This indicates that the company is unable to make good use of the funds invested in
the company.
CE Ltd.'s gross margin percentage is also lower than average—perhaps because its selling
prices are lower than the average or its cost of sales is higher.
The current ratio indicates that CE Ltd.'s current assets are more than its current liabilities by a
factor of 1.5. The industry average shows an even higher figure, with current assets amounting
to almost double current liabilities.
Most companies aim to turn over inventory as quickly as possible, in order to improve cash
flow. CE Ltd. is not managing to do this as quickly as the industry's average of 37 days.
Similarly, companies should try to obtain payment from customers as soon as possible. CE
Ltd. is taking much longer to do this than the average for the industry.
b)
Care must be taken when comparing CE Ltd.'s ratios with industry averages because there
may be differences in accounting methods. Although accounting standards have reduced the
range of acceptable accounting policies, there is still scope for different firms to apply different
accounting policies. For example, one firm may use straight-line depreciation, while another
may use accelerated depreciation. These variations make comparisons difficult.
Size differences may also mean that ratios are not comparable. A very large manufacturing
business should be able to achieve economies of scale that are not possible for CE Ltd. For
example, large companies may be able to negotiate sizable discounts from suppliers.
A third problem arises from differences in product range. CE Ltd. may produce cutlery that is
sold at the top end of the market, for very high prices, and in small volumes. Alternatively, it
may be producing high-volume, low quality cutlery for the catering industry. Either situation will
reduce the value of comparisons with the industry average.
Blooms Level: Evaluate

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

b) Dividend yield ratio.
c) Price-earnings ratio.
d) Accounts receivable turnover.
e) Inventory turnover.
h) Was financial leverage positive or negative for the year? Explain.
a) Dividend payout ratio = Dividends per share/Earnings per share.

= ($10,000,000/5,000,000)/(($8,200,000 - $2,000,000)/5,000,000))
= $2.00/$1.24
= 161.3%
b) Dividend yield ratio = Dividends paid per share/Market price per share
= $2.00/$25
= 8%
c) Price-earnings ratio = Market price per share/Earnings per share

= $25/(($8,200,000 - $2,000,000)/5,000,000))
= 20.16
d) Accounts receivable turnover = Sales on account/Average accounts receivable balance

= $280,000/(($16,800 + $20,000)/2))
= 15.22 times.
e) Inventory turnover = Cost of goods sold/Average inventory balance

= $200,000/(($28,800 + $28,000)/2))
= 7.04 times
f) Return on total assets = [Net income + ((Interest expense x (1 - Tax rate))]

/Average total assets
= 8,200,000 + 5,000,000 x (1 - 0.40)
/[($144,000,000 + $141,000,000)/2]
= 7.9%
g) Return on common shareholders' equity = (Net income - preferred dividends)

/Average common shareholders' equity
= ($8,200,000 - $2,000,000)
/(($92,800,000 + $89,000,000)/2)
= 6.8%
h) Financial leverage was negative, since the rate of return to the common shareholders
(6.8%) was less than the rate of return on total assets (7.9%).

Difficulty: Medium
188. Financial statements for Praeger Company appear below:
Dividends during Year 2 totalled $45,000, of which $10,000 were preferred dividends. The
The preferred shares are convertible to common shares on the basis of 2 common shares for
Required:

d) Dividend payout ratio (use basic earnings per share).
e) Dividend yield ratio.
h) Book value per share.
i) Working capital.
j) Current ratio.
k) Acid-test (quick) ratio.
l.) Accounts receivable turnover.
m) Average collection period (age of receivables).
n) Inventory turnover.
o) Average sale period (turnover in days).
p) Times interest earned.
q) Debt-to-equity ratio.
a) Basic earnings per share = (Net income - Preferred dividends)

/Average number of common shares outstanding*
= ($105 - $5)/40
= $2.50
* Number of common shares outstanding = Common shares/Par value

= $200/$5
= 40
b) Fully diluted earnings per share = Net income

/(Number of common shares outstanding
+ Common shares to be issued on assumed
conversion of preferred shares*)
= $105/(40 + 40*)
= $105/80
= $1.31
* Number of common shares to be issued on assumed conversion of preferred shares

= ($100/$5) x 2
= 20 x 2
= 40
c) Price-earnings ratio = Market price per share/Basic earnings per share*

= $30/$2.50
= 12.0
** See part a) above
d) Dividend payout ratio = Dividend per share*/Basic earnings per share**

= $1/$2.50
= 40.0%
* Dividends per share = Common dividends/Common shares***

= $40/40
= $1.00
*** See part a) above
e) Dividend yield ratio = Dividends per share*/Market price per share

= $1.00/$30.00
= 3.33%
** See part d) above
f) Return on total assets = Adjusted net income*/Average total assets**

= $140/$2,445
= 5.73%
* Adjusted net income = Net income + [Interest expense x (1-Tax rate)]

= $105 + 50 x (1 - 0.30)
= $140
** Average total assets = ($2,460 + $2,430)/2

= $2,445
g) Return on common shareholders' equity = (Net income - Preferred dividends)

/Average common shareholders' equity*
= ($105 - $5)/$1,520
= 6.58%
* Average common shareholders' equity = ($1,550 + $1,490)/2

= $1,520
h) Book value per share = Common shareholders' equity

/Number of common shares outstanding*
= $1,550/40
= $38.75

= $200/$5
= 40
i) Working capital = Current assets - Current liabilities

= $440 - $310
= $130
j) Current ratio = Current assets/Current liabilities

= $440/$310
= 1.42 to 1
k) Acid-test ratio = Quick assets*/Current liabilities
= $270/$310
= 0.87 to 1
* Quick assets = Cash + Marketable securities + Current receivables

= $100 + $170
= $270
l.) Accounts receivable turnover = Sales on account/Average accounts receivable*

= $1,100/$170
= 6.47 times
* Average accounts receivable = ($170 + $170)/2

= $170
m) Average collection period = 365 days/Accounts receivable turnover*

= 365/6.47
= 56.4 days
* See part l.) above
n) Inventory turnover = Cost of goods sold/Average inventory*

= $770/$110
= 7.00 times
* Average inventory = ($110 + $110)/2

= $110
o) Average sale period = 365 days/Inventory turnover*

= 365/7.00
= 52.1 days
* See part n.) above
p) Times interest earned = Net operating income/Interest expense

= $200/$50
= 4.00 times
q) Debt-to-equity ratio = Liabilities/Shareholders' equity

= $810/$1,650
= 0.49 to 1

Difficulty: Medium
189. Financial statements for AAR Company appear below:
AAR Company paid dividends of $3.15 per share during the year. The market price of the
company's common shares at December 31 was $63 per share. Total assets at the beginning
of the year were $1,100,000, and total shareholders' equity was $725,000. The balance of
accounts receivable at the beginning of the year was $150,000. The balance in inventory at
the beginning of the year was $250,000.
Required:
Calculate the following:
a) Current ratio.
g) Dividend payout ratio.
h) Price-earnings ratio.
i) Return on total assets.
j) Return on common shareholders' equity.
k) Was financial leverage positive or negative for the year? Explain.
a) Current ratio = Current assets/Current liabilities

= $490,000/$200,000
= 2.45 to 1
b) Acid-test ratio = Quick assets*/Current liabilities

= $181,000/$200,000
= 0.91 to 1

= $21,000 + $160,000
= $181,000
c) Accounts receivable turnover = Sales on account/Average accounts receivable*

= $2,100,000/$155,000
= 13.55 times
* Average accounts receivable = ($160,000 + $150,000)/2

= $155,000
Average collection period = 365 days/Accounts receivable turnover

= 365/13.55
= 26.94 days
d) Inventory turnover = Cost of goods sold/Average inventory*

= $1,770,000/$275,000
= 6.4 times
* Average inventory = ($300,000 + $250,000)/2

= $275,000
e) Times interest earned = Net operating income/Interest expense

= $200,000/$50,000
= 4.00 times
f) Debt-to-equity ratio = Liabilities/Shareholders' equity

= $500,000/$800,000
= 0.625 to 1
g) Dividend payout ratio = Dividends per share/Earnings per share.

= $3.15/($105,000/20,000 shares)
= $3.15/$5.25
= 60%
h) Dividend yield ratio = Dividends paid per share/Market price per share
= $3.15/$63.00
= 5%
i) Price-earnings ratio = Market price per share/Earnings per share

= $63/$5.25
= 12.0
j) Return on total assets = ((Net income + (Interest expense x (1 - Tax rate))

= (($105,000 + (50,000 x (1 - 0.30))
/(($1,100,000 + $1,300,000)/2))
= $140,000/$1,200,000
= 11.67%
k) Return on common shareholders' equity = (Net income - Preferred dividends)

/Average common shareholders' equity
= $105,000/[($725,000 + $800,000)/2]
= 13.8%
l.) Financial leverage was positive, since the rate of return to the common shareholders
(13.8%) was greater than the rate of return on total assets (11.67%).

Difficulty: Medium
190. Financial statements for Qiang Company appear below:
Total dividends paid during Year 2 were $61,000, of which $12,000 were for preferred shares.
The preferred shares are convertible to common shares on the basis of four common shares
for each preferred share.
Required:

d) Dividend yield ratio.
f) Return on common shareholders' equity.
g) Book value per share.
a) Basic earnings per share = (Net Income - Preferred Dividends)

= ($161 - $12)/36
= $4.14

= $180/$5
= 36
b) Fully diluted earnings per share = Net Income

/(Number of common shares outstanding
+ Common shares to be issued on assumed
conversion of preferred shares*)
= $161/(36 + 96*)
= $161/132
= $1.22
* Number of common shares to be issued on assumed conversion of preferred shares

= ($120/$5) x 4
= 24 x 4
= 96
c) Price-earnings ratio = Market price per share/Basic earnings per share*

= $50/$4.14
= 12.1
* See part a) above
d) Dividend yield ratio = Dividends per share*/Market price per share

= $1.36/$50.00
= 2.72%
* Dividends per share = Common dividends/Common shares**

= $49/36
= $1.36
e) Return on total assets = Adjusted net income*/Average total assets**

= $189/$2,365
= 7.99%
* Adjusted net income = Net income + [Interest expense x (1 - Tax rate)]

= $161 + 40 x (1 - 0.30)
= $189
= $2,365
f) Return on common shareholders' equity = (Net income - Preferred dividends)

= ($161 - $12)/$1,530
= 9.74%

= $1,530
g) Book value per share = Common shareholders' equity

= $1,580/36
= $43.89
* See part a) above

Difficulty: Medium
191. Financial statements for Qualle Company appear below:
Required:

a) Earnings per share = (Net Income - Preferred Dividends)

= ($259 - $10)/16
= $15.56

= $160/$10
= 16
b) Price-earnings ratio = Market price per share/Earnings per share*

= $280/$15.56
= 18.0
* See part a) above
c) Dividend yield ratio = Dividends per share*/Market price per share

= $8.69/$280.00
= 3.10%

= $139/16
= $8.69
d) Return on total assets = Adjusted net income*/Average total assets**

= $294/$2,315
= 12.70%
*Adjusted net income = Net income + [Interest expense x (1-Tax rate)]

= $259 + 50 x (1 - 0.30)
= $294
**Average total assets = ($2,330 + $2,300)/2

= $2,315
e) Return on common shareholders' equity = (Net income - Preferred dividends)

= ($259 - $10)/$1,285
= 19.38%

= $1,285
f) Book value per share = Common shareholders' equity

= $1,340/16
= $83.75
* See part a) above

Difficulty: Medium
192. Financial statements for Quade Company appear below:
Required:

a) Earnings per share = (Net Income - Preferred Dividends)

= ($280 - $18)/16
= $16.38

= $160/$10
= 16
b) Price-earnings ratio = Market price per share/Earnings per share*

= $230/$16.38
= 14.0
* See part a) above
c) Dividend yield ratio = Dividends per share*/Market price per share

= $12.00/$230.00
= 5.22%

= $192/16
= $12.00
d) Return on total assets = Adjusted net income*/Average total assets**

= $308/$2,000
= 15.40%

= $280 + 40 x (1 - 0.30)
= $308

= $2,000
e) Return on common shareholders' equity = (Net income - Preferred dividends)

= ($280 - $18)/$1,065
= 24.60%

= $1,065
f) Book value per share = Common shareholders' equity

= $1,100/16
= $68.75
* See part a) above

Difficulty: Medium
193. Condensed financial statements of Miller Company at the beginning and at the end of the
current year are given below:
The company paid total dividends of $15,000 during the year, of which $5,000 were to
preferred shareholders. The market price of a common share at the end of the year was $30.
Required:
On the basis of the information given above, fill in the blanks with the appropriate figures.
Example: The current ratio at the end of the current year would be computed by dividing
$270,000 by $100,000.
a) The acid-test (quick) ratio at the end of the current year would be computed by dividing
_______________ by ________________.
b) The inventory turnover for the year would be computed by dividing _______________ by
________________.
c) The debt-to-equity ratio at the end of the current year would be computed by dividing
_______________ by ________________.
d) The earnings per common share would be computed by dividing _______________ by
________________.
e) The accounts receivable turnover for the year would be computed by dividing
_______________ by ________________.
f) The times interest earned for the year would be computed by dividing _______________ by
________________.
g) The return on common shareholders' equity for the year would be computed by dividing
_______________ by ________________.
h) The dividend yield would be computed by dividing _______________ by
________________.
a) $120,000; $100,000.
b) $350,000; $125,000.
c) $175,000; $375,000.
d) $45,000; 10,000 shares.
e) $650,000; $100,000.
f) $100,000; $10,000.
g) $45,000; $307,500.
h) $1; $30.

Difficulty: Medium
194. Shelzo Inc., a manufacturer of construction equipment is considering the purchase of one of
its suppliers, Raritron Industries. The purchase has been given preliminary approval by
Shelzo's board of directors, and several discussions have taken place between the
management of both companies. Raritron has submitted financial data for the past several
years. Shelzo's controller has analyzed Raritron's financial statements and prepared the
following ratio analysis comparing Raritron's performance with the industry averages.
Required:
Using the information provided above for Raritron Industries:
a) (1.) Identify the two ratios from the above list that would be of most interest to short-term
creditors.
b) (1.) Identify the three ratios from the above list that would be of most interest to
shareholders.
(2.) Explain what these three ratios measure.
(3.) What do these three ratios indicate about Shelzo Inc.?
c) (1.) Identify the two ratios from the above list that would be of most interest to long-term
creditors.
a)
(1.) Two ratios that would be of most interest to short-term creditors would be the average sale
period and the current ratio.
(2.) The average sale period relates the average amount of inventory to the cost of goods sold.
This ratio measures the length of time it takes on average to sell inventory and is a gauge of
how well the company manages its inventory. The current ratio is calculated by dividing current
assets by current liabilities. This ratio measures short-run solvency, i.e., the ability to meet
current obligations.
(3.) For Shelzo Inc., the average sale period has been increasing and is well above the
industry average, while the current ratio has been below the industry average. Both of these
ratios indicate that there may be problems with the company's liquidity position. This could be
caused by poor inventory control.
b)
(1.) The three ratios that would be of most interest to common shareholders are the return on
common shareholders' equity, the price-earnings ratio, and the dividend yield ratio.
(2.) The return on common shareholders' equity is a measure of how effectively the company
has used the shareholders' investment in the company to generate profits. The price-earnings
ratio provides a measure of how the stock market perceives the company's future earnings
prospects. The higher the ratio, the more favourable the future looks for the company. The
dividend yield ratio tells what proportion of the company's profits is paid out as cash dividends
to common shareholders.
(3.) These three ratios are close to the industry averages and there are no discernible
significant trends.
c)
(1.) The two ratios that would be of most interest to long-term creditors are times interest
earned and the debt-to-equity ratio.
(2.) Times interest earned is earnings before interest expense and taxes divided by interest
expense. This ratio measures debt-paying ability. If stable, the company will be able to
refinance or obtain new funds at reasonable rates. The debt-to-equity ratio measures the
relative proportions of debt and equity in the company's capital structure. The lower the level
of the debt-to-equity ratio, the more security long-term debtors have.
(3.) For Shelzo Inc., times interest earned has been improving and is currently above the
industry average, indicating that the company should be able to borrow additional funds if
needed. The company's debt-to-equity ratio is below the industry average, which also
indicates the company has the capacity to perhaps take on additional debt.

Difficulty: Hard
195. Financial statements for Lowe Company appear below:
Total dividends paid during the year were $25,000, of which $12,000 was paid to the preferred
shareholders.
Required:
a) Current ratio.
f) Times interest earned.
g) Debt-to-equity ratio.
= ($45 + $38 + $67)/($36 + $24)
= 2.5 to 1

= $83/($36 + $24)
= 1.38 to 1
* Quick assets = Cash + Current receivables

= $45 + $38
= $83

= $145/$39
= 3.72 times

= $39

= 365/3.72
= 98.1 days

= $74/$63.5
= 1.17 times

= $63.5
e) Return on total assets = ((Net income + (Interest expense x (1 - tax rate))

= (($33 + ($5 x (1 - 0.40))/(($538 + $430)/2))
= $36/$484
= 7.4%
f) Times interest earned = Earnings before interest and taxes/Interest expense

= ($55 + $5)/$5
= 12.00 times
g) Debt-to-equity ratio = Liabilities/Shareholders' equity

= ($36 + $24 + $35 + $100)/($100 + $195 + $48)
= $195/$343
= 0.57 to 1

Difficulty: Medium
196. Several investors are in the process of organizing a new company. The investors feel that
$800,000 would be adequate to finance the new company's operations. Three methods are
available to finance the new company:
(1.) All $800,000 could be obtained through the issuance of common shares.
issuing $100 par value, l0% preferred shares.
issuing bonds with an interest rate of 10%.
The investors are confident that the company could earn $175,000 each year before interest
and taxes. The tax rate is 40%.
Required:
a) If the estimates are correct, compute the net income available to common shareholders
under each of the three financing methods proposed above.
b) Using the income data computed in part a) above, compute the return on common
shareholders' equity under each of the three methods.
c) Why do methods 2 and 3 provided a greater return on common equity than does method 1?
Why does method 3 provide a greater return on common equity than method 2?
a) Net income available to common shareholders:
c) Methods 2 and 3 provide a greater return on common equity than Method 1 due to the effect
of positive leverage. Methods 2 and 3 each contain sources of funds that require a fixed
annual return on the funds provided. This fixed annual return is less than what is being earned
on the assets of the company, with the difference going to common shareholders.
Method 3 uses debt and provides more leverage than Method 2, in which preferred shares are
issued. The difference is due to the deductibility for tax purposes of the interest on debt,
whereas dividends on preferred shares are not deductible for tax purposes.
Difficulty: Medium
197. Financial statements for Raridan Company appear below:
Required:
a) Current ratio.
= $500/$270
= 1.85 to 1

= $330/$270
= 1.22 to 1

= $140 + $190
= $330

= $1,900/$180
= 10.56 times

= $180

= 365/10.56
= 34.6 days

= $1,330/$105
= 12.67 times

= $105

= $350/$30
= 11.67 times

= $550/$1,490
= 0.37 to 1

Difficulty: Medium
198. Financial statements for Rarig Company appear below:
Required:
a) Current ratio.
= $590/$310
= 1.90 to 1

= $370/$310
= 1.19 to 1

= $210 + $160
= $370

= $1,800/$155
= 11.61 times

= $155

= 365/11.61
= 31.4 days

= $1,260/$185
= 6.81 times

= $185

= $330/$50
= 6.60 times

= $770/$1,320
= 0.58 to 1

Difficulty: Medium
199. Financial statements for Rarity Company appear below:
Required:
a) Current ratio.
= $500/$480
= 1.04 to 1

= $340/$480
= 0.71 to 1

= $210 + $130
= $340

= $1,100/$125
= 8.80 times

= $125

= 365/8.80
= 41.5 days

= $770/$100
= 7.70 times

= $100

= $200/$50
= 4.00 times

= $960/$980
= 0.98 to 1

Difficulty: Medium
200. Financial statements for Sarosa Company appear below:
Required:
a) Calculate Sarosa Company's return on total assets for Year 2.

b) Calculate Sarosa Company's return on common shareholders' equity for Year 2.
c) Financial leverage was positive for Year 2. Why?
d) Assume all current liabilities are interest free and that the interest expense of $40 is for the
bonds payable.
(i) Calculate the dollar amount of the financial leverage (in $1,000)
(ii) Allocate the dollar amount of the financial leverage to the following sources of financing:
Preferred Shares, Bonds Payable, and Current Liabilities (rounded to the nearest $1,000)
a) Return on total assets = Adjusted net income*/Average total assets**
= $245/$2,485
= 9.86%

= $217 + 40 x (1 - 0.30)
= $217 + $28
= $245

= $2,485
b) Return on common shareholders' equity = (Net income - Preferred dividends)

= [($217 - ($100 x 0.10)]/$1,625
= 12.74%
* Average common shareholders' equity = [($1,810 - $100) + ($1,640 - $100)]/2

= ($1,710 + $1,540)/2
= $1,625
c) Financial leverage is positive because return on common shareholders' equity is greater

than return on total assets.
d)
(ii) Allocations:
Note: The dollar amount of return on common shareholders' equity is $207 (that is, net income
of $217 less $10 dividends to preferred shareholders) is made up of $160 (assuming zero
financial leverage calculated as 9.86% x $1,625) and net positive financial leverage of $47

Difficulty: Hard
Chapter 14 Financial Statement Analysis Summary
Category # of Questions
Blooms Level: Analyze 91
Blooms Level: Apply 67
Blooms Level: Evaluate 3
Blooms Level: Remember 3
Blooms Level: Understand 36
Difficulty: Easy 62
Difficulty: Hard 23
Difficulty: Medium 115
Garrison - Chapter 14 218
Learning Objective: 1 114

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Chapter 14 Financial Statem

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Chapter 14 Financial Statement Analysis

1. How is horizontal analysis of financial statements accomplished?

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

A. How quickly accounts receivables can be collected.

A. The sale of additional common shares by the company.

A. Dividend yield ratio.

A. The numerator of the ratio consists only of net income.

7. Financial leverage is negative in which of the following situations?

8. Which of the following is NOT a potential source of financial leverage?

A. A decrease in the acid-test ratio.

A. A decrease in working capital and an increase in the current ratio.

A. Cash payment of payroll taxes payable.

A. An increase in working capital.

A. The firm has a large outstanding accounts receivable balance.

A. No effect on either the company's current ratio or its acid-test ratio.

A. Borrows cash using a six-month note.

A. A decrease in accounts receivable relative to sales.

A. An extraordinary gain or loss resulting from fire.

What were Sheridan's sales for the year?

What is the price-earnings ratio?

What is the price-earnings ratio?

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

What is the book value per common share?

A. Prepayment of $50,000 of next year's rent.

What were Ben Company's current liabilities?

Financial statements for Larosa Company appear below:

105.What is the expected dividend per common share?

128.What was the price-earnings ratio for the prior year?

159.What is the current ratio for CPZ Enterprises?

160.What is the company's acid-test (quick) ratio?

Financial statements for Narlock Company appear below:

182.When calculating the acid-test ratio, prepaid expenses are ignored.

CE Ltd's latest financial statements are as follows:

Calculate the following for Year 2:

a) Dividend payout ratio.

a) Basic earnings per common share.

Calculate the following:

Calculate the following for Year 2:

a) Basic earnings per common share.

Calculate the following for Year 2:

a) Earnings per share.

Calculate the following for Year 2:

a) Earnings per share.

Using the information provided above for Raritron Industries:

Calculate the following for Year 2:

Calculate the following for Year 2:

Calculate the following for Year 2:

Calculate the following for Year 2:

a) Calculate Sarosa Company's return on total assets for Year 2.

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

A. How quickly accounts receivables can be collected.

A. The sale of additional common shares by the company.

A. Dividend yield ratio.

A. The numerator of the ratio consists only of net income.

7. Financial leverage is negative in which of the following situations?

8. Which of the following is NOT a potential source of financial leverage?

A. A decrease in the acid-test ratio.

A. A decrease in working capital and an increase in the current ratio.

A. Cash payment of payroll taxes payable.

A. An increase in working capital.

Inventory = CA - QA = 120,0002 - 120,0001.5 = 60,000.