Chap 013

Chapter 13
Financial Statement Analysis
True / False Questions
1. Horizontal analysis involves comparing two or more years' financial data for a single
company.
True False
2. The gross margin percentage is computed by dividing the gross margin by sales.
True False
3. If a company's return on assets is substantially higher than its cost of borrowing, then
the common stockholders would normally want the company to have a relatively
high debt/equity ratio.
True False
4. Dividing the market price of a share of stock by the dividends per share gives the
price-earnings ratio.
True False
5. The dividend yield ratio is calculated by dividing dividends per share by earnings per
share.
True False
6. Financial leverage is positive if the interest rate on debt is lower than the return on
total assets.
True False
7. Issuing common stock will increase a company's financial leverage.
True False
8. If the assets in which borrowed funds are invested are able to earn a rate of return
greater than the interest rate required by the lender, then financial leverage is
positive.
True False
9. One would expect the book value of a share of stock to be about the same as the
stock's market value.
True False
10. The acid-test ratio is always smaller than the current ratio.
True False
11. All debt is considered in the computation of the acid-test ratio.
True False
12. When computing the acid-test ratio, a short-term note receivable would be included
in the numerator.
True False
13. The purchase of marketable securities for cash will lower a firm's acid-test ratio.
True False
14. As the inventory turnover increases, the number of days required to sell the inventory
one time also increases.
True False
15. Negative working capital indicates that the sum of all current assets is negative.
True False
Multiple Choice Questions
16. The formula for the gross margin percentage is:
A. (Sales - Cost of goods sold)/Cost of goods sold
B. (Sales - Cost of goods sold)/Sales
C. Net income/Sales
D. Net income/Cost of goods sold
17. The gross margin percentage is most likely to be used to assess:
A. how quickly accounts receivables can be collected.
B. how quickly inventories are sold.
C. the efficiency of administrative departments.
D. the overall profitability of the company's products.

18. The market price of XYZ Company's common stock dropped from $25 to $21 per
share. The dividend paid per share remained unchanged. The company's dividend
payout ratio would:
A. increase.
B. decrease.
C. be unchanged.
D. impossible to determine without more information.
19. A drop in the market price of a firm's common stock will immediately affect its:
A. return on common stockholders' equity.
B. current ratio.
C. dividend payout ratio.
D. dividend yield ratio.
20. Financial leverage is negative when:
A. the return on total assets is less than the rate of return on common stockholders'
equity.
B. total liabilities are less than stockholders' equity.
C. total liabilities are less than total assets.
D. the return on total assets is less than the rate of return demanded by creditors.
21. Which of the following is not a potential source of financial leverage?
A. Long-term debt.
B. Common stock.
C. Accounts payable.
D. Interest payable.
22. Issuing new shares of stock in a five-for-one split of common stock would:
A. decrease the book value per share of common stock.
B. increase the book value per share of common stock.
C. increase total stockholders' equity.
D. decrease total stockholders' equity.
23. A company's current ratio and acid-test ratios are both greater than 1. Issuing bonds
to finance purchase of an office building with the first installment of the bonds due in
the current year would:
A. decrease net working capital.
B. decrease the current ratio.
C. decrease the acid-test ratio.
D. affect all of the above as indicated.

24. What is the effect of a purchase of inventory on account on the current ratio and on
working capital, respectively? (Assume a current ratio greater than one prior to this
transaction.)
A. Option A
B. Option B
C. Option C
D. Option D
25. At the beginning of the year, a company's current ratio is 2.2. At the end of the year,
the company has a current ratio of 2.5. Which of the following could help explain the
change in the current ratio?
A. An increase in inventories.
B. An increase in accounts payable.
C. An increase in property, plant, and equipment.
D. An increase in bonds payable.

26. A company's current ratio and acid-test ratios are both greater than 1. The collection
of a current accounts receivable of $29,000 would:
A. increase the current ratio.
C. not affect the current ratio or the acid-test ratio.
D. decrease the acid-test ratio.
27. Assume a company has a current ratio that is greater than 1. Which of the following
transactions will reduce the company's current ratio?
A. Selling office equipment at book value.
B. Paying a cash dividend already declared.
C. Borrowing by taking out a short-term loan.
D. Selling equipment at a loss.
28. Higgins Company presently has a current ratio of 0.6. It is currently negotiating a
loan, but it has been informed it must improve its current ratio before the loan will be
approved. Which of the following actions would improve its current ratio?
A. Pay off a portion of its long-term debt.
B. Use cash to pay off some current liabilities.
C. Purchase additional inventory on credit.
D. Collect some of the current accounts receivable.

29. The ratio of cash, trade receivables, and marketable securities to current liabilities is:
A. the working capital of a company.
B. the acid-test ratio.
C. the current ratio.
D. the debt to equity ratio.
30. Wolbers Company has an acid-test ratio of 1.4. Which of the following events will
cause this ratio to decrease?
A. Selling merchandise on account.
C. Borrowing using a short-term note.
31. Park Company purchased $100,000 in inventory from its suppliers, on account. The
company's acid-test ratio would:
A. increase.
B. decrease.
C. remain unchanged.
D. be impossible to determine from the given information.

32. Assuming stable business conditions, an increase in the accounts receivable turnover
ratio could be explained by:
A. stricter policies with respect to the granting of credit to customers.
B. an easing of policies with respect to the granting of credit to customers.
C. a slowdown in collecting accounts receivables from customers.
D. none of these.
33. Ozols Corporation's most recent income statement appears below:
The gross margin percentage is closest to:
A. 33.2%
B. 55.7%
C. 300.8%
D. 125.6%
34. Crandler Company's net income last year was $60,000. The company paid preferred
dividends of $20,000 and its average common stockholders' equity was $500,000.
The company's return on common stockholders' equity for the year was closest to:
A. 16.0%
B. 4.0%
C. 8.0%
D. 12.0%
35. The average stockholders' equity for Horn Co. last year was $2,000,000. Included in
this figure was $200,000 of preferred stock. Preferred dividends were $16,000. If the
return on common stockholders' equity was 12.5% for the year, net income was:
A. $225,000
B. $250,000
C. $241,000
D. $234,000
36. Artist Company's net income last year was $500,000. The company has 150,000
shares of common stock and 40,000 shares of preferred stock outstanding. There was
no change in the number of common or preferred shares outstanding during the
year. The company declared and paid dividends last year of $1.70 per share on the
common stock and $0.70 per share on the preferred stock. The earnings per share of
common stock is closest to:
A. $3.15
B. $3.52
C. $1.63
D. $3.33
37. Archer Company had net income of $40,000 last year. The company has 5,000 shares
of common stock and 2,500 shares of preferred stock outstanding. There was no
change in the number of common or preferred shares outstanding during the year.
Preferred dividends were $2 per share. The earnings per share of common stock
was:
A. $7.00
B. $8.00
C. $5.33
D. $7.50
38. The following data have been taken from your company's financial records for the
current year:
The price-earnings ratio is:
A. 12.5
B. 6.0
C. 8.0
D. 7.5
current year:
A. 7.5
B. 10.0
C. 9.4
D. 13.3
40. Data concerning Bouerneuf Company's common stock follow:
The price-earnings ratio would be:
A. 2.00
B. 2.67
C. 3.00
D. 4.00
41. Boggs Company has 40,000 shares of common stock outstanding. The book value
per share of this stock was $60.00 and the market value per share was $75.00 at the
end of the year. Net income for the year was $400,000. Interest on long term debt
was $40,000. Dividends paid to common stockholders were $3.00 per share. The tax
rate was 30%. The company's price-earnings ratio at the end of the year was:
A. 25
B. 20
C. 7.50
D. 6.00
42. Last year the return on total assets in Jeffrey Company was 8.5%. The total assets
were 2.9 million at the beginning of the year and 3.1 million at the end of the year.
The tax rate was 30%, interest expense totaled $110 thousand, and sales were $5.2
million. Net income for the year was:
A. $145,000
B. $222,000
C. $332,000
D. $178,000
43. Brandon Company's net income last year was $65,000 and its interest expense was
$20,000. Total assets at the beginning of the year were $640,000 and total assets at
the end of the year were $690,000. The company's income tax rate was 30%. The
company's return on total assets for the year was closest to:
A. 9.8%
B. 10.7%
C. 12.8%
D. 11.9%
44. The following account balances have been provided for the end of the most recent
year:
The book value per share of common stock is:
A. $22
B. $25
C. $20
D. $28
45. Vessels Corporation's net income for the most recent year was $2,532,000. A total of
200,000 shares of common stock and 200,000 shares of preferred stock were
outstanding throughout the year. Dividends on common stock were $3.80 per share
and dividends on preferred stock were $1.25 per share. The earnings per share of
common stock is closest to:
A. $12.66
B. $8.86
C. $7.61
D. $11.41
46. Tronnes Corporation's net income last year was $1,750,000. The dividend on common
stock was $2.60 per share and the dividend on preferred stock was $2.50 per share.
The market price of common stock at the end of the year was $57.70 per share.
Throughout the year, 300,000 shares of common stock and 100,000 shares of
preferred stock were outstanding. The price-earnings ratio is closest to:
A. 17.85
B. 11.54
C. 24.04
D. 9.89
47. Delatrinidad Corporation's net income last year was $7,736,000. The dividend on
common stock was $12.60 per share and the dividend on preferred stock was $2.80
per share. The market price of common stock at the end of the year was $53.30 per
share. Throughout the year, 400,000 shares of common stock and 200,000 shares of
preferred stock were outstanding. The dividend payout ratio is closest to:
A. 0.70
B. 0.65
C. 2.36
D. 1.87
48. Last year, Shadow Corporation's dividend on common stock was $9.90 per share and
the dividend on preferred stock was $1.00 per share. The market price of common
stock at the end of the year was $68.10 per share. The dividend yield ratio is closest
to:
A. 0.15
B. 0.16
C. 0.91
D. 0.01
49. Hagerman Corporation's most recent income statement appears below:
The beginning balance of total assets was $140,000 and the ending balance was
$90,000. The return on total assets is closest to:
A. 18.3%
B. 24.3%
C. 34.8%
D. 26.1%
50. Excerpts from Lasso Corporation's most recent balance sheet appear below:
Net income for Year 2 was $145,000. Dividends on common stock were $55,000 in
total and dividends on preferred stock were $20,000 in total. The return on common
stockholders' equity for Year 2 is closest to:
A. 12.3%
B. 8.1%
C. 13.0%
D. 14.3%
51. Data from Saldivar Corporation's most recent balance sheet appear below:
A total of 150,000 shares of common stock and 40,000 shares of preferred stock were
outstanding at the end of the year. The book value per share is closest to:
A. $2.73
B. $5.00
C. $6.53
D. $7.87
52. Drama Company's working capital is $16,000 and its current liabilities are $94,000.
The company's current ratio is closest to:
A. 1.17
B. 0.17
C. 6.88
D. 0.83
53. Selected year-end data for the Brayer Company are presented below:
The company has no prepaid expenses and inventories remained unchanged during
the year. Based on these data, the company's inventory turnover ratio for the year
was closest to:
A. 1.20
B. 2.40
C. 1.67
D. 2.33
54. Brewster Company has an acid-test ratio of 1.5 and a current ratio of 2.5. Current
assets equal $200,000, of which $10,000 is prepaid expenses. The company's current
assets consist of cash, marketable securities, accounts receivable, prepaid expenses,
and inventory. Brewster Company's inventory must be:
A. $30,000
B. $110,000
C. $70,000
D. $80,000
55. Cotuit Company has a current ratio of 3.2 and an acid-test ratio of 2.4. The
company's current assets consist of cash, marketable securities, accounts receivable,
and inventory. The company's inventory is $40,000. Cotuit Company's current
liabilities must be:
A. $40,000
B. $120,000
C. $50,000
D. $32,000
56. Erastic Company has $14,000 in cash, $8,000 in marketable securities, $34,000 in
account receivable, $40,000 in inventories, and $42,000 in current liabilities. The
company's current assets consist of cash, marketable securities, accounts receivable,
and inventory. The company's acid-test ratio is closest to:
A. 1.33
B. 0.81
C. 2.29
D. 1.14
57. Fraser Company had $130,000 in sales on account last year. The beginning accounts
receivable balance was $10,000 and the ending accounts receivable balance was
$14,000. The company's accounts receivable turnover was closest to:
A. 5.42
B. 13.00
C. 9.29
D. 10.83
58. Grasse Company had $160,000 in sales on account last year. The beginning accounts
receivable balance was $10,000 and the ending accounts receivable balance was
$12,000. The company's average collection period was closest to:
A. 25.09 days
B. 22.81 days
C. 50.19 days
D. 27.38 days
59. Harbor Company, a retailer, had cost of goods sold of $170,000 last year. The
beginning inventory balance was $20,000 and the ending inventory balance was
$24,000. The company's inventory turnover was closest to:
A. 7.08
B. 7.73
C. 3.86
D. 8.50
60. Irastan Company, a retailer, had cost of goods sold of $250,000 last year. The
$20,000. The company's average sale period was closest to:
A. 40.88 days
B. 29.20 days
C. 35.03 days
D. 70.08 days
61. Deschambault Corporation's total current assets are $260,000, its noncurrent assets
are $700,000, its total current liabilities are $130,000, its long-term liabilities are
$510,000, and its stockholders' equity is $320,000. Working capital is:
A. $260,000
B. $320,000
C. $190,000
D. $130,000
62. Ladabouche Corporation's total current assets are $390,000, its noncurrent assets are
$630,000, its total current liabilities are $330,000, its long-term liabilities are $420,000,
and its stockholders' equity is $270,000. The current ratio is closest to:
A. 0.85
B. 0.79
C. 1.18
D. 0.62
63. Data from Adamis Corporation's most recent balance sheet appear below:
The company's acid-test ratio is closest to:
A. 0.33
B. 0.71
C. 0.81
D. 0.10
64. Bonine Corporation has provided the following data:
The accounts receivable turnover for this year is closest to:
A. 0.83
B. 8.94
C. 9.85
D. 1.20
65. Data from Concepcion Corporation's most recent balance sheet and income
statement appear below:
The average collection period for this year is closest to:
A. 54.3 days
B. 7.4 days
C. 7.2 days
D. 54.7 days
66. Kaelker Corporation has provided the following data:
The inventory turnover for this year is closest to:
A. 3.36
B. 0.87
C. 1.15
D. 3.15
67. Data from Davoren Corporation's most recent balance sheet and income statement
appear below:
The average sale period for this year is closest to:
A. 55.7 days
B. 64.4 days
C. 112.0 days
D. 122.1 days
68. Last year Jason Company had a net income of $250,000, income tax expense of
$78,000, and interest expense of $30,000. The company's times interest earned was
closest to:
A. 4.73
B. 9.33
C. 11.93
D. 8.33
69. Jersey Corporation has total interest expense of $10,000, sales of $1 million, a tax rate
of 40%, and net income (after taxes) of $60,000. What is this firm's times interest
earned ratio?
A. 16
B. 11
C. 10
D. 7
70. Krast Company has total assets of $160,000 and total liabilities of $70,000. The
company's debt-to-equity ratio is closest to:
A. 0.56
B. 0.44
C. 0.30
D. 0.78
71. Pia Corporation has provided the following data from its most recent income
statement:
The times interest earned ratio is closest to:
A. 2.09
B. 1.09
C. 0.76
D. 2.98
72. Damon Corporation has provided the following data from its most recent balance
sheet:
The debt-to-equity ratio is closest to:
A. 0.17
B. 6.00
C. 0.86
D. 7.00
73. Hartzog Corporation's most recent balance sheet and income statement appear
below:
Dividends on common stock during Year 2 totaled $60 thousand. Dividends on
preferred stock totaled $5 thousand. The market price of common stock at the end of
Year 2 was $7.04 per share.
The gross margin percentage for Year 2 is closest to:
A. 41.5%
B. 70.9%
C. 15.2%
D. 658.8%
below:
The earnings per share of common stock for Year 2 is closest to:
A. $0.40
B. $0.73
C. $0.61
D. $0.43
below:
The price-earnings ratio for Year 2 is closest to:
A. 9.64
B. 16.37
C. 11.54
D. 17.60
below:
The dividend payout ratio for Year 2 is closest to:
A. 81.3%
B. 75.0%
C. 70.6%
D. 1250.0%
below:
The dividend yield ratio for Year 2 is closest to:
A. 0.36%
B. 92.31%
C. 4.26%
D. 4.62%
below:
The return on total assets for Year 2 is closest to:
A. 7.85%
B. 7.77%
C. 6.51%
D. 6.44%
below:
The return on common stockholders' equity for Year 2 is closest to:
A. 11.33%
B. 10.00%
C. 10.67%
D. 9.41%
below:
The book value per share at the end of Year 2 is closest to:
A. $6.60
B. $4.30
C. $3.80
D. $0.40
below:
The working capital at the end of Year 2 is:
A. $610 thousand
B. $860 thousand
C. $310 thousand
D. $710 thousand
below:
The current ratio at the end of Year 2 is closest to:
A. 2.03
B. 0.35
C. 0.75
D. 0.46
below:
The acid-test ratio at the end of Year 2 is closest to:
A. 2.03
B. 1.47
C. 1.60
D. 1.33
below:
The accounts receivable turnover for Year 2 is closest to:
A. 5.19
B. 5.40
C. 1.08
D. 0.92
below:
The average collection period for Year 2 is closest to:
A. 0.9 days
B. 70.3 days
C. 1.1 days
D. 67.6 days
below:
The inventory turnover for Year 2 is closest to:
A. 0.93
B. 1.08
C. 5.85
D. 6.08
below:
The average sale period for Year 2 is closest to:
A. 60.0 days
B. 35.1 days
C. 62.4 days
D. 213.6 days
below:
The times interest earned for Year 2 is closest to:
A. 3.40
B. 8.34
C. 4.84
D. 5.84
below:
The debt-to-equity ratio at the end of Year 2 is closest to:
A. 0.61
B. 0.28
C. 0.53
D. 0.19
90. Hick Corporation's most recent balance sheet and income statement appear below:
preferred stock totaled $20 thousand. The market price of common stock at the end
of Year 2 was $9.57 per share.
A. 82.9%
B. 45.3%
C. 446.2%
D. 22.4%
A. $0.55
B. $0.93
C. $1.01
D. $0.65
A. 14.72
B. 17.40
C. 9.48
D. 10.29
A. 72.7%
B. 54.5%
C. 46.2%
D. 1818.2%
A. 1.05%
B. 4.18%
C. 75.00%
D. 3.13%
A. 9.35%
B. 10.23%
C. 9.42%
D. 10.16%
A. 12.44%
B. 13.02%
C. 15.38%
D. 10.53%
A. $4.35
B. $5.35
C. $0.55
D. $6.95
98. Selected financial data from Osterville Company for the most recent year appear
below:
The income tax rate is 40%.
Net income as a percentage of sales was:
A. 5%
B. 3%
C. 2.25%
D. 1.75%
below:
Net operating income as a percentage of sales was:
A. 40%
B. 30%
C. 10%
D. 5%
100.Financial statements for Orange Company appear below:
Dividends during Year 2 totaled $156 thousand, of which $18 thousand were
preferred dividends.
The market price of a share of common stock on December 31, Year 2 was $100.
Orange Company's earnings per share of common stock for Year 2 was closest to:
A. $7.23
B. $2.27
C. $10.91
D. $7.64
101. Financial statements for Orange Company appear below:
Orange Company's dividend yield ratio on December 31, Year 2 was closest to:
A. 3.1%
B. 1.1%
C. 3.5%
D. 2.7%
Orange Company's return on total assets for Year 2 was closest to:
A. 15.5%
B. 15.9%
C. 16.5%
D. 14.5%
Orange Company's current ratio at the end of Year 2 was closest to:
A. 1.24
B. 0.55
C. 0.44
D. 1.71
Orange Company's accounts receivable turnover for Year 2 was closest to:
A. 15.7
B. 11.0
C. 17.7
D. 12.4
Orange Company's average sale period for Year 2 was closest to:
A. 23.2 days
B. 29.5 days
C. 33.2 days
D. 20.6 days
Orange Company's times interest earned for Year 2 was closest to:
A. 16.0
B. 28.3
C. 17.0
D. 11.2
107.Financial statements for Harwich Company for the most recent year appear below:
The balances in the Cash, Accounts Receivable, Inventory, Bonds Payable, Common
Stock, and Additional Paid-In Capital accounts are unchanged from the beginning of
the year. A $0.75 per share dividend was declared and paid during the year. On
December 31, Harwich Company's common stock was trading at $24.00 per share.
Harwich Company's current ratio at December 31 was closest to:
A. 1.95
B. 2.67
C. 1.33
D. 2.00
Harwich Company's times interest earned ratio for the year was closest to:
A. 11.0
B. 10.5
C. 12.0
D. 22.0
Harwich Company's acid-test ratio at December 31 was closest to:
A. 0.45
B. 0.83
C. 2.00
D. 1.20
110. Financial statements for Harwich Company for the most recent year appear below:
Harwich Company's inventory turnover ratio for the year was closest to:
A. 8
B. 3
C. 5
D. 7.5
Harwich Company's average collection period for the year was closest to:
A. 72 days
B. 8 days
C. 120 days
D. 46 days
Harwich Company's price-earnings ratio at December 31 was closest to:
A. 3.00
B. 8.25
C. 8.00
D. 7.25
Harwich Company's book value per share at December 31 was closest to:
A. $7.00
B. $15.00
C. $24.00
D. $30.00
Harwich Company's dividend payout ratio for the year was closest to:
A. 75%
B. 25%
C. 5%
D. 3.125%
Harwich Company's debt-to-equity ratio at the end of the year was closest to:
A. 0.33
B. 0.50
C. 0.67
D. 1.00
Harwich Company's dividend yield ratio for the year was closest to:
A. 3.125%
B. 12.500%
C. 9.125%
D. 25.000%
117. Financial statements for Larned Company appear below:
Larned Company's earnings per share of common stock for Year 2 was closest to:
A. $18.39
B. $27.22
C. $19.06
D. $11.03
Larned Company's price-earnings ratio on December 31, Year 2 was closest to:
A. 5.88
B. 14.50
C. 8.70
D. 8.40
Larned Company's dividend payout ratio for Year 2 was closest to:
A. 75.8%
B. 28.5%
C. 76.7%
D. 47.4%
120.Financial statements for Larned Company appear below:
Larned Company's dividend yield ratio on December 31, Year 2 was closest to:
A. 8.7%
B. 9.1%
C. 8.3%
D. 5.5%
Larned Company's return on total assets for Year 2 was closest to:
A. 15.8%
B. 17.2%
C. 18.6%
D. 17.8%
Larned Company's return on common stockholders' equity for Year 2 was closest to:
A. 29.8%
B. 26.9%
C. 30.9%
D. 27.9%
Larned Company's book value per share at the end of Year 2 was closest to:
A. $16.11
B. $63.89
C. $70.56
D. $10.00
124.The following selected data are for Geneva Company:
Geneva Company's return on common stockholders' equity for Year 2 is closest to:
A. 11%
B. 12%
C. 13%
D. 6%
125.The following selected data are for Geneva Company:
A. $1.60
B. $2.07
C. $3.27
D. $3.67
126.Cadarette Corporation's most recent balance sheet and income statement appear
below:
A. $1.00
B. $1.60
C. $1.43
D. $0.90
below:
A. 11.08
B. 12.40
C. 19.70
D. 17.73
below:
A. 55.6%
B. 44.4%
C. 40.0%
D. 1111.1%
below:
A. 2.26%
B. 2.82%
C. 80.00%
D. 0.56%
below:
A. 7.75%
B. 8.67%
C. 7.69%
D. 8.61%
131. Cadarette Corporation's most recent balance sheet and income statement appear
below:
A. 11.43%
B. 11.61%
C. 10.29%
D. 12.90%
below:
A. $8.00
B. $0.90
C. $13.00
D. $9.00
133.Excerpts from Goodrow Corporation's most recent balance sheet and income

A. $0.35
B. $0.50
C. $0.30
D. $0.65

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

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

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

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

A. 8.70%
B. 10.17%
C. 10.14%
D. 11.86%

A. $0.30
B. $3.05
C. $6.10
D. $3.55
140.Financial statements for Marcell Company appear below:
Marcell Company's working capital (in thousands of dollars) at the end of Year 2 was
closest to:
A. $470
B. $20
C. $520
D. $1,240
Marcell Company's current ratio at the end of Year 2 was closest to:
A. 1.04
B. 0.42
C. 0.48
D. 1.22
Marcell Company's acid-test ratio at the end of Year 2 was closest to:
A. 0.33
B. 1.35
C. 0.60
D. 0.74
Marcell Company's accounts receivable turnover for Year 2 was closest to:
A. 16.2
B. 9.9
C. 23.2
D. 14.2
Marcell Company's average collection period for Year 2 was closest to:
A. 22.6 days
B. 15.7 days
C. 25.8 days
D. 36.9 days
Marcell Company's inventory turnover for Year 2 was closest to:
A. 16.2
B. 23.2
C. 14.2
D. 9.9
Marcell Company's average sale period for Year 2 was closest to:
A. 15.7 days
B. 25.8 days
C. 36.9 days
D. 22.6 days
147.Selected financial data for Bragg Company appear below:
Bragg Company's inventory turnover ratio for Year 2 was closest to:
A. 2.00
B. 2.67
C. 4.80
D. 4.00
148.Selected financial data for Bragg Company appear below:
Suppose that 45% of Bragg Company's total sales are cash sales. The company's
average collection period (age of receivables) for Year 2 was closest to:
A. 44.24 days
B. 54.07 days
C. 36.05 days
D. 29.49 days
149.Dieringer Corporation's most recent balance sheet and income statement appear
below:
A. $970 thousand
B. $570 thousand
C. $280 thousand
D. $810 thousand
below:
A. 1.97
B. 0.72
C. 0.30
D. 0.41
151. Dieringer Corporation's most recent balance sheet and income statement appear
below:
A. 1.69
B. 1.97
C. 1.39
D. 1.52
below:
A. 1.14
B. 8.19
C. 0.88
D. 8.73
below:
A. 1.1 days
B. 0.9 days
C. 41.8 days
D. 44.6 days
below:
A. 1.25
B. 9.89
C. 11.13
D. 0.80
below:
A. 36.9 days
B. 248.0 days
C. 22.3 days
D. 32.8 days
156.Excerpts from Zorra Corporation's most recent balance sheet appear below:
Sales on account in Year 2 amounted to $1,370 and the cost of goods sold was $850.
A. $630
B. $810
C. $680
D. $420
A. 0.38
B. 2.62
C. 0.52
D. 0.74
A. 1.81
B. 2.62
C. 1.69
D. 1.36
A. 6.85
B. 0.87
C. 1.15
D. 6.37
A. 57.3 days
B. 53.3 days
C. 0.9 days
D. 1.2 days
161. Excerpts from Zorra Corporation's most recent balance sheet appear below:
A. 4.05
B. 4.36
C. 1.17
D. 0.86
A. 55.9 days
B. 90.1 days
C. 83.7 days
D. 226.5 days
163.Excerpts from Tigner Corporation's most recent balance sheet appear below:
A. $740
B. $790
C. $430
D. $150
A. 1.12
B. 1.54
C. 0.35
D. 1.00
A. 1.18
B. 1.55
C. 1.00
D. 0.96
A. 7.10
B. 0.91
C. 8.79
D. 1.10
A. 0.86
B. 1.17
C. 6.31
D. 6.83
168.Data from Kooistra Corporation's most recent balance sheet appear below:
A. $990
B. $170
C. $1,010
D. $450
A. 0.96
B. 0.30
C. 0.31
D. 1.61
A. 0.75
B. 1.61
C. 0.96
D. 1.05
171. Data from Kooistra Corporation's most recent balance sheet appear below:
A. 0.9 days
B. 38.8 days
C. 40.2 days
D. 1.1 days
A. 51.7 days
B. 221.3 days
C. 78.2 days
D. 85.3 days
173.Financial statements for Narita Company appear below:
Narita Company's times interest earned for Year 2 was closest to:
A. 14.7
B. 26.0
C. 10.3
D. 15.7
174.Financial statements for Narita Company appear below:
Narita Company's debt-to-equity ratio at the end of Year 2 was closest to:
A. 0.17
B. 0.58
C. 0.25
D. 0.42
175.Mclaughlin Corporation's most recent balance sheet and income statement appear
below:
A. 2.73
B. 4.91
C. 7.01
D. 3.91
176.Mclaughlin Corporation's most recent balance sheet and income statement appear
below:
A. 0.69
B. 0.40
C. 0.35
D. 0.93
177.Data from Kempen Corporation's most recent balance sheet and the company's
income statement appear below:
A. 3.45
B. 6.36
C. 4.45
D. 2.42
178.Data from Kempen Corporation's most recent balance sheet and the company's
A. 0.71
B. 0.33
C. 0.24
D. 0.57
Essay Questions
179.Lundberg Corporation's most recent balance sheet and income statement appear
below:
Required:
Compute the following for Year 2:
a. Gross margin percentage.

b. Earnings per share (of common stock).
c. Price-earnings ratio.
d. Dividend payout ratio.
e. Dividend yield ratio.
f. Return on total assets.
g. Return on common stockholders' equity.
h. Book value per share.
i. Working capital.
j. Current ratio.
k. Acid-test ratio.
l. Accounts receivable turnover.
m. Average collection period.
n. Inventory turnover.
o. Average sale period.
p. Times interest earned.
q. Debt-to-equity ratio.
180.Guedea Corporation's most recent balance sheet and income statement appear
below:
Required:

181. Tubergen Corporation's most recent income statement appears below:
Required:
Compute the gross margin percentage.

182.Financial statements for Pracht Company appear below:
Dividends during Year 2 totaled $62 thousand, of which $15 thousand were preferred
dividends.
Required:
a. Earnings per share of common stock.

b. Price-earnings ratio.
c. Dividend payout ratio.
d. Dividend yield ratio.
e. Return on total assets.
f. Return on common stockholders' equity.
g. Book value per share.
h. Working capital.
i. Current ratio.
j. Acid-test ratio.
k. Accounts receivable turnover.
l. Average collection period.
m. Inventory turnover.
n. Average sale period.
o. Times interest earned.
p. Debt-to-equity ratio.
183.Condensed financial statements for Blackhurst Company appear below:
There were 72,000 shares of common stock outstanding throughout the year.
Dividends on common stock amounted to $320,400 and dividends on preferred
stock amounted to $45,000. The market value of a share of common stock was $54
at the end of the year.
Required:
On the basis of the information given above, fill in the blanks with the appropriate
figures:
Example: The gross margin as a percent of sales would be computed by dividing

$2,160,000 by $5,400,000.
a. The earnings per share of common stock for the year would be computed by
dividing _______________ by _________________.
b. The times interest earned for the year would be computed by dividing
_______________ by _________________.
c. The price-earnings ratio at the end of the year would be computed by dividing
_______________ by _________________.
d. The dividend payout ratio for the year would be computed by dividing
_______________ by _________________.
e. The dividend yield ratio for the year would be computed by dividing
_______________ by _________________.
f. The return on total assets for the year would be computed by dividing
_______________ by _________________.
g. The return on common stockholders' equity for the year would be computed by
dividing _______________ by _________________.
h. The acid-test ratio at the end of the year would be computed by dividing
_______________ by _________________.
i. The accounts receivable turnover for the year would be computed by dividing
_______________ by _________________.
j. The inventory turnover for the year would be computed by dividing _______________
by _________________.
k. The debt-to-equity ratio at the end of the year would be computed by dividing
_______________ by _________________.
184.Condensed financial statements for Pardin Company are given below:
The company paid total dividends of $100,000 during the year. At the end of Year 2,
the company's common stock was selling for $38 per share.
Required:
figures:
Example: The current ratio at the end of Year 2 would be computed by dividing
$1,080,000 by $400,000.
a. The acid-test ratio at the end of Year 2 would be computed by dividing

_______________ by _________________.
b. The accounts receivable turnover during Year 2 would be computed by dividing

_______________ by _________________.
c. The inventory turnover during Year 2 would be computed by dividing

_______________ by _________________.
d. The times interest earned for Year 2 would be computed by dividing

_______________ by _________________.
e. The earnings per share of common stock for Year 2 would be computed by
dividing _______________ by _________________.
f. The return on total assets for Year 2 would be computed by dividing

_______________ by _________________.
g. The debt-to-equity ratio at the end of Year 2 would be computed by dividing

_______________ by _________________.
h. The dividend yield ratio would be computed by dividing _______________ by
_________________.
i. The return on common stockholders' equity for Year 2 would be computed by

dividing _______________ by _________________.
j. Whether the common stockholders gained or lost from the use of financial
leverage during Year 2 would be determined by comparing the ratio computed in
question ___ above to the ratio computed in question above ____. In this case,
financial leverage is (positive/negative) ___________________.
185.Bedrosian Incorporated has a line of credit from the Belmont National Bank that is
due to be renewed on February 1. The bank has requested the company's current
Income Statement and Comparative Statements of Financial Position which appear
below.
The bank has also requested that Bedrosian calculate a number of financial ratios.
Bedrosian's financial ratios have not yet been calculated for this year, but the
company's accounting staff has gathered the following industry averages for the
ratios from various sources.
Required:
a. Calculate the following financial ratios for this year for Bedrosian Incorporated.
1. Return on total assets.

2. Return on common stockholders' equity.
3. Current ratio.
4. Acid-test ratio.
5. Debt-to-equity ratio.
6. Times interest earned.
7. Dividend payout ratio.
b. By comparing the ratios calculated in Requirement A with the industry ratios,

evaluate Bedrosian's operations.
186.Renbud Computer Services Co. (RCS) specializes in customized software
development for the broadcast and telecommunications industries. The company
was started by three people in 1973 to develop software primarily for a national
network to be used in broadcasting national election results. After sustained and
manageable growth for many years, the company has grown very fast over the last
three years, doubling in size.
This growth has placed the company in a challenging financial position. Within thirty
days, RCS will need to renew its $300,000 loan with the Third State Bank of San
Marcos. This loan is classified as a current liability on RCS's balance sheet. Harvey
Renbud, president of RCS, is concerned about renewing the loan. The bank has
requested RCS's most recent financial statements which appear below, including
balance sheets for this year and last year. The bank has also requested four ratios
relating to operating performance and liquidity.
Required:
a. Explain why the Third State Bank of San Marcos would be interested in reviewing
Renbud Computer Services Co.'s comparative financial statements and its financial
ratios before renewing the loan.
b. Calculate the following financial ratios for Renbud Computer Services Co:
1. The current ratio for both this year and last year.
2. Accounts receivable turnover for this year.
3. Return on common stockholders' equity for this year.
4. The debt-to-equity ratio for both this year and last year.
c. Discuss briefly the limitations and difficulties that can be encountered in using ratio
analysis.
187.Recent financial statements for Madison Company are given below:
Madison Company paid dividends of $3.15 per share during the year. The company's
common stock had a market price of $63 per share on December 31. Assets at the
beginning of the year totaled $1,100,000 and stockholders' equity totaled $725,000.
Required:
Compute the following:

b. Dividend payout ratio.
c. Dividend yield ratio.
d. Price-earnings ratio.
g. Was financial leverage positive or negative for the year? Explain.
188.Financial statements for Qualle Company appear below:
Required:

d. Return on total assets.
e. Return on common stockholders' equity.
f. Book value per share.
189.Debutiaco Corporation's most recent balance sheet and income statement appear
below:
Required:
a. Earnings per share (of common stock).

190.Sweetman Corporation has provided the following financial data (in thousands of
dollars):
Net income for Year 2 was $120 thousand. Interest expense was $25 thousand. The
tax rate was 30%. Dividends on common stock during Year 2 totaled $80 thousand.
Dividends on preferred stock totaled $20 thousand. The market price of common
stock at the end of Year 2 was $4.75 per share.
Required:

191. Lunghofer Corporation's net income for the most recent year was $3,189,000. A total
of 300,000 shares of common stock and 100,000 shares of preferred stock were
outstanding throughout the year. Dividends on common stock were $4.90 per share
and dividends on preferred stock were $1.95 per share.
Required:
Compute the earnings per share of common stock. Show your work!
192.Basta Corporation's net income last year was $1,401,000. The dividend on common
preferred stock were outstanding.
Required:
Compute the price-earnings ratio. Show your work!

193.Sabb Corporation's net income last year was $6,190,000. The dividend on common
Required:
Compute the dividend payout ratio. Show your work!

194.Last year, Bickham Corporation's dividend on common stock was $8.70 per share
and the dividend on preferred stock was $3.80 per share. The market price of
common stock at the end of the year was $66.10 per share.
Required:
Compute the dividend yield ratio. Show your work!

195.Gulick Corporation's most recent income statement appears below:
$280,000.
Required:
Compute the return on total assets. Show your work!

196.Excerpts from Ruden Corporation's most recent balance sheet appear below:
total and dividends on preferred stock were $15,000 in total.
Required:
Compute the return on common stockholders' equity. Show your work!

197.Data from Paynter Corporation's most recent balance sheet appear below:
A total of 100,000 shares of common stock and 20,000 shares of preferred stock were
outstanding at the end of the year.
Required:
Compute the book value per share. Show your work!

198.Financial statements for Rarig Company appear below:
Required:
a. Current ratio.
b. Acid-test ratio.
c. Average collection period.
d. Inventory turnover.
e. Times interest earned.
f. Debt-to-equity ratio.
199.Malbrough Corporation's most recent balance sheet and income statement appear
below:
Required:
a. Working capital.
b. Current ratio.
c. Acid-test ratio.
d. Accounts receivable turnover.
e. Average collection period.
f. Inventory turnover.
g. Average sale period.
200.Excerpts from Stepney Corporation's most recent balance sheet (in thousands of
dollars) appear below:
Sales on account during the year totaled $1,440 thousand. Cost of goods sold was
$890 thousand.
Required:
a. Working capital.
b. Current ratio.
c. Acid-test ratio.
201.Heningburg Corporation's total current assets are $230,000, its noncurrent assets are
and its stockholders' equity is $250,000.
Required:
Compute the company's working capital. Show your work!

202.Gaskamp Corporation's total current assets are $270,000, its noncurrent assets are
and its stockholders' equity is $310,000.
Required:
Compute the company's current ratio. Show your work!

203.Data from Weichbrodt Corporation's most recent balance sheet appear below:
Required:
Compute the company's acid-test ratio. Show your work!

204.Millage Corporation has provided the following data:
Required:
Compute the accounts receivable turnover for this year. Show your work!
205.Data from Adame Corporation's most recent balance sheet and income statement
appear below:
Required:
Compute the average collection period for this year:

206.Eaglen Corporation has provided the following data:
Required:
Compute the inventory turnover for this year:

207.Data from Ankeny Corporation's most recent balance sheet and income statement
appear below:
Required:
Compute the average sale period for this year:

208.Zide Corporation's most recent balance sheet and income statement appear below:
Required:
a. Times interest earned.

b. Debt-to-equity ratio.
209.Pettengill Corporation's net operating income last year was $280,000; its interest
expense was $37,000; its total stockholders' equity was $920,000; and its total
liabilities were $620,000.
Required:

210.Dehne Corporation has provided the following data from its most recent income
statement:
Required:
Compute the times interest earned ratio. Show your work!

211. Schiff Corporation has provided the following data from its most recent balance
sheet:
Required:
Compute the debt-to-equity ratio. Show your work!

Chapter 13 Financial Statement Analysis Answer Key
True / False Questions
1. Horizontal analysis involves comparing two or more years' financial data for a
single company.
TRUE
AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Prepare and interpret financial statements in comparative and common-size form.
Topic: Statements in Comparative and Common-Size Form
2. The gross margin percentage is computed by dividing the gross margin by sales.
TRUE

Blooms: Remember
Difficulty: 1 Easy
3. If a company's return on assets is substantially higher than its cost of borrowing,
then the common stockholders would normally want the company to have a
relatively high debt/equity ratio.
TRUE

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Common Stockholder
Topic: Ratio Analysis—The Long-Term Creditor
4. Dividing the market price of a share of stock by the dividends per share gives the
price-earnings ratio.
FALSE

Blooms: Remember
Difficulty: 1 Easy
5. The dividend yield ratio is calculated by dividing dividends per share by earnings
per share.
FALSE

Blooms: Remember
Difficulty: 1 Easy
6. Financial leverage is positive if the interest rate on debt is lower than the return on
total assets.
TRUE

Blooms: Understand
Difficulty: 2 Medium
7. Issuing common stock will increase a company's financial leverage.
FALSE

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

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

Blooms: Understand
10. The acid-test ratio is always smaller than the current ratio.
TRUE

Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
11. All debt is considered in the computation of the acid-test ratio.
FALSE

Blooms: Remember
Difficulty: 1 Easy
12. When computing the acid-test ratio, a short-term note receivable would be
included in the numerator.
TRUE

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

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

Blooms: Understand
15. Negative working capital indicates that the sum of all current assets is negative.
FALSE

Blooms: Understand
Multiple Choice Questions
16. The formula for the gross margin percentage is:
A. (Sales - Cost of goods sold)/Cost of goods sold
B. (Sales - Cost of goods sold)/Sales
C. Net income/Sales
D. Net income/Cost of goods sold

Blooms: Remember
Difficulty: 1 Easy
17. The gross margin percentage is most likely to be used to assess:
A. how quickly accounts receivables can be collected.
B. how quickly inventories are sold.
C. the efficiency of administrative departments.
D. the overall profitability of the company's products.
The gross margin percentage is a broad measure of profitability

Blooms: Remember
Difficulty: 1 Easy
18. The market price of XYZ Company's common stock dropped from $25 to $21 per
share. The dividend paid per share remained unchanged. The company's dividend
payout ratio would:
A. increase.
B. decrease.
C. be unchanged.
D. impossible to determine without more information.
The dividend payout ratio is unaffected by market price (e.g., Dividend payout
ratio = Dividends per share ÷ Earnings per share)

Blooms: Remember
Difficulty: 1 Easy
19. A drop in the market price of a firm's common stock will immediately affect its:
A. return on common stockholders' equity.
B. current ratio.
C. dividend payout ratio.
D. dividend yield ratio.
Dividend yield ratio = Dividends per share ÷ Market price per share

Blooms: Understand
Source: CMA, adapted
20. Financial leverage is negative when:
A. the return on total assets is less than the rate of return on common
stockholders' equity.
B. total liabilities are less than stockholders' equity.
C. total liabilities are less than total assets.
D. the return on total assets is less than the rate of return demanded by creditors.
If the rate of return on total assets is less than the rate of return the company pays
its creditors, financial leverage is negative

Blooms: Understand
21. Which of the following is not a potential source of financial leverage?
A. Long-term debt.
B. Common stock.
C. Accounts payable.
D. Interest payable.
Financial leverage is obtained from current and long-term liabilities.

Blooms: Understand
Difficulty: 3 Hard
22. Issuing new shares of stock in a five-for-one split of common stock would:
A. decrease the book value per share of common stock.
B. increase the book value per share of common stock.
C. increase total stockholders' equity.
D. decrease total stockholders' equity.
If the number of shares increases the book value per share is decreased as
illustrated in the formula:
Book value per share = (Total stockholders' equity - Preferred stock) ÷ Number of
common shares outstanding

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

Blooms: Understand
Difficulty: 3 Hard
24. What is the effect of a purchase of inventory on account on the current ratio and
on working capital, respectively? (Assume a current ratio greater than one prior to
this transaction.)
A. Option A
B. Option B
C. Option C
D. Option D
The current ratio would decline since the same amount is added to the numerator
and denominator the fraction is reduced.
There would be no change to working capital since the increase in current assets
and current liabilities is the same.

Blooms: Understand
25. At the beginning of the year, a company's current ratio is 2.2. At the end of the
year, the company has a current ratio of 2.5. Which of the following could help
explain the change in the current ratio?
A. An increase in inventories.
B. An increase in accounts payable.
C. An increase in property, plant, and equipment.
D. An increase in bonds payable.
An increase in inventory would increase the current ratio. An increase in accounts

payable would decrease the current ratio. The other two changes would have no
effect on the current ratio.

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

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

Blooms: Understand
Difficulty: 3 Hard
28. Higgins Company presently has a current ratio of 0.6. It is currently negotiating a
loan, but it has been informed it must improve its current ratio before the loan will
be approved. Which of the following actions would improve its current ratio?
A. Pay off a portion of its long-term debt.
B. Use cash to pay off some current liabilities.
C. Purchase additional inventory on credit.
D. Collect some of the current accounts receivable.
When the current ratio is less than 1 (e.g., $300 ÷ $500 = 0.6) then increasing both
portions of the fraction by an equal amount would increase the current ratio (e.g.,
$350 ÷ $550 = 0.64.)

Blooms: Understand
Difficulty: 3 Hard
29. The ratio of cash, trade receivables, and marketable securities to current liabilities
is:
A. the working capital of a company.
B. the acid-test ratio.
C. the current ratio.
D. the debt to equity ratio.
Acid-test ratio = (Cash + Marketable securities + Accounts receivable + Short-term

notes receivable) ÷ Current liabilities

Blooms: Remember
Difficulty: 1 Easy
30. Wolbers Company has an acid-test ratio of 1.4. Which of the following events will
cause this ratio to decrease?
A. Selling merchandise on account.
C. Borrowing using a short-term note.
When the acid-test ratio is greater than 1 (e.g., $1,400 ÷ $1,000 = 1.4) then
increasing both portions of the fraction by an equal amount would reduce the
current ratio (e.g., $1,500 ÷ $1,100 = 1.36.)

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

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

Blooms: Understand
33. Ozols Corporation's most recent income statement appears below:
The gross margin percentage is closest to:
A. 33.2%
B. 55.7%
C. 300.8%
D. 125.6%
Gross margin percentage = Gross margin ÷ Sales

= $358,000 ÷ $643,000 = $55.7%
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
34. Crandler Company's net income last year was $60,000. The company paid
preferred dividends of $20,000 and its average common stockholders' equity was
$500,000. The company's return on common stockholders' equity for the year was
closest to:
A. 16.0%
B. 4.0%
C. 8.0%
D. 12.0%
Return on common stockholders' equity

= (Net income - Preferred dividends) ÷ Average common stockholders' equity
= ($60,000 - $20,000) ÷ $500,000 = 8.0%
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
35. The average stockholders' equity for Horn Co. last year was $2,000,000. Included in
this figure was $200,000 of preferred stock. Preferred dividends were $16,000. If
the return on common stockholders' equity was 12.5% for the year, net income
was:
A. $225,000
B. $250,000
C. $241,000
D. $234,000
Return on common stockholders' equity = (Net income - Preferred dividends) ÷

Average common stockholders' equity
12.5% = (Net income - $16,000) ÷ ($2,000,000 - $200,000)
Net income -$16,000 = 12.5% × $1,800,000
Net income = 12.5% × $1,800,000 + $16,000
= $225,000 + $16,000 = $241,000
AACSB: Analytic
Blooms: Apply
36. Artist Company's net income last year was $500,000. The company has 150,000
shares of common stock and 40,000 shares of preferred stock outstanding. There
was no change in the number of common or preferred shares outstanding during
the year. The company declared and paid dividends last year of $1.70 per share on
the common stock and $0.70 per share on the preferred stock. The earnings per
share of common stock is closest to:
A. $3.15
B. $3.52
C. $1.63
D. $3.33
Earnings per share = (Net Income - Preferred Dividends) ÷ Average number of

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

= ($40,000 - 2,500 shares × $2.00 per share) ÷ 5,000 shares
= ($40,000 - $5,000) ÷ 5,000 shares = $7.00 per share
AACSB: Analytic
Blooms: Apply
current year:
A. 12.5
B. 6.0
C. 8.0
D. 7.5
Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $120 per share ÷ $15 per share = 8.0
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
current year:
A. 7.5
B. 10.0
C. 9.4
D. 13.3
Price-earnings ratio = Market price per share ÷ Earnings per share

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
40. Data concerning Bouerneuf Company's common stock follow:
The price-earnings ratio would be:
A. 2.00
B. 2.67
C. 3.00
D. 4.00

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
41. Boggs Company has 40,000 shares of common stock outstanding. The book value
per share of this stock was $60.00 and the market value per share was $75.00 at
the end of the year. Net income for the year was $400,000. Interest on long term
debt was $40,000. Dividends paid to common stockholders were $3.00 per share.
The tax rate was 30%. The company's price-earnings ratio at the end of the year
was:
A. 25
B. 20
C. 7.50
D. 6.00

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

8.5% = Adjusted net income ÷ $3,000,000
Adjusted net income = 8.5% × $3,000,000 = $255,000
Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]

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

= $65,000 + [$20,000 × (1 - 0.30)] = $79,000

= $79,000 ÷ $665,000 = 11.9%
AACSB: Analytic
Blooms: Apply
44. The following account balances have been provided for the end of the most recent
year:
The book value per share of common stock is:
A. $22
B. $25
C. $20
D. $28
Book value per share = Common stockholders' equity ÷ Number of common

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

= ($2,532,000 - 200,000 shares × $1.25 per share) ÷ 200,000 shares
= ($2,532,000 - $250,000) ÷ 200,000 shares = $11.41 per share
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
46. Tronnes Corporation's net income last year was $1,750,000. The dividend on
common stock was $2.60 per share and the dividend on preferred stock was $2.50
per share. The market price of common stock at the end of the year was $57.70
per share. Throughout the year, 300,000 shares of common stock and 100,000
shares of preferred stock were outstanding. The price-earnings ratio is closest to:
A. 17.85
B. 11.54
C. 24.04
D. 9.89

= ($1,750,000 - $250,000) ÷ 300,000 shares = $5.00 per share
= $57.70 per share ÷ $5.00 per share = 11.54
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
47. Delatrinidad Corporation's net income last year was $7,736,000. The dividend on
common stock was $12.60 per share and the dividend on preferred stock was
$2.80 per share. The market price of common stock at the end of the year was
$53.30 per share. Throughout the year, 400,000 shares of common stock and
200,000 shares of preferred stock were outstanding. The dividend payout ratio is
closest to:
A. 0.70
B. 0.65
C. 2.36
D. 1.87

= ($7,736,000 - $560,000) ÷ 400,000 shares = $17.94 per share
Dividend payout ratio = Dividends per share ÷ Earnings per share

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
48. Last year, Shadow Corporation's dividend on common stock was $9.90 per share
common stock at the end of the year was $68.10 per share. The dividend yield ratio
is closest to:
A. 0.15
B. 0.16
C. 0.91
D. 0.01
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
49. Hagerman Corporation's most recent income statement appears below:
$90,000. The return on total assets is closest to:
A. 18.3%
B. 24.3%
C. 34.8%
D. 26.1%

= $21,000 + [$10,000 × (1 - 0.30)] = $28,000

= $28,000 ÷ $115,000 = 24.3%
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
50. Excerpts from Lasso Corporation's most recent balance sheet appear below:
total and dividends on preferred stock were $20,000 in total. The return on
common stockholders' equity for Year 2 is closest to:
A. 12.3%
B. 8.1%
C. 13.0%
D. 14.3%
Average common stockholders' equity = ($1,050,000 + $980,000) ÷ 2 = $1,015,000

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

shares outstanding
= $980,000 ÷ 150,000 shares = $6.53 per share
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
52. Drama Company's working capital is $16,000 and its current liabilities are $94,000.
The company's current ratio is closest to:
A. 1.17
B. 0.17
C. 6.88
D. 0.83
Current assets = Working capital + Current liabilities

= $94,000 + $16,000 = $110,000
Current ratio = Current assets ÷ Current liabilities

= $110,000 ÷ $94,000 = 1.17
AACSB: Analytic
Blooms: Apply
53. Selected year-end data for the Brayer Company are presented below:
The company has no prepaid expenses and inventories remained unchanged

during the year. Based on these data, the company's inventory turnover ratio for
the year was closest to:
A. 1.20
B. 2.40
C. 1.67
D. 2.33

3.0 = Current assets ÷ $600,000
Current assets = 3.0 × $600,000 = $1,800,000
Acid-test ratio = Quick assets ÷ Current liabilities

2.5 = Quick assets ÷ $600,000
Quick assets = 2.5 × $600,000 = $1,500,000
Current assets = Inventory + Quick assets

$1,800,000 = Inventory + $1,500,000
Inventory = $1,800,000 - $1,500,000 = $300,000
Since the inventory remained unchanged throughout the year, the average
inventory balance was $300,000.
Inventory turnover = Cost of goods sold ÷ Average inventory balance

= $500,000 ÷ $300,000 = 1.67
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
54. Brewster Company has an acid-test ratio of 1.5 and a current ratio of 2.5. Current
assets equal $200,000, of which $10,000 is prepaid expenses. The company's
current assets consist of cash, marketable securities, accounts receivable, prepaid
expenses, and inventory. Brewster Company's inventory must be:
A. $30,000
B. $110,000
C. $70,000
D. $80,000

2.5 = $200,000 ÷ Current liabilities
Current liabilities = $200,000 ÷ 2.5 = $80,000

1.5 = Quick assets ÷ $80,000
Quick assets = 1.5 × $80,000 = $120,000
Current assets = Quick assets + Inventory + Prepaid expenses

$200,000 = $120,000 + Inventory + $10,000
Inventory = $200,000 - $120,000 - $10,000 = $70,000
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
55. Cotuit Company has a current ratio of 3.2 and an acid-test ratio of 2.4. The
company's current assets consist of cash, marketable securities, accounts
receivable, and inventory. The company's inventory is $40,000. Cotuit Company's
current liabilities must be:
A. $40,000
B. $120,000
C. $50,000
D. $32,000
Current assets = Quick assets + Inventory

Current assets = Quick assets + $40,000

2.4 = Quick assets ÷ Current liabilities
Quick assets = 2.4 × Current liabilities

3.2 = Current assets ÷ Current liabilities
3.2 = (Quick assets + $40,000) ÷ Current liabilities
3.2 = (2.4 × Current liabilities + $40,000) ÷ Current liabilities
3.2 = 2.4 + $40,000 ÷ Current liabilities
(3.2 - 2.4) = $40,000 ÷ Current liabilities
0.8 = $40,000 ÷ Current liabilities
Current liabilities = $40,000 ÷ 0.8 = $50,000
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
56. Erastic Company has $14,000 in cash, $8,000 in marketable securities, $34,000 in
account receivable, $40,000 in inventories, and $42,000 in current liabilities. The
company's current assets consist of cash, marketable securities, accounts
receivable, and inventory. The company's acid-test ratio is closest to:
A. 1.33
B. 0.81
C. 2.29
D. 1.14
Quick assets = Cash + Marketable securities + Accounts receivable

= $14,000 + $8,000 + $34,000 = $56,000
Acid-test ratio = Quick assets ÷ Current liabilities = $56,000 ÷ $42,000 = 1.33
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
57. Fraser Company had $130,000 in sales on account last year. The beginning
accounts receivable balance was $10,000 and the ending accounts receivable
balance was $14,000. The company's accounts receivable turnover was closest to:
A. 5.42
B. 13.00
C. 9.29
D. 10.83
Accounts receivable turnover = Sales on account ÷ Average accounts receivable

balance*
= $130,000 ÷ $12,000 = 10.83
*Average accounts receivable balance = ($10,000 + $14,000) ÷ 2 = $12,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
58. Grasse Company had $160,000 in sales on account last year. The beginning
accounts receivable balance was $10,000 and the ending accounts receivable
balance was $12,000. The company's average collection period was closest to:
A. 25.09 days
B. 22.81 days
C. 50.19 days
D. 27.38 days
Average accounts receivable balance = ($10,000 + $12,000) ÷ 2 = $11,000

balance
= $160,000 ÷ $11,000 = 14.55
Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 14.55 = 25.09 days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
59. Harbor Company, a retailer, had cost of goods sold of $170,000 last year. The
$24,000. The company's inventory turnover was closest to:
A. 7.08
B. 7.73
C. 3.86
D. 8.50
Average inventory balance = ($20,000 + $24,000) ÷ 2 = $22,000

= $170,000 ÷ $22,000 = 7.73
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
60. Irastan Company, a retailer, had cost of goods sold of $250,000 last year. The
$20,000. The company's average sale period was closest to:
A. 40.88 days
B. 29.20 days
C. 35.03 days
D. 70.08 days

= $250,000 ÷ $24,000 = 10.42
Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 10.42 = 35.03 days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
61. Deschambault Corporation's total current assets are $260,000, its noncurrent
assets are $700,000, its total current liabilities are $130,000, its long-term liabilities
are $510,000, and its stockholders' equity is $320,000. Working capital is:
A. $260,000
B. $320,000
C. $190,000
D. $130,000
Working capital = Current assets - Current liabilities

= $260,000 - $130,000 = $130,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
62. Ladabouche Corporation's total current assets are $390,000, its noncurrent assets
$420,000, and its stockholders' equity is $270,000. The current ratio is closest to:
A. 0.85
B. 0.79
C. 1.18
D. 0.62

= $390,000 ÷ $330,000 = 1.18
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
63. Data from Adamis Corporation's most recent balance sheet appear below:
The company's acid-test ratio is closest to:
A. 0.33
B. 0.71
C. 0.81
D. 0.10
Quick assets = Cash + Marketable securities + Accounts receivable + Short-term

notes receivable
= $10,000 + $24,000 + $40,000 + $0 = $74,000

= $74,000 ÷ $104,000 = 0.71
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
64. Bonine Corporation has provided the following data:
The accounts receivable turnover for this year is closest to:
A. 0.83
B. 8.94
C. 9.85
D. 1.20

balance
= $867,000 ÷ $97,000 = 8.94
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
65. Data from Concepcion Corporation's most recent balance sheet and income
The average collection period for this year is closest to:
A. 54.3 days
B. 7.4 days
C. 7.2 days
D. 54.7 days

balance
= $800,000 ÷ $119,000 = 6.72

= 365 days ÷ 6.72 = 54.3 days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
66. Kaelker Corporation has provided the following data:
The inventory turnover for this year is closest to:
A. 3.36
B. 0.87
C. 1.15
D. 3.15

= $671,000 ÷ $199,500 = 3.36
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
67. Data from Davoren Corporation's most recent balance sheet and income
The average sale period for this year is closest to:
A. 55.7 days
B. 64.4 days
C. 112.0 days
D. 122.1 days

= $522,000 ÷ $174,500* = 2.99
*Average inventory balance = ($160,000 + $189,000) ÷ 2 = $174,500

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

Earnings after tax = Earnings before tax - 0.4 × Earnings before tax
Earnings after tax = Earnings before tax × (1 - 0.4)
Earnings before tax = Earnings after tax ÷ (1 - 0.4)
= $60,000 ÷ (1 - 0.4) = $100,000
Earnings before interest and taxes = $100,000 + $10,000 = $110,000

Interest expense
= $110,000 ÷ $10,000 = 11
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
70. Krast Company has total assets of $160,000 and total liabilities of $70,000. The
company's debt-to-equity ratio is closest to:
A. 0.56
B. 0.44
C. 0.30
D. 0.78
Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity

= $70,000 ÷ $90,000* = 0.78
*Stockholders' equity = Total assets - Total liabilities = $160,000 - $70,000 =
$90,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
71. Pia Corporation has provided the following data from its most recent income
statement:
The times interest earned ratio is closest to:
A. 2.09
B. 1.09
C. 0.76
D. 2.98
Interest expense
= $71,000 ÷ $34,000 = 2.09
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
72. Damon Corporation has provided the following data from its most recent balance
sheet:
The debt-to-equity ratio is closest to:
A. 0.17
B. 6.00
C. 0.86
D. 7.00

= $540,000 ÷ $90,000 = 6.00
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
below:
A. 41.5%
B. 70.9%
C. 15.2%
D. 658.8%
Gross margin percentage = Gross margin ÷ Sales = $560 ÷ $1,350 = 41.5%
AACSB: Analytic
Blooms: Apply
below:
A. $0.40
B. $0.73
C. $0.61
D. $0.43
Number of common shares outstanding = Common stock ÷ Par value

= $400 ÷ $2 per share = 200 shares

= ($85 - $5) ÷ 200 shares = $0.40 per share
AACSB: Analytic
Blooms: Apply
below:
A. 9.64
B. 16.37
C. 11.54
D. 17.60


= ($85 - $5) ÷ 200 shares = $0.40 per share
= $7.04 ÷ $0.40 = 17.60
AACSB: Analytic
Blooms: Apply
below:
A. 81.3%
B. 75.0%
C. 70.6%
D. 1250.0%


= ($85 - $5) ÷ 200 shares = $0.40 per share
Dividends per share = Common dividends ÷ Common shares
= $60 ÷ 200 shares = $0.30 per share

= $0.30 ÷ $0.40 = 75.0%
AACSB: Analytic
Blooms: Apply
below:
A. 0.36%
B. 92.31%
C. 4.26%
D. 4.62%


= $60 ÷ 200 shares = $0.30 per share
Dividend yield ratio = Dividends per share (see above) ÷ Market price per share
= $0.30 ÷ $7.04 = 4.26%
AACSB: Analytic
Blooms: Apply
below:
A. 7.85%
B. 7.77%
C. 6.51%
D. 6.44%

= $85 + [$25 × (1 - 0.30)] = $102.5

= $102.5 ÷ $1,305 = 7.85%
AACSB: Analytic
Blooms: Apply
below:
A. 11.33%
B. 10.00%
C. 10.67%
D. 9.41%
Average common stockholders' equity = ($760 + $740) ÷ 2 = $750

= ($85 - $5) ÷ $750 = 10.67%
AACSB: Analytic
Blooms: Apply
below:
A. $6.60
B. $4.30
C. $3.80
D. $0.40


shares outstanding = $760 ÷ 200 shares = $3.80 per share
AACSB: Analytic
Blooms: Apply
below:
A. $610 thousand
B. $860 thousand
C. $310 thousand
D. $710 thousand

= $610 thousand - $300 thousand = $310 thousand
AACSB: Analytic
Blooms: Apply
below:
A. 2.03
B. 0.35
C. 0.75
D. 0.46
Current ratio = Current assets ÷ Current liabilities = $610 ÷ $300 = 2.03
AACSB: Analytic
Blooms: Apply
below:
A. 2.03
B. 1.47
C. 1.60
D. 1.33

notes receivable
= $180 + $0 + $260 = $440
Acid-test ratio = Quick assets ÷ Current liabilities = $440 ÷ $300 = 1.47
AACSB: Analytic
Blooms: Apply
below:
A. 5.19
B. 5.40
C. 1.08
D. 0.92

balance
= $1,350 ÷ $250* = 5.40
*Average accounts receivable balance = ($260 + $240) ÷ 2 = $250
AACSB: Analytic
Blooms: Apply
below:
A. 0.9 days
B. 70.3 days
C. 1.1 days
D. 67.6 days

balance
= $1,350 ÷ $250* = 5.40

= 365 days ÷ 5.40 = 67.6 days
AACSB: Analytic
Blooms: Apply
below:
A. 0.93
B. 1.08
C. 5.85
D. 6.08
Inventory turnover = Cost of goods sold ÷ Average inventory balance* = $790 ÷

$135 = 5.85
*Average inventory balance = ($130 + $140) ÷ 2 = $135
AACSB: Analytic
Blooms: Apply
below:
A. 60.0 days
B. 35.1 days
C. 62.4 days
D. 213.6 days
Average inventory balance = ($130 + $140) ÷ 2 = $135

= $790 ÷ $135 = 5.85

= 365 days ÷ 5.85 = 62.4 days
AACSB: Analytic
Blooms: Apply
below:
A. 3.40
B. 8.34
C. 4.84
D. 5.84
Interest expense
= $146 ÷ $25 = 5.84
AACSB: Analytic
Blooms: Apply
below:
A. 0.61
B. 0.28
C. 0.53
D. 0.19

= $460 ÷ $860 = 0.53
AACSB: Analytic
Blooms: Apply
90. Hick Corporation's most recent balance sheet and income statement appear
below:
preferred stock totaled $20 thousand. The market price of common stock at the
end of Year 2 was $9.57 per share.
A. 82.9%
B. 45.3%
C. 446.2%
D. 22.4%
Gross margin percentage = Gross margin ÷ Sales = $580 ÷ $1,280 = 45.3%
AACSB: Analytic
Blooms: Apply
below:
A. $0.55
B. $0.93
C. $1.01
D. $0.65


= ($130 - $20) ÷ 200 shares = $0.55 per share
AACSB: Analytic
Blooms: Apply
below:
A. 14.72
B. 17.40
C. 9.48
D. 10.29


= ($130 - $20) ÷ 200 shares = $0.55 per share
= $9.57 ÷ $0.55 = 17.40
AACSB: Analytic
Blooms: Apply
below:
A. 72.7%
B. 54.5%
C. 46.2%
D. 1818.2%


= $60 ÷ 200 shares = $0.30 per share

= ($130 - $20) ÷ 200 shares = $0.55 per share

= $0.30 ÷ $0.55 = 54.5%
AACSB: Analytic
Blooms: Apply
below:
A. 1.05%
B. 4.18%
C. 75.00%
D. 3.13%


= $60 ÷ 200 shares = $0.30 per share
= $0.30 ÷ $9.57 = 3.13%
AACSB: Analytic
Blooms: Apply
below:
A. 9.35%
B. 10.23%
C. 9.42%
D. 10.16%

= $130 + [$16 × (1 - 0.30)] = $141.2

= $141.2 ÷ $1,380 = 10.23%
AACSB: Analytic
Blooms: Apply
below:
A. 12.44%
B. 13.02%
C. 15.38%
D. 10.53%

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

shares outstanding = $870 ÷ 200 shares* = $4.35 per share
*Number of common shares outstanding = Common stock ÷ Par value
AACSB: Analytic
Blooms: Apply
below:
Net income as a percentage of sales was:
A. 5%
B. 3%
C. 2.25%
D. 1.75%
Net income percentage = Net income ÷ Sales = $24 ÷ $800 = 3%
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
below:
Net operating income as a percentage of sales was:
A. 40%
B. 30%
C. 10%
D. 5%
Net operating income percentage = Net operating income ÷ Sales = $80 ÷ $800
= 10%
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Orange Company's earnings per share of common stock for Year 2 was closest to:
A. $7.23
B. $2.27
C. $10.91
D. $7.64

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


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

= $336 + [$30 × (1 - 0.30)] = $357

= $357 ÷ $2,170 = 16.5%
AACSB: Analytic
Blooms: Apply
Orange Company's current ratio at the end of Year 2 was closest to:
A. 1.24
B. 0.55
C. 0.44
D. 1.71
AACSB: Analytic
Blooms: Apply
Orange Company's accounts receivable turnover for Year 2 was closest to:
A. 15.7
B. 11.0
C. 17.7
D. 12.4

balance
= $2,830 ÷ $180* = 15.7
AACSB: Analytic
Blooms: Apply
Orange Company's average sale period for Year 2 was closest to:
A. 23.2 days
B. 29.5 days
C. 33.2 days
D. 20.6 days

= $1,980 ÷ $160* = 12.38

= 365 days ÷ 12.38 = 29.5 days
AACSB: Analytic
Blooms: Apply
Orange Company's times interest earned for Year 2 was closest to:
A. 16.0
B. 28.3
C. 17.0
D. 11.2
Interest expense
= $510 ÷ $30 = 17.0
AACSB: Analytic
Blooms: Apply
The balances in the Cash, Accounts Receivable, Inventory, Bonds Payable,
Common Stock, and Additional Paid-In Capital accounts are unchanged from the
beginning of the year. A $0.75 per share dividend was declared and paid during
the year. On December 31, Harwich Company's common stock was trading at
$24.00 per share.
Harwich Company's current ratio at December 31 was closest to:
A. 1.95
B. 2.67
C. 1.33
D. 2.00

= ($90 + $150 + $150 + $10) ÷ ($150 + $25 + $20 + $5)
= $400 ÷ $200 = 2.00
AACSB: Analytic
Blooms: Apply
$24.00 per share.
Harwich Company's times interest earned ratio for the year was closest to:
A. 11.0
B. 10.5
C. 12.0
D. 22.0
Interest expense
= $110 ÷ $10 = 11.0
AACSB: Analytic
Blooms: Apply
$24.00 per share.
Harwich Company's acid-test ratio at December 31 was closest to:
A. 0.45
B. 0.83
C. 2.00
D. 1.20

notes receivable
= $90 + $0 + $150 = $240
Current liabilities = Accounts payable + Accrued expenses payable + Income taxes

payable + Interest payable) = $150 + $25 + $20 + $5 = $200
AACSB: Analytic
Blooms: Apply
$24.00 per share.
Harwich Company's inventory turnover ratio for the year was closest to:
A. 8
B. 3
C. 5
D. 7.5
Inventory turnover = Cost of goods sold ÷ Average inventory balance = $750 ÷

$150 = 5
AACSB: Analytic
Blooms: Apply
$24.00 per share.
Harwich Company's average collection period for the year was closest to:
A. 72 days
B. 8 days
C. 120 days
D. 46 days

balance
= $1,200 ÷ $150 = 8

= 365 days ÷ 8 = 46 days
AACSB: Analytic
Blooms: Apply
$24.00 per share.
Harwich Company's price-earnings ratio at December 31 was closest to:
A. 3.00
B. 8.25
C. 8.00
D. 7.25


= ($60 - $0) ÷ (20 shares + 20 shares)/2 = $3.00 per share

= $24.00 ÷ $3.00 = 8.00
AACSB: Analytic
Blooms: Apply
$24.00 per share.
Harwich Company's book value per share at December 31 was closest to:
A. $7.00
B. $15.00
C. $24.00
D. $30.00


shares outstanding = $300 ÷ 20 shares = $15.00 per share
AACSB: Analytic
Blooms: Apply
$24.00 per share.
Harwich Company's dividend payout ratio for the year was closest to:
A. 75%
B. 25%
C. 5%
D. 3.125%



= $0.75 ÷ $3.00 = 25%
AACSB: Analytic
Blooms: Apply
$24.00 per share.
Harwich Company's debt-to-equity ratio at the end of the year was closest to:
A. 0.33
B. 0.50
C. 0.67
D. 1.00
Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $300 ÷ $300 = 1.00
AACSB: Analytic
Blooms: Apply
$24.00 per share.
Harwich Company's dividend yield ratio for the year was closest to:
A. 3.125%
B. 12.500%
C. 9.125%
D. 25.000%
= $0.75 per share ÷ $24.00 per share = 3.125%
AACSB: Analytic
Blooms: Apply
Larned Company's earnings per share of common stock for Year 2 was closest to:
A. $18.39
B. $27.22
C. $19.06
D. $11.03


AACSB: Analytic
Blooms: Apply
Larned Company's price-earnings ratio on December 31, Year 2 was closest to:
A. 5.88
B. 14.50
C. 8.70
D. 8.40


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


= ($263 - $12) ÷ 18 shares = $13.94 per share

= $13.94 ÷ $18.39 = 75.8%
AACSB: Analytic
Blooms: Apply
Larned Company's dividend yield ratio on December 31, Year 2 was closest to:
A. 8.7%
B. 9.1%
C. 8.3%
D. 5.5%


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

= $343 + [$40 × (1 - 0.30)] = $371

= $371 ÷ $1,995 = 18.6%
AACSB: Analytic
Blooms: Apply
Larned Company's return on common stockholders' equity for Year 2 was closest
to:
A. 29.8%
B. 26.9%
C. 30.9%
D. 27.9%

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

shares outstanding = $1,150 ÷ 18 shares* = $63.89 per share
AACSB: Analytic
Blooms: Apply
124. The following selected data are for Geneva Company:
Geneva Company's return on common stockholders' equity for Year 2 is closest

to:
A. 11%
B. 12%
C. 13%
D. 6%

= ($110 - $12) ÷ $825* = 12%
AACSB: Analytic
Blooms: Apply
125. The following selected data are for Geneva Company:
A. $1.60
B. $2.07
C. $3.27
D. $3.67


AACSB: Analytic
Blooms: Apply
below:
A. $1.00
B. $1.60
C. $1.43
D. $0.90


AACSB: Analytic
Blooms: Apply
below:
A. 11.08
B. 12.40
C. 19.70
D. 17.73


= $17.73 ÷ $0.90 = 19.70
AACSB: Analytic
Blooms: Apply
below:
A. 55.6%
B. 44.4%
C. 40.0%
D. 1111.1%


= $40 ÷ 100 shares = $0.40 per share

= $0.40 ÷ $0.90 = 44.4%
AACSB: Analytic
Blooms: Apply
below:
A. 2.26%
B. 2.82%
C. 80.00%
D. 0.56%


= $40 ÷ 100 shares = $0.40 per share
= $0.40 ÷ $17.73 = 2.26%
AACSB: Analytic
Blooms: Apply
below:
A. 7.75%
B. 8.67%
C. 7.69%
D. 8.61%

= $100 + [$17 × (1 - 0.30)] = $111.9

= $111.9 ÷ $1,290 = 8.67%
AACSB: Analytic
Blooms: Apply
below:
A. 11.43%
B. 11.61%
C. 10.29%
D. 12.90%

= ($100 - $10) ÷ $775* = 11.61%
AACSB: Analytic
Blooms: Apply
below:
A. $8.00
B. $0.90
C. $13.00
D. $9.00

AACSB: Analytic
Blooms: Apply
133. Excerpts from Goodrow Corporation's most recent balance sheet and income

A. $0.35
B. $0.50
C. $0.30
D. $0.65


AACSB: Analytic
Blooms: Apply

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



= $5.34 ÷ $0.30 = 17.80
AACSB: Analytic
Blooms: Apply

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


= $20 ÷ 200 shares = $0.10 per share


AACSB: Analytic
Blooms: Apply

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


= $20 ÷ 200 shares = $0.10 per share
AACSB: Analytic
Blooms: Apply

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

= $70 + [$29 × (1 - 0.30)] = $90.3

= $90.3 ÷ $1,210 = 7.46%
AACSB: Analytic
Blooms: Apply

A. 8.70%
B. 10.17%
C. 10.14%
D. 11.86%

= ($70 - $10) ÷ $590* = 10.17%
AACSB: Analytic
Blooms: Apply

A. $0.30
B. $3.05
C. $6.10
D. $3.55

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

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

balance
= $2,550 ÷ $110* = 23.2
AACSB: Analytic
Blooms: Apply
Marcell Company's average collection period for Year 2 was closest to:
A. 22.6 days
B. 15.7 days
C. 25.8 days
D. 36.9 days

balance
= $2,550 ÷ $110* = 23.2
Average collection period = 365 days ÷ Accounts receivable turnover (see above)
= 365 days ÷ 23.2 = 15.7 days
AACSB: Analytic
Blooms: Apply
Marcell Company's inventory turnover for Year 2 was closest to:
A. 16.2
B. 23.2
C. 14.2
D. 9.9
Inventory turnover = Cost of goods sold ÷ Average inventory balance = $1,780 ÷

$180* = 9.9
AACSB: Analytic
Blooms: Apply
Marcell Company's average sale period for Year 2 was closest to:
A. 15.7 days
B. 25.8 days
C. 36.9 days
D. 22.6 days

$180* = 9.9
Average sale period = 365 days ÷ Inventory turnover (see above) = 365 days ÷ 9.9
= 36.9 days
AACSB: Analytic
Blooms: Apply
147. Selected financial data for Bragg Company appear below:
Bragg Company's inventory turnover ratio for Year 2 was closest to:
A. 2.00
B. 2.67
C. 4.80
D. 4.00

$30,000* = 2.67
*Average inventory balance = ($40,000 + $20,000) ÷ 2 = $30,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
148. Selected financial data for Bragg Company appear below:
Suppose that 45% of Bragg Company's total sales are cash sales. The company's
average collection period (age of receivables) for Year 2 was closest to:
A. 44.24 days
B. 54.07 days
C. 36.05 days
D. 29.49 days
Sales on account = 55% × $180,000 = $99,000

balance
= $99,000 ÷ $12,000 = 8.25

= 365 days ÷ 8.25 = 44.24 days
AACSB: Analytic
Blooms: Apply
below:
A. $970 thousand
B. $570 thousand
C. $280 thousand
D. $810 thousand

thousand
AACSB: Analytic
Blooms: Apply
below:
A. 1.97
B. 0.72
C. 0.30
D. 0.41
AACSB: Analytic
Blooms: Apply
below:
A. 1.69
B. 1.97
C. 1.39
D. 1.52
Acid-test ratio = Quick assets ÷ Current liabilities = $440* ÷ $290 = 1.52

notes receivable
= $280 + $0 + $160 = $440
AACSB: Analytic
Blooms: Apply
below:
A. 1.14
B. 8.19
C. 0.88
D. 8.73

balance
= $1,310 ÷ $150* = 8.73
AACSB: Analytic
Blooms: Apply
below:
A. 1.1 days
B. 0.9 days
C. 41.8 days
D. 44.6 days

balance
= $1,310 ÷ $150* = 8.73

= 365 days ÷ 8.73 = 41.8 days
AACSB: Analytic
Blooms: Apply
below:
A. 1.25
B. 9.89
C. 11.13
D. 0.80

= $890 ÷ $90* = 9.89
AACSB: Analytic
Blooms: Apply
below:
A. 36.9 days
B. 248.0 days
C. 22.3 days
D. 32.8 days

= $890 ÷ $90* = 9.89

= 365 days ÷ 9.89 = 36.9 days
AACSB: Analytic
Blooms: Apply
Sales on account in Year 2 amounted to $1,370 and the cost of goods sold was
$850.
A. $630
B. $810
C. $680
D. $420
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
$850.
A. 0.38
B. 2.62
C. 0.52
D. 0.74
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
$850.
A. 1.81
B. 2.62
C. 1.69
D. 1.36

notes receivable
= $240 + $0 + $200 = $440

= $440 ÷ $260 = 1.69
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
$850.
A. 6.85
B. 0.87
C. 1.15
D. 6.37

balance
= $1,370 ÷ $215* = 6.37
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
$850.
A. 57.3 days
B. 53.3 days
C. 0.9 days
D. 1.2 days

balance
= $1,370 ÷ $215* = 6.37

= 365 days ÷ 6.37 = 57.3 days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
$850.
A. 4.05
B. 4.36
C. 1.17
D. 0.86

= $850 ÷ $195* = 4.36
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
$850.
A. 55.9 days
B. 90.1 days
C. 83.7 days
D. 226.5 days

= $850 ÷ $195* = 4.36

= 365 days ÷ 4.36 = 83.7 days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
163. Excerpts from Tigner Corporation's most recent balance sheet appear below:
$820.
A. $740
B. $790
C. $430
D. $150

= $430 thousand - $280 thousand = $150 thousand
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
$820.
A. 1.12
B. 1.54
C. 0.35
D. 1.00
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
$820.
A. 1.18
B. 1.55
C. 1.00
D. 0.96

notes receivable
= $120 + $0 + $150 = $270
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
$820.
A. 7.10
B. 0.91
C. 8.79
D. 1.10

balance
= $1,230 ÷ $140* = 8.79
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
$820.
A. 0.86
B. 1.17
C. 6.31
D. 6.83

= $820 ÷ $130* = 6.31
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
$770.
A. $990
B. $170
C. $1,010
D. $450
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
$770.
A. 0.96
B. 0.30
C. 0.31
D. 1.61
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
$770.
A. 0.75
B. 1.61
C. 0.96
D. 1.05

notes receivable
= $70 + $0 + $140 = $210
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
$770.
A. 0.9 days
B. 38.8 days
C. 40.2 days
D. 1.1 days

balance
= $1,270 ÷ $135* = 9.41

= 365 days ÷ 9.41 = 38.8 days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
$770.
A. 51.7 days
B. 221.3 days
C. 78.2 days
D. 85.3 days

= $770 ÷ $165* = 4.67

= 365 days ÷ 4.67 = 78.2 days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
173. Financial statements for Narita Company appear below:
Narita Company's times interest earned for Year 2 was closest to:
A. 14.7
B. 26.0
C. 10.3
D. 15.7
Interest expense
= $470 ÷ $30 = 15.7
AACSB: Analytic
Blooms: Apply
174. Financial statements for Narita Company appear below:
Narita Company's debt-to-equity ratio at the end of Year 2 was closest to:
A. 0.17
B. 0.58
C. 0.25
D. 0.42
Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $640 ÷ $1,540 =

0.42
AACSB: Analytic
Blooms: Apply
175. Mclaughlin Corporation's most recent balance sheet and income statement appear
below:
A. 2.73
B. 4.91
C. 7.01
D. 3.91
Interest expense
= $162 ÷ $33 = 4.91
AACSB: Analytic
Blooms: Apply
176. Mclaughlin Corporation's most recent balance sheet and income statement appear
below:
A. 0.69
B. 0.40
C. 0.35
D. 0.93
AACSB: Analytic
Blooms: Apply
177. Data from Kempen Corporation's most recent balance sheet and the company's
A. 3.45
B. 6.36
C. 4.45
D. 2.42
Interest expense
= $147 ÷ $33 = 4.45
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
178. Data from Kempen Corporation's most recent balance sheet and the company's
A. 0.71
B. 0.33
C. 0.24
D. 0.57
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Essay Questions
179. Lundberg Corporation's most recent balance sheet and income statement appear
below:
Required:

i. Working capital.
j. Current ratio.
k. Acid-test ratio.
l. Accounts receivable turnover.
m. Average collection period.
n. Inventory turnover.
o. Average sale period.
p. Times interest earned.
q. Debt-to-equity ratio.
a. Gross margin percentage = Gross margin ÷ Sales = $480 ÷ $1,330 = 36.1%
b. Earnings per share = (Net Income - Preferred Dividends) ÷ Average number of

c. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $9.36 ÷ $0.90 = 10.4
d. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)
= $0.50 ÷ $0.90 = 55.6%
*Dividends per share = Common dividends ÷ Common shares (see above)
= $50 ÷ 100 shares = $0.50 per share
e. Dividend yield ratio = Dividends per share (see above) ÷ Market price per share
= $0.50 ÷ $9.36 = 5.34%
f. Return on total assets = Adjusted net income* ÷ Average total assets**

= $131.7 ÷ $1,335 = 9.87%
*Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]
= $110 + [$31 × (1 - 0.30)] = $131.7
**Average total assets = ($1,330 + $1,340) ÷ 2 = $1,335
g. Return on common stockholders' equity

= (Net income - Preferred dividends) ÷ Average common stockholders' equity*
= ($110 - $20) ÷ $610 = 14.75%
h. Book value per share = Common stockholders' equity ÷ Number of common

shares outstanding* = $630 ÷ 100 shares = $6.30 per share
i. Working capital = Current assets - Current liabilities = $430 - $310 = $120

thousand
j. Current ratio = Current assets ÷ Current liabilities = $430 ÷ $310 = 1.39
k. Acid-test ratio = Quick assets* ÷ Current liabilities = $310 ÷ $310 = 1.00

notes receivable
= $100 + $0 + $210 = $310
l. Accounts receivable turnover = Sales on account ÷ Average accounts receivable

balance*
= $1,330 ÷ $215 = 6.19
m. Average collection period = 365 days ÷ Accounts receivable turnover (see
above)
= 365 days ÷ 6.19 = 59.0 days
n. Inventory turnover = Cost of goods sold ÷ Average inventory balance* = $850

÷ $115 = 7.39
o. Average sale period = 365 days ÷ Inventory turnover (see above) = 365 days ÷
7.39 = 49.4 days
p. Times interest earned = Earnings before interest expense and income taxes ÷
Interest expense = $188 ÷ $31 = 6.06
q. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $500 ÷ $830 =

0.60
AACSB: Analytic
Blooms: Apply
180. Guedea Corporation's most recent balance sheet and income statement appear
below:
Required:

a. Gross margin percentage = Gross margin ÷ Sales = $540 ÷ $1,310 = 41.2%
b. Earnings per share = (Net Income - Preferred Dividends) ÷ Average number of

c. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $5.22 ÷ $0.45 = 11.6
d. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)
= $0.20 ÷ $0.45 = 44.4%
*Dividends per share = Common dividends ÷ Common shares (see above)
= $40 ÷ 200 shares = $0.20 per share
e. Dividend yield ratio = Dividends per share (see above) ÷ Market price per share
= $0.20 ÷ $5.22 = 3.83%
f. Return on total assets = Adjusted net income* ÷ Average total assets**

= $125.9 ÷ $1,575 = 7.99%
= $100 + [$37 × (1 - 0.30)] = $125.9
g. Return on common stockholders' equity = (Net income - Preferred dividends) ÷

Average common stockholders' equity* = ($100 - $10) ÷ $785 = 11.46%
h. Book value per share = Common stockholders' equity÷ Number of common
shares outstanding*
= $810 ÷ 200 shares = $4.05 per share
AACSB: Analytic
Blooms: Apply
181. Tubergen Corporation's most recent income statement appears below:
Required:
Compute the gross margin percentage.
Gross margin percentage = Gross margin ÷ Sales = $518,000 ÷ $928,000 = 55.8%
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
182. Financial statements for Pracht Company appear below:
Required:

h. Working capital.
i. Current ratio.
j. Acid-test ratio.
k. Accounts receivable turnover.
l. Average collection period.
m. Inventory turnover.
n. Average sale period.
o. Times interest earned.
p. Debt-to-equity ratio.
a. Earnings per share = (Net Income - Preferred Dividends) ÷ Average number of

common shares outstanding* = ($182 - $15) ÷ 14 = $11.93
*Number of common shares outstanding = Common stock ÷ Par value = $140 ÷
$10 = 14
b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $160 ÷ $11.93 = 13.4
c. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)
= $3.36 ÷ $11.93 = 28.1%
*Dividends per share = Common dividends ÷ Common shares** = $47 ÷ 14 =

$3.36
**See above
d. Dividend yield ratio = Dividends per share* ÷ Market price per share = $3.36 ÷
$160.00
= 2.10% *See above
e. Return on total assets = Adjusted net income* ÷ Average total assets** = $217 ÷
$2,340 = 9.27%
= $182 + [$50 × (1 - 0.30)] = $217
f. Return on common stockholders' equity = (Net income - Preferred dividends) ÷

Average common stockholders' equity*
= ($182 - $15) ÷ $1,400 = 11.93%
*Average common stockholders' equity = ($1,460 + $1,340) ÷ 2 = $1,400
g. Book value per share = Common stockholders' equity ÷ Number of common

shares outstanding*
= $1,460 ÷ 14 = $104.29
*Number of common shares outstanding = Common stock ÷ Par value = $140 ÷
$10 = 14
h. Working capital = Current assets - Current liabilities = $510 - $340 = $170
i. Current ratio = Current assets ÷ Current liabilities = $510 ÷ $340 = 1.50
j. Acid-test ratio = Quick assets* ÷ Current liabilities = $310 ÷ $340 = 0.91

notes receivable
= $180 + $130 = $310
k. Average accounts receivable balance = ($130 + $100) ÷ 2 = $115

balance
= $1,700 ÷ $115 = 14.78
l. Average collection period = 365 days ÷ Accounts receivable turnover*
= 365 ÷ 14.78 = 24.7 days
m. Average inventory balance = ($150 + $160) ÷ 2 = $155

$155 = 7.68
n. Average sale period = 365 days ÷ Inventory turnover = 365 ÷ 7.68 = 47.5 days
o. Times interest earned = Earnings before interest expense and income taxes ÷
p. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $830 ÷ $1,560 =

0.53
AACSB: Analytic
Blooms: Apply
183. Condensed financial statements for Blackhurst Company appear below:
There were 72,000 shares of common stock outstanding throughout the year.
Dividends on common stock amounted to $320,400 and dividends on preferred
stock amounted to $45,000. The market value of a share of common stock was
$54 at the end of the year.
Required:
figures:
Example: The gross margin as a percent of sales would be computed by dividing

$2,160,000 by $5,400,000.
a. The earnings per share of common stock for the year would be computed by
dividing _______________ by _________________.
b. The times interest earned for the year would be computed by dividing
_______________ by _________________.
c. The price-earnings ratio at the end of the year would be computed by dividing
_______________ by _________________.
d. The dividend payout ratio for the year would be computed by dividing
_______________ by _________________.
e. The dividend yield ratio for the year would be computed by dividing
_______________ by _________________.
f. The return on total assets for the year would be computed by dividing
_______________ by _________________.
g. The return on common stockholders' equity for the year would be computed by
dividing _______________ by _________________.
h. The acid-test ratio at the end of the year would be computed by dividing
_______________ by _________________.
i. The accounts receivable turnover for the year would be computed by dividing
_______________ by _________________.
j. The inventory turnover for the year would be computed by dividing

_______________ by _________________.
k. The debt-to-equity ratio at the end of the year would be computed by dividing
_______________ by _________________.
a. Earnings per share = (Net income - Preferred dividends) ÷ Average number of

common shares outstanding = $704,000 ÷ 72,000 shares
b. The times interest earned = (Net operating income - Interest expense) ÷ Interest
expense = $1,150,000 ÷ $80,000
c. Price-earnings ratio = Market price ÷ Earnings per share = $54 ÷ $9.78
d. Dividend payout ratio = Dividends per share* ÷ Earnings per share** = $4.45 ÷
$9.78
*Dividends per share = $320,400 ÷ 72,000 = $4.45
**Earnings per share = (Net income - Preferred dividends) ÷ Average number of
common shares outstanding = $704,000 ÷ 72,000 shares = $9.78 per share
e. Dividend yield ratio = Dividends per share ÷ Earnings per share = $4.45 ÷ $54
f. Return on total assets = {Net income + [Interest expense × (1 - Tax rate)]} ÷
Average total assets
= [$749,000 + $80,000 × (1 - .30)] ÷ ($4,133,000 + $3,832,000)/2
= $805,000 ÷ $3,982,500
g. Return on common stockholders' equity = (Net income - Preferred dividends) ÷

(Average total stockholders' equity - Average preferred stock)
= ($749,000 - $45,000) ÷ ($1,800,000 + $685,000 + $1,800,000 + $301,400)/2
= $704,000 ÷ $2,293,200
h. Acid-test ratio = (Cash + Marketable securities + Accounts receivable + Short-

term notes receivable) ÷ Current liabilities
= ($128,000 + $472,000) ÷ $198,000
= $600,000 ÷ $198,000
i. Accounts receivable turnover = Sales on account ÷ Average accounts receivable

balance
= ($5,400,000 × .90) ÷ [($472,000 + $438,000)/2]
= $4,860,000 ÷ $455,000
j. Inventory turnover = Cost of goods sold ÷ Average inventory balance

= $3,240,000 ÷ [($797,000 + $673,000)/2]
= $3,240,000 ÷ $735,000
k. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity

= ($198,000 + $1,000,000) ÷ ($450,000 + $1,800,000 + $685,000)
= $1,198,000 ÷ $2,935,000
AACSB: Analytic
Blooms: Apply
184. Condensed financial statements for Pardin Company are given below:
The company paid total dividends of $100,000 during the year. At the end of Year
2, the company's common stock was selling for $38 per share.
Required:
figures:
Example: The current ratio at the end of Year 2 would be computed by dividing
$1,080,000 by $400,000.
a. The acid-test ratio at the end of Year 2 would be computed by dividing

_______________ by _________________.
b. The accounts receivable turnover during Year 2 would be computed by dividing

_______________ by _________________.
c. The inventory turnover during Year 2 would be computed by dividing

_______________ by _________________.
d. The times interest earned for Year 2 would be computed by dividing

_______________ by _________________.
e. The earnings per share of common stock for Year 2 would be computed by
dividing _______________ by _________________.
f. The return on total assets for Year 2 would be computed by dividing

_______________ by _________________.
g. The debt-to-equity ratio at the end of Year 2 would be computed by dividing

_______________ by _________________.
h. The dividend yield ratio would be computed by dividing _______________ by
_________________.
i. The return on common stockholders' equity for Year 2 would be computed by

dividing _______________ by _________________.
j. Whether the common stockholders gained or lost from the use of financial
leverage during Year 2 would be determined by comparing the ratio computed in
question ___ above to the ratio computed in question above ____. In this case,
financial leverage is (positive/negative) ___________________.
a. $480,000; $400,000
b. $2,600,000; $400,000
c. $1,400,000; $500,000
d. $450,000; $50,000
e. $220,000; 40,000 shares
f. $270,000; $2,100,000
g. $700,000; $1,500,000
h. $2.50; $38
i. $220,000; $1,230,000
j. f; i; positive
AACSB: Analytic
Blooms: Apply
185. Bedrosian Incorporated has a line of credit from the Belmont National Bank that is
due to be renewed on February 1. The bank has requested the company's current
Income Statement and Comparative Statements of Financial Position which appear
below.
The bank has also requested that Bedrosian calculate a number of financial ratios.
Bedrosian's financial ratios have not yet been calculated for this year, but the
company's accounting staff has gathered the following industry averages for the
ratios from various sources.
Required:
a. Calculate the following financial ratios for this year for Bedrosian Incorporated.
1. Return on total assets.

2. Return on common stockholders' equity.
3. Current ratio.
4. Acid-test ratio.
5. Debt-to-equity ratio.
6. Times interest earned.
7. Dividend payout ratio.
b. By comparing the ratios calculated in Requirement A with the industry ratios,

evaluate Bedrosian's operations.
a. The financial ratios are calculated as follows.
1. Return on total assets = {Net income + [Interest expense × (1 - Tax rate)]} ÷

Tax rate = $3,600/$9,000 = 40%
Average total assets = ($40,500 + $38,250)/2 = $39,375
Return on total assets = {$5,400 + [$1,500 × (1 - 0.4)]}/$39,375 = 16%
2. Return on common stockholders' equity = (Net income - Preferred dividends) ÷
Average common stockholders' equity = ($19,500 + $16,275)/2 = $17,887.50
Return on common stockholders' equity = ($5,400 - $0)/$17,887.50 = 30.2%
3. Current ratio = Current assets ÷ Current liabilities = $10,800/$9,000 = 1.2
4. Acid-test ratio = (Cash + Marketable securities + Accounts receivable + Short-
term notes receivable) ÷ Current liabilities = ($1,950 + $3,600 + $0) ÷ $9,000 =
$5,550 ÷ $9,000 = 0.62
5. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity
= $21,000 ÷ $19,500 = 1.08
6. Times interest earned = Earnings before interest expense and income taxes ÷
Interest expense
= ($9,000 + $1,500) ÷ $1,500 = $10,500 ÷ $1,500 = 7
7. Dividend payout ratio = Dividends per share ÷ Earnings per share
= $3.86 ÷ $8.18 = 47.2%
b. A comparison of Bedrosian's ratios with industry ratios indicates that Bedrosian

generates a higher than average return on both assets and equity. Its debt-to-
equity ratio is lower than the industry average indicating some capacity to incur
more debt. However, the company's current ratio, acid-test ratio, and times
interest earned are lower than average which may indicate a higher than average
credit risk for a creditor in the short term. Also, the higher dividend payout ratio
indicates a high cash outflow which could aggravate Bedrosian's liquidity position.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
186. Renbud Computer Services Co. (RCS) specializes in customized software
development for the broadcast and telecommunications industries. The company
was started by three people in 1973 to develop software primarily for a national
network to be used in broadcasting national election results. After sustained and
manageable growth for many years, the company has grown very fast over the last
three years, doubling in size.
This growth has placed the company in a challenging financial position. Within
thirty days, RCS will need to renew its $300,000 loan with the Third State Bank of
San Marcos. This loan is classified as a current liability on RCS's balance sheet.
Harvey Renbud, president of RCS, is concerned about renewing the loan. The bank
has requested RCS's most recent financial statements which appear below,
including balance sheets for this year and last year. The bank has also requested
four ratios relating to operating performance and liquidity.
Required:
a. Explain why the Third State Bank of San Marcos would be interested in reviewing
Renbud Computer Services Co.'s comparative financial statements and its financial
ratios before renewing the loan.
b. Calculate the following financial ratios for Renbud Computer Services Co:
1. The current ratio for both this year and last year.
2. Accounts receivable turnover for this year.
3. Return on common stockholders' equity for this year.
4. The debt-to-equity ratio for both this year and last year.
c. Discuss briefly the limitations and difficulties that can be encountered in using
ratio analysis.
a. The Third State Bank would be interested in comparative financial statements so

that it could analyze trends in data and operating results. Trends are important
because they may point to basic changes in the nature of the business. Ratio
analysis would give some indication of the company's short-term solvency and
help Third State Bank assess the level of risk involved in the loan. The ratios would
also be useful in analyzing how RCS is performing compared to industry averages,
and thus serve as a benchmark for comparison to other companies. Ratios reduce
absolute dollar amounts to more meaningful data in order for the bank to
compare ratios to prior periods, other companies, and the industry. Ratios can be
used to show how well the company is being managed and to highlight areas for
further investigation. If the ratios do not appear favorable compared to the
company's own past and to other companies in its industry, the bank may consider
adjusting the dollar level and/or the interest rate of the note or may even decide
not to renew the note.
b. Calculations of selected financial ratios are presented below.
1. Current ratio = Current assets ÷ Current liabilities

This Year
Current assets = $50 + $350 + $70 = $470
Current liabilities = $150 + $140 + $300 = $590
Current assets =
Last Year
Current assets = $50 + $250 + $160 = $460
Current liabilities = $130 + $120 + $200 = $450
Current ratio = $460 ÷ $450 = 1.02
2. Accounts receivable turnover = Sales on account ÷ Average accounts receivable

balance
= $2,500 ÷ ($350 + $250)/2 = $2,500 ÷ $300 = 8.33
3. Return on common stockholders' equity = (Net income - Preferred dividends) ÷

= ($290 - $0) ÷ (($940 + $710)/2 - $0) = $290 ÷ $825 = 35.15%
4. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity

This Year
Debt-to-equity ratio = $990 ÷ $940 = 1.05
Last Year
Debt-to-equity ratio = $850 ÷ $710 = 1.20
c. The difficulties and limitations of ratio analysis include the following:
• Although ratios are useful as a starting point in financial analysis, they are not an
end in themselves. Ratios can be used as indicators of what to pursue in a more
detailed analysis.
• Different companies often use different accounting methods (e.g., FIFO versus
LIFO inventory valuation) and this can have an impact on the financial ratios that
does not reflect real differences in the operations and financial health of the
companies.
• Making comparisons across industries can be difficult. Companies in different
industries tend to have different financial ratios.
• Since the ratios are based on accounting statements, they measure what has
happened in the past and not necessarily what will happen in the future.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
187. Recent financial statements for Madison Company are given below:
Madison Company paid dividends of $3.15 per share during the year. The
company's common stock had a market price of $63 per share on December 31.
Assets at the beginning of the year totaled $1,100,000 and stockholders' equity
totaled $725,000.
Required:
Compute the following:

b. Dividend payout ratio.
d. Price-earnings ratio.
g. Was financial leverage positive or negative for the year? Explain.
a. Earnings per share = (Net income - Preferred dividends) ÷ Average number of

common shares outstanding = ($105,000 - $0) ÷ 20,000 = $5.25/share
b. Dividend payout ratio = Dividends per share ÷ Earnings per share = $3.15 ÷
$5.25 = 60%
c. Dividend yield ratio = Dividends paid per share ÷ Market price per share = $3.15
÷ $63.00 = 5%
d. Price-earnings ratio = Market price per share ÷ Earnings per share = $63.00 ÷
$5.25 = 12.0
e. Return on total assets = [Net income + Interest expense × (1 - Tax rate)] ÷

= [$105,000 + $30,000 × (1-.40)] ÷ [$1,100,000 + $1,300,000)] = $123,000 ÷
$1,200,000 = 10.25%
f. Return on common stockholders' equity = (Net income - Preferred dividends) ÷

Average common stockholders' equity = ($105,000 - $0) ÷ [1/2 × ($725,000 +
$800,000)] = $105,000 ÷ $762,500 = 13.8%
g. Financial leverage is positive since the rate of return to the common

stockholders of 13.8% is greater than the rate of return on total assets of 10.25%.
AACSB: Analytic
Blooms: Apply
188. Financial statements for Qualle Company appear below:
Required:

d. Return on total assets.
e. Return on common stockholders' equity.
f. Book value per share.
a. Number of common shares outstanding = Common stock ÷ Par value = $160 ÷

$10 = 16
common shares outstanding = ($259 - $10) ÷ 16 = $15.56
= $280 ÷ $15.56 = 18.0
c. Number of common shares outstanding = Common stock ÷ Par value = $160 ÷

$10 = 16
Dividends per share = Common dividends ÷ Common shares = $139 ÷ 16 = $8.69
Dividend yield ratio = Dividends per share ÷ Market price per share = $8.69 ÷
$280.00 = 3.10%
d. Average total assets = ($2,330 + $2,300) ÷ 2 = $2,315

= $259 + [$50 × (1 - 0.30)] = $294
Return on total assets = Adjusted net income ÷ Average total assets = $294 ÷
$2,315
= 12.70%
e. Average common stockholders' equity = ($1,340 + $1,230) ÷ 2 = $1,285

Average common stockholders' equity = ($259 - $10)÷$1,285 = 19.38%
f. Number of common shares outstanding = Common stock ÷ Par value = $160 ÷

$10 = 16
shares outstanding
= $1,340 ÷ 16 = $83.75
AACSB: Analytic
Blooms: Apply
189. Debutiaco Corporation's most recent balance sheet and income statement appear
below:
Required:

a. Number of common shares outstanding = Common stock ÷ Par value = $200 ÷

$2 per share = 100 shares
common shares outstanding = ($70 - $10) ÷ (100 shares + 100 shares)/2 = $0.60
per share
= $12.00 ÷ $0.60 = 20.0
c. Dividends per share = Common dividends ÷ Common shares (see above)

= $20 ÷ 100 shares = $0.20 per share
Dividend payout ratio = Dividends per share ÷ Earnings per share (see above)
= $0.20 ÷ $0.60 = 33.3%
d. Dividend yield ratio = Dividends per share (see above) ÷ Market price per share
= $0.20 ÷ $12.00 = 1.67%
e. Average total assets = ($1,620 + $1,630) ÷ 2 = $1,625

= $70 + [$29 × (1 - 0.30)] = $90.3
= $90.3 ÷ $1,625 = 5.56%
f. Average common stockholders' equity = ($1,110 + $1,070) ÷ 2 = $1,090

Average common stockholders' equity = ($70 - $10) ÷ $1,090 = 5.50%
g. Number of common shares outstanding = Common stock ÷ Par value

shares outstanding
= $1,110 ÷ 100 shares = $11.10 per share
AACSB: Analytic
Blooms: Apply
190. Sweetman Corporation has provided the following financial data (in thousands of
dollars):
Net income for Year 2 was $120 thousand. Interest expense was $25 thousand. The
tax rate was 30%. Dividends on common stock during Year 2 totaled $80
thousand. Dividends on preferred stock totaled $20 thousand. The market price of
common stock at the end of Year 2 was $4.75 per share.
Required:

a. Number of common shares outstanding = Common stock ÷ Par value

= $4.75 ÷ $0.50 = 9.5
c. Dividends per share = Common dividends ÷ Common shares (see above)

= $80 ÷ 200 shares = $0.40 per share
Dividend payout ratio = Dividends per share ÷ Earnings per share (see above)
= $0.40 ÷ $0.50 = 80.0%
d. Dividend yield ratio = Dividends per share (see above) ÷ Market price per share
= $0.40 ÷ $4.75 = 8.42%
e. Average total assets = ($1,310 + $1,290) ÷ 2 = $1,300

Return on total assets = {Net income + [Interest expense × (1 - Tax rate)]} ÷
= {$120 + [$25 × (1 - 0.30)]} ÷ $1,300
= $137.5 ÷ $1,300 = 10.58%
f. Average common stockholders' equity = ($710 + $690) ÷ 2 = $700

Average common stockholders' equity = ($120 - $20) ÷ $700 = 14.29%
g. Number of common shares outstanding = Common stock ÷ Par value

common shares outstanding = ($200 + $160 + $350) ÷ 200 shares = $3.55 per
share
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
191. Lunghofer Corporation's net income for the most recent year was $3,189,000. A
total of 300,000 shares of common stock and 100,000 shares of preferred stock
were outstanding throughout the year. Dividends on common stock were $4.90
per share and dividends on preferred stock were $1.95 per share.
Required:
Compute the earnings per share of common stock. Show your work!

common shares outstanding = ($3,189,000 - $195,000) ÷ 300,000 shares = $9.98
per share
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
192. Basta Corporation's net income last year was $1,401,000. The dividend on common
Required:
Compute the price-earnings ratio. Show your work!

per share
Price-earnings ratio = Market price per share ÷ Earnings per share = $65.40 ÷
$3.37 = 19.41
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
193. Sabb Corporation's net income last year was $6,190,000. The dividend on common
stock was $13.90 per share and the dividend on preferred stock was $1.60 per
share. The market price of common stock at the end of the year was $41.50 per
share. Throughout the year, 300,000 shares of common stock and 100,000 shares
of preferred stock were outstanding.
Required:
Compute the dividend payout ratio. Show your work!

per share
Dividend payout ratio = Dividends per share ÷ Earnings per share = $13.90 ÷
$20.10 = 0.69
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
194. Last year, Bickham Corporation's dividend on common stock was $8.70 per share
common stock at the end of the year was $66.10 per share.
Required:
Compute the dividend yield ratio. Show your work!
Dividend yield ratio = Dividends per share ÷ Market price per share = $8.70 ÷
$66.10 = 0.13
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
195. Gulick Corporation's most recent income statement appears below:
$280,000.
Required:
Compute the return on total assets. Show your work!

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

$1,300,000
Average common stockholders' equity = ($102,000 - $15,000) ÷ $1,300,000 = 6.7%
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
197. Data from Paynter Corporation's most recent balance sheet appear below:
A total of 100,000 shares of common stock and 20,000 shares of preferred stock
were outstanding at the end of the year.
Required:
Compute the book value per share. Show your work!
common shares outstanding = ($840,000 + $0) ÷ 100,000 shares = $8.40 per share
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
198. Financial statements for Rarig Company appear below:
Required:
a. Current ratio.
b. Acid-test ratio.
c. Average collection period.
d. Inventory turnover.
e. Times interest earned.
f. Debt-to-equity ratio.
a. Current ratio = Current assets ÷ Current liabilities = $590 ÷ $310 = 1.90
b. Acid-test ratio = (Cash + Marketable securities + Accounts receivable + Short-

term notes receivable) ÷ Current liabilities = ($210 + $160 + $0) ÷ $310 = $370 ÷
$310 = 1.19
c. Average accounts receivable balance = ($160 + $150) ÷ 2 = $155
balance
= $1,800 ÷ $155 = 11.61
Average collection period = 365 days ÷ Accounts receivable turnover = 365 ÷ 11.61
= 31.4 days
d. Average inventory balance = ($190 + $180) ÷ 2 = $185

$185 = 6.81
e. Times interest earned = Earnings before interest expense and income taxes ÷
f. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $770 ÷ $1,320 =

0.58
AACSB: Analytic
Blooms: Apply
199. Malbrough Corporation's most recent balance sheet and income statement appear
below:
Required:
a. Working capital.
b. Current ratio.
c. Acid-test ratio.
a. Working capital = Current assets - Current liabilities = $500 - $270 = $230
b. Current ratio = Current assets ÷ Current liabilities = $500 ÷ $270 = 1.85
c. Acid-test ratio = (Cash + Marketable securities + Accounts receivable + Short-

term notes receivable) ÷ Current liabilities = ($110 + $0 + $140) ÷ $270 = $250 ÷
$270 = 0.93
d. Average accounts receivable balance = ($140 + $140) ÷ 2 = $140

balance
= $1,290 ÷ $140 = 9.21
e. Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 9.21 = 39.6 days
f. Average inventory balance = ($180 + $170) ÷ 2 = $175

$175 = 4.23
g. Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 4.23 = 86.3 days
AACSB: Analytic
Blooms: Apply
200. Excerpts from Stepney Corporation's most recent balance sheet (in thousands of
dollars) appear below:
Sales on account during the year totaled $1,440 thousand. Cost of goods sold was
$890 thousand.
Required:
a. Working capital.
b. Current ratio.
c. Acid-test ratio.
a. Working capital = Current assets - Current liabilities = $720 - $360 = $360
b. Current ratio = Current assets ÷ Current liabilities = $720 ÷ $360 = 2.00
c. Acid-test ratio = (Cash + Marketable securities + Accounts receivable + Short-

term notes receivable) ÷ Current liabilities = ($260 + $0 + $260 = $520) ÷ $360 =
$520 ÷ $360 = 1.44
d. Average accounts receivable balance = ($260 + $270) ÷ 2 = $265

balance
= $1,440 ÷ $265 = 5.43
e. Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 5.43 = 67.2 days
f. Average inventory balance = ($140 + $140) ÷ 2 = $140

$140 = 6.36
g. Average sale period = 365 days ÷ Inventory turnover (see above)

= 365 days ÷ 6.36 = 57.4 days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
201. Heningburg Corporation's total current assets are $230,000, its noncurrent assets
$370,000, and its stockholders' equity is $250,000.
Required:
Compute the company's working capital. Show your work!
Working capital = Current assets - Current liabilities = $230,000 - $140,000 =

$90,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
202. Gaskamp Corporation's total current assets are $270,000, its noncurrent assets are
$610,000, its total current liabilities are $170,000, its long-term liabilities are
$400,000, and its stockholders' equity is $310,000.
Required:
Compute the company's current ratio. Show your work!
Current ratio = Current assets ÷ Current liabilities = $270,000 ÷ $170,000 = 1.59
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
203. Data from Weichbrodt Corporation's most recent balance sheet appear below:
Required:
Compute the company's acid-test ratio. Show your work!
Acid-test ratio = (Cash + Marketable securities + Accounts receivable + Short-term

notes receivable) ÷ Current liabilities = ($15,000 + $26,000 + $37,000) ÷ $102,000
= $78,000 ÷ $102,000 = 0.76
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
204. Millage Corporation has provided the following data:
Required:
Compute the accounts receivable turnover for this year. Show your work!

balance
= $721,000 ÷ $135,000 = 5.34
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
205. Data from Adame Corporation's most recent balance sheet and income statement
appear below:
Required:
Compute the average collection period for this year:

balance
= $799,000 ÷ $111,500 = 7.17
= 365 days ÷ 7.17 = 50.9 days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
206. Eaglen Corporation has provided the following data:
Required:
Compute the inventory turnover for this year:

Inventory turnover = Cost of goods sold ÷ Average inventory balance = $530,000
÷ $153,500 = 3.45
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
207. Data from Ankeny Corporation's most recent balance sheet and income statement
appear below:
Required:
Compute the average sale period for this year:

= $641,000 ÷ $181,500 = 3.53
Average sale period = 365 days ÷ Inventory turnover = 365 days ÷ 3.53 = 103.4
days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
208. Zide Corporation's most recent balance sheet and income statement appear
below:
Required:

a. Times interest earned = Earnings before interest expense and income taxes ÷
b. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $400 ÷ $1,070 =
0.37
AACSB: Analytic
Blooms: Apply
209. Pettengill Corporation's net operating income last year was $280,000; its interest
expense was $37,000; its total stockholders' equity was $920,000; and its total
liabilities were $620,000.
Required:

a. Times interest earned = Earnings before interest expense and income taxes ÷
Interest expense = $280,000 ÷ $37,000 = 7.57
b. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $620,000 ÷
$920,000 = 0.67
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
210. Dehne Corporation has provided the following data from its most recent income
statement:
Required:
Compute the times interest earned ratio. Show your work!
Interest expense = $75,000 ÷ $32,000 = 2.34
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
211. Schiff Corporation has provided the following data from its most recent balance
sheet:
Required:
Compute the debt-to-equity ratio. Show your work!
Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $500,000 ÷

$160,000 = 3.13
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy

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Chapter 13

Financial Statement Analysis

True / False Questions

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

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

Multiple Choice Questions

16. The formula for the gross margin percentage is:

A. (Sales - Cost of goods sold)/Cost of goods sold

B. (Sales - Cost of goods sold)/Sales

D. Net income/Cost of goods sold

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

A. how quickly accounts receivables can be collected.

B. how quickly inventories are sold.

C. the efficiency of administrative departments.

D. the overall profitability of the company's products.

D. impossible to determine without more information.

A. return on common stockholders' equity.

C. dividend payout ratio.

D. dividend yield ratio.

20. Financial leverage is negative when:

B. total liabilities are less than stockholders' equity.

C. total liabilities are less than total assets.

A. decrease the book value per share of common stock.

B. increase the book value per share of common stock.

C. increase total stockholders' equity.

D. decrease total stockholders' equity.

A. decrease net working capital.

B. decrease the current ratio.

C. decrease the acid-test ratio.

D. affect all of the above as indicated.

B. An increase in accounts payable.

C. An increase in property, plant, and equipment.

D. An increase in bonds payable.

A. increase the current ratio.

B. decrease the current ratio.

C. not affect the current ratio or the acid-test ratio.

D. decrease the acid-test ratio.

A. Selling office equipment at book value.

B. Paying a cash dividend already declared.

C. Borrowing by taking out a short-term loan.

D. Selling equipment at a loss.

A. Pay off a portion of its long-term debt.

B. Use cash to pay off some current liabilities.

C. Purchase additional inventory on credit.

D. Collect some of the current accounts receivable.

A. the working capital of a company.

B. the acid-test ratio.

C. the current ratio.

D. the debt to equity ratio.

A. Selling merchandise on account.

B. Paying a cash dividend already declared.

C. Borrowing using a short-term note.

D. Selling equipment at a loss.

D. be impossible to determine from the given information.

A. stricter policies with respect to the granting of credit to customers.

B. an easing of policies with respect to the granting of credit to customers.

C. a slowdown in collecting accounts receivables from customers.

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

The gross margin percentage is closest to: