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Exam 9: Financial Statement Analysis

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Question 1

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Long-term creditors are usually most interested in evaluating:

A) Liquidity.
B) Managerial effectiveness.
C) Solvency.
D) Profitability.

E) C) and D)
F) A) and D)

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Question 2

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If the company purchased a $60,000 piece of equipment by paying $30,000 and having the rest financed with a short-term note from the bank, then immediately after this transaction what is the expected impact on the current ratio?

A) Current assets decrease and current liabilities increase by the same amount therefore, the current ratio decreases.
B) Current liabilities decrease therefore, the current ratio decreases.
C) Current assets and current liabilities decrease by the same amount therefore, the current ratio increases.
D) Current assets decrease therefore, the current ratio increases.

E) A) and B)
F) None of the above

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Question 3

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On December 31, 2013, Allen Company's total current assets were $600,000 and its total current liabilities were $380,000. On January 1, 2014, Allen paid $20,000 on accounts payable. Required: (a) Compute Allen's working capital before and after paying the account payable. (b) Compute Allen's current ratio before and after paying the account payable. Round your answer to two decimal places.

The following information is from the financial records of Newton Company for 2014: $\begin{array}{|l|lc|}\hline \text { Sales } & \$ 620,000 \\\hline \text { Interest expense } & 26,000 \\\hline \text { Income tax expense } & 46,000 \\\hline \text { Net income } & 104,000 \\\hline\end{array}$ Required: Calculate the number of times interest is earned for Newton in 2014. Round your answer to one decimal place.

The following information applies to Markham Company: Additional information: Net credit sales = $220,000; beginning accounts receivable = $11,000. Required: Compute Markham's (a) Quick ratio (b) Current ratio (c) Working capital (d) Accounts receivable turnover (e) Average days to collect receivables Round your answers to two decimal places.

The following balance sheet information is provided for Patton Company: $\begin{array}{|l|r|r|}\hline \text { Assets } & 2014 & 2013 \\\hline \text { Cash } & \$ 4,000 & \$ 2,000 \\\hline \text { Accounts receivable } & 15,000 & 12,000 \\\hline \text { Inventory } & \$ 35,000 & \$ 38,000 \\\hline\end{array}$ Assuming 2014 cost of goods sold is $730,000, what is the company's average days to sell inventory? (Use 365 days in a year. Do not round your intermediate calculations.)

Indicate whether each of the following statements about financial statement analysis is true or false. 1. Vertical analysis of a company's balance sheet is useful in assessing its liquidity. 2. Common size financial statements are a form of vertical analysis, but the common size statements for two or more years may usefully be compared. 3. Vertical analysis of a balance sheet involves converting each component to a percentage of stockholders' equity. 4. Small percentage changes resulting from vertical analysis may still represent large dollar amounts; therefore, changes in both absolute dollar amounts and percentages should be examined. 5. A common size income statement is prepared by converting each component to a percentage of net income.

The Poole Company reported the following income for 2014: What is the company's net margin?

The accounts receivable turnover ratio can be used to asses a firm's solvency.

The study of an individual item or account over several periods in the same financial year or over many years is known as:

Discuss the limitations that affect financial statement analysis.

Various ratios are computed to assess different aspects of a company's financial condition and/or strength. Required: In the table below, indicate which aspect of financial condition each specified ratio is designed to assess:

The following balance sheet information is provided for Santana Company for 2014: What is the company's debt to equity ratio?

The following balance sheet information is provided for Gaynor Company: $\begin{array}{|l|r|r|}\hline \text { Assets } & 2014 & 2013 \\\hline \text { Cash } & \$ 4,000 & \$ 2,000 \\\hline \text { Accounts receivable } & 15,000 & 12,000 \\\hline \text { Inventory } & \$ 35,000 & \$ 38,000 \\\hline\end{array}$ Assuming 2014 cost of goods sold is $153,300, what is the company's inventory turnover?

Lilly's Corporation has working capital of $620,000, and Harmon Corporation has working capital of $840,000. Which of the following statements is incorrect?

Alpha Company provided the following balance sheet for 2014: What is the company's plant assets to long-term liabilities ratio?

Which of the following statement is correct regarding the quick ratio?

Gamma Company and Chi Company are similar and similar-sized companies operating in the same industry. At the end of the most recent year, Gamma's price/earnings ratio was 22.0, and Chi's price/earnings ratio was 14.2. What conclusion would you draw based on the difference in price/earnings ratios for the two companies?

Earnings before interest and taxes divided by interest expense is the formula for which of these analytical measures?

Selected financial information for Martin Company for 2014 follows: $\begin{array}{|l|l|}\hline \text { Sales } & \$ 498,000 \\\hline \text { Cost of goods sold } & 320,000 \\\hline \text { Merchandise inventory } & \\\hline \text { Beginning of year } & 72,000 \\\hline \text { End of year } & 80,000 \\\hline\end{array}$ Required: How many times did Martin's merchandise inventory turnover during 2014? Round your answer to one decimal place.