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Exam 13: Financial Statement Analysis

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Question 1

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Which of the following solvency ratios is the best measure of a company's ability to pay interest and maturing principal amounts on its long-term debt?

A) Debt-to-equity ratio
B) Times interest earned ratio
C) Debt service coverage ratio
D) Earnings per share

E) A) and B)
F) A) and C)

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Question 2

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Which profitability ratio requires the use of earnings per share in its calculation?

A) Price/earnings ratio
B) Return on common stockholders' equity
C) Dividend yield ratio
D) Profit margin

E) A) and C)
F) B) and C)

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Question 3

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The return on assets ratio

A company with a capital structure that shifts more toward debt financing will appear to be in a stronger position to pay interest and any principal amount that may be maturing by using its cash flows generated by operating activities.

Vertical analysis is a comparison of financial statement items for a single company over a period of time.

Moonbeam Gift Shop's inventory turned over six times during the year.Similar gift shops have an inventory turnover equal to 12 times per year.What might explain Moonbeam's state of inventory management?

Knife Corp. Use the selected data presented below from the financial statements of Knife Corp.for 2018 and 2017 to answer the questions that follow. ​ $\begin{array}{lrr}&2018&2017\\\text { Net income } & \$ 110,000 & \$ 123,000 \\\text { Cash dividends paid on preferred stock } & \$ 12,000 & \$ 15,000 \\\text { Cash dividends paid on common stock } & \$ 42,000 & \$ 38,000 \\\text { Weighted average number of common shares outstanding } & 105,000 & \$ 5,000 \\\text { Market price per share of common stock at the end of the year } & \$ 16.00 & \$ 13.00\end{array}$ ​ -Refer to the data for Knife Corp. ​ Required (A)Calculate earnings per share for 2018 for Knife.Why is this considered one of the most quoted ratios for public companies? Which investors,common or preferred or both,desire this information? ​ (B)Calculate the price/earnings ratio for 2018 for Knife.Why is this ratio important to investors? Explain.

The following items appear on the balance sheet of The Piano Company at the end of 2018 and 2017: $\begin{array}{lrr}&2018&2017\\\text { Current assets } & \$ 6,000 & \$ 3,000 \\\text { Long-term assets } & 7,000 & 4,000 \\\text { Current liabilities } & 2,000 & 3,000 \\\text { Long-term liabilities } & 7,000 & 0 \\\text { Stockhol ders' equity } & 4,000 & 4,000\end{array}$ Between 2017 and 2018,

Trend analysis is analysis

A nonbusiness entity would be particularly concerned about its

Kim Chen Corporation is a wholesaler of scuba gear.During 2018,Chen expanded its retail business by adding over 50 dive shops.The following information is obtained from the comparative financial statements included in the company's 2018 annual report (all amounts are in thousands of dollars):

Mother Nature Supplies Following are selected data from the financial statements of Mother Nature Supplies: ​ $\begin{array}{lrr}&2018&2017\\\text { Accounts receivable } & \$ 60,000 & \$ 38,000 \\\text { Merchandise inventory } & 12,000 & 16,000 \\\text { Total assets } & 450,000 & 380,000 \\\text { Net sales } & 380,000 & 270,000 \\\text { Cost of goods sold } & 160,000 & 210,000\end{array}$ ​ -Refer to the data for Mother Nature Supplies. Which of the following results would be found through a vertical analysis of the balance sheet or the income statement of Mother Nature Supplies?

A high P/E ratio always indicates that a stock is overpriced by the market.

The current and quick ratios have two limitations.These ratios

The following information is available from the balance sheets at the end of 2018 and 2017 for Riverside Company: ? $\begin{array}{lrr}& \underline{2018}& \underline{2017}\\\text { Accounts payable } & \$ 80,000 & \$ 40,000 \\\text { Accrued liabilities } & 65,000 & 25,000 \\\text { Taxes payable } & 10,000 & 20,000 \\\text { Short-term notes payable } & 0 & 60,000 \\\text { Bonds payable due within next year } & 200,000 & 200,000\\\text { Total current liabilities } & \underline{ \$ 355,000 }& \underline{\$ 345,000 }\\\text { Bonds payable } & \underline{ \$ 800,000} & \underline{ \$ 300,000} \\\text { Common stock } \$ 5 \text { par } & \$ 1,000,000 & \$ 1,000,000\\ \text { Retained earnings } & \underline{ 695,000}& \underline{55,000} \\ \text { aolders' equity } & \underline{\$ 1,695,000}& \underline{\$1,055,000}\\ \text { Total liabilities and stockhol ders' equity } & \$ 2,850,000 &\$1,700,000\\ \end{array}$ Net income for 2018 and 2017 was $340,000 and $300,000,respectively.Answer the following: ? $\text { A) Calculate the return on common stockholders' equity ratio for } 2018 \text {. }$ ? $\text { B) What information is provided to users with the cal culation in part } ( A ) \text { ? Explain. }$ C) What is the difference between the return on stockholders' equity ratio and the return on assets ratio?

What situations could cause a decrease in the current ratio,but an increase in the acid-test ratio? If this happens,is management to be commended or is a problem evident? Explain

What numerators are used in the computation of the following ratios? $\begin{array}{ll}\text { Inventory turnover ratio }&\text { Accounts receivable turnover ratio }\\a.\text { Cost of Goods Sold } & \text { Cost of Goods Sold } \\b.\text { Net Credit Sales } & \text { Net Credit Sales } \\c.\text { Net Credit Sales } & \text { Cost of Goods Sold } \\d.\text { Cost of Goods Sold } & \text { Net Credit Sales }\end{array}$

All line items in common-size comparative income statements are stated as a percentage of net income.

Your supervisor asks you to compare the company's results for the year,as measured by various ratios,with one of the published surveys that arranges information by industry classification.What difficulties might you encounter when making comparisons using industry standards?

Presented below are selected data from the financial statements of Parade Corp. $\begin{array}{lrr}&2017&2018\\\text { Net income } & \$ 150,000 & \$ 123,000 \\\text { Weighted average number of common shares outstanding } & 105,000 & 95,000 \\\text { Market price per share of common stock at the end of the year } & \$ 12.00 & \$ 10.00\end{array}$ The price/earnings ratio for 2018 is