Chapter 14

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School

University of Memphis *

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7080

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Accounting

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Apr 3, 2024

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Uploaded by JusticeGorilla11999

Chapter 14 Assignments: 1. Consolidated financial statements present which of the following? combined financial statements of parent and subsidiary companies 2. True or false: Calculating a percentage change starts with the second year and works backward to the first year. FALSE 3. A company had sales of $90,000 in Year 1, the base year; $95,000 in Year 2; and $78,000 in Year 3. What is the trend percentage for Year 3? Round the answer to two decimal places. 86.7% ($78,000/$90,000= 86.7%) 4. If a company had sales of $500,000; gross profit of $360,000; interest expense of $10,000; and net income of $125,000, the component percentage for interest expense, is ___. 2% ($10,000/$500,000=2%) 5. Ratios are used for which of the following purposes? assisting in understanding the relationship between one financial statement and another; explaining the relative size of related items 6. Classified financial statements are statements that: place items with certain characteristics together in the statements 7. Comparing amounts for a company over time in successive accounting periods is called: horizontal analysis 8. A company had interest expense of $12,400 during a year. In the previous year, interest expense was $11,800. What was the percentage increase rounded to the nearest 1/10 percent? 5.1% ( ($12,400 – $11,800)/$11,800 = 5.1%) 9. Quality of earnings is a term used to describe: the impact on earnings and assets of the accounting methods selected by a company 10. The basis or denominator for calculating a trend percentage is: a base-year amount 11. A company's ability to meet its obligations on an ongoing basis is generally referred to as the company's: liquidity 12. The percentage that inventory represents of the total assets in a statement of financial position (balance sheet) is called the: component percentage 13. Which of the following is not a current asset? Buildings 14. The relationship of one number to another related number is called a ___. Ratio 15. A company has cash of $4,000; accounts receivable of $8,000; inventory of $12,000; and accounts payable of $15,000. What is the amount of the company's working capital? $9,000 ($4,000 + $8,000 + $12,000 – $15,000 = $9,000)

16. The most common approaches used for financial analysis compare information about a company in a single accounting period with: information about the same company in different accounting periods; information about other companies in the same industry 17. A company's assets include cash of $6,000; accounts receivable of $10,000; inventories of $56,000; and plant assets of $28,000, totaling $100,000. Its liabilities include accounts payable of $25,000 and bonds payable of $45,000, totaling $70,000. Its stockholders' equity includes $10,000 of capital stock and $20,000 of retained earnings, totaling $30,000. What is the company's current ratio? 2.88 ($6,000 + $10,000 + $56,000)/$25,000 = 2.88) 18. Judging the impact on earnings of the specific accounting methods a company chooses is sometimes referred to as the ___ of earnings. Quality 19. A company has cash of $4,000; accounts receivable of $8,000; inventories of $12,000; and accounts payable of $6,000. What is the amount of the company's quick ratio? 2 ( ($4,000 + $8,000)/$6,000 = 2) 20. The ability of a company to meet its continuing obligations is referred to as ___. Liquidity 21. A statement of financial position, or balance sheet, that groups similar items together is called: a classified statement 22. Which of the following are not considered in calculating the amount of a company's working capital? Retained earnings; bonds payable; capital stock 23. Which of the following is/are correct about the debt ratio? The lower the debt ratio, the safer the position of creditors; Debt ratios of companies vary by industry 24. The calculation of the current ratio includes all of the following in the numerator except: retained earnings; equipment 25. True or false: Annual reports of companies are made available only to that company's creditors and stockholders. FALSE 26. True or false: The quick ratio and the current ratio are two names for the same financial statement ratio. FALSE 27. Which of the following are measures of different levels of profitability? operating income; gross profit; net income 28. Which of the following best describe(s) what is meant by a company's liquidity? A company's ability to meet its obligations as they become due 29. Assets that are relatively liquid and are expected to become cash in the relatively near future are called ___ assets. Current 30. The difference between net sales and the cost of goods sold is called: gross profit

31. If a business fails, the claims of ___ take priority over those of the owners. Creditors/lenders 32. Which of the following is not a section you would find in a classified income statement? current assets 33. Standards of comparison commonly used in the financial analysis include all of the following except: comparisons with other companies in close geographic proximity 34. The general formula for calculating earnings per share is: net income divided by the number of shares of common stock outstanding 35. True or false: Public opinion polls show that people generally overstate the amount of profit earned by companies. TRUE 36. Which of the following do(es) not accurately describe the price- earnings ratio? It reflects a company's rate of inventory turnover; It reflects a company's liquidity 37. Which of the following is not a factor in judging a company's liquidity? the depreciation of plant assets 38. Which of the following is not correct about a single-step income statement? Earnings per share figures are not presented in a single-step income statement 39. The final section or item you would expect to find in a classified income statement is: earnings per share 40. Two common applications of the Return on investment concept include: return on equity; return on assets 41. The return on ___ is a broad measure of the profitability of a company based on the total investment in the company. Assets 42. A company had sales of $400,000; gross profit of $250,000; operating income of 150,000; and net income of $75,000. Dividends on preferred stock were $10,000. Throughout the year, 10,000 shares of common stock were outstanding and 1,000 shares of preferred stock were outstanding. What was the earnings per share for the year? $7.50 ($75,000/10,000 = $7.50) 43. The price-earnings ratio is calculated by dividing the current market price by: earnings per share 44. The best number to use for the numerator in the calculation of return on equity is: net income 45. The income statement format that groups all revenues together, less all expenses grouped together, with no intermediate subtotals in arriving at a net income amount is the ___ -step income statement. Single 46. A company had $200,000 of net income during the year. Its dividend requirements for preferred stock were $25,000. Outstanding numbers for common stock were 200,000 at the beginning of the year, which increased to 250,000 at the end of the year as a result of selling additional stock at the halfway point during the year. What was the amount of the company's earnings per share (on common stock) for

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the year, rounded to the nearest whole cent? $0.78 ( ($200,000 – $25,000)/(200,000 + 250,000 shares)/2 = $0.78) 47. The return on investment is calculated as follows: return divided by average amount invested during the period 48. Which of the following best describes the meaning of leverage? Earning more on debt than the cost of debt, enhancing the investment of common stockholders 49. The base number (denominator) in the calculation of the return on assets is the: average total assets 50. The general formula for calculating earnings per share is: net income divided by the number of shares of common stock outstanding 51. A company had operating income of $250,000 and net income of $300,000 for a year in which its total stockholders' equity was $800,000 at the beginning of the year and increased to $950,000 from the sale of additional capital stock during the year. What was the amount of the company's return on equity for the year, rounded to the nearest whole percentage? 34% ($300,000/[($800,000 + $950,000)/2] = 34%) 52. A company had operating income (income before income taxes and interest) of $200,000 and net income of $185,000. Annual interest expense was $50,000. The interest coverage ratio was ___ times. 4 ($300,000/(($800,000 + $950,000)/2) = 34%) 53. Which of the following is/are particularly relevant to a company's common stockholders if they are interested in receiving regular cash income? dividend yield; price-earnings ratio; earnings per share 54. A company paid interest of 5% on bonds and used the funds to earn a return of 8%. The primary beneficiaries of this outcome are the: common stockholders 55. A company had operating income of $450,000 and net income of $230,000 for the year. Its beginning total asset balance was $500,000, and its ending total asset balance was $600,000. What was the return on assets for the year, rounded to the nearest whole percentage? 82% ($450,000/[($500,000 + $600,000)/2] = 82%) 56. A company had sales of $800,000 during a year in which the cost of goods sold was $500,000; beginning receivables were $40,000; and ending receivables were $50,000. Net income for the year was $130,000. What was the company's accounts receivables turnover rate, rounded to the nearest tenth? 17.8 ($800,000/[($40,000 + $50,000)/2] = 17.8 times) 57. The figure resulting from the division of net income by the number of shares of common stock outstanding is called ___ ___ ___. Earnings per share 58. A company had sales of $300,000 and a cost of goods sold of $140,000 for the most recent year. Inventory for the year began at $50,000 and ended at $70,000. What was the average number of days

to sell inventory, rounded to the nearest whole day? 156 days ($140,000/[($50,000 + $70,000)/2] = 2.33333; 365 days/2.33333 = 156.4 days) 59. A company has net income of $500,000, interest expense of $35,000 and income taxes of $150,000. What is the interest coverage ratio, rounded to the nearest whole number? 20 times (($500,000 + $35,000 + $150,000)/$35,000 = 19.57 times) 60. A company had an accounts receivables turnover rate of 5 times and an inventory turnover rate of 10 times. How many days are in the company's operating cycle, rounded to the nearest whole day? 110 days ((365/5) + (365/10) = 109.5 days) 61. A company had $200,000 of net income during the year. Its dividend requirements for preferred stock were $25,000. Outstanding numbers for common stock were 200,000 at the beginning of the year, which increased to 250,000 at the end of the year as a result of selling additional stock at the halfway point during the year. What was the amount of the company's earnings per share (on common stock) for the year, rounded to the nearest whole cent? $0.78 (($200,000 – $25,000)/(200,000 + 250,000 shares)/2 = $0.78) 62. Reconciling a company's net income to its net cash from operating activities includes additions for which of the following? an increase in short-term notes payable; depreciation expense; an increase in accounts payable 63. Which of the following best describes the meaning of leverage? Earning more on debt than the cost of debt, enhancing the investment of common stockholders 64. True or false: Notes to the financial statements are rare and usually include information that is not considered important in financial statement analysis. FALSE 65. A company's sales for the year were $650,000. Its accounts receivable was $50,000 at the beginning of the year and $60,000 at the end of the year. What were the average number of days to collect accounts receivable, rounded to the nearest whole day? 31 days ($650,000/[($50,000 + $60,000)/2] = 11.8; 365 days/11.8 = 31 days) 66. The ratio that indicates the length of time required to sell inventory is called the ___ ___ ___. Inventory turnover rate 67. The length of time required to invest cash in inventory, sell the inventory, and collect the receivable is referred to as the company's ___ ___. Operating cycle 68. The section of a company's statement of cash flows that is most directly related to its ability to produce a continuing, dependable cash flow for ongoing activities is the: operating activities section 69. Which of the following would you expect to find in notes to a company's financial statements? significant commitments and contingencies; assets pledged to secure specific liabilities;

accounting policies and methods used in the financial statements 70. A company had an accounts receivables turnover rate of 5 times and an inventory turnover rate of 10 times. How many days are in the company's operating cycle, rounded to the nearest whole day? 110 days ((365/5) + (365/10) = 109.5 days) 71. Reconciling a company's net income to its net cash from operating activities includes subtractions for which of the following? a decrease in accrued liabilities; an increase in accounts receivable 72. True or false: Notes to the financial statements are rare and usually include information that is not considered important in financial statement analysis. FALSE Homeworks: 73. Quick assets include which of the following? Cash, marketable securities, and receivables 74. The price-earnings ratio is measured by dividing: Market value by earnings per share 75. Flanders Company’s operating income for the current year was $490,000. The company’s average total assets for the same period were $3,500,000, and its total liabilities were $1,000,000. Calculate the company’s return on assets . 14% (490,000 / 3,500,000 = 14%) 76. True/false: The price-earnings ratio is calculated by dividing earnings per share by the current market price of a share of the company's stock. FALSE 77. True/False: The inventory turnover rate is a measure of how quickly inventory sells. TRUE 78. The debt ratio indicates the percentage of: Total assets financed by creditors. 79. Lone Star, Incorporated, reported sales of $560,000, cost of goods sold of $275,000, and operating expenses of $130,000 for the current year. Using this information, calculate the amount of net income and net income as a percentage of sales. $560,000 - $275,000 - $130,000 = $155,000 ($155,000 / $560,000) * 100 = 27.68%

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80. The debt ratio indicates the percentage of: Total assets financed by creditors 81. True/False: A company whose sales are growing at less than the rate of inflation may actually be selling less merchandise every year. TRUE