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Exam 13: Financial Statement Analysis

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Question 21

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Which of the following statements is generally incorrect from an investor's perspective?

A) A 1:1 current ratio is generally preferred over a 1.5:1 current ratio.
B) A 20-day average collection period for accounts receivable is generally preferred over a 30-day average collection period.
C) A 5% dividend yield is generally preferred over a 3% dividend yield.
D) A 10% net margin is generally preferred over an 8% net margin.

E) A) and D)
F) B) and D)

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Question 22

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Indicate whether each of the following statements about financial statement analysis is true or false.Solvency ratios measure a company's short-term debt paying ability and its financial structure.A company with a high debt to assets ratio probably would be considered to have a high level of financial risk.The debt to equity ratio and debt to assets ratio are two ways to measure the same relationship.From the point of view of stockholders, a decline in the debt to equity ratio is always good news.The lower the debt to equity ratio, the higher a company's financial leverage.

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Solvency ratios measure a company's shor...

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Question 23

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Grove Corporation had sales of $3,000,000, cost of sales of $2,250,000, and average inventory of $500,000. What was Grove's inventory turnover ratio for the period?

The return on investment measure is also referred to as:

The following balance sheet information is provided for Apex Company for Year 2: What is the company's working capital? $\begin{array}{|l|r|}\hline \text { Assets } & \\\hline \text { Cash } & \$ \\\hline \text { Accounts receivable } & 5,400 \\\hline \text { Inventory } & 15,500 \\\hline \text { Prepaid expenses } & 18,000 \\\hline \text { Plant and equipment, net of depreciation } & 1,600 \\\hline \text { Land } & 20,200 \\\hline \text { Total assets }&\$80,650\\\hline \\\hline \text { Liabilities and Stockholders' Equity } & \\\hline \text { Accounts payable } & \$4,500 \\\hline \text { Salaries payable } & 11,500\\\hline \text { Bonds payable (Due in 2020) } &19,000 \\\hline \text { Common stock, no par } &30,000 \\\hline \text { Retained earnings } & 15,650 \\\hline \text { Total liabilities and stockholder' equity }&\$80,60\\\hline\end{array}$

As of December 31, Year 1, Gant Corporation had a current ratio of 1.29, quick ratio of 1.05, and working capital of $18,000. The company uses a perpetual inventory system and sells merchandise for more than it cost. On January 1, Year 2, Gant purchased merchandise on account for $4,000. Which of the following statements is correct?

Explain the difference between horizontal analysis and vertical analysis of a company's financial statements.

An analysis procedure that uses percentages to compare each of the parts of an individual statement to a key dollar amount from the financial statements is:

Which of the following statements is correct?

Denver Corporation and Cheyenne Company are in different industries. Denver's current ratio is 1.89, while Cheyenne's current ratio is 1.65. Therefore, is it safe to conclude that Denver's liquidity position is better than that of Cheyenne?

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?

You are considering an investment in IBM stock and wish to assess the firm's long-term debt-paying ability and its use of debt financing. All of the following ratios can be used to assess solvency except:

Rialto Company collected $5,000 on account. What impact will this transaction have on the firm's current ratio?

Indicate whether each of the following statements about financial statement analysis is true or false.The asset turnover ratio is calculated by dividing net income by average total assets.The asset turnover ratio is likely to be high in an industry in which operations require only a minimal investment in assets.Return on equity measures the wealth generated by the amount of assets invested in a business.A higher value for the return on investment ratio would generally indicate more effective company management.The use of financial leverage often causes a business's return on equity to be lower than its return on investment.

You are considering an investment in Facebook stock and wish to assess the company's position in the stock market. All of the following ratios can be used except:

The Crestar Company reported net income of $112,000 on 20,000 average outstanding common shares. Preferred dividends total $12,000. On the most recent trading day, the preferred shares sold at $50 and the common shares sold at $95. What is this company's current price-earnings ratio?

The following balance sheet information is provided for Greene Company for Year 2: What is the company's quick (acid-test) ratio (rounded to one decimal point) ? $\begin{array}{|l|r|}\hline \text { Assets } \\\hline \text { Cash } & \$5,400 \\\hline \text { Accounts receivable } & 15,500 \\\hline \text { Inventory } & 18,000 \\\hline \text { Prepaid expenses } & 1,600 \\\hline \text { Phant and equipment, net of depreciation } &20,200 \\\hline \text { Land } & 19,950 \\\hline \text { Total assets }&\$80,650\\\hline \text { Liabilities and Stockholders' Equity }\\\hline \text { Accounts payable } & \$ 4,500 \\\hline \text { Salaries payable } & 11,500 \\\hline \text { Bonds payable (Due in 2020) } & 19,000 \\\hline \text { Common stock, no par } & 30,000 \\\hline \text { Retained earnings } & 15,650 \\\hline \text { Total liabilities and stockholder' equity }&\$80,650\\\hline\end{array}$

Assume that you are considering purchasing some of a company's long-term bonds as an investment. Which of the company's financial statement ratios would you probably be most interested in?

Jenkins Company's current ratio is higher than the average for its industry, while its quick ratio is below the industry average. One possible interpretation for these results is that Jenkins carries less inventory than most companies in its industry.

As of December 31, Year 1, Gant Corporation had a current ratio of 1.29, quick ratio of 1.05, and working capital of $18,000. The company uses a perpetual inventory system and sells merchandise for more than it cost. On January 1, Year 2, Gant issued common stock at par value for $10,000 cash. Which of the following statement is correct?