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Exam 15: Financial Statement Analysis

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Question 81

True/False

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The ratio of the market price per share of common stock on a specific date to the annual earnings per share is referred to as the price-earnings ratio.

A) True
B) False

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Question 82

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Which of the following should be classified as an extraordinary item on the income statement?

A) gain on a sale of a long-term investment
B) loss due to discontinued operations
C) restructuring charges
D) loss resulting from an infrequent natural disaster

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

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Question 83

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$\begin{array}{c}\text { Assets }\\\begin{array}{lr}\text { Cash and short-term investments } & \$ 30,000 \\\text { Accounts receivable net } & 20,000 \\\text { Inventory } & 15,000 \\\text { Property, plant, and equipment } & \underline {185,000} \\ \text { Total assets } & \underline {\$ 250,000} \\\end{array}\end{array}$ $\begin{array}{c}\text { Liabilities and Stockholders' Equity }\\\begin{array}{lr}\text { Current liablities } & \$ 45,000 \\\text { Long-term liabilities } & 70,000 \\\text { Stockholders' equity \_Common } & \underline {135,000} \\\text { Total liabilities and stockholders' equity } & \underline {\$ 250,000} \\\end{array}\end{array}$ $\begin{array}{c}\text { Income Statement}\\\begin{array}{lll}\text { Sales } \\\text { Cost of goods sold } \\\text { Gross margin } \\\text { Operating expense: } \\\text { Interest expense } \\\text { Net income }\end{array}\begin{array}{lll}\$ 85,000 \\45,000 \\\hline \$ 40,000 \\15,000 \\5,000 \\\hline \$ 20,000 \\\hline\end{array}\end{array}$ $\begin{array}{l}\begin{array}{lll} \text { Number of shares of common stock outstanding}\\ \text { Market price of common stock}\\ \text { Total dividends paid}\\ \text { Cash provided by operations}\\\end{array}\begin{array}{lll}6,000 \\\$ 20 \\\$ 9,000 \\\$ 30,000\end{array}\end{array}$ -What is the price earnings ratio for Diane Company?

$\begin{array}{c}\text { Assets }\\\begin{array}{lr}\text { Cash and short-term investments } & \$ 30,000 \\\text { Accounts receivable net } & 20,000 \\\text { Inventory } & 15,000 \\\text { Property, plant, and equipment } & \underline {185,000} \\ \text { Total assets } & \underline {\$ 250,000} \\\end{array}\end{array}$ $\begin{array}{c}\text { Liabilities and Stockholders' Equity }\\\begin{array}{lr}\text { Current liablities } & \$ 45,000 \\\text { Long-term liabilities } & 70,000 \\\text { Stockholders' equity \_Common } & \underline {135,000} \\\text { Total liabilities and stockholders' equity } & \underline {\$ 250,000} \\\end{array}\end{array}$ $\begin{array}{c}\text { Income Statement}\\\begin{array}{lll}\text { Sales } \\\text { Cost of goods sold } \\\text { Gross margin } \\\text { Operating expense: } \\\text { Interest expense } \\\text { Net income }\end{array}\begin{array}{lll}\$ 85,000 \\45,000 \\\hline \$ 40,000 \\15,000 \\5,000 \\\hline \$ 20,000 \\\hline\end{array}\end{array}$ $\begin{array}{l}\begin{array}{lll} \text { Number of shares of common stock outstanding}\\ \text { Market price of common stock}\\ \text { Total dividends paid}\\ \text { Cash provided by operations}\\\end{array}\begin{array}{lll}6,000 \\\$ 20 \\\$ 9,000 \\\$ 30,000\end{array}\end{array}$ -What are the dividends per common share for Diane Company?

Vertical analysis refers to comparing the financial statements of a single company over several years.

The following information was taken from Slater Company's balance sheet: $\begin{array}{|l|r|}\hline \text { Fixed assets net } & \$ 1,250,000 \\\hline \text { Long-term liabilities } & 500,000 \\\hline \text { Total liabilities } & 672,000 \\\hline \text { Total stockholders' equity } & 1,680,000 \\\hline\end{array}$ Determine the company's a ratio of fixed assets to long-term liabilities,and b ratio of liabilities to stockholders' equity.Round your answer to one decimal place.

$\begin{array}{c}\text { Assets }\\\begin{array}{lr}\text { Cash and short-term investments } & \$ 30,000 \\\text { Accounts receivable net } & 20,000 \\\text { Inventory } & 15,000 \\\text { Property, plant, and equipment } & \underline {185,000} \\ \text { Total assets } & \underline {\$ 250,000} \\\end{array}\end{array}$ $\begin{array}{c}\text { Liabilities and Stockholders' Equity }\\\begin{array}{lr}\text { Current liablities } & \$ 45,000 \\\text { Long-term liabilities } & 70,000 \\\text { Stockholders' equity \_Common } & \underline {135,000} \\\text { Total liabilities and stockholders' equity } & \underline {\$ 250,000} \\\end{array}\end{array}$ $\begin{array}{c}\text { Income Statement}\\\begin{array}{lll}\text { Sales } \\\text { Cost of goods sold } \\\text { Gross margin } \\\text { Operating expense: } \\\text { Interest expense } \\\text { Net income }\end{array}\begin{array}{lll}\$ 85,000 \\45,000 \\\hline \$ 40,000 \\15,000 \\5,000 \\\hline \$ 20,000 \\\hline\end{array}\end{array}$ $\begin{array}{l}\begin{array}{lll} \text { Number of shares of common stock outstanding}\\ \text { Market price of common stock}\\ \text { Total dividends paid}\\ \text { Cash provided by operations}\\\end{array}\begin{array}{lll}6,000 \\\$ 20 \\\$ 9,000 \\\$ 30,000\end{array}\end{array}$ -What is the dividend yield for Diane Company?

A decrease in the ratio of liabilities to stockholders' equity indicates an improvement in the margin of safety for creditors.

When a corporation discontinues a segment of its operations at a loss,the loss should be reported as a separate item before income from continuing operations on the income statement.

Revenue and expense data for Bluestem Company are as follows: $\begin{array}{lrr}&\text { Year 2}&\text { Year 1}\\\text { Administrative expenses } & \$ \overline{37,000} & \overline{\$ 20,000} \\\text { Cost of goods sold } & 350,000 & 320,000 \\\text { Income tax } & 40,000 & 32,000 \\\text { Sales } & 800,000 & 700,000 \\\text { Selling expenses } & 150,000 & 110,000\end{array}$ a Prepare a comparative income statement,with vertical analysis,stating each item for both years as a percent of sales. b Comment upon significant changes disclosed by the comparative income statement. Round percentages to one decimal place.

The ratio of fixed assets to long-term liabilities provides a measure of a firm's ability to pay dividends.

Using measures to assess a business's ability to pay its current liabilities is called current position analysis.

$\begin{array}{c}\text { Assets }\\\begin{array}{lr}\text { Cash and short-term investments } & \$ 30,000 \\\text { Accounts receivable net } & 20,000 \\\text { Inventory } & 15,000 \\\text { Property, plant, and equipment } & \underline {185,000} \\ \text { Total assets } & \underline {\$ 250,000} \\\end{array}\end{array}$ $\begin{array}{c}\text { Liabilities and Stockholders' Equity }\\\begin{array}{lr}\text { Current liablities } & \$ 45,000 \\\text { Long-term liabilities } & 70,000 \\\text { Stockholders' equity \_Common } & \underline {135,000} \\\text { Total liabilities and stockholders' equity } & \underline {\$ 250,000} \\\end{array}\end{array}$ $\begin{array}{c}\text { Income Statement}\\\begin{array}{lll}\text { Sales } \\\text { Cost of goods sold } \\\text { Gross margin } \\\text { Operating expense: } \\\text { Interest expense } \\\text { Net income }\end{array}\begin{array}{lll}\$ 85,000 \\45,000 \\\hline \$ 40,000 \\15,000 \\5,000 \\\hline \$ 20,000 \\\hline\end{array}\end{array}$ $\begin{array}{l}\begin{array}{lll} \text { Number of shares of common stock outstanding}\\ \text { Market price of common stock}\\ \text { Total dividends paid}\\ \text { Cash provided by operations}\\\end{array}\begin{array}{lll}6,000 \\\$ 20 \\\$ 9,000 \\\$ 30,000\end{array}\end{array}$ -What is the rate earned on total assets for Diane Company?

Comparable financial statements are designed to compare the financial statements of two or more corporations.

The balance sheets at the end of each of the first two years of operations indicate the following: -If net income is $250,000 and interest expense is $20,000 for Year 2,and the market price of common shares is $30,what is the price-earnings ratio on common stock for Year 2? Round intermediate calculation to two decimal places and final answers to one decimal place.

The balance sheet for Seuss Company at the end of the current fiscal year indicated the following: $\begin{array}{|l|r|}\hline \text { Bonds payable, } 10 \% \text { 20-year term } & \$ 5,000,000 \\\hline \text { Preferred } 10 \% \text { stock, } \$ 100 \text { par } & 1,000,000 \\\hline \text { Common stock, } \$ 10 \text { par } & 2,000,000 \\\hline\end{array}$ Income before income tax was $1,500,000 and income taxes were $200,000 for the current year.Cash dividends paid on common stock during the current year totaled $150,000.The common stock sells for $70 per share at the end of the year. Determine each of the following: a. Number of times interest charges are earned b. Earnings per share on common stock c .Price-earnings ratio d. Dividends per share of common stock e. Dividend yield Round to one decimal place except earnings per share and dividends per share,which should be rounded to two decimal places.

The following information is available for Meyer Company: Which of the following statements is correct?

A company reports the following: Determine the number of times interest charges are earned.Round your answer to one decimal place.

The following data are taken from the financial statements: $\begin{array}{lrr}& { \text { Current }}& { \text {Preceding}}\\& \underline { \text { Year }}& \underline { \text { Year }}\\\text { Average accounts receivable net } & \$ 123,000 & \$ 95,000 \\\text { Accounts receivable net, end of year } & 129,012 & 87,516 \\\text { Sales on account } & 950,000 & 825,000\end{array}$ a. Assuming that credit terms on all sales are n/45, determine for each year 1 the accounts receivable turnover and 2 the number of days' sales in receivables. Round intermediate calculations to whole numbers and final answers to two decimal places. b. Comment on any significant trends revealed by the data.

Which of the following would appear as an extraordinary item on the income statement?