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Exam 13: Financial Statement Analysis

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Question 1

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Milton Company has total current assets of $46,000,including inventory of $10,000,and current liabilities of $20,000.The company's current ratio is:

A) 0.4.
B) 1.8.
C) 2.8.
D) 2.3.

E) B) and C)
F) B) and D)

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Question 2

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Darden Company has cash of $40,000,accounts receivable of $60,000,inventory of $32,000,and equipment of $100,000.Assuming current liabilities of $48,000,this company's working capital is:

A) $12,000.
B) $52,000.
C) $144,000.
D) $84,000.

E) A) and C)
F) All of the above

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Question 3

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Which of the following statements regarding the return on equity (ROE) measure is incorrect?

Select the correct statement regarding vertical analysis.

Short-term creditors are usually most interested in assessing:

Working capital is defined as:

The return on investment measure is also referred to as:

Which of the following statements regarding ratio analysis is incorrect?

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 paid $3,600 on accounts payable.Which of the following statements is incorrect?

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 collected $5,200 of accounts receivable.As a result of this transaction,Gant's working capital will:

Financial ratios can be used to assess which of the following aspects of a firm's performance?

Many companies have to monitor some of their financial statement ratios,such as the current ratio,due to debt covenants.Selected transactions are provided below for a company that uses a perpetual inventory system;sells its merchandise at a selling price that exceeds cost;and had a current ratio of 1.85 before the event occurred. $\begin{array}{|l|l|l|}\hline & \text { Impact on } & \text { Impact on } \\\hline & \text { Working Capital } & \text { Current Ratio } \\\hline \text { Description of Transaction } & (+) \text { or }(-) \text { or }(0)& (+) \text { or }(-) \text { or }(0) \\\hline \text { 1. Collected accounts receivable } & \\\hline \text { 2. Declared a stock dividend } & \\\hline \text { 3. Issued common stock for cash } & \\\hline \text { 4. Paid advertising cost } & \\\hline \text { 5. Paid cash for a patent } & \\\hline \text { 6. Paid previously declared cash dividend } & \\\hline \text { 7. Paid sales commissions } & \\\hline \text { 8. Paid the balance on an account payable } & \\\hline \text { 9. Purchased a building by issuing a long. } & \\\hline \text { term note } & \\\hline \text { 10. Purchased inventory on account } & \\\hline \text { 11. Purchased current marketable securities for } & \\\text { cash } & \\\hline \text { 12. Recorded depreciation expense } & \\\hline \text { 13. Sold land for cash } & \\\hline \text { 14. Sold merchandise for cash } & \\\hline \text { 15. Sold merchandise on account } & \\\hline\end{array}$ Required: In the above table,indicate whether each transaction would increase (+),decrease (-),or not affect (0)the company's working capital and the current ratio.

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:

In terms of solvency,the larger the number of times interest is earned,the better.

Select the term from the list provided that bests matches each of the following descriptions or definitions: $\begin{array}{|l|l|l|}\hline \text { Your Answer } & \text { Definition or Description } &\text { Term } \\\hline& \text { A. An indication of the relative importance of an item of financial information } &\text { 1. Absolute amounts } \\\hline& \text { B. Analysis techisque that conmares amotuts of the same item over two or more time periods } &\text { 2. Book value per share } \\\hline& \text { C. Meastres of the lomg-tern debt payang ability of the firm } &\text { 3. Current ratio } \\\hline& \text { D. Measure of profitability calculated by dividurg net income by average total stockholders' equity } &\text { 4. Horizontal analysis } \\\hline& \text { E. Dollar amounts of individual items on financial statements can be misleading becanse they make no reference to the size of the company } &\text { 5. Liquidity ratios } \\\hline& \text { F. Measurements of a firms ability to generateincome } &\text { 6. Materiality } \\\hline& \text { G. Stukly of the performance of ratios or other financial measures over time } &\text { 7. Average days to sell inventory } \\\hline& \text { H. Cuntent assets divided by current labilities } &\text { 8. Price-eamings ratio } \\\hline& \text {I. Measures of short-tem debt paying ability } &\text { 9. Profitability ratios } \\\hline& \text {J. Meastue to compare vahes of different stocks. calculated by dividang market price per share by amount of income per share } &\text { 10. Return on equity } \\\hline& \text { K. Another way at looking at inwertory tumover by conwerting the izwentory tumnover ratio into a munber of days } &\text {11. Solvency ratios } \\\hline& \text { L. Calculated by dividing total stockholders' equity less preferred rights by the number of common shares outstanding } &\text { 12. Trend analysis } \\\hline\end{array}$

Accrual accounting requires the use of many estimates,including:

The accounting concept or principle that is perhaps the greatest single culprit in distorting the results of financial statement analysis is the:

Starwood Corporation has current assets of $200,000,total current liabilities of $750,000 net credit sales of $1,300,000,beginning accounts receivable of $65,000 and ending accounts receivable of $69,000.What is Starwood's accounts receivable turnover?

Which of the following statements regarding the information disclosed in financial statements is incorrect?

On December 31,Year 1,Houston Company's total current assets were $560,000 and its total current liabilities were $420,000.On January 1,Year 2,Houston issued a long-term note to a bank for $30,000 cash. Required: (a)Compute Houston's working capital before and after issuing the note payable. (b)Compute Houston's current ratio before and after issuing the note payable.Round your answer to two decimal places.