Chapter 16 “How Well Am I Doing?” Financial Statement Analysis True/False Questions Common-size statements are financial statements of companies of similar size Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy One limitation of vertical analysis is that it cannot be used to compare two companies that are significantly different in size Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy The gross margin percentage is computed by dividing the gross margin by total assets Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium The sale of used equipment at book value for cash will increase earnings per share Ans: False AACSB: Analytic AICPA FN: Reporting LO: AICPA BB: Critical Thinking Level: Medium Earnings per share is computed by dividing net income (after deducting preferred dividends) by the average number of common shares outstanding Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy The dividend payout ratio divided by the dividend yield ratio equals the price-earnings ratio Ans: True AACSB: Analytic AICPA FN: Reporting LO: AICPA BB: Critical Thinking Level: Hard An increase in the number of shares of common stock outstanding will decrease a company's price-earnings ratio if the market price per share remains unchanged Ans: False AACSB: Analytic AICPA FN: Reporting LO: AICPA BB: Critical Thinking Level: Hard Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 16-5 Chapter 16 “How Well Am I Doing?” Financial Statement Analysis A company's financial leverage is negative when its return on total assets is less than its return on common stockholders' equity Ans: False AACSB: Analytic AICPA FN: Reporting LO: AICPA BB: Critical Thinking Level: Hard When computing return on common stockholders' equity, retained earnings should be included as part of common stockholders' equity Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Hard 10 When a retailing company purchases inventory, the book value per share of the company increases Ans: False AACSB: Analytic AICPA FN: Reporting LO: AICPA BB: Critical Thinking Level: Medium 11 If a company's acid-test ratio increases, its current ratio will also increase Ans: True AACSB: Analytic AICPA FN: Reporting LO: AICPA BB: Critical Thinking Level: Medium 12 Assuming a current ratio greater than 1, acquiring land by issuing more of the company's common stock will increase the current ratio Ans: False AACSB: Analytic AICPA FN: Reporting LO: AICPA BB: Critical Thinking Level: Medium 13 If a company successfully implements lean production, its inventory turnover ratio should decrease Ans: False AACSB: Analytic AICPA FN: Reporting LO: AICPA BB: Critical Thinking Level: Medium 14 Short-term borrowing is not a source of working capital Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium 16-6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 16 “How Well Am I Doing?” Financial Statement Analysis 15 Working capital is computed by subtracting long-term liabilities from long-term assets Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium Multiple Choice Questions 16 Common size financial statements help an analyst to: A) Evaluate financial statements of companies within a given industry of the approximate same size B) Determine which companies in a similar industry are at approximately the same stage of development C) Compare the mix of assets, liabilities, capital, revenue, and expenses within a company over a period of time or between companies within a given industry without respect to size D) Ascertain the relative potential of companies of similar size in different industries Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy Source: CMA, adapted 17 Which of the following ratios would be least useful in determining a company's ability to pay its expenses and liabilities? A) current ratio B) acid-test ratio C) price-earnings ratio D) times interest earned ratio Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,3,4 Level: Medium 18 Most stockholders would ordinarily be least concerned with which of the following ratios: A) earnings per share B) dividend yield ratio C) price-earnings ratio D) acid-test ratio Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,3 Level: Easy Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 16-7 Chapter 16 “How Well Am I Doing?” Financial Statement Analysis 19 What effect will the issuance of common stock for cash at year-end have on the following ratios? Return on Total Assets Debt-to-Equity Ratio A) Increase Increase B) Increase Decrease C) Decrease Increase D) Decrease Decrease Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,4 Level: Medium 20 The market price of Friden Company's common stock increased from $15 to $18 Earnings per share of common stock remained unchanged The company's priceearnings ratio would: A) increase B) decrease C) remain unchanged D) impossible to determine Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy 21 If a company is profitable and is effectively using leverage, which one of the following ratios is likely to be the largest? A) Return on total assets B) Return on total liabilities C) Return on common stockholders' equity D) Cannot be determined Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium 22 Clark Company issued bonds with an interest rate of 10% The company's return on assets is 12% The company's return on common stockholders' equity would most likely: A) increase B) decrease C) remain unchanged D) cannot be determined Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy 16-8 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 16 “How Well Am I Doing?” Financial Statement Analysis 23 Which of the following transactions could generate positive financial leverage for a corporation? A) acquiring assets through the issuance of long-term debt B) acquiring assets through the use of accounts payable C) acquiring assets through the issuance of common stock D) both A and B above Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Hard 24 Book value per common share is the amount of stockholders' equity per outstanding share of common stock Which one of the following statements about book value per common share is most correct? A) Market price per common share usually approximates book value per common share B) Book value per common share is based on past transactions whereas the market price of a share of stock mainly reflects what investors expect to happen in the future C) A market price per common share that is greater than book value per common share is an indication of an overvalued stock D) Book value per common share is the amount that would be paid to stockholders if the company were sold to another company Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy Source: CMA, adapted 25 The ratio of total cash, marketable securities, accounts receivable, and short-term notes to current liabilities is: A) the debt-to-equity ratio B) the current ratio C) the acid-test ratio D) working capital Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,4 Level: Easy Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 16-9 Chapter 16 “How Well Am I Doing?” Financial Statement Analysis 26 A company has just converted a long-term note receivable into a short-term note receivable The company's acid-test and current ratios are both greater than This transaction will: A) increase the current ratio and decrease the acid-test ratio B) increase the current ratio and increase the acid-test ratio C) decrease the current ratio and increase the acid-test ratio D) decrease the current ratio and decrease the acid-test ratio Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Hard 27 Broca Corporation has a current ratio of 2.5 Which of the following transactions will increase Broca's current ratio? A) the purchase of inventory for cash B) the collection of an account receivable C) the payment of an account payable D) none of the above Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Hard 28 Allen Company's average collection period for accounts receivable was 25 days in year 1, but increased to 40 days in year Which of the following would most likely be the cause of this change: A) a decrease in accounts receivable relative to sales in year B) an increase in credit sales in year as compared to year C) a relaxation of credit policies in year D) a decrease in accounts receivable in year as compared to year Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Hard 29 Wolbers Company wrote off $100,000 in obsolete inventory The company's inventory turnover ratio would: A) increase B) decrease C) remain unchanged D) impossible to determine Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium 16-10 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 16 “How Well Am I Doing?” Financial Statement Analysis 30 Gottlob Corporation's most recent income statement appears below: Sales (all on account) Cost of goods sold Gross margin Selling and administrative expense Net operating income Interest expense Net income before taxes Income taxes Net income $824,000 477,000 347,000 208,000 139,000 37,000 102,000 30,000 $ 72,000 The gross margin percentage is closest to: A) 20.7% B) 72.7% C) 42.1% D) 481.9% Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy Solution: Gross margin percentage = Gross margin ÷ Sales = $347,000 ÷ $824,000 = 42.1% 31 Crandall Company's net income last year was $60,000 The company paid preferred dividends of $10,000 and its average common stockholders' equity was $480,000 The company's return on common stockholders' equity for the year was closest to: A) 12.5% B) 10.4% C) 2.1% D) 14.6% Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy Solution: Return on common stockholders' equity = (Net income − Preferred dividends) ÷ Average common stockholders' equity = ($60,000 − $10,000) ÷ $480,000 = 10.4% Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 16-11 Chapter 16 “How Well Am I Doing?” Financial Statement Analysis 32 Ardor Company's net income last year was $500,000 The company has 150,000 shares of common stock and 30,000 shares of preferred stock outstanding There was no change in the number of common or preferred shares outstanding during the year The company declared and paid dividends last year of $1.00 per share on the common stock and $0.70 per share on the preferred stock The earnings per share of common stock is closest to: A) $3.33 B) $3.19 C) $2.33 D) $3.47 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium Solution: Earnings per share = (Net Income − Preferred Dividends) ÷ Average number of common shares outstanding = ($500,000 − $21,000) ÷ [(150,000 shares + 150,000 shares) ÷ 2] = $3.19 per share 33 The following information relates to Konbu Corporation for last year: Price earnings ratio Dividend payout ratio Earnings per share 15 30% $5 What is Konbu's dividend yield ratio for last year? A) 1.5% B) 2.0% C) 4.5% D) 10.0% Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Hard 16-12 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 16 “How Well Am I Doing?” Financial Statement Analysis Solution: Dividend yield ratio = Dividends per share* ÷ Market price per share ** = $0.06 ÷ $3 = 2.0% * Dividends per share = Dividend payout ratio ÷ Earnings per share = 30% ÷ $5 = $0.06 per share ** Market price per share = Price earnings ratio ÷ Earnings per share = 15 ÷ $5 = $3 per share 34 Richmond Company has 100,000 shares of $10 par value common stock issued and outstanding Total stockholders' equity is $2,800,000 and net income for the year is $800,000 During the year Richmond paid $3.00 per share in dividends on its common stock The market value of Richmond's common stock is $24 What is the priceearnings ratio? A) 3.0 B) 3.5 C) 4.8 D) 8.0 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium Source: CPA, adapted Solution: Price-earnings ratio = Market price per share ÷ Earnings per share* = $24 ÷ $8 = 3.0 * Earnings per share = (Net income - Preferred dividends) ÷ Average # of common shares outstanding = ($800,000 - $0) ÷ [(100,000 shares + 100,000 shares) ÷ 2] = $8 per share 35 Hurst Company has 20,000 shares of common stock outstanding These shares were originally issued at a price of $15 per share The current book value is $25.00 per share and the current market value is $30.00 per share The dividends on common stock for the year totaled $45,000 The dividend yield ratio is: A) 9% B) 7.5% C) 15% D) 10% Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 16-13 Chapter 16 “How Well Am I Doing?” Financial Statement Analysis Solution: Dividend yield ratio = Dividends per share ÷ Market price per share = ($45,000 ÷ 20,000) ÷ $30.00 = 7.5% 36 Bramble Company's net income last year was $65,000 and its interest expense was $15,000 Total assets at the beginning of the year were $620,000 and total assets at the end of the year were $650,000 The company's income tax rate was 40% The company's return on total assets for the year was closest to: A) 11.7% B) 10.2% C) 12.6% D) 11.2% Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium Solution: Return on total assets = Adjusted net income* ÷ Average total assets** = $74,000 ÷ $635,000 = 11.7% *Adjusted net income = Net income + [Interest expense × (1-Tax rate)] = $65,000 + 15,000 × (1 − 0.40) = $74,000 **Average total assets = ($620,000 + $650,000) ÷ = $635,000 37 Dahl Company can borrow funds at 15% interest Since the company's tax rate is 40%, its after-tax cost of interest is only 9% Thus, the company reasons that if it can earn $70,000 per year before interest and taxes on a new investment of $500,000, then it will be better off by $25,000 per year A) The company's reasoning is correct B) The company's reasoning is not correct, since the after-tax cost of interest would be percent, rather than 9% C) The company's reasoning is not correct, since interest is not tax-deductible D) The company's reasoning is not correct, since it would be worse off by $3,000 per year after taxes Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Hard 16-14 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 16 “How Well Am I Doing?” Financial Statement Analysis 187 Financial statements for Rarick Company appear below: Rarick Company Statement of Financial Position December 31, Year and Year (dollars in thousands) Year Current assets: Cash and marketable securities Accounts receivable, net Inventory Prepaid expenses Total current assets Noncurrent assets: Plant & equipment, net Total assets Current liabilities: Accounts payable Accrued liabilities Notes payable, short term Total current liabilities Noncurrent liabilities: Bonds payable Total liabilities Stockholders’ equity: Preferred stock, $10 par, 10% Common stock, $5 par Additional paid-in capital–common stock Retained earnings Total stockholders’ equity Total liabilities & stockholders’ equity 16-124 Year $ 120 $ 120 180 150 100 100 10 20 410 390 1,830 1,780 $2,240 $2,170 $ 130 $ 150 30 50 270 270 430 470 310 740 300 770 100 100 240 240 250 250 910 810 1,500 1,400 $2,240 $2,170 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 16 “How Well Am I Doing?” Financial Statement Analysis Rarick Company Income Statement For the Year Ended December 31, Year (dollars in thousands) Sales (all on account) Cost of goods sold Gross margin Selling and administrative expense Net operating income Interest expense Net income before taxes Income taxes (30%) Net income $2,400 1,680 720 280 440 30 410 123 $ 287 Required: Compute the following for Year 2: a Current ratio b Acid-test ratio c Average collection period d Inventory turnover e Times interest earned f Debt-to-equity ratio Ans: a Current ratio = Current assets ÷ Current liabilities = $410 ÷ $430 = 0.95 b Acid-test ratio = Quick assets* ÷ Current liabilities = $300 ÷ $430 = 0.70 *Quick assets = Cash + Marketable securities + Accounts receivable + Shortterm notes receivable = $120 + $180 = $300 c Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $2,400 ÷ $165 = 14.55 *Average accounts receivable = ($180 + $150) ÷ = $165 Average collection period = 365 days ÷ Accounts receivable turnover = 365 ÷ 14.55 = 25.1 days Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 16-125 Chapter 16 “How Well Am I Doing?” Financial Statement Analysis d Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,680 ÷ $100 = 16.80 *Average inventory = ($100 + $100) ÷ = $100 e Times interest earned = Net operating income ÷ Interest expense = $440 ÷ $30 = 14.67 f Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $740 ÷ $1,500 = 0.49 AACSB: Analytic AICPA BB: Critical Thinking LO: 3,4 Level: Medium 16-126 AICPA FN: Reporting Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 16 “How Well Am I Doing?” Financial Statement Analysis 188 Carleton Corporation's most recent balance sheet and income statement appear below: Statement of Financial Position December 31, Year and Year (in thousands of dollars) Year Assets Current assets: Cash Accounts receivable Inventory Prepaid expenses Total current assets Plant and equipment, net Total assets Liabilities and Stockholders’ Equity Current liabilities: Accounts payable Accrued liabilities Notes payable, short term Total current liabilities Bonds payable Total liabilities Stockholders’ equity: Preferred stock, $100 par value, 5% Common stock, $2 par value Additional paid-in capital–common stock Retained earnings Total stockholders’ equity Total liabilities & stockholders’ equity Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Year $ 30 $ 110 210 260 190 170 70 70 500 610 810 740 $1,310 $1,350 $ 140 $ 150 30 30 40 40 210 220 190 240 400 460 100 100 400 400 130 130 280 260 910 890 $1,310 $1,350 16-127 Chapter 16 “How Well Am I Doing?” Financial Statement Analysis Income Statement For the Year Ended December 31, Year (in thousands of dollars) Sales (all on account) Cost of goods sold Gross margin Selling and administrative expense Net operating income Interest expense Net income before taxes Income taxes (30%) Net income $1,260 770 490 400 90 26 64 19 $ 45 Required: Compute the following for Year 2: a Working capital b Current ratio c Acid-test ratio d Accounts receivable turnover e Average collection period f Inventory turnover g Average sale period Ans: a Working capital = Current assets − Current liabilities = $500 thousand − $210 thousand = $290 thousand b Current ratio = Current assets ÷ Current liabilities = $500 ÷ $210 = 2.38 c Acid-test ratio = Quick assets* ÷ Current liabilities = $240 ÷ $210 = 1.14 *Quick assets = Cash + Marketable securities + Accounts receivable + Shortterm notes receivable = $30 + $0 + $210 = $240 d Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,260 ÷ $235 = 5.36 *Average accounts receivable = ($210 + $260) ÷ = $235 e Average collection period = 365 days ÷ Accounts receivable turnover (see above) = 365 days ÷ 5.36 = 68.1 days 16-128 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 16 “How Well Am I Doing?” Financial Statement Analysis f Inventory turnover = Cost of goods sold ÷ Average inventory* = $770 ÷ $180 = 4.28 *Average inventory = ($190 + $170) ÷ = $180 g Average sale period = 365 days ÷ Inventory turnover (see above) = 365 days ÷ 4.28 = 85.3 days AACSB: Analytic AICPA BB: Critical Thinking LO: Level: Medium AICPA FN: Reporting 189 Excerpts from Beaty Corporation's most recent balance sheet (in thousands of dollars) appear below: Year Year Current assets: Cash $ 70 $140 Accounts receivable 250 280 Inventory 150 140 Prepaid expenses 20 20 Total current assets $490 $580 Current liabilities: Accounts payable $150 $170 Accrued liabilities 90 90 Notes payable, short term 80 80 Total current liabilities $320 $340 Sales on account during the year totaled $1,320 thousand Cost of goods sold was $730 thousand Required: Compute the following for Year 2: a Working capital b Current ratio c Acid-test ratio d Accounts receivable turnover e Average collection period f Inventory turnover g Average sale period Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 16-129 Chapter 16 “How Well Am I Doing?” Financial Statement Analysis Ans: a Working capital = Current assets − Current liabilities = $490 thousand − $320 thousand = $170 thousand b Current ratio = Current assets ÷ Current liabilities = $490 ÷ $320 = 1.53 c Acid-test ratio = Quick assets* ÷ Current liabilities = $320 ÷ $320 = 1.00 *Quick assets = Cash + Marketable securities + Accounts receivable + Shortterm notes receivable = $70 + $0 + $250 = $320 d Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $1,320 ÷ $265 = 4.98 *Average accounts receivable = ($250 + $280) ÷ = $265 e Average collection period = 365 days ÷ Accounts receivable turnover (see above) = 365 days ÷ 4.98 = 73.3 days f Inventory turnover = Cost of goods sold ÷ Average inventory* = $730 ÷ $145 = 5.03 *Average inventory = ($150 + $140) ÷ = $145 g Average sale period = 365 days ÷ Inventory turnover (see above) = 365 days ÷ 5.03 = 72.6 days AACSB: Analytic AICPA BB: Critical Thinking LO: Level: Easy AICPA FN: Reporting 190 Romaine Corporation's total current assets are $300,000, its noncurrent assets are $570,000, its total current liabilities are $270,000, its long-term liabilities are $360,000, and its stockholders' equity is $240,000 Required: Compute the company's working capital Show your work! Ans: Working capital = Current assets − Current liabilities = $300,000 − $270,000 = $30,000 AACSB: Analytic AICPA BB: Critical Thinking LO: Level: Easy 16-130 AICPA FN: Reporting Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 16 “How Well Am I Doing?” Financial Statement Analysis 191 Wayment Corporation's total current assets are $310,000, its noncurrent assets are $680,000, its total current liabilities are $270,000, its long-term liabilities are $460,000, and its stockholders' equity is $260,000 Required: Compute the company's current ratio Show your work! Ans: Current ratio = Current assets ÷ Current liabilities = $310,000 ÷ $270,000 = 1.15 AACSB: Analytic AICPA BB: Critical Thinking LO: Level: Easy AICPA FN: Reporting 192 Data from Furnia Corporation's most recent balance sheet appear below: Cash Marketable securities Accounts receivables Inventory Prepaid expenses Current liabilities $13,000 $21,000 $32,000 $52,000 $16,000 $118,000 Required: Compute the company's acid-test ratio Show your work! Ans: Acid-test ratio = Quick assets* ÷ Current liabilities = $66,000 ÷ $118,000 = 0.56 *Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $13,000 + $21,000 + $32,000 = $66,000 AACSB: Analytic AICPA BB: Critical Thinking LO: Level: Easy Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition AICPA FN: Reporting 16-131 Chapter 16 “How Well Am I Doing?” Financial Statement Analysis 193 Cozzolino Corporation has provided the following data: Accounts receivable Inventory Sales on account Cost of goods sold This Year $118,000 $141,000 $687,000 $455,000 Last Year $123,000 $165,000 Required: Compute the accounts receivable turnover for this year Show your work! Ans: Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = $687,000 ÷ $120,500 = 5.70 *Average accounts receivable = ($118,000 + $123,000) ÷ = $120,500 AACSB: Analytic AICPA BB: Critical Thinking LO: Level: Easy AICPA FN: Reporting 194 Data from Ringwald Corporation's most recent balance sheet and income statement appear below: Accounts receivable Inventory Sales on account Cost of goods sold This Year $118,000 $164,000 $727,000 $481,000 Last Year $103,000 $173,000 Required: Compute the average collection period for this year: 16-132 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 16 “How Well Am I Doing?” Financial Statement Analysis Ans: Average collection period = 365 days ÷ Accounts receivable turnover* = 365 days ÷ 6.58 = 55.5 days *Accounts receivable turnover = Sales on account ÷ Average accounts receivable** = $727,000 ÷ $110,500 = 6.58 **Average accounts receivable = ($118,000 + $103,000) ÷ = $110,500 AACSB: Analytic AICPA BB: Critical Thinking LO: Level: Easy AICPA FN: Reporting 195 Hsieh Corporation has provided the following data: Accounts receivable Inventory Sales on account Cost of goods sold This Year $104,000 $150,000 $879,000 $575,000 Last Year $115,000 $157,000 Required: Compute the inventory turnover for this year: Ans: Inventory turnover = Cost of goods sold ÷ Average inventory* = $575,000 ÷ $153,500 = 3.75 *Average inventory = ($150,000 + $157,000) ÷ = $153,500 AACSB: Analytic AICPA BB: Critical Thinking LO: Level: Easy Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition AICPA FN: Reporting 16-133 Chapter 16 “How Well Am I Doing?” Financial Statement Analysis 196 Data from Buttler Corporation's most recent balance sheet and income statement appear below: Accounts receivable Inventory Sales on account Cost of goods sold This Year $134,000 $151,000 $864,000 $675,000 Last Year $138,000 $171,000 Required: Compute the average sale period for this year: Ans: Average sale period = 365 days ÷ Inventory turnover* = 365 days ÷ 4.19 = 87.1 days *Inventory turnover = Cost of goods sold ÷ Average inventory* = $675,000 ÷ $161,000 = 4.19 **Average inventory = ($151,000 + $171,000) ÷ = $161,000 AACSB: Analytic AICPA BB: Critical Thinking LO: Level: Easy 16-134 AICPA FN: Reporting Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 16 “How Well Am I Doing?” Financial Statement Analysis 197 Erke Corporation's most recent balance sheet and income statement appear below: Statement of Financial Position December 31, Year and Year (in thousands of dollars) Year Assets Current assets: Cash Accounts receivable Inventory Prepaid expenses Total current assets Plant and equipment, net Total assets Liabilities and Stockholders’ Equity Current liabilities: Accounts payable Accrued liabilities Notes payable, short term Total current liabilities Bonds payable Total liabilities Stockholders’ equity: Preferred stock, $100 par value, 5% Common stock, $2 par value Additional paid-in capital–common stock Retained earnings Total stockholders’ equity Total liabilities & stockholders’ equity Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Year $ 130 $ 160 120 110 90 100 20 20 360 390 890 840 $1,250 $1,230 $ 190 $ 180 70 60 40 40 300 280 130 150 430 430 100 100 200 200 130 130 390 370 820 800 $1,250 $1,230 16-135 Chapter 16 “How Well Am I Doing?” Financial Statement Analysis Income Statement For the Year Ended December 31, Year (in thousands of dollars) Sales (all on account) Cost of goods sold Gross margin Selling and administrative expense Net operating income Interest expense Net income before taxes Income taxes (30%) Net income $1,150 710 440 358 82 18 64 19 $ 45 Required: Compute the following for Year 2: a Times interest earned b Debt-to-equity ratio Ans: a Times interest earned = Net operating income ÷ Interest expense = $82 ÷ $18 = 4.56 b Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $430 ÷ $820 = 0.52 AACSB: Analytic AICPA BB: Critical Thinking LO: Level: Medium AICPA FN: Reporting 198 Froemming Corporation's net operating income last year was $193,000; its interest expense was $22,000; its total stockholders' equity was $950,000; and its total liabilities were $400,000 Required: Compute the following for Year 2: a Times interest earned b Debt-to-equity ratio 16-136 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 16 “How Well Am I Doing?” Financial Statement Analysis Ans: a Times interest earned = Net operating income ÷ Interest expense = $193,000 ÷ $22,000 = 8.77 b Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $400,000 ÷ $950,000 = 0.42 AACSB: Analytic AICPA BB: Critical Thinking LO: Level: Easy AICPA FN: Reporting 199 Brandy Corporation has provided the following data from its most recent income statement: Net operating income Interest expense Net income before taxes Income taxes Net income $51,000 $37,000 $14,000 $4,000 $10,000 Required: Compute the times interest earned ratio Show your work! Ans: Times interest earned = Net operating income ÷ Interest expense = $51,000 ÷ $37,000 = 1.38 AACSB: Analytic AICPA BB: Critical Thinking LO: Level: Easy Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition AICPA FN: Reporting 16-137 Chapter 16 “How Well Am I Doing?” Financial Statement Analysis 200 Molony Corporation has provided the following data from its most recent balance sheet: Total assets Total liabilities Total stockholders’ equity $740,000 $610,000 $130,000 Required: Compute the debt-to-equity ratio Show your work! Ans: Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $610,000 ÷ $130,000 = 4.69 AACSB: Analytic AICPA BB: Critical Thinking LO: Level: Easy 16-138 AICPA FN: Reporting Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition ... receivable* = $160 ,000 ÷ $13,000 = 12.31 *Average accounts receivable = ($10,000 + $16, 000) ÷ = $13,000 16- 20 Garrison/ Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 16 “How Well... acid -test ratio Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,3 Level: Easy Garrison/ Noreen/Brewer, Managerial Accounting, Twelfth Edition 16- 7 Chapter 16. .. $3.50)] ÷ [(500,000 shares + 500,000 shares) ÷ 2] = $14.55 16- 16 Garrison/ Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter 16 “How Well Am I Doing?” Financial Statement Analysis 42